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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJuly 3, 2020
Or
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)
Connecticut06-0613548
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1332 Blue Hills Avenue,Bloomfield,Connecticut06002
(Address of principal executive offices)(Zip Code)
(860) 243-7100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock ($1 par value)KAMNNew 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.
YesNo
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).
YesNo
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 filerAccelerated filerNon-accelerated filer
Smaller reporting companyEmerging 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).
YesNo
At July 31, 2020, there were27,663,517  shares of Common Stock outstanding.



PART I
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except share and per share amounts) (Unaudited)

 July 3, 2020December 31, 2019
Assets  
Current assets:  
Cash and cash equivalents$235,608  $471,540  
Restricted cash25,130    
Accounts receivable, net176,565  156,492  
Contract assets131,061  121,614  
Contract costs, current portion7,132  6,052  
Inventories207,340  156,353  
Income tax refunds receivable11,418  8,069  
Other current assets14,687  16,368  
Total current assets808,941  936,488  
Property, plant and equipment, net of accumulated depreciation of $223,553 and $210,549, respectively
218,202  140,450  
Operating right-of-use assets, net13,732  15,159  
Goodwill304,768  195,314  
Other intangible assets, net141,630  53,439  
Deferred income taxes30,176  35,240  
Contract costs, noncurrent portion5,861  6,099  
Other assets36,774  36,754  
Total assets$1,560,084  $1,418,943  
Liabilities and Shareholders’ Equity  
Current liabilities:  
Accounts payable – trade$58,267  $70,884  
Accrued salaries and wages49,727  43,220  
Contract liabilities, current portion43,739  42,942  
Operating lease liabilities, current portion4,535  4,306  
Income taxes payable2,302  4,722  
Other current liabilities39,573  37,918  
Total current liabilities198,143  203,992  
Long-term debt, excluding current portion, net of debt issuance costs384,609  181,622  
Deferred income taxes6,723  6,994  
Underfunded pension78,782  97,246  
Contract liabilities, noncurrent portion26,056  37,855  
Operating lease liabilities, noncurrent portion9,940  11,617  
Other long-term liabilities52,435  56,415  
Commitments and contingencies (Note 14)
Shareholders' equity:  
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding
    
Common stock, $1 par value, 50,000,000 shares authorized; voting; 30,214,005 and 30,058,455 shares issued, respectively
30,214  30,058  
Additional paid-in capital235,195  228,153  
Retained earnings809,769  820,666  
Accumulated other comprehensive income (loss)(151,210) (150,893) 
Less 2,554,617 and 2,219,332 shares of common stock, respectively, held in treasury, at cost
(120,572) (104,782) 
Total shareholders’ equity803,396  823,202  
Total liabilities and shareholders’ equity$1,560,084  $1,418,943  
See accompanying notes to condensed consolidated financial statements.
2


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except per share amounts) (Unaudited)

 For the Three Months EndedFor the Six Months Ended
 July 3, 2020June 28, 2019July 3, 2020June 28, 2019
Net sales$177,890  $174,712  $385,212  $341,146  
Cost of sales121,222  122,123  260,842  234,036  
Gross profit56,668  52,589  124,370  107,110  
Selling, general and administrative expenses44,880  41,808  105,869  83,759  
Costs from transition services agreement4,373    8,513    
Cost of acquired retention plans5,704    11,407    
Restructuring costs4,484  206  6,279  472  
Gain on sale of business    (493)   
Net gain on sale of assets(3)   (13) (65) 
Operating (loss) income(2,770) 10,575  (7,192) 22,944  
Interest expense, net5,808  5,236  9,055  10,537  
Non-service pension and post retirement benefit income(4,062) (100) (8,125) (199) 
Income from transition services agreement(3,050)   (6,024)   
Other (income) expense, net(108) (463) 110  (552) 
(Loss) earnings from continuing operations before income taxes(1,358) 5,902  (2,208) 13,158  
Income tax (benefit) expense(1,258) (487) (1,701) 947  
(Loss) earnings from continuing operations(100) 6,389  (507) 12,211  
Earnings from discontinued operations before gain on disposal, net of tax  7,077    15,380  
Gain on disposal of discontinued operations, net of tax    692    
Total earnings from discontinued operations  7,077  692  15,380  
Net (loss) earnings$(100) $13,466  $185  $27,591  
Earnings per share:  
Basic (loss) earnings per share from continuing operations$0.00  $0.23  $(0.02) $0.44  
Basic earnings per share from discontinued operations0.00  0.25  0.03  0.55  
Basic (loss) earnings per share$0.00  $0.48  $0.01  $0.99  
Diluted (loss) earnings per share from continuing operations$0.00  $0.23  $(0.02) $0.43  
Diluted earnings per share from discontinued operations0.00  0.25  0.03  0.55  
Diluted (loss) earnings per share$0.00  $0.48  $0.01  $0.98  
Average shares outstanding:  
Basic27,659  27,961  27,734  27,935  
Diluted27,659  28,123  27,734  28,097  

See accompanying notes to condensed consolidated financial statements.

