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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 2, 2021
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 30, 2021, there were27,836,726 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 2, 2021December 31, 2020
Assets  
Current assets:  
Cash and cash equivalents$98,362 $104,377 
Restricted cash 25,121 
Accounts receivable, net99,361 153,806 
Contract assets114,552 108,645 
Contract costs, current portion3,841 3,511 
Inventories196,133 185,072 
Income tax refunds receivable3,783 5,269 
Other current assets13,194 12,173 
Total current assets529,226 597,974 
Property, plant and equipment, net of accumulated depreciation of $240,970 and $228,984, respectively
204,659 210,852 
Operating right-of-use assets, net12,075 12,880 
Goodwill244,480 247,244 
Other intangible assets, net144,204 150,198 
Deferred income taxes36,144 39,809 
Contract costs, noncurrent portion8,332 8,311 
Other assets37,545 39,125 
Total assets$1,216,665 $1,306,393 
Liabilities and Shareholders’ Equity  
Current liabilities:  
Accounts payable – trade$36,543 $60,200 
Accrued salaries and wages37,782 70,552 
Contract liabilities, current portion17,268 39,073 
Operating lease liabilities, current portion4,005 4,305 
Income taxes payable1,555 19 
Liabilities held for sale, current portion 18,086 
Other current liabilities35,183 36,177 
Total current liabilities132,336 228,412 
Long-term debt, excluding current portion, net of debt issuance costs187,358 185,401 
Deferred income taxes7,293 7,381 
Underfunded pension44,754 69,610 
Contract liabilities, noncurrent portion14,324 11,019 
Operating lease liabilities, noncurrent portion8,681 9,325 
Liabilities held for sale, noncurrent portion 1,171 
Other long-term liabilities42,707 47,636 
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; 30,400,125 and 30,278,668 shares issued, respectively
30,400 30,279 
Additional paid-in capital244,546 238,829 
Retained earnings737,203 728,764 
Accumulated other comprehensive income (loss)(111,848)(130,821)
Less 2,567,430 and 2,555,785 shares of common stock, respectively, held in treasury, at cost
(121,089)(120,613)
Total shareholders’ equity779,212 746,438 
Total liabilities and shareholders’ equity$1,216,665 $1,306,393 
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 2, 2021July 3, 2020July 2, 2021July 3, 2020
Net sales$182,394 $177,890 $354,010 $385,212 
Cost of sales120,448 121,222 239,159 260,842 
Gross profit61,946 56,668 114,851 124,370 
Selling, general and administrative expenses38,719 38,396 76,847 91,724 
Research and development costs3,238 2,847 7,464 7,702 
Intangible asset amortization expense2,637 3,637 5,274 6,443 
Costs from transition services agreement999 4,373 1,704 8,513 
Cost of acquired retention plans 5,704  11,407 
Restructuring and severance costs1,516 4,484 2,868 6,279 
Loss (gain) on sale of business  234 (493)
Net loss (gain) on sale of assets5 (3)15 (13)
Operating income (loss)14,832 (2,770)20,445 (7,192)
Interest expense, net4,335 5,808 8,586 9,055 
Non-service pension and post retirement benefit income(6,577)(4,062)(13,220)(8,125)
Income from transition services agreement(442)(3,050)(917)(6,024)
Other expense (income), net
158 (108)447 110 
Earnings (loss) from continuing operations before income taxes17,358 (1,358)25,549 (2,208)
Income tax expense (benefit)5,502 (1,258)5,709 (1,701)
Earnings (loss) from continuing operations11,856 (100)19,840 (507)
Earnings from discontinued operations before gain on disposal, net of tax    
Gain on disposal of discontinued operations, net of tax   692 
Total earnings from discontinued operations   692 
Net earnings (loss)$11,856 $(100)$19,840 $185 
Earnings per share:  
Basic earnings (loss) per share from continuing operations$0.43 $0.00 $0.71 $(0.02)
Basic earnings per share from discontinued operations0.00 0.00 0.00 0.03 
Basic earnings per share$0.43 $0.00 $0.71 $0.01 
Diluted earnings (loss) per share from continuing operations$0.42 $0.00 $0.71 $(0.02)
Diluted earnings per share from discontinued operations0.00 0.00 0.00 0.03 
Diluted earnings per share$0.42 $0.00 $0.71 $0.01 
Average shares outstanding:  
Basic27,867 27,659 27,841 27,734 
Diluted27,913 27,659 27,890 27,734 

