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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM
10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended
December 31, 2019
Commission File No.
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)
Registrant's telephone number, including area code
(860)
 743-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock ($1 par value)
 
KAMN
 
New York Stock Exchange LLC
Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act.
Yes
No
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 checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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
The aggregate market value on June 28, 2019, (the last business day of the Company’s most recently completed second quarter)
of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price
of the stock, was approximately
$
1,743,603,171

.
At January 31, 2020, there were
27,814,888

shares of Common Stock outstanding.
Documents Incorporated Herein By Reference
Portions of our definitive proxy statement for our 2020 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.



Kaman Corporation
Index to Form 10-K
 
Part I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
Part II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
 
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
Part IV
Item 15
Item 16



2


PART I

ITEM 1.
BUSINESS

GENERAL

Kaman Corporation, headquartered in Bloomfield, Connecticut, was incorporated in 1945. We are a diversified company that conducts business in the aerospace, medical and industrial markets. The Company produces and markets proprietary aircraft bearings and components; super precision, miniature ball bearings; proprietary spring energized seals, springs and contacts; 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 Company also manufactures and supports our K-MAX® manned and unmanned medium-to-heavy lift helicopters and restores, modifies and supports our SH-2G Super Seasprite maritime helicopters.

Principal customers include the U.S. military, foreign allied militaries, Sikorsky Aircraft Corporation, The Boeing Company, Airbus, Lockheed Martin, Rolls-Royce, Raytheon and Bell Helicopter. The SH-2G aircraft is currently in service with the Egyptian Air Force and the New Zealand, Peruvian and Polish navies. Operations are conducted throughout the United States, as well as in facilities located in the United Kingdom, Germany, the Czech Republic, Mexico and Singapore. Additionally, the Company maintains an investment in a joint venture in India. In the year ended December 31, 2019, three individual customers, the U.S. Government, The Boeing Company and a Joint Programmable Fuze ("JPF") direct commercial sales ("DCS") customer, accounted for more than 10% of consolidated net sales.

We report information for ourselves and our subsidiaries (collectively, “we,” “us,” “our,” and “the Company”) in a single business segment, Aerospace. In 2019, the Company completed the sale of its Distribution business for total cash consideration of $700.0 million, excluding certain working capital adjustments and transaction costs. Prior to the sale of the Distribution business, the Company was composed of two segments. As the Company had not made any fundamental changes to its management or organization structure, the Aerospace segment is reflective of how the Company's Chief Executive Officer, who is its Chief Operating Decision Maker, reviews operating results for the purposes of allocating resources and assessing performance.

On January 3, 2020, the Company announced that it had completed the acquisition of Bal Seal Engineering Inc. ("Bal Seal"), at a purchase price of approximately $331.0 million, subject to working capital adjustments. Bal Seal is a leader in the design, development, and manufacturing of highly engineered products including precision springs, seals and contacts. Bal Seal has an established global presence, with manufacturing facilities across the United States and sales representation in the United States, Europe and Asia. A discussion of 2019 developments is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-K.

WORKING CAPITAL

A discussion of our working capital is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, in this Form 10-K.

Our working capital requirements are dependent on the nature and life cycles of the programs for which work is performed. New programs may initially require higher working capital to complete nonrecurring start-up activities and fund the purchase of inventory and equipment necessary to perform the work. Nonrecurring start-up costs on large and complex programs often take longer to recover, negatively impacting working capital in the short-term and producing a corresponding benefit in future periods. As these programs mature and efficiencies are gained in the production process, working capital requirements generally decrease.

Our credit agreement is a revolving credit facility which is available for additional working capital requirements and investment opportunities. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 14, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.


3


PRINCIPAL PRODUCTS AND SERVICES

The following table sets forth the percentage contribution of each major product line to consolidated net sales for each of the three most recently completed years:
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Sales
 
 
 
 
 
 
Military and Defense, excluding safe and arm devices
 
23.4
%
 
25.9
%
 
27.8
%
Safe and Arm Devices
 
29.9
%
 
26.6
%
 
25.5
%
Commercial Aerospace and Other
 
46.7
%
 
47.5
%
 
46.7
%
Total
 
100.0
%
 
100.0
%
 
100.0
%
  
AVAILABILITY OF RAW MATERIALS

While we believe we have sufficient sources for the materials, components, services and supplies used in our manufacturing activities, we are highly dependent on the availability of essential materials, parts and subassemblies from our suppliers and subcontractors. The most important raw materials required for our aerospace products are aluminum (sheet, plate, forgings and extrusions), titanium, nickel, steel, copper and composites. Many major components and product equipment items are procured from or subcontracted on a sole-source basis with a number of domestic and non-U.S. companies. Although alternative sources generally exist for these raw materials, qualification of the sources could take a year or more. We are dependent upon the ability of a large number of suppliers and subcontractors to meet performance specifications, quality standards and delivery schedules at anticipated costs. While we maintain an extensive qualification system to control risk associated with such reliance on third parties, failure of suppliers or subcontractors to meet commitments could adversely affect production schedules and contract profitability, while jeopardizing our ability to fulfill commitments to our customers. From time to time, we have experienced shortages in raw materials which have impacted our near term results; however, we do not foresee any near term unavailability of materials, components or supplies that would have an adverse effect on our business. For further discussion of the possible effects of changes in the cost or availability of raw materials on our business, see Item 1A, Risk Factors, in this Form 10-K.

INTELLECTUAL PROPERTY

We use patented and unpatented proprietary information, know-how and trade secrets to develop, maintain and enhance our competitive position, but we believe our continued success depends more on the knowledge, ability, experience and technological expertise of our employees than the legal protection that our patents and other proprietary rights may afford. Moreover, while we rely on a combination of patents, trademarks, copyrights, trade secrets, nondisclosure agreements, physical and information technology security systems, internal controls and compliance systems and other measures to protect our intellectual property, data and technology rights and that of third parties with which we are entrusted, our ability to protect and enforce our intellectual property, data and technology rights may be limited by a variety of factors and may be even more limited in certain countries outside the U.S., as may be our ability to prevent theft or compromise of our intellectual property, data and technology by competitors or third parties.
As of December 31, 2019, we held a total of 71 patents, 7 of which were U.S. patents and 64 of which were foreign patents. We acquired an additional 93 U.S. patents and 149 foreign patents in connection with our acquisition of Bal Seal, increasing our total patent portfolio to 313 as of January 3, 2020. In addition, we have numerous U.S. and foreign patents pending. The Company believes the duration of its patents is adequate relative to the expected lives of its products.

 Trademarks are also an important aspect of our business. The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and registrations are maintained. We sell products under a number of registered trademarks that we own. Registered trademarks of the Company include KAflex®, KAron®, and K-MAX®. In all, we maintain 23 U.S. and foreign trademarks as of December 31, 2019.


4


BACKLOG

We anticipate that approximately 63.4% of our backlog at the end of 2019 will be performed in 2020. Approximately 30.3% of our backlog at the end of 2019 is related to U.S. Government ("USG") contracts or subcontracts.

Total backlog at December 31, 2019, 2018 and 2017, and the portion of the backlog we expect to complete in 2020, is as follows:
 
 
Total Backlog at
December 31, 2019
 
2019 Backlog to be
completed in 2020
 
Total Backlog at
December 31, 2018
 
Total Backlog at
December 31, 2017
In thousands
 
 
 
 
 
 
 
 
Backlog
 
$
806,870

 
$
511,765

 
$
851,814

 
$
616,090


Backlog related to uncompleted contracts for which we have recorded a provision for estimated losses was $2.1 million as of December 31, 2019. At December 31, 2019, there was no backlog related to firm but not yet funded orders. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for further discussion.

REGULATORY MATTERS
 
Government Contracts

The USG, and other governments, may terminate any of our government contracts at their convenience or for default if we fail to meet specified performance measurements. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the USG would pay only for the work that has been accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The USG can also hold us liable for damages resulting from the default.

During 2019, approximately 96.0% of the work performed by the Company directly or indirectly for the USG was performed on a fixed-price basis and the balance was performed on a cost-reimbursement basis. Under a fixed-price contract, the price paid to the contractor is negotiated at the outset of the contract and is not generally subject to adjustment to reflect the actual costs incurred by the contractor in the performance of the contract. Cost reimbursement contracts provide for the reimbursement of allowable costs and an additional negotiated fee.

Compliance with Environmental Protection Laws

Our operations are subject to and affected by a variety of federal, state, local and non-U.S. environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation and remediation of certain materials, substances and wastes. We continually assess our compliance status and management of environmental matters in an effort to ensure our operations are in substantial compliance with all applicable environmental laws and regulations.

Operating and maintenance costs associated with environmental compliance and management of sites are a normal, recurring part of our operations. These costs often are generally allowable costs under our contracts with the USG. It is reasonably possible that continued environmental compliance could have a material impact on our results of operations, financial condition or cash flows if more stringent clean-up standards are imposed, additional contamination is discovered and/or clean-up costs are higher than estimated.

See Environmental Matters in Item 3, Legal Proceedings, and Critical Accounting Estimates - Environmental Costs in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 19, Commitments and Contingencies, in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for further discussion of our environmental matters.


5


With respect to all other matters that may currently be pending, in the opinion of management, based on our analysis of relevant facts and circumstances, we do not believe that compliance with relevant environmental protection laws is likely to have a material adverse effect upon our capital expenditures, earnings or competitive position. In arriving at this conclusion, we have taken into consideration site-specific information available regarding total costs of any work to be performed and the extent of work previously performed. If we are identified as a “potentially responsible party” ("PRP") by environmental authorities at a particular site, we, using information available to us, will also review and consider a number of other factors, including: (i) the financial resources of other PRPs involved in each site and their proportionate share of the total volume of waste at the site; (ii) the existence of insurance, if any, and the financial viability of the insurers; and (iii) the success others have had in receiving reimbursement for similar costs under similar insurance policies issued during the periods applicable to each site.

International Operations

Our international sales are subject to U.S. and non-U.S. governmental regulations and procurement policies and practices, including regulations relating to import-export control, investment, exchange controls and repatriation of earnings. International sales are also subject to varying currency, political and economic risks.

COMPETITION

The Company operates in a highly competitive environment with many other organizations, some of which are substantially larger than us and have greater financial strength and more extensive resources. We compete for composite and metallic aerostructures subcontracts, and helicopter sales and structures, bearings and components business on the basis of price and/or quality; product endurance and special performance characteristics; proprietary knowledge; the quality of our products and services; the availability of facilities, equipment and personnel to perform contracts; and the reputation of our business. Competitors for our business include small machine shops and offshore manufacturing facilities. We compete for advanced technology fuzing business primarily on the basis of technical competence, product quality and price, and also on the basis of our experience as a developer and manufacturer of fuzes for particular weapon types and the availability of our facilities, equipment and personnel. We are also affected by the political and economic circumstances of our potential foreign customers and, in certain situations, the relationships of those foreign customers with the USG, the USG's perceptions of those foreign customers and the ability to obtain necessary export approvals, licenses or authorizations from the U.S. Government.

EMPLOYEES

As of December 31, 2019, we employed 2,935 individuals.

AVAILABLE INFORMATION

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the SEC.

We make available, free of charge on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, and current reports on Form 8-K as well as amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act, together with Section 16 insider beneficial stock ownership reports, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our website at www.kaman.com — select the “Investors” link, then the "Financial Information" link and then the “SEC Filings” link.

We also make available, free of charge on our website, our Certificate of Incorporation, By–Laws, Governance Principles and all Board of Directors' standing Committee Charters (Audit, Corporate Governance, Compensation and Finance). These documents are posted on our website at www.kaman.com — select the “Investors” link, then the "Corporate Governance" link and then the "Documents and Downloads" link.

The information contained on our website is not intended to be, and shall not be deemed to be, incorporated into this Form 10-K or any other filing under the Exchange Act or the Securities Act of 1933, as amended.


6


INFORMATION ABOUT OUR EXECUTIVE OFFICERS
 
The Company’s executive officers as of the date of this report are as follows:
Name
Age
Position
Prior Experience
Neal J. Keating
64
Chairman, President, Chief Executive Officer and Director
Mr. Keating was appointed President and Chief Operating Officer as well as elected a Director of the company effective September 17, 2007.  Effective January 1, 2008, he was appointed to the offices of President and Chief Executive Officer and effective March 1, 2008, he was appointed to the additional position of Chairman. Prior to joining the company, Mr. Keating served as Chief Operating Officer at Hughes Supply, a $5.4 billion industrial distributor that was acquired by Home Depot in 2006. Prior to that, he held senior positions at GKN Aerospace, an aerospace subsidiary of GKN plc, and Rockwell Collins Commercial Systems, and served as a board member of GKN plc and Agusta-Westland.
Richard R. Barnhart
59
President of Kaman Aerospace Group, Inc. and Executive Vice President of Kaman Corporation
Mr. Barnhart joined the company as President of Kaman Aerospace Group, Inc., with overall responsibility for the company's Aerospace business, effective October 1, 2017. Effective November 14, 2017, he was appointed Executive Vice President of Kaman Corporation. He was previously Senior Vice President of Barnes Group, Inc. and President of Barnes Aerospace, effective August 2013, and remained in this role until his retirement in June 2016. Prior to that, Mr. Barnhart served as President of Barnes Aerospace from February 2012 until his appointment in August 2013, following a tenure of divisional leadership and advancement across a number of the company's Aerospace and Distribution divisions. Prior to his service with Barnes Group, Mr. Barnhart was President of Kaman's Aerostructures division. He began his career with Price Waterhouse and spent a decade in increasingly responsible operating roles with United Technologies and Pratt & Whitney.
Robert D. Starr
52
Executive Vice President and Chief Financial Officer
Mr. Starr was appointed Executive Vice President effective July 1, 2015, and has served as the Chief Financial Officer of the company since July 1, 2013. Mr. Starr joined the company in 2009 as Vice President - Treasurer. Prior to joining Kaman, Mr. Starr served as Assistant Treasurer at Crane Co. of Stamford, Connecticut, a then $2.6 billion diversified manufacturer of highly engineered industrial products. He also previously served as Managing Director, Corporate Finance at Aetna, Inc. of Hartford, Connecticut and as Director, Capital Markets and Risk Management at Fisher Scientific International, Inc. of Hampton, New Hampshire. Mr. Starr was also an associate at both Salomon Smith Barney in New York and Chase Securities, Inc. in New York and Singapore.
James G. Coogan
39
Vice President, Investor Relations & Business Development
Mr. Coogan was appointed Vice President, Investor Relations & Business Development effective January 2020. Mr. Coogan has served in various roles since joining the company in 2008, most recently as Vice President, Investor Relations from April 2017 through December 2019 and prior to that Assistant Vice President, SEC Compliance and External Reporting from January 2013 through April 2017. Previous Kaman positions include: Director, External Reporting and SEC Compliance, and Manager, External Reporting and SEC Compliance. Prior to joining the company, Mr. Coogan held positions at Ann Taylor Stores Corporation, Mohegan Tribal Gaming Authority and PricewaterhouseCoopers.

