Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM	10-Q



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



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

For the transition period from _____ to ______



Commission File Number:	001-35419

KAMAN CORPORATION

(Exact name of registrant as specified in its charter)



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



1332 Blue Hills Avenue,	Bloomfield,	Connecticut	06002
(Address of principal executive offices)			(Zip Code)



(860)	743-7100
(Registrant’s telephone number, including area code)

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



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock ($1 par value)	KAMN	New York Stock Exchange LLC

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



Yes	☒	No	☐

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



Yes	☒	No	☐

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



Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐
		Smaller reporting company	☐	Emerging growth company	☐



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

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



Yes	☐	No	☒



At May 1, 2020, there were	27,644,062	shares of Common Stock outstanding.

PART I

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

KAMAN CORPORATION AND SUBSIDIARIES

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



	April 3, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	270,713		$	471,540
Restricted cash	24,745			—
Accounts receivable, net	171,149			156,492
Contract assets	133,421			121,614
Contract costs, current portion	6,207			6,052
Inventories	193,179			156,353
Income tax refunds receivable	10,108			8,069
Other current assets	15,676			16,368
Total current assets	825,198			936,488
Property, plant and equipment, net of accumulated depreciation of $215,657 and $210,549, respectively	219,336			140,450
Operating right-of-use assets, net	14,415			15,159
Goodwill	294,798			195,314
Other intangible assets, net	149,652			53,439
Deferred income taxes	31,410			35,240
Contract costs, noncurrent portion	6,652			6,099
Other assets	36,100			36,754
Total assets	$	1,577,561		$	1,418,943
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable – trade	$	65,676		$	70,884
Accrued salaries and wages	43,076			43,220
Contract liabilities, current portion	43,582			42,942
Operating lease liabilities, current portion	4,475			4,306
Income taxes payable	3,934			4,722
Other current liabilities	38,056			37,918
Total current liabilities	198,799			203,992
Long-term debt, excluding current portion, net of debt issuance costs	383,631			181,622
Deferred income taxes	6,706			6,994
Underfunded pension	83,014			97,246
Contract liabilities, noncurrent portion	38,957			37,855
Operating lease liabilities, noncurrent portion	10,669			11,617
Other long-term liabilities	58,556			56,415
Commitments and contingencies (Note 14)
Shareholders' equity:
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding	—			—
Common stock, $1 par value, 50,000,000 shares authorized; voting; 30,142,054 and 30,058,455 shares issued, respectively	30,142			30,058
Additional paid-in capital	231,493			228,153
Retained earnings	815,396			820,666
Accumulated other comprehensive income (loss)	(160,612		)	(150,893		)
Less 2,525,001 and 2,219,332 shares of common stock, respectively, held in treasury, at cost	(119,190		)	(104,782		)
Total shareholders’ equity	797,229			823,202
Total liabilities and shareholders’ equity	$	1,577,561		$	1,418,943

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

KAMAN CORPORATION AND SUBSIDIARIES

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



	For the Three Months Ended
	April 3, 2020			March 29, 2019
Net sales	$	207,322		$	166,434
Cost of sales	139,620			111,913
Gross profit	67,702			54,521
Selling, general and administrative expenses	60,989			41,951
Costs from transition services agreement	4,140			—
Cost of acquired retention plans	5,703			—
Restructuring costs	1,795			266
Gain on sale of business	(493		)	—
Net gain on sale of assets	(10		)	(65		)
Operating (loss) income	(4,422		)	12,369
Interest expense, net	3,247			5,301
Non-service pension and post retirement benefit income	(4,063		)	(99		)
Income from transition services agreement	(2,974		)	—
Other expense (income), net	218			(89		)
(Loss) earnings from continuing operations before income taxes	(850		)	7,256
Income tax (benefit) expense	(443		)	1,434
(Loss) earnings from continuing operations	(407		)	5,822
Earnings from discontinued operations before gain on disposal, net of tax	—			8,303
Gain on disposal of discontinued operations, net of tax	692			—
Total earnings from discontinued operations	692			8,303
Net earnings	$	285		$	14,125

Earnings per share:
Basic (loss) earnings per share from continuing operations	$	(0.01	)	$	0.21
Basic earnings per share from discontinued operations	0.02			0.30
Basic earnings per share	$	0.01		$	0.51
Diluted (loss) earnings per share from continuing operations	$	(0.01	)	$	0.20
Diluted earnings per share from discontinued operations	0.02			0.30
Diluted earnings per share	$	0.01		$	0.50
Average shares outstanding:
Basic	27,809			27,908
Diluted	27,891			28,070

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

KAMAN CORPORATION AND SUBSIDIARIES

(In thousands) (Unaudited)



	For the Three Months Ended
	April 3, 2020			March 29, 2019
Net earnings	$	285		$	14,125
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments and other	(10,826		)	(2,917		)
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $330 and $940, respectively	1,107			2,936
Other comprehensive (loss) income	(9,719		)	19
Comprehensive (loss) income	$	(9,434	)	$	14,144

See accompanying notes to condensed consolidated financial statements.