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 2,
2021
July 3,
2020
July 2,
2021
July 3,
2020
Net earnings (loss)$11,856 $(100)$19,840 $185 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments and other1,719 8,295 17,232 (2,531)
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $266 and $330 and $516 and $660, respectively
899 1,107 1,741 2,214 
Other comprehensive income (loss)2,618 9,402 18,973 (317)
Comprehensive income (loss)$14,474 $9,302 $38,813 $(132)

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 2, 2021July 3, 2020
Cash flows from operating activities:  
Net earnings$19,840 $185 
Less: Total earnings from discontinued operations 692 
Earnings (loss) from continuing operations$19,840 $(507)
Adjustments to reconcile net earnings from continuing operations to net cash (used in) provided by operating activities of continuing operations:  
Depreciation and amortization18,391 19,814 
Amortization of debt issuance costs882 907 
Accretion of convertible notes discount1,484 1,412 
Provision for doubtful accounts290 314 
Loss (gain) on sale of business234 (493)
Net loss (gain) on sale of assets15 (13)
Net loss on derivative instruments566 404 
Stock compensation expense4,225 3,590 
Deferred income taxes2,957 4,124 
Changes in assets and liabilities, excluding effects of acquisitions/divestitures: 
Accounts receivable53,232 (11,368)
Contract assets(4,637)(9,158)
Contract costs(349)(842)
Inventories(12,205)(38,029)
Income tax refunds receivable1,485 (3,382)
Operating right of use assets781 1,974 
Other assets1,319 135 
Accounts payable - trade(24,068)(13,872)
Contract liabilities(18,588)(11,002)
Operating lease liabilities(919)(1,916)
Acquired retention plan payments(25,108) 
Other current liabilities(9,470)528 
Income taxes payable1,532 (2,658)
Pension liabilities(22,837)(15,775)
Other long-term liabilities(3,775)(3,587)
Net cash used in operating activities of continuing operations(14,723)(79,400)
Cash flows from investing activities:  
Proceeds from sale of discontinued operations 5,223 
Proceeds from sale of business, net of cash on hand(3,428)493 
Expenditures for property, plant & equipment(8,102)(9,592)
Acquisition of businesses, net of cash acquired (304,661)
Other, net(671)(366)
Net cash used in investing activities of continuing operations(12,201)(308,903)
Cash flows from financing activities:  
Net borrowings under revolving credit agreements 201,100 
Purchase of treasury shares(390)(14,168)
Dividends paid(11,106)(11,144)
Other, net876 1,399 
Net cash (used in) provided by financing activities of continuing operations(10,620)177,187 
Net decrease in cash and cash equivalents(37,544)(211,116)
Effect of exchange rate changes on cash and cash equivalents(183)314 
Cash and cash equivalents and restricted cash at beginning of period (See Note 3) 136,089 471,540 
Cash and cash equivalents and restricted cash at end of period$98,362 $260,738 
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 2, 2021 and July 3, 2020
(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 finalization of the gain on the sale of the Distribution business was recorded to gain on disposal of discontinued operations, net of tax on the Company's Condensed Consolidated Statements of Operations in the six-month fiscal period ended July 3, 2020. See Note 3, Disposals, to the Condensed Consolidated Financial Statements for further information.