7


Name
Age
Position
Prior Experience
Shawn G. Lisle
53
Senior Vice President and General Counsel
Mr. Lisle joined the company in 2011 and was appointed Senior Vice President and General Counsel effective December 1, 2012. Prior to joining the company, Mr. Lisle served as Senior Counsel for International Paper Company in Memphis, Tennessee. Prior to that, he served as legal counsel for Dana Corporation in Toledo, Ohio, and as an attorney at Porter Wright Morris & Arthur LLP in Columbus, Ohio. He also previously worked as a trial attorney at the U.S. Department of Justice, Tax Division in Washington, D.C. and was a Judge Advocate in the U.S. Navy.
John J. Tedone
55
Vice President, Finance and Chief Accounting Officer
Mr. Tedone has served as Vice President, Finance and the company's Chief Accounting Officer since May 2007. From April 2006 to April 2007, Mr. Tedone served as the company's Vice President, Internal Audit and prior to that as Assistant Vice President, Internal Audit.
Gregory T. Troy
64
Senior Vice President – Human Resources and Chief Human Resources Officer
Mr. Troy joined the company as Senior Vice President – Human Resources in March 2012. On February 19, 2013, he was appointed to the position of Chief Human Resources Officer. Prior to joining the company, Mr. Troy served as Chief Human Resources Officer of Force Protection, Inc. from April 2011 to March 2012, where he was a member of the Executive Committee. Prior to joining Force Protection, Mr. Troy served as Vice President and Chief Human Resources Officer at Modine Manufacturing Company from February 2006 to April 2011, providing global human resources leadership in the Americas, Europe and Asia. Mr. Troy also previously worked at OMNOVA Solutions Inc., Bosch Corporation and Mobil Corporation, after serving as a Transportation Officer in the United States Army.

Each executive officer holds office for a term of one year and until his or her successor is duly appointed and qualified, in accordance with the Company’s By-Laws.

8


ITEM 1A.     RISK FACTORS

Our business, financial condition, operating results and cash flows can be impacted by the factors set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.

RISKS RELATED TO OUR BUSINESS

Our future operating results will be impacted by changes in global economic and political conditions.

Our future operating results and liquidity are expected to be impacted by changes in general economic and political conditions which may affect, among other things, the following:

The availability of credit and our ability to obtain additional or renewed bank financing, the lack of which could have a material adverse impact on our business, financial condition and results of operations and may limit our ability to invest in capital projects and planned expansions or to fully execute our business strategy;
Market rates of interest, any increase in which would increase the interest payable on some of our borrowings and adversely impact our cash flow;
The investment performance of our pension plan, as well as the associated discount rate, any adverse changes in which may result in a deterioration in the funded status of the plan and an increase in required contributions and plan expense;
The relationship between the U.S. dollar and other currencies, any adverse changes in which could negatively impact our financial results;
The ability of our customers to pay for products and services on a timely basis, any adverse change in which could negatively impact sales and cash flows and require us to increase our bad debt reserves;
The volume of orders we receive from our customers, any adverse change in which could result in lower operating profits as well as less absorption of fixed costs due to a decreased business base;
The ability of our suppliers to meet our demand requirements, maintain the pricing of their products or continue operations, any of which may require us to find and qualify new suppliers;
The issuance and timely receipt of necessary export approvals, licenses and authorizations from the U.S. Government, the lack or untimely receipt of which could have a material adverse effect on our business, financial condition and results of operations; and
The political stability and leadership of countries where our customers reside, including military activity, training and threat levels, any adverse changes in which could negatively impact our financial results.

While general economic and political conditions have not impaired our ability to access credit markets and finance our operations to date, there can be no assurance that we will not experience future adverse effects that may be material to our cash flows, competitive position, financial condition, results of operations or our ability to access capital.

We are subject to litigation, tax, environmental and other legal compliance risks that could adversely affect our operating results.

We are subject to a variety of litigation, tax and legal compliance risks. These risks include, among other things, possible liability relating to contract-related claims, government contracts, product liability matters, personal injuries, intellectual property rights, taxes, employment, environmental matters and compliance with U.S. and foreign export laws, competition laws, laws governing improper business practices and data privacy laws, including the EU-wide General Data Protection Regulation (the "GDPR") and the California Consumer Privacy Act. In the event that we or one of our business units engage in wrongdoing in connection with any of these kinds of matters, we could be subject to significant fines, penalties, repayments, other damages (in certain cases, treble damages), or suspension or debarment from government contracts. Moreover, our failure to comply with applicable export and trade practice laws could result in civil or criminal penalties and suspension or termination of export privileges.


9


As a global business, we are subject to complex laws and regulations in the U.S. and other countries in which we operate. Those laws and regulations may be interpreted in different ways. They may also change from time to time, as may related interpretations and other guidance. Changes in laws or regulations could result in higher expenses and payments, and uncertainty relating to laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights. Changes in environmental and climate change laws or regulations, including laws relating to greenhouse gas emissions, could lead to new or additional investment in product designs and could increase environmental compliance expenditures. Changes in climate change concerns, or in the regulation of such concerns, including greenhouse gas emissions, could subject us to additional costs and restrictions, including increased energy and raw material costs.

Our financial results may be adversely affected by the outcome of pending legal proceedings and other contingencies that cannot be predicted. In accordance with GAAP, if a liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time, we make an estimate of material loss contingencies and establish reserves based on our assessment. Subsequent developments in legal proceedings may affect our assessment. The accrual of a loss contingency adversely affects our results of operations in the period in which a liability is recognized. This could also have an adverse impact on our cash flows in the period during which damages are paid.

For a discussion of these matters, please refer to Note 19, Commitments and Contingencies, and Note 13, Environmental Costs, in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Our foreign operations require us to comply with a number of United States and international laws and regulations, violations of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are required to comply with a number of United States and international laws and regulations, such as the U.S. Foreign Corrupt Practices Act of 1977 (the "FCPA"), the U.K. Bribery Act of 2010 (the "Bribery Act"), and other similar anticorruption laws and regulations. The FCPA generally prohibits United States companies or their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person or corporate entity or obtain any unfair advantage. Although we have internal controls, procedures and compliance programs to train our employees and agents with respect to compliance with the FCPA and other applicable international laws and regulations, there can be no assurance that our policies, procedures and programs will always protect us from reckless or criminal acts committed by our employees or agents. Allegations of violations of applicable international laws and regulations, including the FCPA and the Bribery Act, may result in internal, independent or government investigations. Violations of the FCPA and other international laws and regulations may lead to severe criminal or civil sanctions and could result in liabilities that have a material adverse effect on our business, financial condition, results of operations and cash flows.

Exports of certain of our products are subject to various export control regulations and authorizations, and we may not be successful in obtaining the necessary U.S. Government approvals and resultant export licenses for proposed sales to certain foreign customers.

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


10


Additional tax exposure and tax law changes could have a material effect on our financial results.

We are subject to income taxes in the United States and certain foreign jurisdictions. The determination of the Company’s provision for income taxes and other tax liabilities requires judgment and is based on legislative and regulatory structures that exist in the jurisdictions in which we operate, and we are periodically under audit by various tax authorities. We regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We are currently under audit by various states for the years 2013 through 2017. Although we do not believe that any material adjustments will result from these audits, the outcome of tax audits cannot be predicted with certainty. Any final assessment resulting from tax audits may result in material changes to our past or future taxable income, tax payable or deferred tax assets and may require us to pay penalties and interest that could have a material adverse effect on our results of operations.

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

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

The value of our deferred tax assets could become impaired, which could materially and adversely affect our operating results.
 
As of December 31, 2019, we had approximately $28.2 million in net deferred tax assets after valuation allowance. These deferred tax assets can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Each quarter, we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning strategies. In the event that there is insufficient positive evidence to support the valuation of these assets, we may be required to further adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in a material non-cash charge in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations.


11


Economic conditions and regulatory changes following the United Kingdom’s ("UK") exit from the European Union ("EU") could have a material adverse effect on our business, financial condition and results of operations.

We have business operations in both the UK and the broader EU. On January 31, 2020, the UK officially exited the EU (“Brexit”) and entered a transition period during which it remains bound by EU rules and trade policy. There is significant uncertainty regarding the terms and the future relationship between the UK and the EU following the transition period. In addition, the UK referendum and withdrawal process have given rise to calls for the governments of other EU member states to consider withdrawal.

During the process leading up to Brexit, global markets and currencies have been adversely impacted, including a decline in the value of the British pound as compared to the U.S. dollar. Because the terms of the UK’s future relationship with the EU are still subject to further negotiation, it is unclear what long-term economic, financial, trade and legal implications Brexit will have and how it will affect the regulation applicable to our business globally and in the region. Adverse developments during their negotiations, or the perception that any could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings continue to be subject to market volatility. Lack of clarity about future UK laws and regulations as the UK determines which EU laws to replace or replicate following Brexit, including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, immigration laws and employment laws, could decrease foreign direct investment in the UK, increase costs, depress economic activity and restrict our access to capital. If the UK and the EU are unable to negotiate acceptable terms for their future relationship or if other EU member states pursue withdrawal, barrier-free access between the UK and other EU member states or among the European economic area overall could be diminished or eliminated. Any of these factors could have a direct or indirect impact on our business in the UK and EU, our customers and suppliers in the UK and EU and our business outside the UK and EU. Any of these factors could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our common stock.

Our foreign operations present additional risks and uncertainties which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our foreign business operations create additional risks and uncertainties, including the following:

Longer payment cycles;
Difficulties in accounts receivable collection, including complexities in documenting letters of credit;
Changes in regulatory requirements;
Export restrictions, tariffs and other trade barriers;
Difficulties in staffing and managing foreign operations;
Seasonal reductions in business activity during the summer months in Europe and certain other parts of the world;
Political or economic instability in the markets we serve;
Potentially adverse tax consequences; and
Cultural and legal differences impacting the conduct of business.

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


12


We could be negatively impacted by the loss of key suppliers, the consolidation of suppliers, the lack of product availability or changes in supplier programs.

Our business depends on maintaining a sufficient supply of various products to meet our customers' demands. We have long-standing relationships with key suppliers but these relationships generally are non-exclusive and could be terminated by either party. If we were to lose a key supplier, or were unable to obtain the same levels of deliveries from these suppliers and were unable to supplement those purchases with products obtained from other suppliers, it could have a material adverse effect on our business. Additionally, we rely on foreign and domestic suppliers and commodity markets to secure raw materials used in many of the products we manufacture. Suppliers have consolidated and formed alliances to broaden their product and integrated system offerings, and achieve critical mass. Supplier consolidation could cause us to compete against certain competitors with greater financial resources, market penetration and purchasing power. This exposes us to volatility in the price and availability of raw materials. In some instances, we depend upon a single source of supply. Supply interruptions could arise from shortages of raw materials, labor disputes, weather conditions or pandemics, such as the novel strain of coronavirus, affecting suppliers' production, transportation disruptions or other reasons beyond our control. Even if we continue with our current supplier relationships, high demand for certain products may result in us being unable to meet our customers' demands, which could put us at a competitive disadvantage. Additionally, our key suppliers could also increase the pricing of their products, which would negatively affect our operating results if we were not able to pass these price increases through to our customers. We base our supply management process on an appropriate balancing of the foreseeable risks and the costs of alternative practices. To protect ourselves against such risks, we may engage in strategic inventory purchases during the year, negotiate long-term vendor supply agreements, monitor our inventory levels and obtain second sources when applicable to ensure that we have the appropriate inventory on hand to meet our customers' requirements.

We depend on our intellectual property, and have access to certain intellectual property and information of our customers and suppliers and any infringement or failure to protect such intellectual property could have a material adverse effect on our business, financial condition results of operations and cash flows.

We rely on a combination of patents, trademarks, copyrights, trade secrets, nondisclosure agreements, physical and information technology security systems, internal controls and compliance systems and other measures to protect our intellectual property, data, and technology rights, both domestically and internationally, as well as the intellectual property, data and technology rights of our customers and suppliers that we have in our possession or to which we have access. Our efforts to protect such intellectual property, data and technology rights may not be sufficient. There can be no assurance that our pending patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past or in the future will not be challenged or circumvented by competitors, or that these patents will be found to be valid or sufficiently broad to preclude our competitors from introducing technologies similar to those covered by our patents and patent applications. Our ability to protect and enforce our intellectual property, data and technology rights may be limited in certain countries outside the U.S. as may be our ability to prevent theft or compromise of our intellectual property, data and technology rights by competitors, state actors or third parties. In addition, we may be the target of competitor or other third-party patent enforcement actions seeking substantial monetary damages or seeking to prevent our sale and marketing of certain of our products or services. Our competitive position also may be adversely impacted by limitations on our ability to obtain possession of, and ownership or necessary licenses concerning, data important to the development or provision of our products or service offerings, or by limitations on our ability to restrict the use by others of data related to our products or services. Any of these events or factors could have a material adverse effect on our competitive position, subject us to judgments, penalties and significant litigation costs or temporarily or permanently disrupt our sales and marketing of the affected products or services. Any of the foregoing could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

13


Our financial results of operations could be adversely affected by impairment of our goodwill or other intangible assets.
When we acquire a business, we record goodwill equal to the excess of the amount we pay for the business, including liabilities assumed, over the fair value of the tangible and identifiable intangible assets of the business we acquire. Goodwill and other intangible assets that have indefinite useful lives must be evaluated at least annually for impairment. The specific guidance for testing goodwill and other non-amortized intangible assets for impairment requires management to make certain estimates and assumptions when allocating goodwill to reporting units and determining the fair value of reporting unit net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, investment rates, cost of capital and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Changes in our estimates and assumptions could adversely impact projected cash flows and the fair value of reporting units. Fair value is generally determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. Absent any impairment indicators, we generally perform our evaluations annually in the fourth quarter, using available forecast information. If at any time we determine an impairment has occurred, we are required to reflect the reduction in value as an expense within operating income, resulting in a reduction of earnings and a corresponding reduction in our net asset value in the period such impairment is identified.