3


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)

 For the Three Months EndedFor the Six Months Ended
 July 3, 2020June 28, 2019July 3, 2020June 28, 2019
Net (loss) earnings$(100) $13,466  $185  $27,591  
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments and other8,295  1,329  (2,531) (1,588) 
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $330 and $940 and $660 and $1,880, respectively
1,107  2,936  2,214  5,872  
Other comprehensive income (loss)9,402  4,265  (317) 4,284  
Comprehensive income (loss)$9,302  $17,731  $(132) $31,875  

See accompanying notes to condensed consolidated financial statements.
4

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

 For the Six Months Ended
 July 3,
2020
June 28,
2019
Cash flows from operating activities:  
Net earnings$185  $27,591  
Less: Total earnings from discontinued operations692  15,380  
(Loss) earnings from continuing operations$(507) $12,211  
Adjustments to reconcile net earnings from continuing operations to net cash (used in) provided by operating activities of continuing operations:  
Depreciation and amortization19,814  12,365  
Amortization of debt issuance costs907  906  
Accretion of convertible notes discount1,412  1,347  
Provision for doubtful accounts314  204  
Gain on sale of business(493)   
Net gain on sale of assets(13) (65) 
Net loss on derivative instruments404  3  
Stock compensation expense3,590  3,557  
Deferred income taxes4,124  (3,252) 
Changes in assets and liabilities, excluding effects of acquisitions/divestitures: 
Accounts receivable(11,368) 48,270  
Contract assets(9,158) (19,572) 
Contract costs(842) 2,355  
Inventories(38,029) (31,662) 
Income tax refunds receivable(3,382) (3,656) 
Operating right of use assets1,974  2,140  
Other assets135  (892) 
Accounts payable - trade(13,872) (2,673) 
Contract liabilities(11,002) (4,640) 
Operating lease liabilities(1,916) (2,115) 
Other current liabilities528  (4,606) 
Income taxes payable(2,658) (147) 
Pension liabilities(15,775) 2,087  
Other long-term liabilities(3,587) (1,303) 
Net cash (used in) provided by operating activities of continuing operations(79,400) 10,862  
Net cash used in operating activities of discontinued operations  (9,134) 
Net cash (used in) provided by operating activities(79,400) 1,728  
Cash flows from investing activities:  
Proceeds from sale of assets71  71  
Proceeds from sale of discontinued operations5,223    
Proceeds from sale of business493    
Expenditures for property, plant & equipment(9,592) (11,375) 
Acquisition of businesses, net of cash acquired(304,661)   
Other, net(437) (1,618) 
Net cash used in investing activities of continuing operations(308,903) (12,922) 
Net cash used in investing activities of discontinued operations  (3,662) 
Net cash used in investing activities(308,903) (16,584) 
Cash flows from financing activities:  
Net borrowings under revolving credit agreements201,100  16,700  
Debt repayment  (4,375) 
Net change in bank overdraft131  724  
Proceeds from exercise of employee stock awards1,986  3,546  
Purchase of treasury shares(14,168) (3,063) 
Dividends paid(11,144) (11,160) 
Other, net(718) (663) 
Net cash provided by financing activities of continuing operations177,187  1,709  
Net cash provided by financing activities of discontinued operations  4,458  
Net cash provided by financing activities177,187  6,167  
Net decrease in cash and cash equivalents(211,116) (8,689) 
Cash and cash equivalents of discontinued operations  (1,957) 
Effect of exchange rate changes on cash and cash equivalents314  (49) 
Cash and cash equivalents and restricted cash at beginning of period471,540  27,711  
Cash and cash equivalents and restricted cash at end of period$260,738  $17,016  
See accompanying notes to condensed consolidated financial statements.
5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)

1. BASIS OF PRESENTATION

During the third quarter of 2019, Kaman Corporation ("the Company") completed the sale of its Distribution business for total cash consideration of approximately $700.0 million, excluding certain working capital adjustments which were finalized in the first quarter of 2020 and transaction costs. The Distribution business' results of operations and the related cash flows have been reclassified to earnings from discontinued operations in the Condensed Consolidated Statement of Operations and cash flows from discontinued operations in the Condensed Consolidated Statement of Cash Flows, respectively, for all periods presented. See Note 3, Discontinued Operations, to the Condensed Consolidated Financial Statements for further information.