During the fourth quarter of 2020, the Company committed to a plan and received approval from its Board of Directors to sell
its United Kingdom ("UK") Composites division. As a result of the approved plan, the UK Composites division met the criteria set forth in Accounting Standards Codification 205-20, Presentation of Financial Statements - Discontinued Operations, ("ASC 205-20") for held for sale. At December 31, 2020, the assets of the UK Composites business were considered impaired as the estimated fair value of the disposal group was lower than the estimated carrying value of the UK Composites business. As a result, the assets of the UK Composites business were written off and the remaining loss related to the anticipated sale of the disposal group was accrued for in liabilities held for sale, current portion on the Company's Consolidated Balance Sheets. The related liabilities of the UK division to be sold were reclassified to liabilities held for sale, respectively, as of December 31, 2020 on the Company's Consolidated Balance Sheets. On February 2, 2021, the Company sold its UK Composites business. See Note 3, Discontinued Operations and Liabilities Held for Sale, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 Form 10-K") for additional 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 ("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 2020 Form 10-K.

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 2021 and 2020 ended on July 2, 2021, and July 3, 2020, respectively.

2. RECENT ACCOUNTING STANDARDS

Recent Accounting Standards Adopted

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 was 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. In 2021, the Company adopted ASU 2019-12 using the modified retrospective basis which resulted in a cumulative effect reduction to retained earnings of $0.3 million.


6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)

Recent Accounting Standards Yet to be Adopted

In May 2021, the FASB issued ASU 2021-04, "Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)". The objective of this standard update is to clarify and reduce diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The guidance clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as either an adjustment to equity and, if so, the related earnings per share ("EPS") effects, if any, or as an expense and, if so, the manner and pattern of recognition. The standard update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the potential impact this standard update could have on its consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity". The objective of this standard update is to simplify the accounting for certain financial instruments with characteristics of liabilities and equity. The update removes certain separation models between a debt component and equity or derivative component for certain convertible instruments, 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.

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.

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


7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
3. DISPOSALS

UK Composites Business

In the fourth quarter of 2020, the Company received approval from its Board of Directors to sell its UK Composites division. The Company sold its UK Composites division in a transaction that closed on February 2, 2021. The sale of the UK Composites business did not meet the criteria set forth in ASC 205-20 for discontinued operations as it did not reflect a significant shift in the Company's strategy. As a result of the approved plan, the UK Composites division met the criteria set forth in ASC 205-20 for held for sale presentation at December 31, 2020. At December 31, 2020, the assets of the UK Composites business were considered impaired as the estimated fair value of the disposal group was lower than the estimated carrying value of the UK Composites business. As such, the assets of the UK Composites business were written off and the related liabilities of the UK division to be sold were reclassified to liabilities held for sale, as of December 31, 2020 on the Company's Consolidated Balance Sheets.

The following table provides information on the loss recorded on the sale of the UK Composites business. These amounts reflect the balance sheet of the UK Composites business as of February 2, 2021.

In thousands
Proceeds received from the sale of the UK Composites business$3,600 
Assets, including cash on hand23,460 
Liabilities6,618 
Net book value of business16,842 
UK cumulative foreign currency translation adjustment balance22,835 
Transaction costs442
Loss on the sale of the UK Composites business$36,519 

Of this amount, a loss of $36.3 million was recorded in the year ended December 31, 2020 and a loss of $0.2 million was recorded in the six-month fiscal period ended July 2, 2021.

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

Distribution Business

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 ASC 205-20 for discontinued operations.


8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
3. DISPOSALS (CONTINUED)

Distribution Business - 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 exercised the option to extend the support period for up to a maximum of an additional year for certain IT services. The buyer has the right to terminate individual services at any point over the renewal term and began to terminate certain services in 2020. Substantially all services were completed as of the end of the first quarter of 2021 and the Company expects the TSA to be fully completed in the third quarter of 2021. Since the sale of the Distribution business, costs associated with the TSA were $18.9 million through July 2, 2021. The Company incurred $1.0 million and $1.7 million in costs associated with the TSA in the three-month and six-month fiscal periods ended July 2, 2021. In addition, 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. These amounts were 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 $13.0 million in income associated with the TSA through July 2, 2021. The Company earned $0.4 million and $0.9 million in income associated with the TSA in the three-month and six-month fiscal periods ended July 2, 2021. In addition, 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. These amounts were 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 2, 2021, which primarily related to Distribution employee and employee-related costs incurred prior to the sale. There were no cash flows from the Company to its former Distribution business in the six-month fiscal period ended July 2, 2021. 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 $18.4 million through July 2, 2021, 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 periods ended July 2, 2021 and July 3, 2020 totaled $1.5 million and $10.5 million, respectively.