A failure to maintain effective internal controls could adversely affect our ability to accurately report our financial results or prevent fraud.
Our ability to provide assurance with respect to our financial reports and to effectively prevent fraud depends on effective internal controls. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements; therefore, even effective controls can only provide reasonable assurance with respect to the preparation and fair presentation of financial statements. If our internal controls were to be compromised, our financial statements could become materially misleading, which could adversely affect the trading price of our common stock. Any material weakness could adversely impact investor confidence in the accuracy of our financial statements, affecting our ability to obtain additional financing. This would likely have an adverse effect on our business, financial condition and the market value of our stock. Additionally, we would be required to incur costs to make the necessary improvements to our internal control systems.
Although management has assessed our internal control over financial reporting as effective based on criteria set forth by the Committee of Sponsoring Organizations - Integrated Framework, we can give no assurance that material weaknesses will not occur in the future nor that existing controls will continue to be adequate to prevent or identify irregularities or ensure fair presentation of our financial statements in the future.

The adoption of new accounting guidance or changes in the interpretations of existing guidance could affect our financial results.
We prepare our financial statements in conformity with accounting principles generally accepted in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”). A change in these principles or interpretations could have a significant effect on our reported financial results, may retroactively affect previously reported results, could cause unexpected financial reporting fluctuations and may require us to make costly changes to our operational processes and accounting systems. In the first quarter of 2019, we implemented Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842), which superseded nearly all existing generally accepted accounting principles ("GAAP") lease guidance. For additional information on the impact of this standard, please refer to Note 1, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. Additionally, during the first quarter of 2018, we implemented ASU 2014-09, Revenue from Contracts with Customers, which superseded nearly all GAAP revenue recognition guidance. For additional information on the impact of this standard, please refer to Note 2, Accounting Changes, in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.


14


Our failure to comply with the covenants contained in our credit facility could trigger an event of default, which could materially and adversely affect our operating results and our financial condition.

Our credit facility requires us to maintain certain financial ratios and comply with various operational and other covenants. If we were unable to maintain these ratios and comply with such covenants, we would need to seek relief from our lenders in order to avoid, cure or have waived an event of default under the facility. There can be no assurance that we would be able to obtain such relief on commercially reasonable terms or otherwise. If an event of default occurs and is not cured or waived, we may not be able to make further borrowings under the credit facility and our lenders could, among other things, cause all outstanding indebtedness under the credit facility to be due and payable immediately. There can be no assurance that our assets or cash flows would be sufficient to provide us with sufficient liquidity to fund outstanding commitments or meet other business requirements or to enable us to fully repay those amounts or that we would be able to refinance or restructure the indebtedness. If, as or when required, we are unable to repay, refinance or restructure the indebtedness outstanding under our senior credit facility, or amend the financial ratios and covenants contained therein, the lenders under our credit facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets. This, in turn, could result in an event of default under one or more of our other financing agreements, including our convertible notes.

In addition, in the ordinary course of business, certain of our customers require us to deliver standby letters of credit to guarantee our performance under our contractual obligations with them, which are currently issued by certain of our lenders pursuant to our credit facility. If we are unable to obtain letters of credit as needed to operate our business as a result of any of the circumstances described above or otherwise, our ability to enter into certain contracts may be adversely affected. Moreover, by their nature, standby letters of credit may be drawn upon by the beneficiaries thereof, which could affect our financial ratios and ability to make additional borrowings. The occurrence of any of these events could have a material adverse effect on our liquidity, financial position or results of operations.

Changes affecting the availability of the London Interbank Offered Rate (“LIBOR”) could affect our financial results.

The Company has outstanding debt and receivable transactions with variable interest rates based on LIBOR. The LIBOR benchmark has been the subject of national, international, and other regulatory guidance and proposals for reform. In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit rates for calculation of LIBOR after 2021. These reforms may cause LIBOR to perform differently than in the past and LIBOR may ultimately cease to exist after 2021. Alternative benchmark rate(s) may replace LIBOR and could affect the Company's debt securities, derivative instruments, receivables, debt payments and receipts. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact our contracts which terminate after 2021. There is uncertainty about how applicable law, the courts or the Company will address the replacement of LIBOR with alternative rates on variable rate retail loan contracts and other contracts that do not include alternative rate fallback provisions. In addition, any changes to benchmark rates may have an uncertain impact on our cost of funds and our access to the capital markets, which could impact our liquidity, financial position or results of operations.

Business disruptions could seriously affect our sales and financial condition or increase our costs and expenses.

Our business may be impacted by disruptions including, but not limited to, threats to physical security, information technology attacks or failures, damaging weather or other acts of nature and pandemics or other public health crises, such as the novel strain of coronavirus first identified in Wuhan, China. Any of these disruptions could affect our internal operations or services provided to customers, and could impact our sales, increase our expenses or adversely affect our reputation or our stock price. We have developed and are implementing business continuity plans for each of our businesses, in order to mitigate the effects disruptions may have on our financial results.

Our insurance coverage may be inadequate to cover all significant risk exposures.

We are exposed to risks that are unique to the products and services we provide. While we believe that we maintain adequate insurance for certain risks, insurance cannot be obtained to protect against all risks and liabilities. It is therefore possible that our insurance coverage may not cover all claims or liabilities, and we may be forced to bear substantial unanticipated costs.


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Cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products and data.

Our information technology systems provide critical data connectivity, information and services for internal and external users. These interactions include, but are not limited to, ordering and managing materials from suppliers, inventory management, shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements and other processes necessary to manage our business. Our computer systems face the threat of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions.

Cyber-attacks are evolving and include, but are not limited to, malicious software, destructive malware, attempts to gain unauthorized access to data, manipulation of data, disruption or denial of service attacks and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential, personal or otherwise protected information, including trade secrets, and corruption of data, networks or systems. We provide products and services to customers who also face cyber threats. Our products and services may be subject to cyber threats and we may not be able to detect or deter such threats, which could result in losses that could adversely affect our customers and our company. Additionally, we could be impacted by cyber threats in products that we use in our partners' and customers' systems that are used in connection with our business. Any such breach could compromise our networks and the information there could be accessed, publicly disclosed, lost or stolen. These events, if not prevented or mitigated, could damage our reputation, require remedial action and lead to loss of business, regulatory actions, potential liability and other financial losses. To address the risks to our information technology systems and data, we manage an information security program, maintain strong incident report capabilities and perform daily off-site backups. Additionally, we have put in place business continuity plans and security precautions for our critical systems, including a back-up data center. Updates on cyber security are provided to the Board of Directors at least annually.

Our information technology systems, processes and sites may suffer interruptions or failures which may affect our ability to conduct our business.

In the event our information technology systems are damaged or cease to function properly due to any number of causes, such as catastrophic events, power outages and security breaches resulting in unauthorized access or cyber-attacks, and our information security program, incident report capabilities, business continuity plans and security precautions do not function effectively on a timely basis, we may suffer interruptions in our operations or the misappropriation of proprietary information, which may adversely impact our business, financial condition, results of operations and cash flows.

We rely on the experience and expertise of our skilled employees, and must continue to attract and retain qualified technical, marketing and managerial personnel in order to succeed.

Our future success will depend largely upon our ability to attract and retain highly skilled technical, operational and financial managers and marketing personnel. There is significant competition for such personnel in the aerospace industry. We try to ensure that we offer competitive compensation and benefits as well as opportunities for continued development, and we continually strive to recruit and train qualified personnel and retain key employees. There can be no assurance, however, that we will continue to be successful in attracting and retaining the personnel we require to develop new and enhanced products and to continue to grow and operate profitably.

The freezing of our defined benefit pension plan could trigger a material curtailment adjustment in favor of the USG.

Our defined benefit pension plan was frozen with respect to future benefit accruals effective December 31, 2015. U.S. Government Cost Accounting Standard 413 ("CAS 413") requires the Company to determine the USG’s share of any resulting pension curtailment adjustment attributable to pension expense charged to Company contracts with the USG, which could result in an amount due to the USG if the plan is determined to be in a surplus position or an amount due to the Company if the plan is determined to be in a deficit position. During the fourth quarter of 2016, the Company accrued a $0.3 million liability representing our estimate of the amount due to the USG based on our pension curtailment adjustment calculation, which was submitted to the USG for review in December 2016. The Company has maintained its accrual at $0.3 million as of December 31, 2019. There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on our results of operations, financial position and cash flows.


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Our business could be impacted as a result of actions by activist shareholders or others.

We may be subject, from time to time, to legal and business challenges in the operation of our company due to actions instituted by activist shareholders or others. Responding to such actions could be costly and time-consuming, may not align with our business strategies and could divert the attention of our Board of Directors and senior management from the pursuit of our business strategies. Perceived uncertainties as to our future direction as a result of shareholder activism may lead to the perception of a change in the direction of the business or other instability and may make it more difficult to attract and retain qualified personnel and business partners and may affect our relationships with vendors, customers and other third parties.

Our revenue, cash flows and quarterly results may fluctuate, which could adversely affect our stock price.

We may in the future experience significant fluctuations in our quarterly operating results attributable to a variety of factors. Such factors include but are not limited to:

Changes in demand for our products;
Introduction, enhancement or announcement of products by us or our competitors;
Market acceptance of our new products;
The growth rates of certain market segments in which we compete;
Size, timing and shipment terms of significant orders;
Difficulties with our technical programs;
Budgeting cycles of customers;
Pricing pressures from customers;
Customer advances;
Longer payment terms required by our customers;
Mix of distribution channels;
Mix of products and services sold;
Mix of domestic and international revenues;
Fluctuations in currency exchange rates;
Changes in the level of operating expenses;
Changes in our sales and management incentive plans;
Changes in tax laws in the jurisdictions in which we conduct business;
Timing of tax payments, assessments and settlements;
Inventory obsolescence;
Accrual of contract losses;
Fluctuations in oil and utility costs;
Health care reform;
Completion or announcement of acquisitions or divestitures; and
General economic conditions in regions in which we conduct business.

Most of our expenses are relatively fixed in the short-term, including costs of personnel and facilities, and are not easily reduced. Thus, an unexpected reduction in our revenue, or failure to achieve an anticipated rate of growth, could have a material adverse effect on our profitability. If our operating results do not meet the expectations of investors, our stock price may decline.


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RISKS RELATED TO THE INDUSTRIES IN WHICH WE OPERATE, OUR PROGRAMS AND OUR CONTRACTS

Our financial performance is significantly influenced by conditions within the aerospace and defense industries.

The financial performance of our business is directly tied to economic conditions in the commercial aviation and defense industries. The commercial aviation industry tends to be cyclical, and capital spending by airlines and aircraft manufacturers may be influenced by a variety of global factors including current and future traffic levels, aircraft fuel pricing, labor issues, competition, the retirement of older aircraft, regulatory changes, terrorism and related safety concerns, general economic conditions, worldwide airline profits and backlog levels. The defense industry may be influenced by a changing global political environment, changes in U.S. and global defense spending, U.S. foreign policy and the activity level of military flight operations. Changes to the aerospace and defense industries and any reductions in U.S. defense spending could have a material impact on our current and proposed aerospace programs, which could adversely affect our operating results and future prospects. In addition, changes in economic conditions may cause customers to request that firm orders be rescheduled or canceled, which could put a portion of our backlog at risk.

Furthermore, because of the lengthy research and development cycle involved in bringing new products to market, we cannot predict the economic conditions that will exist when a new product is introduced. A reduction in capital spending in the aviation or defense industries could have a significant effect on the demand for our products, which could have an adverse effect on our financial performance or results of operations.

Our USG programs are subject to unique risks.

We have several significant long-term contracts either directly with the USG or where the USG is the ultimate customer, including the Sikorsky BLACK HAWK cockpit program, the Joint Programmable Fuze (“JPF”) program and the AH-1Z program. These contracts are subject to unique risks, some of which are beyond our control. Examples of such risks include:

The USG may modify, curtail or terminate its contracts and subcontracts at its convenience without prior notice, upon payment for work done and commitments made at the time of termination. Modification, curtailment or termination of our major programs or contracts could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our USG business is subject to specific procurement regulations and other requirements. These requirements, although customary in USG contracts, increase our performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. Although we have procedures designed to assure compliance with these regulations and requirements, failure to do so under certain circumstances could lead to suspension or debarment, for cause, from USG contracting or subcontracting for a period of time and could have a material adverse effect on our business, financial condition, results of operations and cash flows and could adversely impact our reputation and our ability to receive other USG contract awards in the future.
The costs we incur on our USG contracts, including allocated indirect costs, may be audited by USG representatives. Any costs found to be improperly allocated to a specific contract would not be reimbursed, and such costs already reimbursed would have to be refunded, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Moreover, if any audit were to reveal the existence of improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the USG.
We are from time to time subject to governmental inquiries and investigations of our business practices due to our participation in domestic and foreign government contracts and programs and our transaction of business domestically and internationally. Adverse findings associated with any such inquiry or investigation could also result in civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with domestic and foreign governments.

Our business may be adversely affected by changes in budgetary priorities of the USG.

Because a significant percentage of our revenue is derived either directly or indirectly from contracts with the USG, changes in federal government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs that we support or a change in federal government contracting policies could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise options to renew contracts.