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

	For the Three Months Ended
	April 3, 2020			March 29, 2019
Cash flows from operating activities:
Net earnings	$	285		$	14,125
Less: Total earnings from discontinued operations	692			8,303
(Loss) earnings from continuing operations	$	(407	)	$	5,822
Adjustments to reconcile net earnings from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation and amortization	9,509			6,122
Amortization of debt issuance costs	492			461
Accretion of convertible notes discount	702			669
Provision for doubtful accounts	179			110
Gain on sale of business	(493		)	—
Net gain on sale of assets	(10		)	(65		)
Net loss on derivative instruments	983			247
Stock compensation expense	1,633			1,570
Deferred income taxes	3,493			1,149
Changes in assets and liabilities, excluding effects of acquisitions/divestitures:
Accounts receivable	(6,531		)	58,683
Contract assets	(11,665		)	(12,722		)
Contract costs	(709		)	1,015
Inventories	(25,206		)	(19,284		)
Income tax refunds receivable	(2,078		)	(394		)
Operating right of use assets	1,223			1,205
Other assets	(917		)	(2,662		)
Accounts payable - trade	(6,405		)	(2,666		)
Contract liabilities	1,743			(1,113		)
Operating lease liabilities	(1,183		)	(1,100		)
Other current liabilities	(8,079		)	(2,336		)
Income taxes payable	(1,038		)	(1,990		)
Pension liabilities	(12,887		)	1,043
Other long-term liabilities	2,209			3,884
Net cash (used in) provided by operating activities of continuing operations	(55,442		)	37,648
Net cash used in operating activities of discontinued operations	—			(15,012		)
Net cash (used in) provided by operating activities	(55,442		)	22,636
Cash flows from investing activities:
Proceeds from sale of assets	11			65
Proceeds from sale of discontinued operations	5,223			—
Proceeds from sale of business	493			—
Expenditures for property, plant & equipment	(5,559		)	(5,178		)
Acquisition of businesses, net of cash acquired	(304,342		)	—
Other, net	394			(660		)
Net cash used in investing activities of continuing operations	(303,780		)	(5,773		)
Net cash used in investing activities of discontinued operations	—			(2,319		)
Net cash used in investing activities	(303,780		)	(8,092		)
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements	201,100			(8,500		)
Debt repayment	—			(1,875		)
Net change in bank overdraft	371			1,062
Proceeds from exercise of employee stock awards	1,455			1,519
Purchase of treasury shares	(14,072		)	(2,951		)
Dividends paid	(5,595		)	(5,578		)
Other, net	(381		)	(337		)
Net cash provided by (used in) financing activities of continuing operations	182,878			(16,660		)
Net cash provided by financing activities of discontinued operations	—			2,951
Net cash provided by (used in) financing activities	182,878			(13,709		)
Net (decrease) increase in cash and cash equivalents	(176,344		)	835
Cash and cash equivalents of discontinued operations	—			(2,861		)
Effect of exchange rate changes on cash and cash equivalents	262			(190		)
Cash and cash equivalents and restricted cash at beginning of period	471,540			27,711
Cash and cash equivalents and restricted cash at end of period	$	295,458		$	25,495

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

1. BASIS OF PRESENTATION

During the third quarter of 2019, Kaman Corporation ("the Company") completed the sale of its Distribution business for total cash consideration of $700.0 million, excluding certain working capital adjustments and transaction costs. The Distribution business' results of operations and the related cash flows have been reclassified to earnings from discontinued operations in the Condensed Consolidated Statement of Operations and cash flows from discontinued operations in the Condensed Consolidated Statement of Cash Flows, respectively, for all periods presented. See Note 3, Discontinued Operations, to the Condensed Consolidated Financial Statements for further information.

In the opinion of management, the condensed consolidated financial information reflects all adjustments necessary for a fair statement of the Company's financial position, results of operations and cash flows for the interim periods presented, but do not include all disclosures required by accounting principles generally accepted in the United States of America ("US GAAP"). All such adjustments are of a normal recurring nature, unless otherwise disclosed in this report. Certain amounts in prior year financial statements and notes thereto have been reclassified to conform to current year presentation. The statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the interim periods presented are not necessarily indicative of trends or of results to be expected for the entire year.

The Company has a calendar year-end; however, its first three fiscal quarters follow a 13-week convention, with each quarter ending on a Friday. The first quarters for 2020 and 2019 ended on April 3, 2020, and March 29, 2019, respectively.

2. RECENT ACCOUNTING STANDARDS

Recent Accounting Standards Adopted

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract". The objective of the standard update is to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract to address the diversity in practice. The ASU requires an entity in a hosting arrangement that is a service arrangement to determine which costs to capitalize as an asset related to a service contract and which costs to expense, and to determine which project stage implementation activities relate to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. Capitalized implementation costs of a hosting arrangement are expensed over the term of the hosting arrangement in the same line item in the statement of operations as the fees associated with the hosting element of the arrangement. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption was permitted. The amendments in this standard update should be applied either retrospectively or prospectively to all implementation costs incurred after the inception date. The Company has elected to adopt the standard update prospectively. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurement". The objective of this standard update is to improve the effectiveness of disclosures for recurring and nonrecurring fair value measurements. This standard update removes certain disclosure requirements that are no longer considered cost beneficial, modifies existing disclosure requirements and adds new disclosure requirements identified as relevant. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption was permitted. An entity was permitted to early adopt any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until the effective date. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Adopted - continued

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The objective of this standard update is to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, assuming the loss recognized does not exceed the total amount of goodwill for the reporting unit. The standard update is effective for fiscal years beginning after December 15, 2019. Early adoption was permitted. There was no impact to the Company upon adoption of this standard.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". The objective of this standard update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard update is effective for fiscal

years, and interim periods within those years, beginning after December 15, 2019. Early adoption was permitted. An entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.

Subsequent to the issuance of ASU 2016-13, the FASB has issued the following updates: ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses", ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief", ASU 2020-02, "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)" and ASU 2020-03, "Codification Improvements to Financial Instruments". The amendments in these updates affect the guidance within ASU 2016-13 and have been assessed with ASU 2016-13.

Recent Accounting Standards Yet to be Adopted

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Yet to be Adopted - continued

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

In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to Disclosure Requirements for Defined Benefit Plans". The objective of the standard update is to improve the effectiveness of disclosure requirements for defined benefit pension and other post-retirement plans. This standard update removes disclosures that are no longer considered cost beneficial, clarifies specific requirements of disclosures and adds new disclosure requirements identified as relevant. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. Early adoption is permitted. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.