In the six-month fiscal period ended July 3, 2020, the Company recorded a pretax gain on disposal of discontinued operations as a result of the final settlement of the working capital adjustment, partially offset by transaction costs. The pretax gain of $0.9 million was subject to income tax expense of $0.2 million, resulting in a gain on disposal of discontinued operations, net of tax of $0.7 million in the six-month fiscal period ended July 3, 2020 which was included in the Company's Condensed Consolidated Statement of Operations. As the gain on the sale of the Distribution business was finalized in 2020, no activity aside from the TSA activity and cash flows discussed above impacted the Company's Condensed Consolidated Financial Statements in the three-month and six-month fiscal periods ended July 2, 2021.

4. BUSINESS COMBINATIONS

On January 3, 2020, the Company acquired all of the equity interests of Bal Seal Engineering ("Bal Seal"), of Foothill Ranch, California, at a purchase price of $317.5 million. 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.

Upon closing, the Company funded $24.7 million associated with employee retention plans at Bal Seal. This amount and related interest was included in restricted cash on the Company's Consolidated Balance Sheets as of December 31, 2020. Eligible participants received an allocation of the escrow balance one year following the acquisition date, which was reflected in the Company's cash flows from operating activities for the six-month fiscal period ended July 2, 2021.


9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(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 2,
2021
July 3,
2020
July 2,
2021
July 3,
2020
In thousands
Defense$39,780 $42,200 $83,391 $90,957 
Safe and Arm Devices58,006 56,986 99,592 114,986 
Commercial, Business & General Aviation41,130 47,855 89,088 111,112 
Medical22,862 14,763 43,445 35,739 
Industrial & Other20,616 16,086 38,494 32,418 
Total revenue$182,394 $177,890 $354,010 $385,212 

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. The Company saw recoveries in the medical and industrial end markets through the first half of 2021 and management expects improved performance through the remainder of 2021. 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 2,
2021
July 3,
2020
July 2,
2021
July 3,
2020
Original Equipment Manufacturer55 %55 %59 %58 %
Aftermarket13 %13 %13 %12 %
Safe and Arm Devices32 %32 %28 %30 %
Total revenue100 %100 %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 EndedFor the Six Months Ended
July 2,
2021
July 3,
2020
July 2,
2021
July 3,
2020
Over time36 %35 %36 %33 %
Point-in-time64 %65 %64 %67 %
Total revenue100 %100 %100 %100 %
10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(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 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 2,
2021
July 3,
2020
July 2,
2021
July 3,
2020
In thousands
Net change in revenue due to change in profit estimates$(3,446)$(1,425)$(581)$(2,540)

The net reductions in revenue in the three-month and six-month fiscal periods ended July 2, 2021 were primarily related to cost growth on certain structures programs and missile fuzing contracts, partially offset by favorable cost performance on the completion of the SH-2 program with New Zealand. Additionally, for the six-month fiscal period ended July 2, 2021, the net decrease in revenue was offset by favorable cost performance on the joint programmable fuze ("JPF") contract with the U.S. Government ("USG"). 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 JPF contract with the USG.

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 2, 2021 and December 31, 2020, and the portion of backlog the Company expects to recognize revenue on over the next twelve months is as follows:
July 2,
 2021(1)
December 31,
2020
In thousands
Backlog$510,224 $631,236 
(1) The Company expects to recognize revenue on approximately 78% of backlog as of July 2, 2021 over the next twelve months.