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The ability to obtain and retain product approvals issued by the Federal Aviation Administration ("FAA") and any intellectual property claims could adversely affect our operating results and profits.
Our business may be impacted by regulations set forth by the FAA to obtain Parts Manufacturer Approvals ("PMAs") to design or produce a modification or replacement aircraft part. The loss or suspension of the Company's product and design approvals could negatively impact our operating results and profits. We believe our current design and production processes that are subject to such regulations by the FAA are in compliance; however, there can be no assurance that we will not lose approvals for our products in the future. Additionally, we may be subject to claims of intellectual property infringement by third parties, including in connection with our PMA business, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Competition from domestic and foreign manufacturers may result in the loss of potential contracts and opportunities.

The aerospace markets in which we participate are highly competitive, and we often compete for work not only with large OEMs but also sometimes with our own customers and suppliers. Many of our large customers may choose not to outsource production due to, among other things, their own direct labor and overhead considerations and capacity utilization objectives. This could result in these customers supplying their own products or services and competing directly with us for sales of these products or services, all of which could significantly reduce our revenues.

Our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas, and we may not have the technology, cost structure, or available resources to effectively compete with them. We believe that developing and maintaining a competitive advantage requires continued investment in product development; engineering; supply chain management; production capabilities, including technology, equipment and facilities; and sales and marketing, and we may not have enough resources to make the necessary investments to do so. Further, our significant customers may attempt to use their position to negotiate price or other concessions for a particular product or service without regard to the terms of an existing contract or the underlying cost of production.

We believe our strategies for our business will allow us to continue to effectively compete for key contracts and customers, but there can be no assurance that we will be able to compete successfully in this market or against such competitors.

The cost and effort to start up new programs and introduce new products and technologies could negatively impact our operating results and profits.

The time required and costs incurred to ramp up a new program can be significant and include nonrecurring costs for tooling, first article testing, finalizing drawings and engineering specifications and hiring new employees able to perform the technical work required. New programs can typically involve a greater volume of scrap, higher costs due to inefficiencies, delays in production and learning curves that are often more extended than anticipated, all of which could have a material effect on our business, financial condition, results of operations and cash flows.

We also seek to achieve growth through the design, development, production, sale and support of innovative products that incorporate advanced technologies. The product, program and service needs of our customers change and evolve regularly and we invest in research and development efforts to pursue advances in technologies, products and services. We are currently developing the next generation K-MAX® unmanned aircraft system that will allow operators to have the ability to fly either manned or unmanned missions. We have received five orders as of December 31, 2019, which allow for a short time frame to develop and manufacture the unmanned aircraft systems. If any of our development and/or production efforts are delayed, if suppliers cannot deliver timely or perform to our standards and/or if we identify or experience any other issues, we may not meet delivery schedules agreed upon with our customers, which could result in material additional costs, including liquidated damages or other liabilities that could be assessed.


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Our ability to realize the anticipated benefits of our technological advancements depends on a variety of factors, including meeting development, production, certification and regulatory approval schedules; execution of internal and external performance plans; availability of supplier and internal facility capacity to perform maintenance, repair, and overhaul services on our products; hiring and training of qualified personnel; achieving cost and production efficiencies, identification of emerging technological trends in our target end markets; validation of innovative technologies; the level of customer interest in new technologies and products; and customer acceptance of products we manufacture. Development efforts divert resources from potential resources in our businesses, and these efforts may not lead to the development of new technologies on a timely basis or meet the needs of our customers as fully as competitive offerings. Additionally, the markets for our products or products that incorporate our technologies may not develop or grow as we anticipate. We may encounter difficulties in developing and/or producing new products or services and may not realize the degree or timing of benefits initially anticipated or may otherwise suffer significant adverse financial consequences. Due to the design complexity of our products, we may experience delays in completing the development and introduction of new products. Delays could result in increased development costs or deflect resources from other projects. Furthermore, our competitors or customers may develop competing technologies which gain market acceptance in advance or instead of our products. Additionally, our competitors may develop new technologies or offerings that may cause our existing technologies or offerings to become obsolete. These risks associated with efforts to start up new programs and introduce new products and technologies could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Estimates of future costs for long-term contracts impact our current and future operating results and profits.

We generally recognize sales and gross margin on long-term contracts based on the over time method of accounting. This method allows for revenue recognition as our work progresses on a contract and requires that we estimate future revenues and costs over the life of a contract. Revenues are estimated based upon the negotiated contract price, with consideration being given to exercised contract options, change orders and, in some cases, projected customer requirements. Contract costs may be incurred over a period of several years, and the estimation of these costs requires significant judgment based upon the acquired knowledge and experience of program managers, engineers and financial professionals.

Estimated costs are based primarily on anticipated purchase contract terms, historical performance trends, business base and other economic projections. The complexity of certain programs as well as technical risks and the availability of materials and labor resources could affect our ability to accurately estimate future contract costs. Additional factors that could affect recognition of revenue and gross margin under this method include:

Accounting for initial program costs;
The effect of nonrecurring work;
Delayed contract start-up or changes to production schedules;
Transition of work to or from the customer or other vendors;
Claims or unapproved change orders;
Product warranty issues;
Delayed completion of certain programs for which inventory has been built up;
Our ability to estimate or control scrap level;
Accrual of contract losses; and
Changes in our overhead rates.

Because of the significance of the judgments and estimation processes, it is likely that materially different sales and profit amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect current and future financial performance. While we perform quarterly reviews of our long-term contracts to address and lessen the effects of these risks, there can be no assurance that we will not make material adjustments to underlying assumptions or estimates relating to one or more long-term contracts that have a material adverse effect on our business, financial condition, results of operations and cash flows.


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We may lose money or generate lower than expected profits on our fixed-price contracts.

Our customers set demanding specifications for product performance, reliability and cost. Most of our government contracts and subcontracts provide for a predetermined, fixed price for the products we make regardless of the costs we incur. Therefore, we must absorb cost overruns, notwithstanding the difficulty of estimating all of the costs we will incur in performing these contracts and in projecting the ultimate level of sales that we may achieve. Our failure to anticipate technical problems, estimate costs accurately, integrate technical processes effectively or control costs during performance of a fixed-price contract may reduce the profitability of a fixed-price contract or cause a loss. While we believe that we have recorded adequate provisions in our financial statements for losses on our fixed-price contracts as required under GAAP, there can be no assurance that our contract loss provisions will be adequate to cover all actual future losses.

We face significant pressure to lower our pricing notwithstanding our own internal costs.

There is substantial and continuing pressure from original equipment manufacturers in the commercial aerospace industry to reduce the prices they pay to suppliers, such as Kaman. We attempt to manage such downward pricing pressure, while trying to preserve our business relationships with our customers, by seeking to reduce our production and procurement costs through various measures, including implementing cost-effective process improvements and partnering with our own suppliers to reduce our cost of raw materials and components. Our suppliers have periodically resisted, and in the future may resist, pressure to lower their prices and may seek to impose price increases. If we are unable to offset price reductions to our OEM customers, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may not realize all of the sales expected from our existing backlog or anticipated orders.

At December 31, 2019, we had $806.9 million of order backlog. There can be no assurance that the revenues included in our backlog will be realized or, if realized will result in profits. We consider backlog to be firm customer orders. OEM customers may provide projections of components and assemblies that they anticipate purchasing in the future under existing programs. These projections may represent orders that are beyond lead time and are included in backlog when supported by a long term agreement. Our customers have the right under certain circumstances or with certain penalties or consequences to terminate, reduce or defer firm orders that we have in backlog. If our customers terminate, reduce or defer firm orders, we may be protected from certain costs and losses, but our sales would be adversely affected. Although we strive to maintain ongoing relationships with our customers, there is an ongoing risk that orders may be canceled or rescheduled due to fluctuations in our customers’ business needs or purchasing budgets.

The 737 MAX fleet is currently grounded, and we are subject to a number of risks and uncertainties related to the timing and conditions surrounding the aircraft’s return to service.

On March 13, 2019, the FAA issued an order to suspend operations of all 737 MAX aircraft in the U.S. and by U.S. aircraft operators following two fatal 737 MAX accidents. Non-U.S. civil aviation authorities have issued directives to the same effect. Boeing has suspended deliveries until the FAA and other civil aviation authorities worldwide grant the clearance to return the aircraft to service. On April 5, 2019, Boeing announced plans to reduce the 737 production rate from 52 aircraft per month to 42 per month effective April 15, 2019. On December 16, 2019, Boeing announced that it would temporarily suspend production of the 737 MAX beginning in January 2020 as a result of the ongoing evaluation. On January 21, 2020, Boeing announced that it is currently estimating the ungrounding of the 737 MAX during mid-2020. There can be no assurance that the production rate will return to the production rate prior to the grounding of the 737 MAX fleet. We have recognized $19.9 million and $19.5 million in revenue associated with the 737 MAX fleet in the years ended December 31, 2019 and 2018, respectively. Any delays in the aircraft being returned to service and/or future reductions to the production rate could have an adverse effect on our financial position, results of operations, and/or cash flows.


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The U.S. Navy contract award for the FMU-139 D/B bomb fuze could jeopardize the continued viability and profitability of the Company's FMU-152 A/B bomb fuze program with the U.S. Air Force ("USAF").

The Company currently provides the FMU-152 A/B bomb fuze (also referred to as the JPF) to the USAF and forty other nations, but the U.S. Navy currently utilizes a different fuze - the FMU-139. During 2015, the U.S. Naval Air Systems Command (“NAVAIR”) solicited proposals for a firm, fixed-price production contract to implement improvements to the performance characteristics of the FMU-139 (such improved fuze having been designated the FMU-139 D/B). The USAF has stated that, if and when a contract is awarded and production begins, the funds associated with the FMU-152 A/B will be redirected to the FMU-139 D/B. During the third quarter of 2015, the U.S. Navy awarded the FMU-139 D/B contract to a competitor. In the event that the FMU-139 D/B program proceeds as planned and the USAF redirects the funds associated with the FMU-152 A/B to the FMU-139 D/B, our business, financial condition, results of operations and cash flows is expected to be materially adversely impacted. During the third quarter of 2019, our competitor announced that it received its first production order from the U.S. Navy to manufacture the FMU-139 D/B. Due to the complexity of this program and the pending status of the USAF's final decision to redirect funds to the FMU-139 D/B, the timing and magnitude of the impact on the Company's financial statements is not certain.

RISKS RELATING TO ACQUISITIONS, JOINT VENTURES, DIVESTITURES AND RESTRUCTURING

We may make acquisitions or investments in new businesses, products or technologies that involve additional risks, which could disrupt our business or harm our financial condition or results of operations.

As part of our business strategy, we have made, and expect to continue to make, acquisitions of businesses or investments in companies that offer complementary products, services and technologies. Such acquisitions or investments involve a number of risks, including:

Assimilating operations and products may be unexpectedly difficult;
Management's attention may be diverted from other business concerns;
We may enter markets in which we have limited or no direct experience;
We may lose key employees, customers or vendors of an acquired business;
We may not be able to achieve the synergies or cost savings we anticipated;
We may not realize the assigned value of the acquired assets;
We may experience quality control failures or encounter other customer relationship issues; and
We may become subject to preexisting liabilities and obligations of the acquired businesses.

These factors could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the consideration paid for any future acquisitions could include our stock or require that we incur additional debt and contingent liabilities. As a result, future acquisitions could cause dilution of existing equity interests and earnings per share.

Our business following the sale of our Distribution business is materially different.

For the year ended December 31, 2018, our former Distribution business generated approximately 60.8% of the Company’s total net sales and represented approximately 38.6% of the Company’s total assets. Our continuing businesses are less diversified and our exposure to the risks inherent in those businesses will increase. Our shareholders have no ongoing interest in our former Distribution businesses and have ceased to participate in the future earnings and cash flows of those businesses on and after the closing date. Instead, the Company will seek to grow our aerospace and engineered products businesses through internal investments and strategic acquisitions. We may be unable to retain the existing employees of our aerospace and engineered products businesses or to attract additional qualified employees to meet current and future needs. Our results of operations and financial condition may be materially adversely affected if we fail to implement our strategic growth initiatives as planned, and the ultimate value of the sale of our Distribution business may be unfavorably affected to the extent we are unable to realize the expected accounting and tax benefits of the sale.


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The performance of required transition services may disrupt our continuing businesses, divert our resources and distract our management.

In connection with the sale of our former Distribution business, we entered into a transition services agreement, pursuant to which we agreed to provide various transition services to the purchasers of the Distribution business for specified periods beginning as of the closing date. In order to perform our obligations under the transition services agreement, we will allocate certain of our resources, including Company assets, facilities, equipment and the time and attention of our senior management team, to ensure a smooth transition of the businesses sold, which may negatively impact our own business, results of operations, financial condition and cash flows. Difficulties in separating the operations, technologies and IT infrastructure of the Distribution business from those of our aerospace and engineered products businesses may require substantially more time and funds than we anticipated in negotiating the terms of the transition services agreement. Although the transition services agreement generally entitles us to compensation for services rendered under the agreement, the compensation specified in the transition services agreement may not be sufficient to cover the costs incurred in providing the services, which could result in unrecoverable costs that could be material. If we are unable to effectively manage these risks, our business, results of operations, financial condition and cash flows may be adversely affected.

We have broad discretion in how we use the net proceeds from the sale of our former Distribution business, and we may not use those proceeds effectively.

The net proceeds from the sale of our former Distribution business were received by the Company, not the Company’s shareholders. The Company used a portion of the net proceeds for the acquisition of Bal Seal, to pay off outstanding indebtedness, and to pay the taxes related to the gain on the sale of the Distribution business. We cannot, however, specify with any certainty the particular uses of the remaining net proceeds, and our Board of Directors and management will have broad discretion in applying those net proceeds. Those remaining proceeds may be used for, among other things, effectuating unspecified acquisitions, investing in the Company’s remaining businesses, returning capital to our shareholders and funding general corporate purposes. We may spend or invest these proceeds in a way with which our shareholders disagree. The failure to utilize the net proceeds of the sale of our Distribution business effectively could affect our ability to grow our remaining businesses, which could adversely affect our business, results of operations, financial position and cash flows and cause the value of our common stock to decline. Pending their use, the net proceeds from the sale of the Distribution business may be invested in a way that does not produce income or that loses value.