3. DISCONTINUED OPERATIONS

On August 26, 2019, the Company completed the sale of its Distribution business for total cash consideration of $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 business met the criteria set forth in Accounting Standards Codification ("ASC") 205-20, Presentation of Financial Statements - Discontinued Operations for discontinued operations.

Upon closing, the Company entered into a transition services agreement ("TSA") with the buyer, pursuant to which the Company agreed to support the information technology, human resources and benefits, tax and treasury functions of the 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. Since the sale of the Distribution business, costs associated with the TSA were $8.8 million through April 3, 2020. The Company incurred $4.1 million in costs associated with the TSA in the three-month fiscal period ended April 3, 2020, which was included in costs from transition services agreement on the Company's Condensed Consolidated Statements of Operations. Since the sale of the Distribution business, the Company earned $6.6 million in income associated with the TSA through April 3, 2020. The Company earned $3.0 million in income associated with the TSA in the three-month fiscal period ended April 3, 2020, which was included in income from transaction services on the Company's Condensed Consolidated Statements of Operations.

Since the sale of the Distribution business, cash outflows from the Company to its former Distribution business totaled $8.1 million through April 3, 2020, which primarily related to Distribution employee and employee-related costs incurred prior to the sale. Cash outflows from the Company to its former Distribution business after the sale totaled $0.3 million for the three-month fiscal period ended April 3, 2020. Since the sale of the Distribution business, cash inflows from the Company's former Distribution business to the Company totaled $11.5 million through April 3, 2020, which primarily related to cash received for services performed under the TSA and the $5.2 million working capital adjustment settled in the first quarter of 2020. Cash inflows from the Company's former Distribution business received in the three-month fiscal period ended April 3, 2020 totaled $7.9 million.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

3. DISCONTINUED OPERATIONS (CONTINUED)

The results of operations for the Distribution business were included in discontinued operations on the Company's Condensed Consolidated Statement of Operations. The following table provides information regarding the results of discontinued operations:



	For the Three Months Ended
	April 3, 2020		March 29, 2019
In thousands
Net sales from discontinued operations	$	—	$	290,954
Cost of sales from discontinued operations	—		208,690
Gross profit from discontinued operations	—		82,264
Selling, general and administrative expenses from discontinued operations	—		71,265
Net loss on sale of assets from discontinued operations	—		4
Operating income from discontinued operations	—		10,995
Interest expense, net from discontinued operations	—		12
Other income, net from discontinued operations	—		(2		)
Earnings from discontinued operations before income taxes	—		10,985
Income tax expense	—		2,682
Earnings from discontinued operations before gain on disposal	—		8,303
Gain on disposal of discontinued operations, pretax	925		—
Income tax expense on gain on disposal	233		—
Gain on disposal of discontinued operations, net of tax	692		—
Earnings from discontinued operations	$	692	$	8,303

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

4. ACQUISITIONS

On January 3, 2020, the Company acquired all of the equity interests of Bal Seal Engineering, LLC ("Bal Seal"), of Foothill Ranch, California, at a purchase price of $317.2 million. Bal Seal is a leader in the design, development, and manufacturing of highly engineered products, including precision springs, seals, and contacts. With this acquisition, the Company has significantly expanded its portfolio of engineered products and offerings while creating new opportunities to reach customers in medical technology, aerospace and defense, and industrial end markets.

This acquisition was accounted for as a purchase transaction. The assets acquired and liabilities assumed were recorded based on their fair values at the date of acquisition as follows (in thousands):



Cash	$	10,953
Restricted cash	1,932
Accounts receivable	9,525
Contract assets	784
Inventories	13,500
Property, plant and equipment	82,267
Operating right-of-use asset	653
Other tangible assets	2,492
Goodwill	104,800
Other intangible assets	100,000
Liabilities	(9,679		)
Net assets acquired	317,227
Less cash received	(12,885		)
Net consideration	$	304,342

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

4. ACQUISITIONS (CONTINUNED)

The preliminary purchase price allocation for the acquisition of Bal Seal was based upon a preliminary valuation and the Company's estimates and assumptions for this acquisition are subject to change as the Company obtains additional information during the measurement period. The principal areas of the purchase price allocation that are not yet finalized relate to the validation of certain forecasted cash flows used to value the identifiable intangible assets. These purchase price allocations will be finalized within the one-year measurement period.

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

The fair value of the identifiable intangible assets of $100.0 million, consisting of customer relationships, developed technologies, trade name and acquired backlog, was determined using the income approach. Specifically, a multi-period, excess earnings method was utilized for the customer relationships and backlog and the relief-from-royalty method was utilized for the trade name and developed technologies. The fair value of the customer relationships, $60.6 million, is being amortized on a straight-line basis over periods ranging from 30 to 34 years; the fair value of the developed technologies, $26.9 million, is being amortized over periods ranging from 7 to 13 years; the fair value of the trade name, $11.0 million, is being amortized over a 40 year term; and the fair value of the acquired backlog, $1.5 million, is being amortized over a period of 1 year. These amortization periods represent the estimated useful lives of the assets.

As of the acquisition date, Bal Seal had $1.9 million in costs accrued for its employee retention plans in other long term liabilities. Upon closing, the Company funded $24.7 million associated with these employee retention plans into escrow accounts, which was included in restricted cash on the Company's Condensed Consolidated Balance Sheets as of April 3, 2020. Eligible participants will receive an allocation of the escrow balance one year following the acquisition date. In addition to the purchase price of $317.2 million, the Company will incur $22.8 million in compensation expense associated with these retention plans in the year ended December 31, 2020. Of this amount, $5.7 million was incurred in the three-month fiscal period ended April 3, 2020.

