KAMAN CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide readers of our consolidated financial
statements with the perspectives of management. MD&A presents in narrative form
information regarding our financial condition, results of operations, liquidity
and certain other factors that may affect our future results. This should allow
the readers of this report to obtain a comprehensive understanding of our
businesses, strategies, current trends and future prospects. MD&A should be read
in conjunction with the Consolidated Financial Statements and related Notes
included in this Form 10-K.
OVERVIEW OF BUSINESS
Kaman Corporation ("The Company") currently operates as a single Aerospace segment that conducts business in the aerospace and defense, industrial and medical markets. The Company produces and markets proprietary aircraft bearings and components; super precision, miniature ball bearings; proprietary spring energized seals, springs and contacts; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; and safe and arming solutions for missile and bomb systems for theU.S. and allied militaries. The Company also manufactures and supports our K-MAX® manned and unmanned medium-to-heavy lift helicopters and restores, modifies and supports our SH-2G Super Seasprite maritime helicopters. Our strategic goals are built upon our objectives of differentiating our value proposition by utilizing engineering, innovation, automation and process expertise to develop unique products and manufacturing processes within our global manufacturing facilities, increasing scale in our core competencies, diversifying our customer portfolio across multiple end markets and investing in our people, technologies and infrastructure. In order to achieve these objectives, we focus our efforts on improving balance between commercial and defense program content and customers, leveraging our broad capabilities to expand market positions, executing strategic acquisitions and increasing focused investments in our people, research and development, manufacturing technologies, capital equipment and infrastructure to increase capabilities and drive continuous improvement.
Company financial performance
• Net sales from continuing operations increased 3.5% compared to the prior
year driven by an increase in net sales under our safe and arm device
product programs.
• Earnings from continuing operations, net of tax increased 255.5% compared
to the prior year. This increase reflects the tax benefits realized in the
current period and the absence of the $10.0 million other intangible
assets impairment charge incurred in 2018.
• Diluted earnings per share from continuing operations increased to
in 2019 compared to
• Cash flows provided by operating activities of continuing operations were
$42.5 million for 2019, a decrease of$76.2 million . This change was largely driven by the absence of advance payments received in the prior year in connection with a Joint Programmable Fuze ("JPF") direct commercial sales ("DCS") contract.
• Total unfulfilled performance obligations ("backlog") decreased 5.3% to
Acquisitions and divestitures
• In
Inc. ("Bal Seal") for $331.0 million in cash, subject to customer
adjustments for net debt and working capital.
• In August 2019 , we completed the sale of our Distribution segment for
total cash consideration of
capital adjustments.
Awards and recognition
• In May 2019 , our Vermont division was recognized by Rolls-Royce as the
"Best New Supplier 2018" for its support for Rolls-Royce on various
compressor components and composite assemblies.
• In
award by BAE Systems for exceptional performance and contributions to
supply chain success.
• In the first quarter of 2019, our integrated structures and metallics
business was named supplier of the year by Sikorsky for the Sikorsky BLACK
HAWK program.
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Other key events
• In 2019, four K-MAX® aircraft were accepted by our customers. We received
three new orders for the K-MAX® medium-to-heavy lift helicopter in the
period.
• In 2019, we received two significant JPF DCS orders with an expected total
value of
• In
agreement. In addition to extending the maturity of the credit agreement
to
under the facility increased from
• In
supply of wing control surfaces and structural assemblies in support of
the U.S. Air Force's A-10 program.
• In
DCS contract.
• In
Seasprite customers and inaugurated a K-MAX® Flight Training Device.
• In
land to allow for expansion of our German based engineered products
business.
• In
two
• In
supply of composite skin to core assembly structural components for Bell's
AH-1Z helicopter blades.
• In
K-MAX® unmanned aircraft system that will allow operators to have the
capability to fly either manned or unmanned missions. We expect to offerunmanned system kits for new production and existing aircraft in 2020 and
have received five orders for K-MAX® unmanned system kit in 2019.
• In
program for the K-MAX® helicopter.
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RESULTS FROM CONTINUING OPERATIONS
During the third quarter of 2019, we completed the sale of our Distribution business for total cash consideration of$700.0 million , excluding certain working capital adjustments. As a result of the sale, the Distribution business results met the criteria for the presentation of discontinued operations. The results presented below represent the results of continuing operations, which include the Aerospace segment and our Corporate office. See Note 3, Discontinued Operations, in the Notes to Consolidated Financial Statements included in this Form 10-K for further details. OnJanuary 1, 2018 , we adopted new revenue recognition guidance ("ASC 606") using the modified retrospective method. As a result, we applied the new revenue recognition guidance only to contracts that were not completed as ofJanuary 1, 2018 ; therefore, results for 2019 and 2018 are presented under the new revenue recognition guidance and results for 2017 are presented in accordance with previous revenue recognition guidance ("ASC 605"). See Note 1, Summary of Significant Accounting Policies, and Note 2, Accounting Changes, in the Notes to Consolidated Financial Statements included in this Form 10-K for further details.
2019 2018 2017
In thousands
Net sales $ 761,608 $ 735,994 $ 724,944
$ change 25,614 11,050 22,890
% change 3.5 % 1.5 % 3.3 %
Net sales for 2019 increased when compared to 2018, primarily due to increases
of $32.1 million and $5.5 million in our safe and arm devices and commercial
product programs, respectively. These increases were partially offset by a
decrease in sales of $12.0 million on our military and defense product programs,
excluding safe and arm devices. Foreign currency exchange rates relative to the
U.S. dollar had an unfavorable impact of $6.5 million on net sales.
The increase in sales under our safe and arm device product programs was
primarily attributable to higher direct commercial sales of our JPF to foreign
militaries, partially offset by lower sales under our JPF program with the USG
and the FMU-139 program.
Higher sales under our commercial product programs were primarily driven by an
increase in sales on our Sikorsky s70 program and Bell Helicopter composite
blade program and higher sales volume of our commercial bearings products. These
increases, totaling $16.0 million , were partially offset by lower sales under
the K-MAX® program and the absence of sales from our former engineering services
business.
The decrease in sales under our military and defense, excluding safe and arm
device product programs was primarily attributable to lower sales under our
SH-2G program for Peru , the Sikorsky BLACK HAWK helicopter program and the AH-1Z
program, and the absence of sales from our former U.K. Tooling business. These
decreases, totaling $25.6 million , were partially offset by higher sales on the
Boeing 7P Door Surround program and an increase in sales of spares for the SH-2
program with New Zealand .