6. RESTRUCTURING AND SEVERANCE COSTS

General & Administrative Expense Reduction Initiative

The Company continues to evaluate its cost structure with the objective of a lean organizational structure that provides a scalable infrastructure which facilitates future growth opportunities. In the three-month and six-month fiscal periods ended July 2, 2021, the Company incurred $1.5 million and $2.9 million in severance costs associated with these cost reduction efforts, which were included in restructuring and severance costs on the Company's Condensed Consolidated Statements of Operations.
11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
6. RESTRUCTURING AND SEVERANCE COSTS (CONTINUED)

General & Administrative Expense Reduction Initiative - continued

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 was to ensure that the Company has a lean organizational structure that provides a scalable infrastructure that facilitates future growth opportunities. The Company identified information technology functions to be outsourced, workforce reductions and other reductions in certain general and administrative expenses which were completed in 2020 to support the cost savings initiative discussed above. 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 and severance costs on the Company's Condensed Consolidated Statements of Operations.

Workforce Reductions in Response to COVID-19

During the second quarter of 2020, 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.

Other Matters

In addition, the Company incurred $0.5 million in severance costs as it integrated the acquisition of Bal Seal in the six-month fiscal period ended July 3, 2020.

7. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consisted of the following:
 July 2,
2021
December 31,
2020
In thousands  
Trade receivables$22,187 $19,945 
U.S. Government contracts:
Billed21,928 18,854 
Cost and accrued profit - not billed727 1,080 
Commercial and other government contracts
Billed48,731 111,794 
Cost and accrued profit - not billed7,382 4,141 
Less allowance for doubtful accounts(1,594)(2,008)
Accounts receivable, net$99,361 $153,806 

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.


12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
7. ACCOUNTS RECEIVABLE, NET (CONTINUED)
The following table summarizes the activity in the allowance for doubtful accounts in the six-month fiscal period ended July 2, 2021:
In thousands 
Balance at December 31, 2020$(2,008)
Provision(290)
Amounts written off387 
Recoveries316
Changes in foreign currency exchange rates1 
Balance at July 2, 2021
$(1,594)

COVID-19

The Company anticipates that the disruptions and delays resulting from the spread of COVID-19 and the measures instituted by the governments and businesses to mitigate its spread could impact the Company's liquidity in the next twelve months. The Company 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:
July 2,
2021
December 31,
2020
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:
July 2,
2021
December 31, 2020$ Change% Change
In thousands
Contract assets$114,552 $108,645 $5,907 5.4 %
Contract costs, current portion$3,841 $3,511 $330 9.4 %
Contract costs, noncurrent portion$8,332 $8,311 $21 0.3 %
Contract liabilities, current portion$17,268 $39,073 $(21,805)(55.8)%
Contract liabilities, noncurrent portion$14,324 $11,019 $3,305 30.0 %

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 six-month fiscal period ended July 2, 2021. This increase was primarily related to work performed and not yet billed on certain structures programs, the JPF program and the KAflex® programs, partially offset by amounts billed on certain structures programs. There were no significant impairment losses related to the Company's contract assets during the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020.

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(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:
July 2,
2021
December 31,
2020
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs$2,167 $3,178 

Contract Costs

At July 2, 2021, costs to fulfill a contract and costs to obtain a contract were $11.2 million and $1.0 million, respectively. At December 31, 2020, costs to fulfill a contract and costs to obtain a contract were $9.3 million and $2.5 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 July 2, 2021 and December 31, 2020.

The increase in contract costs, current portion was primarily attributable to the addition of costs to fulfill the K-MAX® program and the reclassification of a portion of costs to fulfill the K-MAX® program and certain structures programs from contract costs, noncurrent portion, partially offset by the amortization of contract costs. For the three-month and six-month fiscal periods ended July 2, 2021, amortization of contract costs was $3.2 million and $5.1 million, respectively. For the three-month and six-month fiscal periods ended July 3, 2020, amortization of contract costs was $2.1 million and $4.6 million, respectively.

Contract costs, noncurrent portion remained relatively flat, which was primarily attributable to the addition of costs to fulfill the K-MAX® unmanned program, offset by the reclassification of costs to fulfill the K-MAX® program and certain structures programs to contract costs, current portion.