Bal Seal's results of operations have been included in the Company's financial statements for the period subsequent to the completion of the acquisition on January 3, 2020. Bal Seal contributed $23.4 million of revenue and $5.8 million of operating loss for the three-month fiscal period ended April 3, 2020. The following table reflects the unaudited pro forma operating results of the Company for the three month fiscal periods ended April 3, 2020 and March 29, 2019, which gives effect to the acquisition of Bal Seal as if the company had been acquired on January 1, 2019. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisitions been effective January 1, 2019, nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes the historical financial results of the Company and the acquired business adjusted for certain items discussed below. The pro forma information does not include the effects of any synergies, cost reduction initiatives or anticipated integration costs related to the acquisitions.



	For the Three Months Ended
	April 3, 2020		March 29, 2019
In thousands
Net sales	$	207,322	$	189,559
Earnings from continuing operations	$	11,682	$	(5,719	)
Net earnings	$	12,374	$	2,584

Adjustments to pro forma earnings for the three-month fiscal period ended April 3, 2020, include a $5.7 million reduction in compensation expense associated with Bal Seal's employee retention plans, the absence of $8.5 million in acquisition-related costs, a $1.2 million reduction in costs associated with the inventory step-up, $0.4 million in lower amortization of intangible assets and $3.6 million in higher income tax expense. Adjustments to pro forma earnings for the three-month fiscal period ended March 29, 2019, include the adoption of ASU 2014-09, Revenue from Contracts with Customers, a $1.0 million reduction in net expenses associated with buildings purchased by the Company that were previously leased by Bal Seal, $1.7 million in incremental amortization of intangible assets, $5.7 million incremental compensation expense associated with Bal Seal's employee retention plans, $8.5 million of acquisition-related costs, $1.2 million in costs associated with the inventory step-up and $2.9 million in lower income tax expense.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

5. REVENUE

Disaggregation of Revenue

The following table disaggregates total revenue by major product sales by end market.



	For the Three Months Ended
	April 3, 2020		March 29, 2019
In thousands
Defense	$	48,757	$	35,642
Safe and Arm Devices	58,000		57,594
Commercial Aerospace	63,257		55,107
Medical	20,976		7,252
Other	16,332		10,839
Total revenue⁽¹⁾	$	207,322	$	166,434

⁽¹⁾ Sales of the Company's formerly owned Distribution business were included in earnings from discontinued operations, net of tax, on the Company's Condensed Consolidated Statements of Operations. See Note 3, Discontinued Operations, for further information on the Company's sale of the Distribution business.

COVID-19

The impact of the novel coronavirus (“COVID-19”) and the precautionary measures instituted by governments and businesses to mitigate the spread, including limiting non-essential gatherings of people, ceasing all non-essential travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing “shelter-in-place” orders, have contributed to a general slowdown in the global economy and significant volatility in financial markets. As the Company looks forward to the reopening of the economy, it is developing strategies to limit the risk to its operations with a continued focus on the health of its employees and the satisfaction of its customers’ requirements. Despite all of these efforts to mitigate the risks associated with COVID-19, the Company expects its operations to be adversely impacted as commercial end markets have been particularly impacted by the effects of the pandemic, more specifically commercial aerospace customers. Looking at the other end markets, the Company expects more modest declines in its medical and industrial end markets and has seen growth in its overall defense programs. The extent and duration of time to which COVID-19 may adversely impact the Company depends on future developments, which are highly uncertain and unpredictable at this time.

The following table disaggregates total revenue by product types.



	For the Three Months Ended
	April 3, 2020		March 29, 2019

Original Equipment Manufacturer	61	%	54	%
Aftermarket	11	%	11	%
Safe and Arm Devices	28	%	35	%
Total revenue	100	%	100	%

The following table illustrates the approximate percentage of revenue recognized for performance obligations satisfied over time versus the amount of revenue recognized for performance obligations satisfied at a point in time:



	For the Three Months Ended
	April 3, 2020		March 29, 2019
Revenue recognized for performance obligations satisfied:
Over time	32	%	43	%
Point-in-time	68	%	57	%
Total revenue	100	%	100	%

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

5. REVENUE (CONTINUED)

Disaggregation of Revenue - continued

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



	For the Three Months Ended
	April 3, 2020			March 29, 2019
In thousands
Net reductions in revenue due to change in profit estimates	$	(1,115	)	$	(781	)

The net reduction in revenue in the three-month fiscal period ended April 3, 2020 was primarily related to cost growth on a structures program and certain legacy fuzing contracts. The net reduction revenue in the three-month fiscal period ended March 29, 2019 was primarily related to cost growth on the SH-2G program, partially offset by favorable cost performance on the FMU-139 fuzing contract.

Unfulfilled Performance Obligations

Unfulfilled performance obligations ("backlog") represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. Backlog at April 3, 2020 and December 31, 2019, and the portion of backlog we expect to recognize revenue on over the next twelve months is as follows:



	April 3, 2020⁽¹⁾		December 31, 2019
In thousands
Backlog	$	801,538	$	806,870

⁽¹⁾ The Company expects to recognize revenue on approximately 65% of backlog as of April 3, 2020 over the next twelve months.

6. RESTRUCTURING COSTS

During the third quarter of 2017, the Company initiated restructuring activities at its composite 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 include workforce reductions and the consolidation of operations, which began in the third quarter of 2017. The majority of these restructuring activities were completed by the end of 2019. The Company began realizing total cost savings in excess of $8.0 million annually as a result of these restructuring activities in 2019.