The following table details the components of ASC 606 changes as a percentage of
consolidated net sales from continuing operations in 2018 as compared to the
corresponding period in 2017:
2018
Increase in sales associated with ASC 606 8.2 %
Decrease in sales absent the adoption impact of ASC 606 (6.7 )% % change in net sales
1.5 %
Net sales for 2018 increased when compared to 2017, due to an increase in net
sales of $59.7 million resulting from the adoption of the new revenue
recognition guidance, as discussed below, partially offset by a decrease in net
sales of $48.6 million absent the adoption of ASC 606. The decrease in net sales
absent the adoption of the new revenue recognition guidance was primarily
attributable to lower direct commercial sales of our JPF to foreign militaries,
decreases in sales under the K-
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MAX® program and certain metallic structures programs and lower sales volume of
our composite structures products from foreign operations. These decreases,
totaling $70.8 million , were partially offset by higher sales volume of our
bearings products, an increase in sales under the AH-1Z program and higher sales
under the Sikorsky Combat Rescue Helicopter program. Foreign currency exchange
rates relative to the U.S. dollar had a favorable impact of $5.0 million on net
sales.
The increase in sales resulting from the adoption of the new revenue recognition
guidance was primarily related to recognizing sales under our JPF program with
the USG on an over time method using the cost-to-cost basis in the current
period compared to percentage-of-completion using units-of-delivery in 2017 and
the recognition of sales for our K-MAX® program at a point in time in the
current period compared to a percentage-of-completion on a cost-to-cost basis in
2017.
Gross Profit from Continuing Operations
2019 2018 2017
In thousands
Gross profit $ 240,805 $ 227,317 $ 234,029
$ change 13,488 (6,712 ) 6,962
% change 5.9 % (2.9 )% 3.1 %
% of net sales 31.6 % 30.9 % 32.3 %
Gross profit for 2019 increased when compared to 2018. This was primarily
attributable to higher direct commercial sales of our JPF to foreign militaries,
an increase in sales and associated gross profit on the Boeing 7P Door Surround
program and spares for the SH-2 program with New Zealand , and an increase in
gross profit on the AH-1Z program. These increases, totaling $28.7 million , were
partially offset by lower sales and associated gross profit under the SH-2G
program for Peru , our JPF program with the USG and the K-MAX® program, and a
decrease in gross profit on certain legacy fuzing programs.
Gross profit for 2018 decreased when compared to 2017. This was attributable to
a decrease in gross profit of $24.3 million absent the adoption of the new
revenue recognition guidance, primarily driven by lower direct commercial sales
of our JPF to foreign militaries, lower sales and associated gross profit on the
K-MAX® program, and decreases in gross profit under the AH-1Z program and our
composite structures products from foreign operations. These decreases were
partially offset by higher gross profit of $17.6 million resulting from the
adoption of the new revenue recognition guidance.
Selling, General & Administrative Expenses (S,G&A) from Continuing Operations
2019 2018 2017
In thousands
S,G&A $ 177,187 $ 172,271 $ 169,683
$ change 4,916 2,588 7,572
% change 2.9 % 1.5 % 4.7 %
% of net sales 23.3 % 23.4 % 23.4 %
S,G&A increased for the year ended
2019 2018 2017
Organic S,G&A:
Aerospace (4.1 )% 1.3 % (0.3 )%
Corporate 7.0 % 0.2 % 5.0 %
Total Organic S,G&A 2.9 % 1.5 % 4.7 %
The increase in S,G&A expenses for 2019 as compared to 2018 was attributable to
higher corporate expenses, partially offset by a decrease in expenses in our
Aerospace business. Corporate expenses increased primarily due to $9.0 million
in higher costs associated with corporate development activities and higher
incentive compensation costs. The decrease in expenses at the Aerospace business
was primarily attributable to the absence of $3.0 million in costs incurred in
the prior year for employee tax-related matters and lower depreciation expense
as a result of our restructuring efforts in the prior year.
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The increase in S,G&A expenses for 2018 as compared to 2017 was primarily
attributable to higher expenses in the Aerospace business. S,G&A expenses at our
Aerospace business increased when compared to prior year, primarily due to $3.0
million in costs incurred for employee-tax related matters. Corporate expenses
in 2018 remained relatively flat when compared to 2017. This was primarily
attributable to $1.1 million in corporate development activities, which includes
costs associated with the due diligence for an acquisition we elected not to
complete, and higher consulting fees mostly offset by the absence of $1.6
million in separation costs associated with a senior executive incurred in the
prior year.
Costs from Transition Services Agreement
2019 2018 2017
In thousands
Costs from transition services agreement $ 4,673 $ - $ -
Upon closing the sale of the Distribution business, the Company entered into a
transition services agreement ("TSA") with the buyer, pursuant to which the
Company agreed to support the information technology, human resources and
benefits, tax and treasury functions of the Distribution business for six to
twelve months. The buyer has the option to extend the support period for up to
an additional year for certain services. The Company incurred $4.7 million in
costs associated with the TSA in 2019. These costs are partially offset by $3.7
million in income earned from the TSA included in income from transition
services agreement, which is below operating income on the Company's
Consolidated Statements of Operations.
Other Intangible Assets Impairment
2019 2018 2017
In thousands
Other intangible assets impairment $ - $ 10,039 $ -
In 2018, we identified a triggering event for possible impairment of long-lived
intangible assets at a certain asset group within the Company's U.K. business
based on an analysis of historical performance, the current forecast for the
remainder of the year and the loss of future orders from one of its customers.
We performed a recoverability test by comparing the undiscounted cash flows of
the asset group to its carrying value, and the estimated future cash flows of
the business did not exceed the carrying value of the assets. Based on these
results, we calculated the fair value of the asset group using an income
approach, which resulted in an impairment charge of $10.0 million , or the
remaining balance of the customer lists/relationships at a certain asset group
within the U.K. business. This charge has been included in the operating results
of the Aerospace business.