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

The Company has a calendar year-end; however, its first three fiscal quarters follow a 13-week convention, with each quarter ending on a Friday. The second quarters for 2020 and 2019 ended on July 3, 2020, and June 28, 2019, respectively.

2. RECENT ACCOUNTING STANDARDS

Recent Accounting Standards Adopted

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract". The objective of the standard update is to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract to address the diversity in practice. The ASU requires an entity in a hosting arrangement that is a service arrangement to determine which costs to capitalize as an asset related to a service contract and which costs to expense, and to determine which project stage implementation activities relate to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. Capitalized implementation costs of a hosting arrangement are expensed over the term of the hosting arrangement in the same line item in the statement of operations as the fees associated with the hosting element of the arrangement. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption was permitted. The amendments in this standard update should be applied either retrospectively or prospectively to all implementation costs incurred after the inception date. The Company has elected to adopt the standard update prospectively. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurement". The objective of this standard update is to improve the effectiveness of disclosures for recurring and nonrecurring fair value measurements. This standard update removes certain disclosure requirements that are no longer considered cost beneficial, modifies existing disclosure requirements and adds new disclosure requirements identified as relevant. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption was permitted. An entity was permitted to early adopt any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until the effective date. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.
6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Adopted - continued

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

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". The objective of this standard update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard update is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2019. Early adoption was permitted. An entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. The adoption of this standard update did not have a material impact on the Company's consolidated financial statements.

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

Recent Accounting Standards Yet to be Adopted

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


7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Yet to be Adopted - continued

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

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

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

3. DISCONTINUED OPERATIONS

On August 26, 2019, the Company completed the sale of its Distribution business for total cash consideration of approximately$700.0 million, excluding certain working capital adjustments which were finalized in the first quarter of 2020. The sale of the Distribution business was a result of the Company's shift in strategy to be a highly focused, technologically differentiated aerospace and engineered products company. As a result of the sale, the Distribution business met the criteria set forth in Accounting Standards Codification ("ASC") 205-20, Presentation of Financial Statements - Discontinued Operations for discontinued operations.


8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)
3. DISCONTINUED OPERATIONS (CONTINUED)

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

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

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

In the six-month fiscal period ended July 3, 2020, the Company recorded a gain on disposal of discontinued operations as a result of the final settlement of the working capital adjustment, partially offset by transaction costs.
9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)
4. BUSINESS COMBINATIONS

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

This acquisition was accounted for as a purchase transaction. The assets acquired and liabilities assumed were recorded based
on their fair values at the date of acquisition as follows (in thousands):
Cash$10,953  
Restricted cash1,932  
Accounts receivable9,525  
Contract assets784  
Inventories13,500  
Property, plant and equipment81,997  
Operating right-of-use asset653  
Other tangible assets2,492  
Goodwill110,789  
Other intangible assets94,600  
Liabilities(9,679) 
    Net assets acquired317,546  
    Less cash received(12,885) 
    Net consideration$304,661  

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

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

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

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


10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)
4. BUSINESS COMBINATIONS (CONTINUED)

Bal Seal's results of operations have been included in the Company's financial statements for the period subsequent to the completion of the acquisition on January 3, 2020. Bal Seal contributed $18.1 million and $41.4 million of revenue and $8.1 million and $13.9 million of operating loss for the three-month and six-month fiscal periods ended July 3, 2020. The following table reflects the unaudited pro forma operating results of the Company for the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019, which gives effect to the acquisition of Bal Seal as if the company had been acquired on January 1, 2019. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisitions been effective January 1, 2019, nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes the historical financial results of the Company and the acquired business adjusted for certain items discussed below. The pro forma information does not include the effects of any synergies, cost reduction initiatives or anticipated integration costs related to the acquisitions.
For the Three Months EndedFor the Six Months Ended
July 3, 2020June 28, 2019July 3, 2020June 28, 2019
In thousands
Net sales$177,890  $198,493  $385,212  $388,052  
Earnings from continuing operations$5,243  $2,024  $16,925  $(3,695) 
Net earnings$5,243  $9,101  $17,617  $11,685  