Since the announcement, restructuring expense associated with these activities through April 3, 2020 was $9.3 million of the total anticipated expense of $9.5 million. Expense associated with these restructuring activities was not material for the three-month fiscal periods ended April 3, 2020 and March 29, 2019. At April 3, 2020 and December 31, 2019, the Company had an accrual balance of $0.4 million included in other current liabilities, which relates to costs associated with the consolidation of facilities. The Company is currently in negotiations associated with the early termination of a lease, which is expected to be completed in 2020.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

6. RESTRUCTURING COSTS (CONTINUED)

Severance

Following the sale of the Company's former distribution business, the Company announced it would undertake a comprehensive review of its general and administrative functions in order to improve operational efficiency and to align the Company's costs with its revenues. The objective of the initiative is to ensure that the Company has a lean organizational structure that provides a scalable infrastructure that facilitates future growth opportunities.

In the first quarter of 2020, the Company identified workforce reductions to be completed in 2020 to support the cost savings initiative discussed above. The Company currently expects these workforce reductions to result in approximately $2.1 million in severance costs and provide annualized cost savings of approximately $4.0 million. In accordance with ASC 712-10, Compensation - Nonretirement Postemployment Benefits, the Company recorded $1.3 million in severance costs associated with these workforce reductions in the three-month fiscal period ended April 3, 2020, which were included in restructuring costs on the Company's Condensed Consolidated Statements of Operations. The accrual balance associated with these severance costs were included in other current liabilities on the Company's Condensed Consolidated Balance Sheets as of April 3, 2020.

In addition to the severance associated with the cost savings initiative discussed above, the Company incurred $0.5 million in severance costs as it integrates the acquisition of Bal Seal in the three-month fiscal period ended April 3, 2020. These costs were included in restructuring costs on the Company's Condensed Consolidated Statements of Operations and the associated workforce reduction is expected to provide annual cost savings of approximately $1.2 million.

7. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consisted of the following:



	April 3, 2020			December 31, 2019
In thousands
Trade receivables	$	22,660		$	13,794
U.S. Government contracts:
Billed	17,851			15,136
Cost and accrued profit - not billed	862			894
Commercial and other government contracts
Billed	127,032			120,427
Cost and accrued profit - not billed	4,144			7,487
Less allowance for doubtful accounts	(1,400		)	(1,246		)
Accounts receivable, net	$	171,149		$	156,492

The increase in accounts receivable was primarily attributable to the acquisition of Bal Seal and higher receivables under a joint programmable fuze ("JPF") direct commercial sales ("DCS") contract. These increases were partially offset by payments received for the Company's bearings products. Refer to Note 4, Acquisitions, for further information on the Bal Seal acquisition.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

7. ACCOUNTS RECEIVABLE, NET (CONTINUED)

The following table summarizes the activity in the allowance for doubtful accounts in the three-month fiscal period ended April 3, 2020:



In thousands
Balance at December 31, 2019	$	(1,246	)
Provision	(179		)
Additions attributable to acquisitions	(82		)
Amounts written off	96
Changes in foreign currency exchange rates	11
Balance at April 3, 2020	$	(1,400	)

COVID-19 and Oil Prices

The Company anticipates that the disruptions and delays resulting from the spread of COVID-19 and the measures instituted by governments and businesses to mitigate its spread will impact its liquidity in the next twelve months. Certain of the Company's receivables associated with the JPF program are from Middle Eastern countries which may be impacted by the recent declines in crude oil prices. The Company also continues to closely monitor the collectability of its receivables from commercial aerospace customers as it recognizes there may be delays in payments due to the impacts of COVID-19 on its customers. As of the date of this filing, the Company does not believe there has been any material impact on the collectability of these receivables.

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



	April 3, 2020		December 31, 2019
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	900	$	900

8. CONTRACT ASSETS, CONTRACT COSTS AND CONTRACT LIABILITIES

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



	April 3, 2020		December 31, 2019		$ Change		% Change
In thousands
Contract assets	$	133,421	$	121,614	$	11,807	9.7	%

Contract costs, current portion	$	6,207	$	6,052	$	155	2.6	%
Contract costs, noncurrent portion	$	6,652	$	6,099	$	553	9.1	%

Contract liabilities, current portion	$	43,582	$	42,942	$	640	1.5	%
Contract liabilities, noncurrent portion	$	38,957	$	37,855	$	1,102	2.9	%

Contract Assets

The increase in contract assets was primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the three-month fiscal period ended April 3, 2020. This increase was primarily related to work performed and not yet billed on certain structures and legacy fuzing programs, partially offset by amounts billed on the JPF program with the USG. There were no significant impairment losses related to the Company's contract assets during the three-month fiscal periods ended April 3, 2020 and March 29, 2019.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

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

Contract Assets - continued

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



	April 3, 2020		December 31, 2019
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	3,810	$	3,745

Contract Costs

At April 3, 2020, costs to fulfill a contract and costs to obtain a contract were $7.9 million and $5.0 million, respectively. At December 31, 2019, costs to fulfill a contract and costs to obtain a contract were $6.6 million and $5.5 million, respectively. These amounts are included in contract costs, current portion and contract costs, noncurrent portion on the Company's Condensed Consolidated Balance Sheets at April 3, 2020 and December 31, 2019.

The increase in contract costs, current portion was primarily attributable to costs to fulfill unmanned K-MAX® contracts and the reclassification of a portion of costs to obtain a JPF DCS contract and costs to fulfill certain structures programs from contract costs, noncurrent portion, partially offset by the amortization of contract costs. For the three-month fiscal periods ended April 3, 2020 and March 29, 2019, amortization of contract costs was $2.5 million and $1.0 million, respectively.

The increase in contract costs, noncurrent portion was primarily attributable to costs to fulfill unmanned K-MAX® contracts and costs to obtain a JPF DCS contract, partially offset by the reclassification of a portion of costs to obtain a JPF DCS contract and costs to fulfill certain structures programs.