Restructuring Costs
2019 2018 2017
In thousands
Restructuring costs $ 1,558 $ 7,353 $ 2,661
During the third quarter 2017, we announced restructuring activities at certain
businesses to support the ongoing effort of improving capacity utilization and
operating efficiency to better position the Company for increased profitability
and growth. Such actions included workforce reductions and the consolidation of
operations, which continued through the planned completion in 2019. In the years
ended December 31, 2019 , 2018 and 2017, we recorded $0.6 million , $6.0 million
and $2.7 million , respectively, in costs associated with the restructuring
activities. In addition to these costs, in 2019, the Company's corporate office
incurred $0.9 million in severance expense and, in 2018, we incurred $1.4
million in other non-related restructuring costs associated with the termination
of certain distributor agreements and separation costs associated with certain
employees not included in restructuring activities discussed above.
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Loss on Sale of Business
2019 2018 2017
In thousands
Loss on sale of business $ 3,739 $ 5,722 $ -
During 2018, we sold our U.K. Tooling business to better position the Company
for increased profitability. This sale did not qualify for the reporting of
discontinued operations within the consolidated financial statements. In the
year ended December 31, 2018 , we incurred a loss of $5.7 million associated with
the sale. Of this amount, $1.7 million related to the foreign currency
translation reclassified from accumulated other comprehensive income (loss) to
net income. In the year ended December 31, 2019 , the Company incurred an
additional loss of $3.7 million associated with the write-off of note
receivables recorded for the remaining amounts to be collected on the sale of
the U.K. Tooling business as this balance was deemed not likely to be collected.
Operating Income
2019 2018 2017
In thousands
Aerospace $ 130,393 $ 94,357 $ 117,654
Loss on sale of business (3,739 ) (5,722 ) -
Net (loss) gain on sale of assets (237 ) 1,031 31
Corporate expense (73,006 ) (56,703 ) (55,969 )
Operating income $ 53,411 $ 32,963 $ 61,716
$ change 20,448 (28,753 ) (3,239 )
% change 62.0 % (46.6 )% (5.0 )%
% of net sales 7.0 % 4.5 % 8.5 %
The increase in operating income for 2019 as compared to 2018 was primarily
attributable to an increase in gross profit on certain programs as discussed
above, the absences of the $10.0 million other intangibles assets impairment at
our U.K. business and the $3.0 million in costs for employee tax-related matters
incurred in the prior year, lower restructuring costs and lower depreciation
costs. These changes, totaling $35.0 million , were partially offset by higher
corporate expenses, as discussed above, and $4.7 million in costs from the TSA
associated with the sale of our Distribution business.
The decrease in operating income for 2018 as compared to 2017 was primarily
attributable to lower operating income at our Aerospace business, driven by the
$10.0 million other intangible assets impairment at our U.K business, the loss
incurred for the sale of the U.K. Tooling business, higher restructuring costs,
the costs incurred for employee-tax related matters and the loss on the sale of
substantially all of the assets and liabilities of our Engineering Services
business. These changes were partially offset by an increase in operating income
of $15.9 million resulting from the adoption of the new revenue recognition
guidance.
Interest Expense, Net
2019 2018 2017
In thousands
Interest expense, net $ 17,202 $ 20,046 $ 20,578
Interest expense, net generally consists of interest charged on our Credit
Agreement, which includes a revolving credit facility and a term loan under our
previously existing credit facility, and our convertible notes and the
amortization of debt issuance costs, offset by interest income. The decrease in
interest expense, net for 2019 as compared to 2018 was primarily due to interest
income earned on marketable securities and lower average borrowings in the
current period. The decrease in interest expense, net for 2018 as compared to
2017 was primarily due to lower average borrowings, partially offset by an
increase in letter of credit fees. At December 31, 2018 , the interest rate for
outstanding amounts on both the revolving credit facility and term loan
agreement was 3.74% compared to 2.84% at December 31, 2017 .
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Effective Income Tax Rate
2019 2018 2017
Effective income tax rate (39.1 )% 36.8 % 56.1 %
The effective tax rate represents the combined federal, state and foreign tax
effects attributable to pretax earnings for the year. The decrease in the
effective tax rate for 2019 compared to 2018 was primarily due to a 2019 entity
classification election related to the Company's U.K. business, which had the
effect of treating the subsidiary as a disregarded entity for U.S. tax purposes.
This election resulted in a significant loss for U.S. tax purposes and a tax
benefit of $25.7 million recognized by the Company in 2019. Additionally, in
2019, the Company recognized additional benefits from research and development
credits, relating to research completed in the three prior years. The decrease
in the effective tax rate for 2018 compared to 2017 was primarily due to the
rate reduction resulting from Tax Reform, partially offset by foreign losses for
which no tax benefit was recorded. Tax reform was enacted by the federal
government during the fourth quarter of 2017 and provided for the reduction in
the applicable U.S. corporate tax rate from 35% to 21%, effective January 1,
2018 . See Note 16, Income Taxes, in the Notes to Consolidated Financial
Statements included in this Form 10-K for further details.
Backlog
2019 2018 2017
In thousands
Backlog $ 806,870 $ 851,814 $ 616,090
Backlog decreased from 2018 to 2019, primarily driven by revenue recognized for
deliveries of direct commercial JPF orders, K-MAX® aircraft and bearings
products, and work performed on the JPF program with the USG, the Sikorsky BLACK
HAWK program and the AH-1Z program. These decreases were partially offset by
orders of our JPF and bearings products and orders under the Boeing 767/777
program and the A-10 program.
Other Matters
Information regarding our various environmental remediation activities and associated accruals can be found in Note 19, Commitments and Contingencies, and Note 13, Environmental Costs, in the Notes to Consolidated Financial Statements included in this Form 10-K.
Long-Term Contracts
For long-term contracts, we generally recognize sales and cost of sales over
time because of continuous transfer of control to the customer, which allows for
recognition of revenue as work on a contract progresses. For those programs for
which there is a continuous transfer of control to the customer, we recognize
sales and profit on a cost-to-cost basis, in which case sales and profit are
recorded based upon the ratio of costs incurred to date to the total estimated
costs to complete the contract. Conversely, revenue on certain programs, such as
the K-MAX® program and on direct commercial sales under our JPF program, is
recognized at a point in time, with revenue being recognized upon transfer to
the end customer. See Note 1, Summary of Significant Accounting Policies, in the
Notes to the Consolidated Financial Statements included in this Form 10-K for
additional information regarding the effects of adjustments in profit estimates
on long-term contracts for which revenue is recognized over time.