Certain of our operations are conducted through joint ventures, which entail special risks.

The Company has a 49% equity interest in Kineco-Kaman Composites - India Private Limited, a composites manufacturing joint venture located in Goa, India. The Company relies significantly on the services and skills of its joint venture partner to manage and conduct the local business operations of the joint venture and ensure compliance with all applicable laws and regulations. If our joint venture partner fails to perform these functions adequately, it may adversely affect our business, financial condition, results of operations and cash flows. Moreover, if our joint venture partner fails to honor its financial obligations to commit capital, equity or credit support to the joint venture as a result of financial or other difficulties or for any other reason, the joint venture may be unable to perform contracted services or deliver contracted products unless we provide the necessary capital, equity or credit support.

We may be unable to realize expected benefits from our sales initiatives and cost reduction and restructuring efforts and our profitability may be hurt or business otherwise might be adversely affected.

We have a number of initiatives to grow sales and win new programs. Additionally, in order to operate more efficiently and control costs, from time to time, we announce restructuring plans or other cost savings initiatives, which include workforce reductions as well as facility consolidations and other cost reduction initiatives, such as streamlining our processes. These plans are intended to generate operating expense savings through direct cost and indirect overhead expense reductions, as well as other savings. We may undertake further sales growth initiatives, workforce reductions or restructuring actions in the future. These types of sales growth initiatives and cost reduction and restructuring activities are complex. If we do not successfully manage our current initiatives and restructuring activities or any other similar activities that we may undertake in the future, expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. Risks associated with these initiatives, actions and other workforce management issues include political responses to such actions, unforeseen delays in the implementation of anticipated workforce reductions, additional unexpected costs, changes in responsibilities, business and information technology systems disruptions, changes in internal controls, potential impacts on financial reporting, adverse effects on employee morale and the failure to meet operational targets, whether due to the loss of employees, work stoppages or otherwise, any of which may impair our ability to achieve anticipated sales or cost reductions and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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FORWARD-LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements also may be included in other publicly available documents issued by the Company and in oral statements made by our officers and representatives from time to time. These forward-looking statements are intended to provide management's current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. They can be identified by the use of words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "would," "could," "will" and other words of similar meaning in connection with a discussion of future operating or financial performance. Examples of forward looking statements include, among others, statements relating to future sales, earnings, cash flows, results of operations, uses of cash and other measures of financial performance.

Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and other factors that may cause the Company's actual results and financial condition to differ materially from those expressed or implied in the forward-looking statements. Such risks, uncertainties and other factors include, among others: (i) the possibility that we may be unable to find appropriate reinvestment opportunities for the proceeds from the sale of our former Distribution business; (ii) risks related to Kaman's performance of its obligations under the transition services agreement entered into in connection with the sale of our former Distribution business and disruption of management time from ongoing business operations relating thereto; (iii) changes in domestic and foreign economic and competitive conditions in markets served by the Company, particularly the defense, commercial aviation and industrial production markets; (iv) changes in government and customer priorities and requirements (including cost-cutting initiatives, government and customer shut-downs, the potential deferral of awards, terminations or reductions of expenditures to respond to the priorities of Congress and the Administration, or budgetary cuts resulting from Congressional actions or automatic sequestration); (v) changes in geopolitical conditions in countries where the Company does or intends to do business; (vi) the successful conclusion of competitions for government programs (including new, follow-on and successor programs) and thereafter successful contract negotiations with government authorities (both foreign and domestic) for the terms and conditions of the programs; (vii) the timely receipt of any necessary export approvals and/or other licenses or authorizations from the USG; (viii) timely satisfaction or fulfillment of material contractual conditions precedents in customer purchase orders, contracts, or similar arrangements; (ix) the existence of standard government contract provisions permitting renegotiation of terms and termination for the convenience of the government; (x) the successful resolution of government inquiries or investigations relating to our businesses and programs; (xi) risks and uncertainties associated with the successful implementation and ramp up of significant new programs, including the ability to manufacture the products to the detailed specifications required and recover start-up costs and other investments in the programs; (xii) potential difficulties associated with variable acceptance test results, given sensitive production materials and extreme test parameters; (xiii) the receipt and successful execution of production orders under the Company's existing USG JPF contract, including the exercise of all contract options and receipt of orders from allied militaries, but excluding any next generation programmable fuze programs, as all have been assumed in connection with goodwill impairment evaluations; (xiv) the continued support of the existing K-MAX® helicopter fleet, including sale of existing K-MAX® spare parts inventory and the receipt of orders for new aircraft sufficient to recover our investments in the K-MAX® production line; (xv) the accuracy of current cost estimates associated with environmental remediation activities; (xvi) the profitable integration of acquired businesses into the Company's operations; (xvii) the ability to recover from cyber-based or other security attacks, information technology failures or other disruptions; (xviii) changes in supplier sales or vendor incentive policies; (xix) the ability of our suppliers to satisfy their performance obligations; (xx) the effects of price increases or decreases; (xxi) the effects of pension regulations, pension plan assumptions, pension plan asset performance, future contributions and the pension freeze, including the ultimate determination of the USG's share of any pension curtailment adjustment calculated in accordance with CAS 413; (xxii) future levels of indebtedness and capital expenditures; (xxiii) the continued availability of raw materials and other commodities in adequate supplies and the effect of increased costs for such items; (xxiv) the effects of currency exchange rates and foreign competition on future operations; (xxv) changes in laws and regulations, taxes, interest rates, inflation rates and general business conditions; (xxvi) the effects, if any, of the United Kingdom's exit from the European Union; (xxvii) future repurchases and/or issuances of common stock; (xxviii) the occurrence of unanticipated restructuring costs or the failure to realize anticipated savings or benefits from past or future expense reduction actions; (xxix) the ability to recruit and retain skilled employees; and (xxx) other risks and uncertainties set forth herein.

Any forward-looking information provided in this report should be considered with these factors in mind. We assume no obligation to update any forward-looking statements contained in this report.


24



ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

25


ITEM 2.
PROPERTIES

Our facilities are generally suitable for, and adequate to serve, their intended uses. At December 31, 2019, we occupied major facilities at the following principal locations:
Segment
 
Location
 
Property Type (1)
Aerospace
 
Jacksonville, Florida
 
Leased - Manufacturing & Office
 
 
Chihuahua, Mexico
 
Leased - Manufacturing & Office
 
 
Rimpar, Germany
 
Owned - Manufacturing & Office
 
 
Prachatice, Czech Republic
 
Owned - Assembly & Office
 
 
Wichita, Kansas
 
Leased - Manufacturing & Office
 
 
Darwen, Lancashire, United Kingdom
 
Leased - Manufacturing & Office
 
 
Orlando, Florida
 
Owned - Manufacturing & Office
 
 
Höchstadt, Germany
 
Owned - Manufacturing & Office
 
 
Middletown, Connecticut
 
Owned - Manufacturing & Office
 
 
Bloomfield, Connecticut
 
Owned - Manufacturing, Office & Service Center
 
 
Bennington, Vermont
 
Owned - Manufacturing & Office
 
 
Gilbert, Arizona
 
Leased - Office & Service Center
 
 
 
 
 
Corporate
 
Bloomfield, Connecticut
 
Owned - Office & Information Technology Back-Up Data Center
 
Square Feet
Aerospace
1,985,374

Corporate (2)
105,432

Total
2,090,806

(1)
Owned facilities are unencumbered.
(2)
We occupy a 40,000 square foot corporate headquarters building, 38,000 square foot mixed use building, and 8,000 square foot data center in Bloomfield, Connecticut.

26


ITEM 3.
LEGAL PROCEEDINGS

General

From time to time, as a normal incident of the nature and kinds of businesses in which the Company and its subsidiaries are, and were, engaged, various claims or charges are asserted and legal proceedings are commenced by or against the Company and/or one or more of its subsidiaries. Claimed amounts may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitral awards. We record accruals related to those matters for which we consider a loss to be both probable and reasonably estimable. Gain contingencies, if any, are not recognized until they are realized. Legal costs are generally expensed when incurred.

We evaluate, on a quarterly basis, developments in legal proceedings that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. Our loss contingencies are subject to substantial uncertainties, however, including for each such contingency the following, among other factors: (i) the procedural status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings involve a large number of parties and/or claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement discussions, if any, and the settlement postures of the parties. Because of these uncertainties, management has determined that, except as otherwise noted below, the amount of loss or range of loss that is reasonably possible in respect of each matter described below (including any reasonably possible losses in excess of amounts already accrued), is not reasonably estimable.

While it is not possible to predict the outcome of these matters with certainty, based upon available information, management believes that all settlements, arbitration awards and final judgments, if any, which are considered probable of being rendered against us in legal proceedings and that can be reasonably estimated are accrued for at December 31, 2019. Despite this analysis, there can be no assurance that the final outcome of these matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

Except as set forth below, as of December 31, 2019, neither the Company nor any of its subsidiaries is a party, nor is any of its or their property subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company and its subsidiaries. Additional information relating to certain of these matters is set forth in Note 19, Commitments and Contingencies, and Note 13, Environmental Costs, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Environmental Matters

The Company and its subsidiaries are subject to numerous U.S. Federal, state and international environmental laws and regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental issues concerning activities at our facilities or former facilities or remediation as a result of past activities (including past activities of companies we have acquired). From time to time, we receive notices from the U.S. Environmental Protection Agency or equivalent state or international environmental agencies that we are a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent laws. Such notices assert potential liability for cleanup costs at various sites, which may include sites owned by us, sites we previously owned and treatment or disposal sites not owned by us, allegedly containing hazardous substances attributable to us from past operations. While it is not possible to predict the outcome of these proceedings, in the opinion of management, any payments we may be required to make as a result of all such claims in existence at December 31, 2019, will not have a material adverse effect on our business, financial condition and results of operations or cash flows. Additional information relating to certain of these matters is set forth in Note 19, Commitments and Contingencies, and Note 13, Environmental Costs, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.


27


Asbestos Litigation

Like many other industrial companies, the Company and/or one of its subsidiaries may be named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos integrated into certain products sold or distributed by the Company and/or the named subsidiary. A substantial majority of these asbestos-related claims have been covered by insurance or other forms of indemnity or have been dismissed without payment. The rest have been resolved for amounts that are not material to the Company, either individually or in the aggregate. Based on information currently available, we do not believe that the resolution of any currently pending asbestos-related matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 4.
MINE SAFETY DISCLOSURES

Information concerning mine safety violations required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and Item 104 of Regulation S-K was not required for this Annual Report on Form 10-K as there were no reportable violations during 2019.


28


PART II

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

MARKET, DIVIDEND AND SHAREHOLDER INFORMATION

Our Common Stock is traded on the New York Stock Exchange under the symbol "KAMN".  As of January 31, 2020, there were 3,517 registered holders of our Common Stock. Holders of the Company’s Common Stock are eligible to participate in the Computershare CIP program, which offers a variety of services including dividend reinvestment and direct stock purchase. The plan brochure describing the program may be obtained by contacting Computershare at (800) 227-0291 or via the web at www.computershare.com/investor.

ISSUER PURCHASES OF EQUITY SECURITIES

The following table provides information about purchases of Common Stock by the Company during the three months ended December 31, 2019:
Period
 
Total Number
of Shares
Purchased (a)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of a Publicly
Announced Plan (b)
 
Approximate Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plan (in thousands)
September 28, 2019 – October 25, 2019
 
99,000

 
$
58.51

 
99,000

 
$
29,579

October 26, 2019 – November 22, 2019
 
64,676

 
$
60.15

 
63,000

 
$
25,797

November 23, 2019 – December 31, 2019
 
150,569

 
$
67.05

 
150,569

 
$
15,701

Total
 
314,245

 
 

 
312,569

 
 

(a) During the quarter the Company purchased 1,676 shares in connection with employee tax withholding obligations as permitted by our equity compensation plans; these purchases were made in compliance with SEC Rule 16b-3. These are not purchases under our publicly announced program.
(b) On April 29, 2015, the Company announced that its Board of Directors approved a $100.0 million share repurchase program ("2015 Share Repurchase Program").