Contract Liabilities

The increase in contract liabilities, current portion was primarily due to advance payments received on certain legacy fuzing programs and the reclassification of a portion of the advance payments received for a JPF DCS contract from contract liabilities, noncurrent portion, partially offset by revenue recognized on a JPF DCS contract. Revenue recognized related to contract liabilities, current portion was $14.7 million and $8.0 million in the three-month fiscal periods ended April 3, 2020 and March 29, 2019, respectively.

The increase in contract liabilities, noncurrent portion was due to advance payments received for a JPF DCS contract, partially offset by the reclassification of a portion of the advance payments received for a JPF DCS contract to contract liabilities, current portion. For the three-month fiscal periods ended April 3, 2020 and March 29, 2019, the Company did not recognize revenue against contract liabilities, noncurrent portion.

9. FAIR VALUE MEASUREMENTS

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

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


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


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


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

9. FAIR VALUE MEASUREMENTS (CONTINUED)

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



	April 3, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
In thousands
Debt ⁽¹⁾	$	387,841	$	379,676	$	186,060	$	237,381

⁽¹⁾ These amounts are classified within Level 2.

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

The fair values of cash and cash equivalents, accounts receivable, net and accounts payable - trade approximate their carrying amounts due to the short-term maturities of these instruments. The Company's cash and cash equivalents at April 3, 2020 and December 31, 2019 included $230.3 million and $443.2 million of Level 1 money market funds, respectively.

Recurring Fair Value Measurements

The Company holds derivative instruments for foreign exchange contracts that are measured at fair value using observable market inputs such as forward rates and its counterparties’ credit risks. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy. At April 3, 2020 and December 31, 2019, the derivative instruments were included in other current assets and other current liabilities on the Company's Consolidated Balance Sheets. Based on the Company's continued ability to trade and enter into forward contracts and interest rate swaps, the Company considers the markets for its fair value instruments to be active.

The Company evaluated the credit risk associated with the counterparties to these derivative instruments and determined that as of April 3, 2020, such credit risks had not had an adverse impact on the fair value of these instruments.

10. DERIVATIVE FINANCIAL INSTRUMENTS

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

Forward Exchange Contracts

The Company holds forward exchange contracts designed to hedge forecasted transactions denominated in foreign currencies and to minimize the impact of foreign currency fluctuations on the Company’s earnings and cash flows. Some of these contracts are designated as cash flow hedges. The Company will include in earnings amounts currently included in accumulated other comprehensive income upon recognition of cost of sales related to the underlying transaction. These contracts were not material to the Company's Condensed Consolidated Balance Sheets as of April 3, 2020 and December 31, 2019. The activity related to these contracts was not material to the Company's Condensed Consolidated Financial Statements for the three-month fiscal periods ended April 3, 2020 and March 29, 2019.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

11. INVENTORIES

Inventories consisted of the following:



	April 3, 2020		December 31, 2019
In thousands
Raw materials	$	20,040	$	15,012
Contracts and other work in process (including certain general stock materials)	141,004		116,382
Finished goods	32,135		24,959
Inventories	$	193,179	$	156,353

The increase in inventories for the three-month fiscal period ended April 3, 2020 was primarily attributable to the acquisition of Bal Seal and work performed on the JPF DCS program, K-MAX® program and bearings products. Refer to Note 4, Acquisitions, for further information on the Bal Seal acquisition.

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



	April 3, 2020		December 31, 2019
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	428	$	403

At April 3, 2020 and December 31, 2019, $54.5 million and $43.6 million, respectively, of K-MAX® inventory was included in contracts and other work in process inventory and finished goods on the Company's Condensed Consolidated Balance Sheets. Management believes that approximately $28.1 million of the K-MAX® inventory will be sold after April 3, 2021, based upon the anticipation of additional aircraft manufacturing and the requirements to support the fleet for the foreseeable future.

At April 3, 2020 and December 31, 2019, $5.5 million and $3.6 million, respectively, of SH-2G(I) inventory was included in contracts and other work in process inventory on the Company's Condensed Consolidated Balance Sheets. Management believes that approximately $4.2 million of the SH-2G(I) inventory will be sold after April 3, 2021. This balance represents spares requirements and inventory to be used on SH-2G programs.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

12. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The following table sets forth the change in the carrying amount of goodwill for continuing operations:



In thousands
Gross balance at December 31, 2019	$	211,566
Accumulated impairment	(16,252		)
Net balance at December 31, 2019	195,314
Additions⁽¹⁾	104,800
Impairments	—
Foreign currency translation	(5,316		)
Ending balance at April 3, 2020	$	294,798

⁽¹⁾ The additions to goodwill in the three-month fiscal period ended April 3, 2020 were attributable to the acquisition of Bal Seal. Refer to Note 4, Acquisitions, for further information on this acquisition.

In accordance with ASC 350 - Intangibles - Goodwill and Other ("ASC 350"), the Company is required to evaluate goodwill for possible impairment testing if an event occurs or circumstances change that indicate that the fair value of the reporting entity may be below its carrying amount. The spread of COVID-19 and the precautionary measures instituted by governments and businesses to mitigate the risk of its spread have contributed to the general slowdown in the global economy and significant volatility in financial markets, which have resulted in a significant decrease in the Company's stock price and market capitalization. As a result, the Company performed analyses to determine the impact that the decrease in the Company's market capitalization would have on the fair values of its reporting units relative to their respective carrying values and if there was a triggering event for potential impairment with respect to each reporting unit.

Management performed qualitative analyses on its Specialty Bearings, KPP-Orlando and Bal Seal reporting units, which took into consideration the following factors: general economic conditions, industry specific performance, changes in carrying values of the reporting units and the assessments of assumptions used in the previous fair value calculation. The results of these analyses indicated that it is more likely than not that goodwill is not impaired and these reporting units did not need to proceed to a Step 1 impairment analysis.