Major Programs/Product Lines
Defense Markets
A-10
In 2019, the USAF awarded Boeing a contract to provide up to 112 new wing
assemblies and up to 15 wing kits through 2030 and we announced that we had been
awarded a contract by Boeing to manufacture wing control surfaces and structural
assemblies in support of the USAF's A-10 Thunderbolt Advanced Wing Continuation
Kitting ("ATTACK") program. We were previously under contract with Boeing to
produce the wing control surfaces (inboard and outboard flaps, slats and
deceleron assemblies) for the USAF's A-10 fleet. Final production and deliveries
under the initial contract were completed during 2018. At December 31, 2019 , our
program backlog was $36.5 million . At December 31, 2018 , our program backlog was
not material.
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--------------------------------------------------------------------------------Bearings
Our bearings products are included on numerous military platforms manufactured inNorth America ,South America ,Asia andEurope . These products are used as original equipment and/or specified as replacement parts by the manufacturers. The most significant portion of our military bearings sales is derived fromU.S. military platforms, such as the AH-64 helicopter,Virginia Class submarine and Joint Strike Fighter aircraft, and sales inEurope for the Typhoon program. These products are primarily proprietary self-lubricating, ball and roller bearings for aircraft flight controls, turbine engines and landing gear, and helicopter driveline couplings.
BLACK HAWK
The Sikorsky BLACK HAWK helicopter cockpit program involves the manufacture of cockpits, including the installation of all wiring harnesses, hydraulic assemblies, control pedals and sticks, seat tracks, pneumatic lines and the composite structure that holds the windscreen for most models of the BLACK HAWK helicopter. We delivered 66 cockpits in 2019 as compared to the 61 cockpits delivered in 2018. InJuly 2017 , we announced that we had entered into a new multi-year contract with Sikorsky to manufacture H-60 cockpits under theDepartment of Defense MY IX H-60 procurement authorization. The term of the agreement is five years, beginning in 2018 and ending in 2022. Included in backlog atDecember 31, 2019 and 2018, was$53.0 million and$81.0 million , respectively, for orders on this program. We anticipate cockpit deliveries to total 47 in 2020. AH-1Z The segment manufactures sheet metal details and subassemblies for the increased capability AH-1Z attack helicopter, which is produced by Bell Helicopter for theU.S. Marine Corps . We are currently on contract through Lot 16. As ofDecember 31, 2019 and 2018, our backlog for this program was$17.6 million and$46.6 million , respectively.
SH-2G
During 2016, we were awarded a contract for$41.0 million withGeneral Dynamics Mission Systems -Canada to commence work on the implementation phase of the previously announcedPeruvian Navy's SH-2G Super Seasprite aircraft program. This contract was for the remanufacture and upgrade of four Kaman SH-2G Super Seasprite aircraft and support for the operation of a fifth aircraft for thePeruvian Navy . The total expected value to Kaman for the combined program, including this contract and previously issued contracts, totaled$50.5 million . Total backlog atDecember 31, 2018 , was$4.3 million . AtDecember 31, 2019 , there was no remaining backlog as the program has completed.
FMU-152 A/B - Joint Programmable Fuze
We manufacture the JPF, an electro-mechanical bomb safe and arming device, which
allows the settings of a weapon to be programmed in flight. The Company
currently provides the FMU-152 A/B to the USAF and forty other nations. Sales of
these fuzes can be direct to the USAF, Foreign Military Sales ("FMS") through
the USG and DCS to foreign militaries that, although not funded by the USG,
require regulatory approvals from the USG.
We occasionally experience lot acceptance test failures due to the complexity of
the product and the extreme parameters of the acceptance test. Given the
maturity of the product, we now generally experience isolated failures, rather
than systemic ones. As a result, identifying a root cause can take longer and
result in inconsistent delivery quantities from quarter to quarter.
A total of 41,429 fuzes were delivered in 2019. We expect to deliver 45,000 to 50,000 fuzes in 2020.
Total JPF backlog atDecember 31, 2019 was$356.8 million , all of which has received required export approvals, licenses or authorizations from the USG, allowing for the sale of these products outside ofthe United States . The receipt of export approvals, licenses or authorizations are subject to political and geopolitical conditions which could impact the timing and/or our ability to sell these products outside ofthe United States . Total JPF backlog atDecember 31, 2018 was$454.1 million .
JPF - USG
Revenue for JPF USG programs is recognized over time when costs are incurred as work progresses on the program. The Company currently provides the FMU-152 A/B to the USAF, but theU.S. Navy currently utilizes a different fuze - the FMU-139. In 2015, NAVAIR solicited proposals for a firm fixed price production contract to implement improvements to the performance characteristics of the FMU-139 (such improved fuze having been designated the FMU-139 D/B), and, the USAF had stated that, if and when a contract is awarded and production begins, the funds associated with the FMU-152 A/B will be 41 -------------------------------------------------------------------------------- redirected to the FMU-139 D/B. During the third quarter of 2015, theU.S. Navy announced that a competitor was awarded the contract for the FMU-139 D/B. In the event the FMU-139 D/B program proceeds as planned and the USAF redirects the funds associated with the FMU-152 A/B to the FMU-139 D/B, our business, financial condition, results of operations and cash flows may be materially adversely impacted. During the third quarter of 2019, our competitor announced that it received its first production order from theU.S. Navy to manufacture the FMU-139 D/B. Due to the complexity of this program and the pending status of the USAF's final decision to redirect funds to the FMU-139 D/B, the timing and magnitude of the impact on the Company's financial statements are not certain; however, the Company continues to see strong demand for the FMU-152 A/B. In 2017, we were awarded Options 13 and 14 with the USG. The USAF has exercised two orders under Option 13, which have a total value of more than$102.0 million , and two orders under Option 14 which have a total value of approximately$121.4 million . Additionally, the USAF issued a Notice of Contract Action announcing its intent to award us Options 15 and 16, which, if and when awarded, would extend FMU-152 A/B deliveries into 2023.