29


PERFORMANCE GRAPH

Following is a comparison of our total shareholder return for the period 2014 – 2019 compared to the S&P 600 Small Cap Index and the Russell 2000 Small Cap Index. The performance graph does not include a published industry or line-of-business index or peer group of similar issuers because during the performance period the Company was conducting operations in diverse lines of business and we do not believe a meaningful industry index or peer group can be reasonably identified. Accordingly, as permitted by regulation, the graph includes the S&P 600 Small Cap Index and the Russell 2000 Small Cap Index, both of which are comprised of issuers with market capitalizations generally similar to that of the Company.

performancegraph2019.jpg
 
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
Kaman Corporation
 
100.00

 
103.62

 
126.29

 
154.21

 
148.89

 
177.26

S&P Small Cap 600
 
100.00

 
98.03

 
124.06

 
140.48

 
128.56

 
157.85

Russell 2000
 
100.00

 
95.59

 
115.95

 
132.94

 
118.30

 
148.49


30


ITEM 6.     SELECTED FINANCIAL DATA

FIVE-YEAR SELECTED FINANCIAL DATA
(in thousands, except per share amounts, shareholders and employees)
 
 
2019 1,6,8,9
 
2018 2,6,7,8,9
 
2017 3,6,7,8,9
 
2016 4,6,7,8,9
 
2015 5,6,7,8,9
OPERATIONS
 
 
 
 
 
 
 
 
 
 
Net sales from continuing operations
 
$
761,608

 
$
735,994

 
$
724,944

 
$
702,054

 
$
597,586

Operating income from continuing operations
 
53,411

 
32,963

 
61,716

 
64,955

 
50,342

Earnings from continuing operations before income taxes
 
40,587

 
25,136

 
44,922

 
51,921

 
40,103

Income tax (benefit) expense
 
(15,859
)
 
9,259

 
25,214

 
15,294

 
9,612

Earnings from continuing operations
 
56,446

 
15,877

 
19,708

 
36,627

 
30,491

Earnings from discontinued operations, net of taxes
 
29,027

 
38,292

 
30,118

 
22,227

 
29,947

Gain on disposal of discontinued operations, net of taxes
 
124,356

 

 

 

 

Net earnings
 
$
209,829

 
$
54,169

 
$
49,826

 
$
58,854

 
$
60,438

FINANCIAL POSITION
 
 

 
 

 
 

 
 

 
 

Current assets
 
$
936,488

 
$
773,105

 
$
747,869

 
$
698,553

 
$
676,035

Current liabilities
 
203,992

 
298,476

 
246,299

 
353,886

 
236,689

Working capital
 
732,496

 
474,629

 
501,570

 
344,667

 
439,346

Property, plant and equipment, net
 
140,450

 
137,112

 
139,313

 
131,705

 
131,563

Total assets
 
1,418,943

 
1,474,062

 
1,466,396

 
1,439,476

 
1,451,186

Long-term debt, excluding current portion
 
181,622

 
284,256

 
391,651

 
296,598

 
434,227

Shareholders’ equity
 
823,202

 
633,157

 
635,656

 
565,787

 
543,077

PER SHARE AMOUNTS
 
 

 
 

 
 

 
 

 
 

Basic earnings per share from continuing operations
 
$
2.02

 
$
0.57

 
$
0.71

 
$
1.35

 
$
1.12

Basic earnings per share from discontinued operations
 
5.49

 
1.37

 
1.09

 
0.82

 
1.10

Basic earnings per share
 
$
7.51

 
$
1.94

 
$
1.80

 
$
2.17

 
$
2.22

Diluted earnings per share from continuing operations
 
$
2.01

 
$
0.56

 
$
0.69

 
$
1.31

 
$
1.09

Diluted earnings per share from discontinued operations
 
5.46

 
1.36

 
1.06

 
0.79

 
1.08

Diluted earnings per share
 
$
7.47

 
$
1.92

 
$
1.75

 
$
2.10

 
$
2.17

Dividends declared
 
$
0.80

 
$
0.80

 
$
0.80

 
$
0.72

 
$
0.72

Shareholders’ equity
 
29.57

 
22.72

 
22.85

 
20.87

 
20.09

AVERAGE SHARES OUTSTANDING
 
 

 
 

 
 

 
 

 
 

Basic
 
27,936

 
27,945

 
27,611

 
27,107

 
27,177

Diluted
 
28,092

 
28,223

 
28,418

 
28,072

 
27,868

GENERAL STATISTICS
 
 

 
 

 
 

 
 

 
 

Registered shareholders
 
3,528

 
3,085

 
3,142

 
3,261

 
3,402

Employees
 
2,935

 
2,900

 
3,095

 
3,072

 
2,991

 (See Footnotes below)

31


(Footnotes to Five-Year Selected Financial Data above)
 
Included within certain annual results are a variety of unusual or significant items that may affect comparability. The most significant of such items are described below.

1.
Results from continuing operations for 2019 include a tax benefit of $25.7 million associated with an entity classification election for the investment in the Company's U.K. business, which had the effect of treating the subsidiary as a disregarded entity for U.S. tax purposes, $10.1 million in expense related to corporate development activities, a $3.7 million write-off of note receivables recorded in 2018 for the remaining amounts to be collected on the sale of the U.K. Tooling business as this balance was deemed not likely to be collected and $1.6 million in restructuring and severance costs. Additionally, the Company sold its Distribution business in 2019 (Refer to Item 9 below for further information). Upon closing, the Company entered into a transition services agreement ("TSA") with the buyer, pursuant to which the Company agreed to support the information technology, human resources and benefits, tax and treasury functions of the Distribution business for six to twelve months. Results from continuing operations for 2019 include $4.7 million in costs associated with the TSA, partially offset by income earned from the TSA of $3.7 million.

2.
Results from continuing operations for 2018 include a $10.0 million write-off of other intangibles and $0.7 million write-off of inventory associated with the impairment for a certain asset group at our U.K. business, $6.0 million in expense related to the announced restructuring activities in the Aerospace business, a $5.7 million loss on the sale of our U.K. Tooling business, $3.0 million in costs incurred for employee-tax related matters, a $1.5 million gain on the sale of land, $1.4 million in costs associated with the termination of certain distributor agreements and separation costs for certain employees not covered by the restructuring activities, $1.1 million in costs associated with corporate development activities and a $0.7 million loss on the sale of substantially all the assets and liabilities of our Engineering Services business.

3.
Results from continuing operations for 2017 include $9.7 million in tax expense associated with the revaluation of the Company's existing U.S. deferred tax assets resulting from Tax Reform, $2.7 million in expense related to restructuring activities and $1.6 million in separation costs associated with a senior executive. Additionally, we issued convertible senior unsecured notes in the aggregate principal amount of $200.0 million ("2024 Notes"). The Company used the proceeds from the issuance of the 2024 Notes, along with cash received in connection with the termination of existing convertible note hedge transactions, to repurchase a portion of the existing convertible senior unsecured notes due in November 2017 ("2017 Notes") at a cost of $106.7 million, purchase a capped call related to the 2024 Notes and pay down a portion of our revolving credit facility. The remaining portion of the 2017 Notes was settled in November 2017. The Company incurred $7.4 million of debt issuance costs in connection with the issuance of the 2024 Notes. Of the total amount, $0.7 million was recorded as an offset to additional paid-in capital and the remaining balance of $6.7 million was recorded as a contra-debt balance and is being amortized over the term of the 2024 Notes.

4.
Results for 2016 include $5.1 million of acquisition transaction and integration costs related to our 2015 acquisitions and $2.5 million of severance costs, of which $1.1 million was included in acquisition transaction and integration costs. Additionally, the carrying amount of the 2017 Notes was reclassified to current liabilities, as these 2017 Notes were convertible through April 3, 2017. Upon closure of the conversion period, the Notes remained in current liabilities due to their scheduled maturity.

5.
Results for 2015 include $4.9 million in acquisition costs, $4.0 million in expense associated with the resolution of the matters related to our AH-1Z program and $3.0 million of expenses related to foreign currency transactions associated with the purchase of GRW Bearing GmbH ("GRW").

6.
On January 1, 2018, we adopted new revenue recognition guidance ("ASC 606") using the modified retrospective method. As a result, we applied the new revenue recognition guidance only to contracts that were not completed as of January 1, 2018; therefore, results from 2019 and 2018 are presented under the new revenue recognition guidance and results prior to 2018 are presented in accordance with previous revenue recognition guidance ("ASC 605"). The adoption of this standard resulted in an additional $59.7 million in net sales and $15.9 million in operating income in 2018, which otherwise would not have been recorded in 2018 under previous guidance.

7.
On January 1, 2018, we adopted the new accounting standard that resulted in the net periodic pension cost and net post retirement cost other than service costs to no longer be presented in cost of sales and selling, general and administrative expenses, but instead be presented within non-service pension and post retirement benefit cost. This ASU was applied retrospectively for the presentation of the service cost component and the other components of net

32


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.

8.
On January 1, 2019, we adopted the new leasing standard ("ASC 842") using the modified retrospective method. As a result, the Company applied ASC 842 only to leases that existed as of January 1, 2019 and did not restate prior periods. Under this standard, lessees are required to recognize the following for all 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. The adoption of ASC 842 resulted in a net increase of approximately $18.5 million to its assets and liabilities as of January 1, 2019 due to the addition of right-of-use assets and liabilities for operating leases on the balance sheet.

9.
On August 26, 2019, we completed the sale of our Distribution business for total cash consideration of $700.0 million, excluding certain working capital adjustments. The sale of the Distribution business was a result of the Company's shift in strategy to be a highly focused, technologically differentiated aerospace and engineered products company. As a result of the sale, the Distribution segment met the criteria set forth in ASC 205-20, Presentation of Financial Statements - Discontinued Operations for discontinued operations. The related assets and liabilities of the Company's former Distribution business were reclassified to assets held for sale and liabilities held for sale, respectively, for the periods prior to 2019 on the Company's Consolidated Balance Sheets.

33


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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide readers of our consolidated financial statements with the perspectives of management. MD&A presents in narrative form information regarding our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This should allow the readers of this report to obtain a comprehensive understanding of our businesses, strategies, current trends and future prospects. MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Form 10-K.

OVERVIEW OF BUSINESS

Kaman Corporation ("The Company") currently operates as a single Aerospace segment that conducts business in the aerospace and defense, industrial and medical markets. The Company produces and markets proprietary aircraft bearings and components; super precision, miniature ball bearings; proprietary spring energized seals, springs and contacts; 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 Company also manufactures and supports our K-MAX® manned and unmanned medium-to-heavy lift helicopters and restores, modifies and supports our SH-2G Super Seasprite maritime helicopters.

Our strategic goals are built upon our objectives of differentiating our value proposition by utilizing engineering, innovation, automation and process expertise to develop unique products and manufacturing processes within our global manufacturing facilities, increasing scale in our core competencies, diversifying our customer portfolio across multiple end markets and investing in our people, technologies and infrastructure. In order to achieve these objectives, we focus our efforts on improving balance between commercial and defense program content and customers, leveraging our broad capabilities to expand market positions, executing strategic acquisitions and increasing focused investments in our people, research and development, manufacturing technologies, capital equipment and infrastructure to increase capabilities and drive continuous improvement.

Company financial performance

Net sales from continuing operations increased 3.5% compared to the prior year driven by an increase in net sales under our safe and arm device product programs.
Earnings from continuing operations, net of tax increased 255.5% compared to the prior year. This increase reflects the tax benefits realized in the current period and the absence of the $10.0 million other intangible assets impairment charge incurred in 2018.
Diluted earnings per share from continuing operations increased to $2.01 in 2019 compared to $0.56 in the prior year.
Cash flows provided by operating activities of continuing operations were $42.5 million for 2019, a decrease of $76.2 million. This change was largely driven by the absence of advance payments received in the prior year in connection with a Joint Programmable Fuze ("JPF") direct commercial sales ("DCS") contract.
Total unfulfilled performance obligations ("backlog") decreased 5.3% to $806.9 million, mostly driven by deliveries under our JPF program.

Acquisitions and divestitures

In January 2020, we completed the acquisition of Bal Seal Engineering, Inc. ("Bal Seal") for $331.0 million in cash, subject to customer adjustments for net debt and working capital.
In August 2019, we completed the sale of our Distribution segment for total cash consideration of $700.0 million, excluding certain working capital adjustments.

Awards and recognition
In May 2019, our Vermont division was recognized by Rolls-Royce as the "Best New Supplier 2018" for its support for Rolls-Royce on various compressor components and composite assemblies.
In April 2019, our joint venture was honored with a gold tier supplier award by BAE Systems for exceptional performance and contributions to supply chain success.
In the first quarter of 2019, our integrated structures and metallics business was named supplier of the year by Sikorsky for the Sikorsky BLACK HAWK program.



34


Other key events

In 2019, four K-MAX® aircraft were accepted by our customers. We received three new orders for the K-MAX® medium-to-heavy lift helicopter in the period.
In 2019, we received two significant JPF DCS orders with an expected total value of $90.6 million.
In December 2019, we closed on a five-year amended and restated credit agreement. In addition to extending the maturity of the credit agreement to December 2024, the aggregate amount of revolving commitments available under the facility increased from $600.0 million to $800.0 million.
In November 2019, we announced that Boeing awarded us the manufacture and supply of wing control surfaces and structural assemblies in support of the U.S. Air Force's A-10 program.
In July 2019, we received the export license for the $324.0 million JPF DCS contract.
In July 2019, we announced that we opened a new customer service center in Bloomfield, Connecticut to support both the K-MAX® and SH-2 Super Seasprite customers and inaugurated a K-MAX® Flight Training Device.
In July 2019, we announced that we entered into an agreement to purchase land to allow for expansion of our German based engineered products business.
In May 2019, we announced that we had been awarded a contract to return two United States Marine Corps K-MAX® aircraft to flight operations.
In April 2019, we announced that we were awarded the manufacture and supply of composite skin to core assembly structural components for Bell's AH-1Z helicopter blades.
In March 2019, we announced that we are developing the next generation K-MAX® unmanned aircraft system that will allow operators to have the capability to fly either manned or unmanned missions. We expect to offer unmanned system kits for new production and existing aircraft in 2020 and have received five orders for K-MAX® unmanned system kit in 2019.
In March 2019, we announced that we launched a composite blade development program for the K-MAX® helicopter.


35


RESULTS FROM CONTINUING OPERATIONS

During the third quarter of 2019, we completed the sale of our Distribution business for total cash consideration of $700.0 million, excluding certain working capital adjustments. As a result of the sale, the Distribution business results met the criteria for the presentation of discontinued operations. The results presented below represent the results of continuing operations, which include the Aerospace segment and our Corporate office. See Note 3, Discontinued Operations, in the Notes to Consolidated Financial Statements included in this Form 10-K for further details.

On January 1, 2018, we adopted new revenue recognition guidance ("ASC 606") using the modified retrospective method. As a result, we applied the new revenue recognition guidance only to contracts that were not completed as of January 1, 2018; therefore, results for 2019 and 2018 are presented under the new revenue recognition guidance and results for 2017 are presented in accordance with previous revenue recognition guidance ("ASC 605"). See Note 1, Summary of Significant Accounting Policies, and Note 2, Accounting Changes, in the Notes to Consolidated Financial Statements included in this Form 10-K for further details.

Net Sales from Continuing Operations
 
 
2019
 
2018
 
2017
In thousands
 
 
Net sales
 
$
761,608

 
$
735,994

 
$
724,944

$ change
 
25,614

 
11,050

 
22,890

% change
 
3.5
%
 
1.5
%
 
3.3
%

Net sales for 2019 increased when compared to 2018, primarily due to increases of $32.1 million and $5.5 million in our safe and arm devices and commercial product programs, respectively. These increases were partially offset by a decrease in sales of $12.0 million on our military and defense product programs, excluding safe and arm devices. Foreign currency exchange rates relative to the U.S. dollar had an unfavorable impact of $6.5 million on net sales.