Based on the analysis of the impact that the decrease in the Company's market capitalization would have on the Company's reporting unit fair values relative to their respective carrying values, management identified a triggering event for possible goodwill impairment in its Aerosystems reporting unit. Management performed a Step 1 impairment analysis on the Aerosystems reporting unit using an income methodology based on management's estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. In addition, management used a market-based valuation method involving analysis of market multiples of revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") for (i) a group of comparable companies and (ii) recent transactions, if any, involving comparable companies. In estimating the fair value of the reporting unit, a weighting of 80% to the income approach and 20% to the market-based valuation method was selected, consistent with the fourth quarter of 2019. The estimated fair value of the reporting unit was adjusted based on an assumption of excess working capital, which represents management's identification of specific contract-related assets that will generate cash flows in the future. The results of the Step 1 impairment test resulted in a conclusion that the fair value of the Aerosystems reporting unit was 9.4% above its carrying value; therefore, goodwill was not impaired. The carrying value of the Aerosystems reporting unit was $270.7 million and the reporting unit's goodwill balance was $49.0 million as of April 3, 2020.

As a result of these assessments, there were no impairments that impacted the Company's Condensed Consolidated Financial Statements as of and for the three-month fiscal period ended April 3, 2020. The Company's future assessment of the magnitude and duration of the COVID-19 pandemic, as well as other factors, could result in material impacts to the Consolidated Financial Statements in future reporting periods. Specifically, with respect to its Aerosystems reporting unit, further deterioration of business conditions, declines in revenues or inability to secure future K-MAX® aircraft orders will result in additional risk of impairment in future periods.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

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

Other Intangibles

Other intangible assets consisted of:



		At April 3,					At December 31,
		2020					2019
	Amortization Period	Gross Amount		Accumulated Amortization			Gross Amount		Accumulated Amortization
In thousands
Customer lists / relationships	6-34 years	$	116,528	$	(22,385	)	$	56,789	$	(21,415	)
Developed technologies	7-20 years	46,130		(6,185		)	19,552		(5,217		)
Trademarks / trade names	15- 40 years	15,821		(1,465		)	5,012		(1,368		)
Non-compete agreements and other	1-15 years	3,739		(2,597		)	2,338		(2,321		)
Patents	17 years	523		(457		)	523		(454		)
Total		$	182,741	$	(33,089	)	$	84,214	$	(30,775	)

The increase in other intangible assets, net was attributable to the acquisition of Bal Seal. Refer to Note 4, Acquisitions, for further information on this acquisition.

13. PENSION PLANS

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



	For the Three Months Ended
	Qualified Pension Plan						SERP
	April 3, 2020			March 29, 2019			April 3, 2020		March 29, 2019
In thousands
Service cost	$	1,309		$	1,275		$	—	$	—
Interest cost on projected benefit obligation	5,255			6,606			41		59
Expected return on plan assets	(10,796		)	(10,640		)	—		—
Amortization of net loss	1,201			3,815			236		61
Net pension (income) cost	$	(3,031	)	$	1,056		$	277	$	120

The Company contributed $10.0 million to the qualified pension plan and $0.1 million to the SERP through the end of the first quarter of 2020. No further contributions are expected to be made to the qualified pension plan during 2020. The Company plans to contribute an additional $0.4 million to the SERP in 2020. For the 2019 plan year, the Company contributed $0.5 million to the SERP and did not make a contribution to the qualified pension plan.

14. COMMITMENTS AND CONTINGENCIES

Pension Freeze

Effective December 31, 2015, the Company's qualified pension plan was frozen with respect to future benefit accruals. Under USG Cost Accounting Standard (“CAS”) 413 the Company must determine the USG’s share of any pension curtailment adjustment calculated in accordance with CAS. Such adjustments can result in an amount due to the USG for pension plans that are in a surplus position or an amount due to the contractor for plans that are in a deficit position. During the fourth quarter of 2016, the Company accrued a $0.3 million liability representing its estimate of the amount due to the USG based on the Company's pension curtailment adjustment calculation, which was submitted to the USG for review in December 2016. The Company maintained its accrual at $0.3 million as of April 3, 2020. There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations, financial position and cash flows.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

New Hartford Property

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

The Company's estimate of its portion of the cost to assess the environmental conditions and remediate this site is $2.3 million, all of which has been accrued. The remediation has been substantially completed and the Company continues to monitor the results of the remediation. The total amount paid to date in connection with these environmental remediation activities is $1.6 million. At April 3, 2020, the Company had $0.7 million accrued for these environmental remediation activities. A portion ($0.1 million) of the accrual related to this property is included in other current liabilities and the balance is included in other long-term liabilities. The remaining balance of the accrual reflects the total anticipated cost of completing these environmental remediation activities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.

Bloomfield Property

In connection with the Company’s 2008 purchase of the portion of the Bloomfield campus that Kaman Aerospace Corporation had leased from NAVAIR, the Company assumed responsibility for environmental remediation at the facility as may be required under the Transfer Act and is currently remediating the property under the guidance of the Connecticut Department of Environmental Protection. The assumed environmental liability of $10.3 million was determined by taking the undiscounted estimated remediation liability of $20.8 million and discounting it at a rate of 8%. This remediation process will take many years to complete. The total amount paid to date in connection with these environmental remediation activities is $14.4 million. At April 3, 2020, the Company had $2.1 million accrued for these environmental remediation activities. A portion ($0.2 million) of the accrual related to this property is included in other current liabilities, and the balance is included in other long-term liabilities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.