JPF - DCS
Revenue for DCS programs is generally recognized at the point in time when control is transferred to the customer under the new revenue recognition guidance. The Company continues to see strong demand for DCS fuzes. During 2019, we were awarded two DCS contracts totaling approximately$90.0 million . During the first quarter of 2018, we were awarded a DCS contract totaling approximately$324.0 million , of which$307.5 million was included in backlog as ofDecember 31, 2018 . The remaining$16.5 million relates to potential penalties payable to the customer in the event the offset requirements of the contract are not met, which remained excluded from backlog atDecember 31, 2019 . This agreement is designed to return economic value to the foreign country by requiring us to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. The offset agreement may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects and the purchase by third parties of supplies from in-country vendors. This agreement may also be satisfied through the Company's use of cash for activities, such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. The offset requirements associated with this contract could extend for several years and have a notional value of approximately$194.0 million , which is equal to sixty percent of the total contract value as defined by the agreement with the customer. The amount ultimately applied against the offset agreement is based on negotiations with the customer and may require cash outlays that represent only a fraction of the notional value in the offset agreement. The Company continues to work with the customer to further define the requirements to satisfy the offset agreement. The satisfaction of the offset requirements will be determined by the customer and is expected to occur over a seven-year period. Additionally, this contract provides for potential penalties payable to the customer of up to 10% of the total contract value in the event that we default on the contract and we are unable to fulfill our contractual commitments. Commercial Markets K-MAX® During 2015, we announced that we were resuming production of commercial K-MAX® aircraft. The aircraft are being manufactured at ourJacksonville, Florida andBloomfield, Connecticut facilities. The first thirteen helicopters from the newly reopened commercial production line were accepted by our customers throughDecember 2019 . During the fourth quarter of 2018, we announced that we will continue production of the commercial K-MAX® aircraft into 2020 at a minimum due to continued interest in the capabilities of the K-MAX®. During the first quarter of 2019, we announced that we are developing the next generation K-MAX® unmanned aircraft system that will allow operators to have the capability to fly either manned or unmanned missions. We expect to offer unmanned system kits for new production and existing aircraft in 2020. As ofDecember 31, 2019 and 2018, our backlog for this program was$13.1 million and$14.9 million , respectively.
777 / 767
In 2019, we signed a multi-year follow-on contract with Boeing for the
production of fixed trailing edge ("FTE") assemblies for the Boeing 777 and 767
commercial aircraft. Annual quantities will vary, as they are dependent upon the
orders Boeing receives from its customers. To date, Kaman has provided
approximately 1,375 FTE kits and assemblies for each of the 777 and 767 programs
since 1995 and 1986, respectively. During 2019, on average, we delivered four
shipsets per month on the Boeing 777 platform and two and one-half shipsets per
month on the Boeing 767 platform, which includes one shipset per month
associated with a military tanker derivative of the 767. For 2020, we estimate
deliveries on the 777 program to be two and one-half shipsets per month and on
the 767 program to be three shipsets per month which includes one shipset per
month associated with a military tanker derivative of the 767. As of
December 31, 2019 and 2018, our backlog for these programs was $25.8 million and
$9.3 million , respectively.
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Our
Bearings
Our bearings products are included on commercial airliners and regional/business jets manufactured inNorth and South America ,Europe andAsia and are used as original equipment and/or specified as replacement parts by airlines and aircraft manufacturers. These products are primarily proprietary self-lubricating, ball and roller bearings for aircraft flight controls, turbine engines, landing gear and helicopter driveline couplings. The most significant portion of our commercial sales is derived from Boeing, Airbus and Bombardier platforms, such as the Boeing 737, 747, 777 and 787, the Airbus A320, A330, A350 and A380, and the Bombardier Global 7500. Additionally, our bearings offerings include super precision miniature ball bearings used primarily in aerospace applications, dental products, surgical power tools, analytical devices and various industrial applications. In the first quarter of 2019, theFederal Aviation Administration ("FAA") issued an order to suspend all 737 MAX aircraft in theU.S. and byU.S. aircraft operators following two fatal 737 MAX accidents. Boeing has suspended deliveries until theFAA and other civil aviation authorities worldwide grant the clearance to return the aircraft to service. In 2019, Boeing announced its plan to reduce the 737 production rate from 52 aircraft per month to 42 per month beginning inApril 2019 and that it would temporarily suspend production of the 737 MAX beginning inJanuary 2020 . OnJanuary 21, 2020 , Boeing announced that it is currently estimating the ungrounding of the 737 MAX during mid-2020. In the years endedDecember 31, 2019 and 2018, we recognized$19.9 million and$19.5 million in revenue associated with the 737 MAX fleet. Any delays in aircraft being returned to service and/or future reductions in the production rate could have an adverse impact on our financial position, results of operations and/or cash flows. Other MattersLearjet 85 In 2010, ourU.K. Composites operation was awarded a contract to manufacture composite passenger entry and over-wing exit doors for theLearjet 85, a mid-sized business jet built primarily from composites and featuring advances in aerodynamics, structures and efficiency; however, inOctober 2015 , Bombardier Inc. announced the cancellation of itsLearjet 85 business aircraft program. AtDecember 31, 2019 , we had total accounts receivable and contract assets related to the program of$3.8 million . During 2016, we filed suit against our customer to recover this amount. Although we expect to recover the full amount of our claim, there can be no assurance that we will prevail in the litigation.
For a discussion of other matters, see Note 19, Commitments and Contingencies, in the Notes to Consolidated Financial Statements included in this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Discussion and Analysis of Cash Flows
We assess liquidity in terms of our ability to generate cash to fund working
capital requirements and investing and financing activities. Significant factors
affecting liquidity include: cash flows generated from or used by operating
activities, capital expenditures, investments in our business and its programs,
acquisitions, divestitures, dividends, availability of future credit, adequacy
of available bank lines of credit and factors that might otherwise affect the
Company's business and operations generally, as described under the heading
"Risk Factors" and "Forward-Looking Statements" in Item 1A of Part I of this
Form 10-K.
We continue to rely upon bank financing as an important source of liquidity for
our business activities including acquisitions. We believe this, when combined
with cash generated from operating activities, will be sufficient to support our
anticipated cash requirements for the foreseeable future. However, we may decide
to raise additional debt or equity capital to support other business activities
including potential future acquisitions.
43
--------------------------------------------------------------------------------In addition to our working capital requirements, one or more of the following items could have an impact on our liquidity during the next 12 months:
• the matters described in Note 19, Commitments and Contingencies, in the
Notes to Consolidated Financial Statements, including the cost of existing
environmental remediation matters discussed in Note 13, Environmental
Costs;
• contributions to our qualified pension plan and Supplemental Employees'
Retirement Plan ("SERP");
• deferred compensation payments to officers;
• interest payments on outstanding debt;
• income tax payments;
• costs associated with acquisitions and corporate development activities;
• finance and operating lease payments;
• capital expenditures;
• research and development expenditures;
• repurchase of common stock under the 2015 Share Repurchase Program;
• payment of dividends;
• costs associated with the start-up of new programs; and
• the extension of payment terms by our customers.