Contract Liabilities

The decrease in contract liabilities, current portion was primarily due to revenue recognized on a JPF direct commercial sales ("DCS") contract, the K-MAX® unmanned program and the SH-2G program for New Zealand, partially offset by advances received for the K-MAX® unmanned program and the SH-2G program for New Zealand. Revenue recognized related to contract liabilities, current portion was $20.5 million and $29.9 million in the three-month and six-month fiscal periods ended July 2, 2021, respectively. Revenue recognized related to contract liabilities, current portion was $14.0 million and $28.7 million in the three-month and six-month fiscal periods ended July 3, 2020, respectively.

The increase in contract liabilities, noncurrent portion was due to advances received for a JPF DCS contract. For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020, the Company did not recognize revenue against contract liabilities, noncurrent portion.


14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
9. FAIR VALUE MEASUREMENTS

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

The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: 
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following table presents the carrying value and fair value of financial instruments that are not carried at fair value:
July 2, 2021December 31, 2020
Carrying ValueFair ValueCarrying ValueFair Value
In thousands
Debt (1)
$190,404 $212,501 $188,919 $230,093 
(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 July 2, 2021 and December 31, 2020 included $65.5 million and $51.5 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 July 2, 2021 and December 31, 2020, the derivative instruments were included in other current assets and other current liabilities on the Company's Condensed Consolidated Balance Sheets. Based on the Company's continued ability to trade and enter into forward contracts and interest rate swaps, the Company considers the markets for its fair value instruments to be active.

The Company evaluated the credit risk associated with the counterparties to these derivative instruments and determined that as of July 2, 2021, 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 (loss) are subsequently included in earnings in the periods in which earnings are affected by the hedged item. The Company does not use derivative instruments for speculative purposes.


15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
10. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

Forward Exchange Contracts

The Company holds forward exchange contracts designed to hedge forecasted transactions denominated in foreign currencies and to minimize the impact of foreign currency fluctuations on the Company’s earnings and cash flows. Some of these contracts are designated as cash flow hedges. The Company will include in earnings amounts currently included in accumulated other comprehensive income (loss) upon recognition of cost of sales related to the underlying transaction. These contracts were not material to the Company's Condensed Consolidated Balance Sheets as of July 2, 2021 and December 31, 2020. The activity related to these contracts was not material to the Company's Condensed Consolidated Financial Statements for the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020.

11. INVENTORIES

Inventories consisted of the following:
 July 2,
2021
December 31,
2020
In thousands  
Raw materials$19,021 $19,502 
Contracts and other work in process (including certain general stock materials)140,494 129,241 
Finished goods36,618 36,329 
Inventories$196,133 $185,072 

Inventories include amounts associated with matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts were as follows:
July 2,
2021
December 31,
2020
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs$467 $500 

At July 2, 2021 and December 31, 2020, $65.8 million and $60.4 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 $30.1 million of the K-MAX® inventory will be sold after July 2, 2022, based upon the anticipation of additional aircraft manufacturing and the requirements to support the fleet for the foreseeable future.

At July 2, 2021 and December 31, 2020, $6.1 million and $6.3 million, respectively, of SH-2G(I) inventory was included in contracts and other work in process inventory on the Company's Condensed Consolidated Balance Sheets. Management believes that approximately $5.2 million of the SH-2G(I) inventory will be sold after July 2, 2022. This balance represents spares requirements and inventory to be used on SH-2G programs.