The increase in sales under our safe and arm device product programs was primarily attributable to higher direct commercial sales of our JPF to foreign militaries, partially offset by lower sales under our JPF program with the USG and the FMU-139 program.

Higher sales under our commercial product programs were primarily driven by an increase in sales on our Sikorsky s70 program and Bell Helicopter composite blade program and higher sales volume of our commercial bearings products. These increases, totaling $16.0 million, were partially offset by lower sales under the K-MAX® program and the absence of sales from our former engineering services business.

The decrease in sales under our military and defense, excluding safe and arm device product programs was primarily attributable to lower sales under our SH-2G program for Peru, the Sikorsky BLACK HAWK helicopter program and the AH-1Z program, and the absence of sales from our former U.K. Tooling business. These decreases, totaling $25.6 million, were partially offset by higher sales on the Boeing 7P Door Surround program and an increase in sales of spares for the SH-2 program with New Zealand.

The following table details the components of ASC 606 changes as a percentage of consolidated net sales from continuing operations in 2018 as compared to the corresponding period in 2017:
 
 
2018
 
 
 
Increase in sales associated with ASC 606
 
8.2
 %
Decrease in sales absent the adoption impact of ASC 606
 
(6.7
)%
% change in net sales
 
1.5
 %

Net sales for 2018 increased when compared to 2017, due to an increase in net sales of $59.7 million resulting from the adoption of the new revenue recognition guidance, as discussed below, partially offset by a decrease in net sales of $48.6 million absent the adoption of ASC 606. The decrease in net sales absent the adoption of the new revenue recognition guidance was primarily attributable to lower direct commercial sales of our JPF to foreign militaries, decreases in sales under the K-

36


MAX® program and certain metallic structures programs and lower sales volume of our composite structures products from foreign operations. These decreases, totaling $70.8 million, were partially offset by higher sales volume of our bearings products, an increase in sales under the AH-1Z program and higher sales under the Sikorsky Combat Rescue Helicopter program. Foreign currency exchange rates relative to the U.S. dollar had a favorable impact of $5.0 million on net sales.

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

Gross Profit from Continuing Operations
 
 
2019
 
2018
 
2017
In thousands
 
 
Gross profit
 
$
240,805

 
$
227,317

 
$
234,029

$ change
 
13,488

 
(6,712
)
 
6,962

% change
 
5.9
%
 
(2.9
)%
 
3.1
%
% of net sales
 
31.6
%
 
30.9
 %
 
32.3
%

Gross profit for 2019 increased when compared to 2018. This was primarily attributable to higher direct commercial sales of our JPF to foreign militaries, an increase in sales and associated gross profit on the Boeing 7P Door Surround program and spares for the SH-2 program with New Zealand, and an increase in gross profit on the AH-1Z program. These increases, totaling $28.7 million, were partially offset by lower sales and associated gross profit under the SH-2G program for Peru, our JPF program with the USG and the K-MAX® program, and a decrease in gross profit on certain legacy fuzing programs.

Gross profit for 2018 decreased when compared to 2017. This was attributable to a decrease in gross profit of $24.3 million absent the adoption of the new revenue recognition guidance, primarily driven by lower direct commercial sales of our JPF to foreign militaries, lower sales and associated gross profit on the K-MAX® program, and decreases in gross profit under the AH-1Z program and our composite structures products from foreign operations. These decreases were partially offset by higher gross profit of $17.6 million resulting from the adoption of the new revenue recognition guidance.

Selling, General & Administrative Expenses (S,G&A) from Continuing Operations
 
 
2019
 
2018
 
2017
In thousands
 
 
S,G&A
 
$
177,187

 
$
172,271

 
$
169,683

$ change
 
4,916

 
2,588

 
7,572

% change
 
2.9
%
 
1.5
%
 
4.7
%
% of net sales
 
23.3
%
 
23.4
%
 
23.4
%

S,G&A increased for the year ended December 31, 2019, as compared to 2018. The following table details the components of this change:
 
 
2019
 
2018
 
2017
 
 
 
 
 
 
 
Organic S,G&A:
 
 
 
 
 
 
Aerospace
 
(4.1
)%
 
1.3
%
 
(0.3
)%
Corporate
 
7.0
 %
 
0.2
%
 
5.0
 %
Total Organic S,G&A
 
2.9
 %
 
1.5
%
 
4.7
 %

The increase in S,G&A expenses for 2019 as compared to 2018 was attributable to higher corporate expenses, partially offset by a decrease in expenses in our Aerospace business. Corporate expenses increased primarily due to $9.0 million in higher costs associated with corporate development activities and higher incentive compensation costs. The decrease in expenses at the Aerospace business was primarily attributable to the absence of $3.0 million in costs incurred in the prior year for employee tax-related matters and lower depreciation expense as a result of our restructuring efforts in the prior year.

37


The increase in S,G&A expenses for 2018 as compared to 2017 was primarily attributable to higher expenses in the Aerospace business. S,G&A expenses at our Aerospace business increased when compared to prior year, primarily due to $3.0 million in costs incurred for employee-tax related matters. Corporate expenses in 2018 remained relatively flat when compared to 2017. This was primarily attributable to $1.1 million in corporate development activities, which includes costs associated with the due diligence for an acquisition we elected not to complete, and higher consulting fees mostly offset by the absence of $1.6 million in separation costs associated with a senior executive incurred in the prior year.

Costs from Transition Services Agreement

 
 
2019
 
2018
 
2017
In thousands
 
 
 
 
 
 
Costs from transition services agreement
 
$
4,673

 
$

 
$


Upon closing the sale of the Distribution business, the Company entered into a transition services agreement ("TSA") with the buyer, pursuant to which the Company agreed to support the information technology, human resources and benefits, tax and treasury functions of the Distribution business for six to twelve months. The buyer has the option to extend the support period for up to an additional year for certain services. The Company incurred $4.7 million in costs associated with the TSA in 2019. These costs are partially offset by $3.7 million in income earned from the TSA included in income from transition services agreement, which is below operating income on the Company's Consolidated Statements of Operations.

Other Intangible Assets Impairment
 
 
2019
 
2018
 
2017
In thousands
 
 
 
 
 
 
Other intangible assets impairment
 
$

 
$
10,039

 
$


In 2018, we identified a triggering event for possible impairment of long-lived intangible assets at a certain asset group within the Company's U.K. business based on an analysis of historical performance, the current forecast for the remainder of the year and the loss of future orders from one of its customers. We performed a recoverability test by comparing the undiscounted cash flows of the asset group to its carrying value, and the estimated future cash flows of the business did not exceed the carrying value of the assets. Based on these results, we calculated the fair value of the asset group using an income approach, which resulted in an impairment charge of $10.0 million, or the remaining balance of the customer lists/relationships at a certain asset group within the U.K. business. This charge has been included in the operating results of the Aerospace business.

Restructuring Costs

 
 
2019
 
2018
 
2017
In thousands
 
 
 
 
 
 
Restructuring costs
 
$
1,558

 
$
7,353

 
$
2,661


During the third quarter 2017, we announced restructuring activities at certain businesses to support the ongoing effort of improving capacity utilization and operating efficiency to better position the Company for increased profitability and growth. Such actions included workforce reductions and the consolidation of operations, which continued through the planned completion in 2019. In the years ended December 31, 2019, 2018 and 2017, we recorded $0.6 million, $6.0 million and $2.7 million, respectively, in costs associated with the restructuring activities. In addition to these costs, in 2019, the Company's corporate office incurred $0.9 million in severance expense and, in 2018, we incurred $1.4 million in other non-related restructuring costs associated with the termination of certain distributor agreements and separation costs associated with certain employees not included in restructuring activities discussed above.


38


Loss on Sale of Business

 
 
2019
 
2018
 
2017
In thousands
 
 
 
 
 
 
Loss on sale of business
 
$
3,739

 
$
5,722

 
$


During 2018, we sold our U.K. Tooling business to better position the Company for increased profitability. This sale did not qualify for the reporting of discontinued operations within the consolidated financial statements. In the year ended December 31, 2018, we incurred a loss of $5.7 million associated with the sale. Of this amount, $1.7 million related to the foreign currency translation reclassified from accumulated other comprehensive income (loss) to net income. In the year ended December 31, 2019, the Company incurred an additional loss of $3.7 million associated with the write-off of note receivables recorded for the remaining amounts to be collected on the sale of the U.K. Tooling business as this balance was deemed not likely to be collected.

Operating Income
 
 
2019
 
2018
 
2017
In thousands
 
 
Aerospace
 
$
130,393

 
$
94,357

 
$
117,654

Loss on sale of business
 
(3,739
)
 
(5,722
)
 

Net (loss) gain on sale of assets
 
(237
)
 
1,031

 
31

Corporate expense
 
(73,006
)
 
(56,703
)
 
(55,969
)
Operating income
 
$
53,411

 
$
32,963

 
$
61,716

$ change
 
20,448

 
(28,753
)
 
(3,239
)
% change
 
62.0
%
 
(46.6
)%
 
(5.0
)%
% of net sales
 
7.0
%
 
4.5
 %
 
8.5
 %

The increase in operating income for 2019 as compared to 2018 was primarily attributable to an increase in gross profit on certain programs as discussed above, the absences of the $10.0 million other intangibles assets impairment at our U.K. business and the $3.0 million in costs for employee tax-related matters incurred in the prior year, lower restructuring costs and lower depreciation costs. These changes, totaling $35.0 million, were partially offset by higher corporate expenses, as discussed above, and $4.7 million in costs from the TSA associated with the sale of our Distribution business.

The decrease in operating income for 2018 as compared to 2017 was primarily attributable to lower operating income at our Aerospace business, driven by the $10.0 million other intangible assets impairment at our U.K business, the loss incurred for the sale of the U.K. Tooling business, higher restructuring costs, the costs incurred for employee-tax related matters and the loss on the sale of substantially all of the assets and liabilities of our Engineering Services business. These changes were partially offset by an increase in operating income of $15.9 million resulting from the adoption of the new revenue recognition guidance.

Interest Expense, Net
 
 
2019
 
2018
 
2017
In thousands
 
 
Interest expense, net
 
$
17,202

 
$
20,046

 
$
20,578


Interest expense, net generally consists of interest charged on our Credit Agreement, which includes a revolving credit facility and a term loan under our previously existing credit facility, and our convertible notes and the amortization of debt issuance costs, offset by interest income. The decrease in interest expense, net for 2019 as compared to 2018 was primarily due to interest income earned on marketable securities and lower average borrowings in the current period. The decrease in interest expense, net for 2018 as compared to 2017 was primarily due to lower average borrowings, partially offset by an increase in letter of credit fees. At December 31, 2018, the interest rate for outstanding amounts on both the revolving credit facility and term loan agreement was 3.74% compared to 2.84% at December 31, 2017.



39


Effective Income Tax Rate
 
 
2019
 
2018
 
2017
Effective income tax rate
 
(39.1
)%
 
36.8
%
 
56.1
%

The effective tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the year. The decrease in the effective tax rate for 2019 compared to 2018 was primarily due to a 2019 entity classification election related to the Company's U.K. business, which had the effect of treating the subsidiary as a disregarded entity for U.S. tax purposes. This election resulted in a significant loss for U.S. tax purposes and a tax benefit of $25.7 million recognized by the Company in 2019. Additionally, in 2019, the Company recognized additional benefits from research and development credits, relating to research completed in the three prior years. The decrease in the effective tax rate for 2018 compared to 2017 was primarily due to the rate reduction resulting from Tax Reform, partially offset by foreign losses for which no tax benefit was recorded. Tax reform was enacted by the federal government during the fourth quarter of 2017 and provided for the reduction in the applicable U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. See Note 16, Income Taxes, in the Notes to Consolidated Financial Statements included in this Form 10-K for further details.

Backlog
 
 
2019
 
2018
 
2017
In thousands
 
 
 
 
 
 
Backlog
 
$
806,870

 
$
851,814

 
$
616,090


Backlog decreased from 2018 to 2019, primarily driven by revenue recognized for deliveries of direct commercial JPF orders, K-MAX® aircraft and bearings products, and work performed on the JPF program with the USG, the Sikorsky BLACK HAWK program and the AH-1Z program. These decreases were partially offset by orders of our JPF and bearings products and orders under the Boeing 767/777 program and the A-10 program.

Other Matters

Information regarding our various environmental remediation activities and associated accruals can be found in Note 19, Commitments and Contingencies, and Note 13, Environmental Costs, in the Notes to Consolidated Financial Statements included in this Form 10-K.

Long-Term Contracts

For long-term contracts, we generally recognize sales and cost of sales over time because of continuous transfer of control to the customer, which allows for recognition of revenue as work on a contract progresses. For those programs for which there is a continuous transfer of control to the customer, we recognize sales and profit on a cost-to-cost basis, in which case sales and profit are recorded based upon the ratio of costs incurred to date to the total estimated costs to complete the contract. Conversely, revenue on certain programs, such as the K-MAX® program and on direct commercial sales under our JPF program, is recognized at a point in time, with revenue being recognized upon transfer to the end customer. See Note 1, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in this Form 10-K for additional information regarding the effects of adjustments in profit estimates on long-term contracts for which revenue is recognized over time.

Major Programs/Product Lines

Defense Markets

A-10

In 2019, the USAF awarded Boeing a contract to provide up to 112 new wing assemblies and up to 15 wing kits through 2030 and we announced that we had been awarded a contract by Boeing to manufacture wing control surfaces and structural assemblies in support of the USAF's A-10 Thunderbolt Advanced Wing Continuation Kitting ("ATTACK") program. We were previously under contract with Boeing to produce the wing control surfaces (inboard and outboard flaps, slats and deceleron assemblies) for the USAF’s A-10 fleet. Final production and deliveries under the initial contract were completed during 2018. At December 31, 2019, our program backlog was $36.5 million. At December 31, 2018, our program backlog was not material.