Offset Agreement

During January 2018, the Company entered into an offset agreement as a condition to obtaining orders from a foreign customer for the Company's JPF product. This agreement is designed to return economic value to the foreign country by requiring the Company to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. The offset agreement may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects and the purchase by third parties of supplies from in-country vendors. This agreement may also be satisfied through the Company's use of cash for activities, such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. At April 3, 2020, the offset agreement had an outstanding notional value of approximately $194.0 million, which is equal to sixty percent of the contract value of $324.0 million as defined by the agreement between the customer and the Company. The amount ultimately applied against the offset agreement is based on negotiations with the customer and may require cash outlays that represent only a fraction of the notional value in the offset agreement.

The Company 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. In the event the offset requirements of the contract are not met, the Company could be liable for potential penalties up to $16.5 million payable to the customer. The Company began recognizing revenue associated with this contract in the third quarter of 2019 and has considered the potential penalties of $16.5 million as a reduction to the transaction price in its determination of the value of the performance obligations within this contract. At the point the Company has an approved plan to satisfy the offset requirements, the Company will include the value of the potential penalties in backlog to the extent those penalties are expected to be offset and begin recognizing revenue on the total contract value.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Employee-Related Tax Matter

During 2018, the Company identified certain individuals at one of its foreign subsidiaries who were potentially misclassified as self-employed persons performing services for the subsidiary, as opposed to being classified as employees of the subsidiary. The Company investigated the misclassification of these individuals and the potential liability for any associated social contributions, interest and fines and/or penalties as a result of the misclassification. Following the internal investigation, the foreign subsidiary made a voluntary disclosure of the matter to the appropriate legal and regulatory authorities. At December 31, 2019, the Company had accrued $2.5 million, which represented the Company's best estimate of potentially unpaid social security contributions, related interest and possible penalties. During the first quarter of 2020, the Company received written notification of an assessment for the unpaid social security contributions and related interest. As a result, the Company reduced its accrual to $1.3 million, which represents the Company's best estimate of the unpaid social security contributions, related interest and possible penalties at April 3, 2020. There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations, financial position and cash flows.

15. COMPUTATION OF EARNINGS PER SHARE

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



	For the Three Months Ended
	April 3, 2020			March 29, 2019
In thousands, except per share amounts
(Loss) earnings from continuing operations	$	(407	)	$	5,822
Total earnings from discontinued operations	692			8,303
Net earnings	$	285		$	14,125

Basic:
Weighted average number of shares outstanding	27,809			27,908

(Loss) earnings per share from continuing operations	$	(0.01	)	$	0.21
Earnings per share from discontinued operations	0.02			0.30
Basic earnings per share	$	0.01		$	0.51

Diluted:
Weighted average number of shares outstanding	27,809			27,908
Weighted average shares issuable on exercise of dilutive stock options	82			162
Total	27,891			28,070

(Loss) earnings per share from continuing operations	$	(0.01	)	$	0.20
Earnings per share from discontinued operations	0.02			0.30
Diluted earnings per share	$	0.01		$	0.50

Equity awards

For the three-month fiscal period ended April 3, 2020 and March 29, 2019, respectively, 443,379 and 385,232 shares issuable under equity awards granted to employees were excluded from the calculation of diluted earnings per share as they were anti-dilutive based on the average stock price during the period.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

15. COMPUTATION OF EARNINGS PER SHARE (CONTINUED)

2024 Convertible Notes

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019, shares issuable under the Convertible Notes due 2024 were excluded from the diluted earnings per share calculation because the conversion price was more than the average market price of the Company's stock during the periods.

16. SHARE-BASED ARRANGEMENTS

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

Compensation expense for stock options, restricted stock awards and restricted stock units is recognized on a straight-line basis over the vesting period of the awards. Share-based compensation expense recorded for continuing operations for the three-month fiscal periods ended April 3, 2020 and March 29, 2019 was $1.6 million in both periods. These amounts were included in selling, general and administrative expenses on the Company's Condensed Consolidated Statements of Operations. Share-based compensation expense recorded for discontinued operations for the three-month fiscal period ended March 29, 2019 was $0.3 million. This amount was included in earnings from discontinued operations, net of tax on the Company's Condensed Consolidated Statements of Operations.

Stock option activity was as follows:



	For the Three Months Ended
	April 3, 2020
	Options		Weighted - average exercise price
Options outstanding at beginning of period	736,364		$	49.67
Granted	157,860		$	64.48
Exercised	(44,324	)	$	30.63
Forfeited or expired	(1,575	)	$	64.48
Options outstanding at April 3, 2020	848,325		$	53.39

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



	For the Three Months Ended
	April 3, 2020			March 29, 2019
Expected option term (years)	4.9			4.9
Expected volatility	20.2		%	19.4		%
Risk-free interest rate	1.4		%	2.5		%
Expected dividend yield	1.3		%	1.3		%
Per share fair value of options granted		$10.74			$11.18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three-month fiscal periods ended April 3, 2020 and March 29, 2019

(Unaudited)

16. SHARE-BASED ARRANGEMENTS (CONTINUED)

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



	For the Three Months Ended
	April 3, 2020
	Restricted Stock		Weighted- average grant date fair value
Restricted Stock outstanding at beginning of period	92,800		$	53.63
Granted	30,890		$	64.48
Vested	(29,089	)	$	53.08
Forfeited or expired	(1,160	)	$	60.73
Restricted Stock outstanding at April 3, 2020	93,441		$	57.30

17. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in shareholders’ equity for the three-month fiscal periods ended April 3, 2020, and March 29, 2019, were as follows:



	For the Three Months Ended
	April 3, 2020			March 29, 2019
In thousands
Beginning balance	$	823,202		$	633,157
Comprehensive (loss) income	(9,434		)	14,144
Dividends declared (per share of common stock, $0.20 and $0.20, respectively)	(5,555		)	(5,582		)
Employee stock plans and related tax benefit	1,455			1,519
Purchase of treasury shares	(14,072		)	(2,951		)
Share-based compensation expense	1,633			1,880
Ending balance	$	797,229		$