16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(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, 2020$313,803 
Accumulated impairment(66,559)
Net balance at December 31, 2020247,244 
Additions 
Impairments 
Foreign currency translation(2,764)
Ending balance at July 2, 2021
$244,480 

Other Intangibles

Other intangible assets consisted of:
At July 2,At December 31,
20212020
Amortization
Period
Gross
Amount
Accumulated
Amortization
Gross
Amount
Accumulated
Amortization
In thousands     
Customer lists / relationships
6-38 years
$128,176 $(32,688)$128,882 $(30,094)
Developed technologies
7-20 years
45,534 (11,661)45,798 (9,665)
Trademarks / trade names
15-40 years
17,197 (2,421)17,353 (2,149)
Non-compete agreements and other
1-15 years
4,695 (4,682)5,290 (5,276)
Patents
17 years
523 (469)523 (464)
Total $196,125 $(51,921)$197,846 $(47,648)

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 PlanSERP
 July 2,
2021
July 3,
2020
July 2,
2021
July 3,
2020
In thousands    
Service cost(1)
$(649)$1,309 $ $ 
Interest cost on projected benefit obligation3,558 5,255 14 42 
Expected return on plan assets(11,314)(10,796)  
Amortization of net loss1,147 1,201 18 236 
Net pension (income) cost$(7,258)$(3,031)$32 $278 
(1) In the second quarter, the Company elected to use the alternative method to calculate the Pension Benefit Guaranty Corporation premium. The change resulted in a $3.9 million decrease to the 2021 premium, which is included in the service cost. Due to this election and the reduction of the premium, the Company reversed $1.0 million of service cost in the three-month fiscal period ended July 2, 2021, which was previously incurred in the first quarter of 2021.

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
13. PENSION PLANS (CONTINUED)
 For the Six Months Ended
 Qualified Pension PlanSERP
 July 2,
2021
July 3,
2020
July 2,
2021
July 3,
2020
In thousands    
Service cost$651 $2,618 $ $ 
Interest cost on projected benefit obligation7,083 10,510 29 83 
Expected return on plan assets(22,589)(21,592)  
Amortization of net loss2,222 2,402 35 472 
Net pension (income) cost$(12,633)$(6,062)$64 $555 

The Company contributed $10.0 million to the qualified pension plan and $0.3 million to the SERP through the end of the second quarter of 2021. No further contributions are expected to be made to the qualified pension plan during 2021. The Company plans to contribute an additional $2.5 million to the SERP in 2021. For the 2020 plan year, the Company contributed $10.0 million to the qualified pension plan and $0.5 million to the SERP.

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 July 2, 2021. There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations, financial position and cash flows.

New Hartford Property

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

The Company's estimate of its portion of the cost to assess the environmental conditions and remediate this site is $2.3 million, all of which has been accrued. The remediation has been nearly completed and the Company continues to monitor the results of the remediation. The total amount paid to date in connection with these environmental remediation activities is $1.7 million. At July 2, 2021, the Company had $0.6 million accrued for these environmental remediation activities. A portion ($0.1 million) of the accrual related to this property is included in other current liabilities and the balance is included in other long-term liabilities. The remaining balance of the accrual reflects the total anticipated cost of completing these environmental remediation activities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.


18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 $14.6 million. At July 2, 2021, the Company had $2.4 million accrued for these environmental remediation activities. A portion ($0.4 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 July 2, 2021, 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. Deliveries under the contract are expected to be completed prior to satisfaction of the offset requirements. In the event the offset requirements of the contract are not met, the Company could be liable for potential penalties up to $16.5 million payable to the customer. Failure to satisfy the offset requirement could also negatively impact the Company's ability to attract future orders from this customer. The Company began recognizing revenue associated with this contract in the third quarter of 2019 and has considered the potential penalties of $16.5 million as a reduction to the transaction price in its determination of the value of the performance obligations within this contract. At July 2, 2021, $14.3 million in contract liabilities associated with the potential penalties of the offset requirements were included on the Company's Condensed Consolidated Balance Sheets. At the point the Company has an approved plan to satisfy the offset requirements, the Company will update the estimate of the contract transition price, including any potential penalties or contract costs associated with the plan to fulfill the offset requirements.