In addition to the items listed above, we received$97.2 million in advance payments in 2018, which relate to$146.2 million in letters of credit for a JPF DCS contract, including the offset agreement. In the event that we default on the contract and we are unable to fulfill our contractual commitments, our customer has the ability to draw on the letters of credit. Additionally, we received approximately$655.0 million in proceeds, net of transaction costs, upon closing the sale of the Distribution business, subject to any working capital adjustments. During 2019, we allocated$164.3 million of the proceeds to pay down debt and$47.8 million of the proceeds for payments of income taxes, net of refunds. In the first quarter of 2020, we used approximately$331.0 million of the proceeds for the acquisition ofBal Seal Engineering Inc. We expect to use the remaining portion for acquisition priorities, new product development and organic growth initiatives. We regularly monitor credit market conditions to identify potential issues that may adversely affect, or provide opportunities for, the securing and/or pricing of additional financing, if any, that may be necessary to continue with our growth strategy and finance working capital requirements. Management regularly monitors its pension plan asset performance and the assumptions used in the determination of our benefit obligation, comparing them to actual experience. We continue to believe the assumptions selected are valid due to the long-term nature of our benefit obligation. EffectiveDecember 31, 2015 , the qualified pension plan was frozen with respect to future benefit accruals. UnderU.S. Government Cost Accounting Standard ("CAS") 413 we must calculate the USG's share of any pension curtailment adjustment resulting from the freeze. Such adjustments can result in an amount due to the USG for pension plans that are in a surplus position or an amount due to the contractor for plans that are in a deficit position. During the fourth quarter of 2016, we accrued a$0.3 million liability representing our estimate of the amount due to the USG based on our pension curtailment adjustment calculation which was submitted to the USG for review inDecember 2016 . We have maintained our accrual at$0.3 million as ofDecember 31, 2019 . There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on our results of operations, financial position and cash flows. 44 --------------------------------------------------------------------------------
A summary of our consolidated cash flows is as follows:
2019 2018 2017 19 vs. 18 18 vs. 17
(in thousands)
Total cash provided by (used
in):
Operating activities $ 42,488 $ 118,714 $ 38,272 $ (76,226 ) $ 80,442
Investing activities 628,316 (22,538 ) (22,840 ) 650,854 302
Financing activities (152,713 ) (141,145 ) (53,627 ) (11,568 ) (87,518 )
Free Cash Flow(1) : Net cash provided by operating activities$ 42,488 $ 118,714 $ 38,272 $ (76,226 ) $ 80,442 Expenditures for property, plant and equipment (22,447 ) (21,504 ) (18,010 ) (943 ) (3,494 ) Free cash flow$ 20,041 $ 97,210 $ 20,262 $ (77,169 ) $ 76,948
(1) Free Cash Flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less expenditures for property plant and equipment, both of which are presented in our Consolidated Statements of Cash Flows. See Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures, in this Form 10-K.
2019 vs. 2018
Net cash provided by operating activities decreased in 2019 compared to 2018. This change was primarily due to the absence of advance payments received under a JPF DCS contract in the prior period and work performed on the JPF DCS program and K-MAX® program in the current period, partially offset by the absence of$30.0 million in contributions made to the pension plan in the prior period and higher net earnings. Net cash provided by investing activities was$628.3 million in 2019, compared to net cash used by investing activities of$22.5 million in 2018. This change was primarily attributable to the proceeds received from the sale of the Distribution business in the current period.
Net cash used in financing activities increased in 2019 compared to 2018, primarily due to higher net repayments of our credit facility and an increase in purchases of treasury shares, partially offset by higher proceeds from the exercise of employee stock awards.
2018 vs. 2017
Net cash provided by operating activities increased
Net cash used in investing activities remained relatively flat in 2018 compared to 2017, primarily due to proceeds received from the sale of assets in 2018 and the absence of an earnout payment associated with a previous acquisition incurred in 2017, mostly offset by higher expenditures for property, plant and equipment. Net cash used in financing activities increased in 2018 by$87.5 million compared to 2017, primarily due to the absence of the convertible notes transactions and higher net repayments of our revolving credit facility in 2018. In 2017, convertible notes transactions consisted of$200.0 million in proceeds received from the issuance of our 2024 Notes and$58.6 million in proceeds related to the unwind of a portion of the convertible note hedge transactions related to our 2017 Notes, which were partially offset by the cost to repurchase a portion of the 2017 Notes, the purchase of the capped call transactions related to our 2024 Notes and higher debt issuance costs associated with the issuance of our 2024 Notes. 45
--------------------------------------------------------------------------------
Financing Arrangements
Refer to Note 14, Debt, in the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for further information on our Financing Arrangements.