40


Bearings

Our bearings products are included on numerous military platforms manufactured in North America, South America, Asia and Europe. These products are used as original equipment and/or specified as replacement parts by the manufacturers. The most significant portion of our military bearings sales is derived from U.S. military platforms, such as the AH-64 helicopter, Virginia Class submarine and Joint Strike Fighter aircraft, and sales in Europe for the Typhoon program. These products are primarily proprietary self-lubricating, ball and roller bearings for aircraft flight controls, turbine engines and landing gear, and helicopter driveline couplings.

BLACK HAWK

The Sikorsky BLACK HAWK helicopter cockpit program involves the manufacture of cockpits, including the installation of all wiring harnesses, hydraulic assemblies, control pedals and sticks, seat tracks, pneumatic lines and the composite structure that holds the windscreen for most models of the BLACK HAWK helicopter. We delivered 66 cockpits in 2019 as compared to the 61 cockpits delivered in 2018. In July 2017, we announced that we had entered into a new multi-year contract with Sikorsky to manufacture H-60 cockpits under the Department of Defense MY IX H-60 procurement authorization. The term of the agreement is five years, beginning in 2018 and ending in 2022. Included in backlog at December 31, 2019 and 2018, was $53.0 million and $81.0 million, respectively, for orders on this program. We anticipate cockpit deliveries to total 47 in 2020.

AH-1Z

The segment manufactures sheet metal details and subassemblies for the increased capability AH-1Z attack helicopter, which is produced by Bell Helicopter for the U.S. Marine Corps. We are currently on contract through Lot 16. As of December 31, 2019 and 2018, our backlog for this program was $17.6 million and $46.6 million, respectively.

SH-2G Peru

During 2016, we were awarded a contract for $41.0 million with General Dynamics Mission Systems - Canada to commence work on the implementation phase of the previously announced Peruvian Navy's SH-2G Super Seasprite aircraft program. This contract was for the remanufacture and upgrade of four Kaman SH-2G Super Seasprite aircraft and support for the operation of a fifth aircraft for the Peruvian Navy. The total expected value to Kaman for the combined program, including this contract and previously issued contracts, totaled $50.5 million. Total backlog at December 31, 2018, was $4.3 million. At December 31, 2019, there was no remaining backlog as the program has completed.

FMU-152 A/B – Joint Programmable Fuze

We manufacture the JPF, an electro-mechanical bomb safe and arming device, which allows the settings of a weapon to be programmed in flight. The Company currently provides the FMU-152 A/B to the USAF and forty other nations. Sales of these fuzes can be direct to the USAF, Foreign Military Sales ("FMS") through the USG and DCS to foreign militaries that, although not funded by the USG, require regulatory approvals from the USG.

We occasionally experience lot acceptance test failures due to the complexity of the product and the extreme parameters of the acceptance test. Given the maturity of the product, we now generally experience isolated failures, rather than systemic ones. As a result, identifying a root cause can take longer and result in inconsistent delivery quantities from quarter to quarter.
 
A total of 41,429 fuzes were delivered in 2019. We expect to deliver 45,000 to 50,000 fuzes in 2020.

Total JPF backlog at December 31, 2019 was $356.8 million, all of which has received required export approvals, licenses or authorizations from the USG, allowing for the sale of these products outside of the United States. The receipt of export approvals, licenses or authorizations are subject to political and geopolitical conditions which could impact the timing and/or our ability to sell these products outside of the United States. Total JPF backlog at December 31, 2018 was $454.1 million.

JPF - USG

Revenue for JPF USG programs is recognized over time when costs are incurred as work progresses on the program. The Company currently provides the FMU-152 A/B to the USAF, but the U.S. Navy currently utilizes a different fuze - the FMU-139. In 2015, NAVAIR solicited proposals for a firm fixed price production contract to implement improvements to the performance characteristics of the FMU-139 (such improved fuze having been designated the FMU-139 D/B), and, the USAF had stated that, if and when a contract is awarded and production begins, the funds associated with the FMU-152 A/B will be

41


redirected to the FMU-139 D/B. During the third quarter of 2015, the U.S. Navy announced that a competitor was awarded the contract for the FMU-139 D/B. In the event the FMU-139 D/B program proceeds as planned and the USAF redirects the funds associated with the FMU-152 A/B to the FMU-139 D/B, our business, financial condition, results of operations and cash flows may be materially adversely impacted. During the third quarter of 2019, our competitor announced that it received its first production order from the U.S. Navy to manufacture the FMU-139 D/B. Due to the complexity of this program and the pending status of the USAF's final decision to redirect funds to the FMU-139 D/B, the timing and magnitude of the impact on the Company's financial statements are not certain; however, the Company continues to see strong demand for the FMU-152 A/B. In 2017, we were awarded Options 13 and 14 with the USG. The USAF has exercised two orders under Option 13, which have a total value of more than $102.0 million, and two orders under Option 14 which have a total value of approximately $121.4 million. Additionally, the USAF issued a Notice of Contract Action announcing its intent to award us Options 15 and 16, which, if and when awarded, would extend FMU-152 A/B deliveries into 2023.

JPF - DCS

Revenue for DCS programs is generally recognized at the point in time when control is transferred to the customer under the new revenue recognition guidance. The Company continues to see strong demand for DCS fuzes. During 2019, we were awarded two DCS contracts totaling approximately $90.0 million. During the first quarter of 2018, we were awarded a DCS contract totaling approximately $324.0 million, of which $307.5 million was included in backlog as of December 31, 2018. The remaining $16.5 million relates to potential penalties payable to the customer in the event the offset requirements of the contract are not met, which remained excluded from backlog at December 31, 2019. This agreement is designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. The offset agreement may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects and the purchase by third parties of supplies from in-country vendors. This agreement may also be satisfied through the Company's use of cash for activities, such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. The offset requirements associated with this contract could extend for several years and have a notional value of approximately $194.0 million, which is equal to sixty percent of the total contract value as defined by the agreement with the customer. The amount ultimately applied against the offset agreement is based on negotiations with the customer and may require cash outlays that represent only a fraction of the notional value in the offset agreement. 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. Additionally, this contract provides for potential penalties payable to the customer of up to 10% of the total contract value in the event that we default on the contract and we are unable to fulfill our contractual commitments.
Commercial Markets

K-MAX®

During 2015, we announced that we were resuming production of commercial K-MAX® aircraft. The aircraft are being manufactured at our Jacksonville, Florida and Bloomfield, Connecticut facilities. The first thirteen helicopters from the newly reopened commercial production line were accepted by our customers through December 2019. During the fourth quarter of 2018, we announced that we will continue production of the commercial K-MAX® aircraft into 2020 at a minimum due to continued interest in the capabilities of the K-MAX®. During the first quarter of 2019, we announced that we are developing the next generation K-MAX® unmanned aircraft system that will allow operators to have the capability to fly either manned or unmanned missions. We expect to offer unmanned system kits for new production and existing aircraft in 2020. As of December 31, 2019 and 2018, our backlog for this program was $13.1 million and $14.9 million, respectively.

777 / 767

In 2019, we signed a multi-year follow-on contract with Boeing for the production of fixed trailing edge ("FTE") assemblies for the Boeing 777 and 767 commercial aircraft. Annual quantities will vary, as they are dependent upon the orders Boeing receives from its customers. To date, Kaman has provided approximately 1,375 FTE kits and assemblies for each of the 777 and 767 programs since 1995 and 1986, respectively. During 2019, on average, we delivered four shipsets per month on the Boeing 777 platform and two and one-half shipsets per month on the Boeing 767 platform, which includes one shipset per month associated with a military tanker derivative of the 767. For 2020, we estimate deliveries on the 777 program to be two and one-half shipsets per month and on the 767 program to be three shipsets per month which includes one shipset per month associated with a military tanker derivative of the 767. As of December 31, 2019 and 2018, our backlog for these programs was $25.8 million and $9.3 million, respectively.

42


Airbus

Our U.K. Composites operations provide composite components for many Airbus platforms. The most significant of these are the A320, A330 and A350. Orders for all of these platforms are dependent on the customer’s build rate.

Bearings

Our bearings products are included on commercial airliners and regional/business jets manufactured in North and South America, Europe and Asia and are used as original equipment and/or specified as replacement parts by airlines and aircraft manufacturers. These products are primarily proprietary self-lubricating, ball and roller bearings for aircraft flight controls, turbine engines, landing gear and helicopter driveline couplings. The most significant portion of our commercial sales is derived from Boeing, Airbus and Bombardier platforms, such as the Boeing 737, 747, 777 and 787, the Airbus A320, A330, A350 and A380, and the Bombardier Global 7500. Additionally, our bearings offerings include super precision miniature ball bearings used primarily in aerospace applications, dental products, surgical power tools, analytical devices and various industrial applications.
In the first quarter of 2019, the Federal Aviation Administration ("FAA") issued an order to suspend all 737 MAX aircraft in the U.S. and by U.S. aircraft operators following two fatal 737 MAX accidents. Boeing has suspended deliveries until the FAA and other civil aviation authorities worldwide grant the clearance to return the aircraft to service. In 2019, Boeing announced its plan to reduce the 737 production rate from 52 aircraft per month to 42 per month beginning in April 2019 and that it would temporarily suspend production of the 737 MAX beginning in January 2020. On January 21, 2020, Boeing announced that it is currently estimating the ungrounding of the 737 MAX during mid-2020. In the years ended December 31, 2019 and 2018, we recognized $19.9 million and $19.5 million in revenue associated with the 737 MAX fleet. Any delays in aircraft being returned to service and/or future reductions in the production rate could have an adverse impact on our financial position, results of operations and/or cash flows.
Other Matters

Learjet 85

In 2010, our U.K. Composites operation was awarded a contract to manufacture composite passenger entry and over-wing exit doors for the Learjet 85, a mid-sized business jet built primarily from composites and featuring advances in aerodynamics, structures and efficiency; however, in October 2015, Bombardier Inc. announced the cancellation of its Learjet 85 business aircraft program. At December 31, 2019, we had total accounts receivable and contract assets related to the program of $3.8 million. During 2016, we filed suit against our customer to recover this amount. Although we expect to recover the full amount of our claim, there can be no assurance that we will prevail in the litigation.

For a discussion of other matters, see Note 19, Commitments and Contingencies, in the Notes to Consolidated Financial Statements included in this Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

Discussion and Analysis of Cash Flows

We assess liquidity in terms of our ability to generate cash to fund working capital requirements and investing and financing activities. Significant factors affecting liquidity include: cash flows generated from or used by operating activities, capital expenditures, investments in our business and its programs, acquisitions, divestitures, dividends, availability of future credit, adequacy of available bank lines of credit and factors that might otherwise affect the Company's business and operations generally, as described under the heading “Risk Factors” and “Forward-Looking Statements” in Item 1A of Part I of this Form 10-K.

We continue to rely upon bank financing as an important source of liquidity for our business activities including acquisitions. We believe this, when combined with cash generated from operating activities, will be sufficient to support our anticipated cash requirements for the foreseeable future. However, we may decide to raise additional debt or equity capital to support other business activities including potential future acquisitions.


43


In addition to our working capital requirements, one or more of the following items could have an impact on our liquidity during the next 12 months:

the matters described in Note 19, Commitments and Contingencies, in the Notes to Consolidated Financial Statements, including the cost of existing environmental remediation matters discussed in Note 13, Environmental Costs;
contributions to our qualified pension plan and Supplemental Employees’ Retirement Plan (“SERP”);
deferred compensation payments to officers;
interest payments on outstanding debt;
income tax payments;
costs associated with acquisitions and corporate development activities;
finance and operating lease payments;
capital expenditures;
research and development expenditures;
repurchase of common stock under the 2015 Share Repurchase Program;
payment of dividends;
costs associated with the start-up of new programs; and
the extension of payment terms by our customers.

In addition to the items listed above, we received $97.2 million in advance payments in 2018, which relate to $146.2 million in letters of credit for a JPF DCS contract, including the offset agreement. In the event that we default on the contract and we are unable to fulfill our contractual commitments, our customer has the ability to draw on the letters of credit.

Additionally, we received approximately $655.0 million in proceeds, net of transaction costs, upon closing the sale of the Distribution business, subject to any working capital adjustments. During 2019, we allocated $164.3 million of the proceeds to pay down debt and $47.8 million of the proceeds for payments of income taxes, net of refunds. In the first quarter of 2020, we used approximately $331.0 million of the proceeds for the acquisition of Bal Seal Engineering Inc. We expect to use the remaining portion for acquisition priorities, new product development and organic growth initiatives.

We regularly monitor credit market conditions to identify potential issues that may adversely affect, or provide opportunities for, the securing and/or pricing of additional financing, if any, that may be necessary to continue with our growth strategy and finance working capital requirements.

Management regularly monitors its pension plan asset performance and the assumptions used in the determination of our benefit obligation, comparing them to actual experience. We continue to believe the assumptions selected are valid due to the long-term nature of our benefit obligation.

Effective December 31, 2015, the qualified pension plan was frozen with respect to future benefit accruals. Under U.S. Government Cost Accounting Standard ("CAS") 413 we must calculate the USG’s share of any pension curtailment adjustment resulting from the freeze. Such adjustments can result in an amount due to the USG for pension plans that are in a surplus position or an amount due to the contractor for plans that are in a deficit position. During the fourth quarter of 2016, we accrued a $0.3 million liability representing our estimate of the amount due to the USG based on our pension curtailment adjustment calculation which was submitted to the USG for review in December 2016. We have maintained our accrual at $0.3 million as of December 31, 2019. There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on our results of operations, financial position and cash flows.


44


A summary of our consolidated cash flows is as follows:
 
 
2019
 
2018
 
2017
 
19 vs. 18
 
18 vs. 17
(in thousands)
 
 
Total cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
42,488

 
$
118,714

 
$
38,272

 
$
(76,226
)
 
$
80,442

Investing activities
 
628,316

 
(22,538
)
 
(22,840
)
 
650,854

 
302

Financing activities
 
(152,713
)
 
(141,145
)
 
(53,627
)
 
(11,568
)
 
(87,518
)
 
 
 
 
 
 
 
 
 
 
 
Free Cash Flow(1) :