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

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


11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)
5. REVENUE

Disaggregation of Revenue

The following table disaggregates total revenue by major product sales by end market.
For the Three Months EndedFor the Six Months Ended
July 3, 2020June 28, 2019July 3, 2020June 28, 2019
In thousands
Defense$42,200  $46,758  $90,957  $82,400  
Safe and Arm Devices56,986  39,113  114,986  96,707  
Commercial, Business, & General Aviation47,855  69,176  111,112  124,283  
Medical14,763  7,974  35,739  15,226  
Industrial & Other16,086  11,691  32,418  22,530  
Total revenue(1)
$177,890  $174,712  $385,212  $341,146  
(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. The Company has implemented strategies to limit the risk to its operations with a continued focus on the health of its employees and the satisfaction of its customers’ requirements. Despite all of these efforts to mitigate the risks associated with COVID-19, the effects of the pandemic have adversely impacted our commercial end markets, more specifically Commercial, Business, and General Aviation customers, and Medical. Additionally, the Company has experienced modest declines in its other product lines driven by lower demand in the industrial end market. As of the date of this filing, the Company's defense and safe and arm device end markets have not been impacted by COVID-19. 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 EndedFor the Six Months Ended
July 3, 2020June 28, 2019July 3, 2020June 28, 2019
Original Equipment Manufacturer55 %62 %58 %57 %
Aftermarket13 %16 %12 %15 %
Safe and Arm Devices32 %22 %30 %28 %
Total revenue100 %100 %100 %100 %


12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)
5. REVENUE (CONTINUED)

Disaggregation of Revenue - continued

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 EndedFor the Six Months Ended
July 3, 2020June 28, 2019July 3, 2020June 28, 2019
Over time35 %50 %33 %47 %
Point-in-time65 %50 %67 %53 %
Total revenue100 %100 %100 %100 %

For contracts in which revenue is recognized over time, the Company performs detailed quarterly reviews of the progress and execution of its performance obligations under these contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g. the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g. to estimate increases in wages and prices for materials and related support cost allocations), execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables. Based upon these reviews, the Company will record the effects of adjustments in profit estimates each period. If at any time management determines that in the case of a particular contract total costs will exceed total contract revenue, a provision for the entire anticipated contract loss is recorded at that time. Net changes in revenue associated with cost growth on the Company's over time contracts were as follows:
For the Three Months EndedFor the Six Months Ended
July 3, 2020June 28, 2019July 3, 2020June 28, 2019
In thousands
Net change in revenue due to change in profit estimates$(1,425) $467  $(2,540) $(314) 

The net reductions in revenue in the three-month and six-month fiscal periods ended July 3, 2020 were primarily related to cost growth on certain structures programs and legacy fuzing contracts, partially offset by favorable cost performance on the joint programmable fuze ("JPF") contract with the U.S. Government ("USG"). The revenue recognized due to changes in profit estimates in the three-month fiscal period ended June 28, 2019 was primarily related to favorable cost performance on the JPF contract with the USG, partially offset by cost growth on certain legacy fuzing contracts and the SH-2G contract with Peru. The net reduction in revenue in the six-month fiscal period ended June 28, 2019 was primarily related to cost growth on the SH-2G program with Peru, certain legacy fuzing contracts, and a certain metallics structures contract, partially offset by favorable cost performance on the JPF contract with the USG and the FMU-139 fuzing contract.


13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)
5. REVENUE (CONTINUED)

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 July 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:
July 3,
 2020(1)
December 31,
2019
In thousands
Backlog$708,960  $806,870  
(1) The Company expects to recognize revenue on approximately 67% of backlog as of July 3, 2020 over the next twelve months.

6. RESTRUCTURING COSTS

General & Administration Expense Reduction Initiative

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. The Company has identified information technology functions to be outsourced and workforce reductions to be completed in 2020 to support the cost savings initiative discussed above. The Company currently expects these actions to result in approximately $3.7 million in severance costs and provide annualized cost savings of approximately $8.0 million. In accordance with ASC 712-10, Compensation - Nonretirement Postemployment Benefits, the Company recorded $1.8 million and $3.1 million in severance costs associated with these workforce reductions in the three-month and six-month fiscal periods ended July 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 July 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 six-month fiscal period ended July 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.

Workforce Reductions in Response to COVID-19

During the second quarter, the Company implemented workforce reductions and elected to eliminate certain open positions as a response to the unprecedented hardships brought on by COVID-19. For the three-month fiscal period ended July 3, 2020, the Company recorded severance costs of $2.7 million related to workforce reductions, which were included in restructuring costs on the Company's Condensed Consolidated Statements of Operations. These actions are expected to provide annualized cost savings of approximately $15.8 million.

Composites Businesses Restructuring

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.


14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 3, 2020 and June 28, 2019
(Unaudited)
6. RESTRUCTURING COSTS (CONTINUED)

Composites Businesses Restructuring - continued

Since the announcement, restructuring expense associated with these activities through July 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 and six-month fiscal periods ended July 3, 2020 and June 28, 2019. At July 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.

7. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consisted of the following:
 July 3,
2020
December 31,
2019