Convertible Notes
2024 Notes
DuringMay 2017 , we issued$200.0 million aggregate principal amount of convertible senior unsecured notes dueMay 2024 (the "2024 Notes") pursuant to an indenture (the "Indenture"), datedMay 12, 2017 , between the Company andU.S. Bank National Association , as trustee. In connection therewith, we entered into certain capped call transactions that cover, collectively, the number of shares of the Company's common stock underlying the 2024 Notes. The 2024 Notes bear 3.25% interest per annum on the principal amount, payable semiannually in arrears onMay 1 andNovember 1 of each year, beginning onNovember 1, 2017 . The 2024 Notes will mature onMay 1, 2024 , unless earlier repurchased by the Company or converted. We will settle any conversions of the 2024 Notes in cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election. The sale of the Distribution business in the third quarter of 2019 was deemed to be a "Fundamental Change" and a "Make-Whole Fundamental Change" pursuant to the terms and conditions of the indenture governing the 2024 Notes. As a result, the sale triggered the right of the holders of our 2024 Notes to require us to repurchase all of the 2024 Notes, or any portion thereof that is a multiple of$1,000 principal amount onSeptember 27, 2019 . The aggregate principal amount of the 2024 Notes validly tendered and not validly withdrawn was$0.5 million , representing 0.25% of all outstanding notes. Holders of such notes receive the purchase price equal to 100% of the principal amount of the 2024 Notes being purchased, plus accrued and unpaid interest. The following table illustrates the dilutive effect of securities issued under the 2024 Notes at various theoretical average share prices for our stock as ofDecember 31, 2019 : Theoretical Average Share Price of Kaman Stock$65.26 $70.00 $75.00 $80.00 $84.84 Dilutive Shares associated with: Convertible Debt - 206,879 396,879 563,129 705,394 Credit Agreement OnDecember 13, 2019 , the Company closed an amended and restated$800.0 million Credit Agreement (the "Credit Agreement") withJPMorgan Chase Bank, N.A ., as Administrative Agent and as Collateral Agent. The Credit Agreement amends and restates the Company's previously existing credit facility in its entirety to, among other things: (i) extend the maturity date toDecember 13, 2024 ; (ii) increase the aggregate amount of revolving commitments from$600.0 million to$800.0 million ; (iii) remove the existing term loan credit facility; (iv) modify the affirmative and negative covenants set forth in the facility; and (v) effectuate a number of additional modifications to the terms and provision of the facility, including its pricing. Capitalized terms used but not defined within this discussion of the Credit Agreement have the meanings ascribed thereto in the Credit Agreement. Interest rates on amounts outstanding under the Credit Agreement are variable based on LIBOR. The LIBOR benchmark has been the subject of national, international, and other regulatory guidance and proposals for reform. InJuly 2017 , theU.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit rates for calculation of LIBOR after 2021. These reforms may cause LIBOR to perform differently than in the past and LIBOR may ultimately cease to exist after 2021. Alternative benchmark rate(s) may replace LIBOR and could affect the Company's debt securities, derivative instruments, receivables, debt payments and receipts. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact our contracts which terminate after 2021. There is uncertainty about how applicable law, the courts or the Company will address the replacement of LIBOR with alternative rates on variable rate retail loan contracts and other contracts that do not include alternative rate fallback provisions. In addition, any changes to benchmark rates may have an uncertain impact on our cost of funds and our access to the capital markets, which could impact our liquidity, financial position or results of operations. 46
-------------------------------------------------------------------------------- AtDecember 31, 2019 , there were no amounts outstanding on the Credit Agreement. AtDecember 31, 2018 , the interest rate for the outstanding amounts on the Credit Agreement was 3.74%. In addition, we are required to pay a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.150% to 0.250% per annum, based on the Senior Secured Net Leverage Ratio. Fees for outstanding letters of credit range from 1.125% to 1.625%, based on the Senior Secured Net Leverage Ratio. Total average bank borrowings under our revolving credit facility and previously existing term loan facility during the year endedDecember 31, 2019 , were$70.6 million compared to$151.6 million for the year endedDecember 31, 2018 . As ofDecember 31, 2019 and 2018, there was$647.4 million and$408.9 million available for borrowing, respectively, net of letters of credit. However, based on EBITDA levels, amounts available for borrowings, net of outstanding letters of credit were at least$322.9 million atDecember 31, 2019 and amounts available for borrowings, net of outstanding letters of credit were limited to$323.5 million atDecember 31, 2018 . Letters of credit are generally considered borrowings for purposes of calculating available borrowings. As ofDecember 31, 2019 and 2018,$152.6 million letters of credit were outstanding in both periods, all of which were under the revolving credit facility. Of this amount,$146.2 million letters of credit relate to a JPF DCS contract.
Interest Rate Swaps
During 2015, we entered into interest rate swap agreements under the previously existing credit facility for the purposes of hedging the eight quarterly variable-rate Term Loan interest payments due in 2016 and 2017. Additionally, we entered into interest rate swap agreements to effectively convert$83.8 million of our variable rate revolving credit facility debt to a fixed interest rate. These interest rate swap agreements were designated as cash flow hedges and intended to manage interest rate risk associated with our variable-rate borrowings and minimize the impact on our earnings and cash flows of interest rate fluctuations attributable to changes in LIBOR rates. As ofDecember 31, 2017 , these interest rate swap agreements had all matured and were not outstanding. As such, there was no activity related to these contracts for the years endedDecember 31, 2019 and 2018. The activity related to these contracts was not material to the Company's Consolidated Financial Statements for the year endedDecember 31, 2017 .
Other Sources/Uses of Capital
Pension
We paid$0.5 million and$0.9 million in SERP benefits during 2019 and 2018, respectively. We expect to pay$0.5 million in SERP benefits in 2020. We did not make any contributions to the qualified pension plan in 2019. We contributed$30.0 million to the qualified pension plan during 2018. In 2020, we have contributed$10.0 million to the qualified pension plan (as of the date of this filing) and do not anticipate making any further contributions this year.
Acquisitions
No acquisitions were completed in 2019, 2018 or 2017. For the year endedDecember 31, 2017 , the Company paid$1.4 million in earn-out payments related to a past acquisition. OnJanuary 3, 2020 , the Company announced that it had completed the acquisition of Bal Seal, at a purchase price of approximately$331.0 million , subject to working capital adjustments. We continue to identify and evaluate potential acquisition candidates, the purchase of which may require the use of additional capital.
Stock Repurchase Plans
OnApril 29, 2015 , we announced that our Board of Directors approved a share repurchase program ("2015 Share Repurchase Program") authorizing the repurchase of up to$100.0 million of the common stock, par value$1.00 per share, of the Company. We currently intend to repurchase shares to offset the annual issuance of shares under our employee stock plans, but the timing and actual number of shares repurchased will depend on a variety of factors including stock price, market conditions, corporate and regulatory requirements, capital availability and other factors, including acquisition opportunities. As ofDecember 31, 2019 , we had repurchased 1,590,422 shares under the 2015 Share Repurchase Program and approximately$15.7 million remained available for repurchases under this authorization. 47 --------------------------------------------------------------------------------
NON-GAAP FINANCIAL MEASURES
Management believes that the non-GAAP measures used in this Annual Report on Form 10-K provide investors with important perspectives into our ongoing business performance. We do not intend for the information to be considered in isolation or as a substitute for the related GAAP measures. Other companies may define the measures differently. We define the non-GAAP measures used in this report and other disclosures as follows:
Organic Sales
Organic Sales is defined as "Net Sales" less sales derived from acquisitions completed during the preceding twelve months. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, which can obscure underlying trends. We also believe that presenting Organic Sales enables a more direct comparison to other businesses and companies in similar industries. Management recognizes that the term "Organic Sales" may be interpreted differently by other companies and under different circumstances.