Guarantee

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



19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
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 EndedFor the Six Months Ended
  July 2,
2021
July 3,
2020
July 2,
2021
July 3,
2020
In thousands, except per share amounts  
Earnings (loss) from continuing operations$11,856 $(100)$19,840 $(507)
Total earnings from discontinued operations   692 
Net earnings (loss)$11,856 $(100)$19,840 $185 
Basic:  
Weighted average number of shares outstanding27,867 27,659 27,841 27,734 
Earnings (loss) per share from continuing operations$0.43 $0.00 $0.71 $(0.02)
Earnings per share from discontinued operations0.00 0.00 0.00 0.03 
Basic earnings per share$0.43 $0.00 $0.71 $0.01 
Diluted:  
Weighted average number of shares outstanding27,867 27,659 27,841 27,734 
Weighted average shares issuable on exercise of dilutive stock options46  49  
Total27,913 27,659 27,890 27,734 
Earnings (loss) per share from continuing operations$0.42 $0.00 $0.71 $(0.02)
Earnings per share from discontinued operations0.00 0.00 0.00 0.03 
Diluted earnings per share$0.42 $0.00 $0.71 $0.01 

Equity awards

For the three-month and six-month fiscal periods ended July 2, 2021, respectively, 482,339 and 461,649 shares issuable under equity awards granted to employees were excluded from the calculation of diluted earnings per share as they were anti-dilutive based on the average stock price during the periods. For the three-month and six-month fiscal periods ended July 3, 2020, respectively, 772,781 and 608,080 shares issuable under equity awards granted to employees were excluded from the calculation of diluted earnings per share as they were anti-dilutive based on the average stock price during the periods.

All outstanding stock awards were excluded in the computation of diluted earnings per share in the three-month and six-month fiscal periods ended July 3, 2020 because their effect was antidilutive due to the loss from continuing operations. For the three-month and six-month fiscal periods ended July 3, 2020, respectively, an additional 5,226 and 43,645 shares issuable under equity awards, which would have been dilutive if exercised based on the average market price being higher than the exercise price, were excluded from the computation of diluted earnings per share as their effect was antidilutive due to the loss from continuing operations.




20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020
(Unaudited)
15. COMPUTATION OF EARNINGS PER SHARE (CONTINUED)

2024 Convertible Notes

For the three-month and six-month fiscal periods ended July 2, 2021 and July 3, 2020, 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 ("RSAs"), restricted stock units and performance stock units ("PSUs") as equity awards and measures the cost of all share-based payments, including stock options, at fair value on the grant date and recognizes this cost in the statement of operations. The Company also has an employee stock purchase plan which is accounted for as a liability award.

In 2021, the Company modified its long-term incentive program to increase the emphasis on equity. Beginning in the first quarter of 2021, the long-term incentive awards granted to the Company's Named Executive Officers ("NEOs") will consist of a combination of service-based RSAs and PSUs which are intended to be settled in shares, as opposed to cash-based awards that had been utilized in the past. These awards are expected to increase the alignment of interests between the Company's NEOs and shareholders and help build stock ownership for new executives, supporting both executive retention and the Company's long-term financial performance. RSAs will vest over a three-year period on each of the first three anniversaries of the date of grant. The number of PSUs that will vest will be determined based on total shareholder return ("TSR") and return on total invested capital ("ROIC") over a three-year performance period, each of which will remain equally weighted in determining payouts. The achievement level for both factors may range from zero to 200%.

Compensation expense for stock options, RSAs, restricted stock units and PSUs is recognized on a straight-line basis over the vesting period of the awards. Throughout the course of the vesting period, the Company monitors the achievement level for the ROIC metric of the PSUs compared to the ROIC target and adjusts the number of shares expected to be earned, and the related compensation expense recorded thereafter, to reflect the most probable outcome. Share-based compensation expense recorded for the three-month and six-month fiscal periods ended July 2, 2021 was $2.5 million and $4.2 million, respectively. Of these amounts, $0.2 million was recorded to restructuring and severance costs in both periods, and the remaining amounts were recorded to selling, general and administrative expenses on the Company's Condensed Consolidated Statements of Operations. Share-based compensation expense recorded for the three-month and six-month fiscal periods ended July 3, 2020 was $2.0 million and $