Organic Sales (in thousands)
2019 2018 2017
Net sales $ 761,608 $ 735,994 $ 724,944
Less: Acquisition Sales - - -
Organic Sales $ 761,608 $ 735,994 $ 724,944
Free Cash Flow
Free cash flow is defined as GAAP "Net cash provided by (used in) operating
activities" in a period less "Expenditures for property, plant & equipment" in
the same period. Management believes Free Cash Flow provides an important
perspective on our ability to generate cash from our business operations and, as
such, that it is an important financial measure for use in evaluating the
Company's financial performance. Free Cash Flow should not be viewed as
representing the residual cash flow available for discretionary expenditures
such as dividends to shareholders or acquisitions, as it may exclude certain
mandatory expenditures such as repayment of maturing debt and other contractual
obligations. Management uses Free Cash Flow internally to assess overall
liquidity.
48
--------------------------------------------------------------------------------CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations
The following table summarizes certain of the Company's contractual obligations as ofDecember 31, 2019 : Payments due by period (in millions) More than 5 Contractual Obligations Total Within 1 year 1-3 years 3-5 years years Long-term debt (including convertible notes)$ 199.5 $ - $ -$ 199.5 $ - Interest payments on debt (a) 70.0 14.3 29.3 23.1 3.3 Operating leases 15.9 4.3 6.7 4.9 - Finance leases 7.4 1.9 3.6 1.9 - Purchase obligations (b) 203.4 177.6 25.5 0.3 - Transition services agreement (c) 8.8 8.8 - - - Other long-term obligations (d) 57.3 14.0 16.5 4.1 22.7 Planned funding of pension and SERP (e) 16.3 10.5 3.0 0.9 1.9 Total$ 578.6 $ 231.4$ 84.6 $ 234.7 $ 27.9 Note: For more information refer to Note 3, Discontinued Operations; Note 14, Debt; Note 16, Income Taxes; Note 17, Pension Plans; Note 18, Other Long-Term Liabilities; Note 19, Commitments and Contingencies and Note 20, Leases in the Notes to Consolidated Financial Statements included in this Form 10-K.
(a) Interest payments on debt are calculated based on the applicable rate and
payment dates for each instrument. For variable-rate instruments, interest
rates and payment dates are based on management's estimate of the most likely
scenarios for each relevant debt instrument.
(b) This category includes purchase commitments to suppliers for materials and
supplies as part of the ordinary course of business, consulting arrangements
and support services. Only obligations of at least
(c) This category includes obligations under the Company's transition services
agreement entered into upon closing the sale of the Company's Distribution
business. The Company agreed to support the information technology, human
resources and benefits, tax and treasury functions of the Distribution
business for six to twelve months from the date of sale. The buyer has the
option to extend the support period for up to an additional year for certain
services.
(d) This category includes obligations under the Company's long-term incentive
plan, deferred compensation plan, environmental liabilities, acquisition
holdbacks and unrecognized tax benefits.
(e) This category includes planned funding of the Company's SERP and qualified
pension plan. Projected funding for the qualified pension plan beyond one
year has not been included as there are several significant factors, such as
the future market value of plan assets and projected investment return rates,
which could cause actual funding requirements to differ materially from
projected funding.
Additionally, upon closing of the sale of the Distribution business, the Company entered into separate trademark, trade name and domain license agreements with certain licensees. Under each such agreement, the Company granted the licensee a non-exclusive, royalty-free license to use certain registered service marks, common law service marks, trade names and domain names owned by the Company for a period of five years after the closing date, subject to the licensee's agreement to use commercially reasonable efforts to phase its use of such service marks and domain names as soon as it is reasonably practicable prior to the expiration of the term. These agreements, and the licenses granted therein, apply only withinNorth America .
Off-Balance Sheet Arrangements
As ofDecember 31, 2019 , we had no significant off-balance sheet arrangements other than purchase obligations and$152.6 million of outstanding standby letters of credit, all of which were under the revolving credit facility. Of this amount,$146.2 million letters of credit relate to a JPF DCS contract. 49 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are outlined in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in this Form 10-K. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures based upon historical experience, current trends and other factors that management believes to be relevant. We are also responsible for evaluating the propriety of our estimates, judgments and accounting methods as new events occur. Actual results could differ from those estimates. Management periodically reviews the Company's critical accounting policies, estimates and judgments with the Audit Committee of our Board of Directors. The most significant areas currently involving management judgments and estimates are described below. Revenue from Contracts with Customers Methodology We recognize sales and profit based upon either (1) the over time method, in which sales and profit are recorded based upon the ratio of costs incurred to date to estimated total costs to complete the performance obligation, or (2) the point-in-time method, in which sales are recognized at the time control is transferred to the customer. For long-term contracts, we generally recognize sales and income over time because of continuous transfer of control to the customer. Revenue is generally recognized using the cost-to-cost method based on the extent of progress towards completion of the performance obligation, which allows for recognition of revenue as work on a contract progresses. OnJanuary 1, 2018 , the Company adopted Accounting Standard Codification 606, Revenue from Contracts with Customers, using the modified retrospective method. As a result, the Company applied ASC 606 only to contracts that were not completed as ofJanuary 1, 2018 . Prior to the adoption of ASC 606, for long-term contracts, we generally recognized sales and income based on the percentage-of-completion method accounting, which allowed for recognition of revenue as work on a contract progressed. We recognized sales and profit based upon either (1) the cost-to-cost method, in which sales and profit were recorded based upon the ratio of costs incurred to estimated total costs to complete the contract, or (2) the units-of delivery method, in which sales were recognized as deliveries were made and cost of sales was computed on the basis of the estimated ratio of total contract cost to total contract sales. Management performs detailed quarterly reviews of all of our significant long-term contracts. Based upon these reviews, we 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, we record a provision for the entire anticipated contract loss at that time. Judgment and Uncertainties The over time revenue recognition model requires that we estimate future revenues and costs over the life of a contract. Revenues are estimated based upon the original contract price, with consideration being given to exercised contract options, change orders and, in some cases, projected customer requirements. Contract costs may be incurred over a period of several years, and the estimation of these costs requires significant judgment based upon the acquired knowledge and experience of program managers, engineers and financial professionals. Estimated costs are based primarily on anticipated purchase contract terms, historical performance trends, business base and other economic projections. The complexity of certain programs as well as technical risks and uncertainty as to the future availability of materials and labor resources could affect the Company's ability to accurately estimate future contract costs. 50 --------------------------------------------------------------------------------
The following table illustrates the amount of revenue recognized for performance obligations satisfied over time versus the amount of revenue recognized for performance obligations satisfied at a point in time.
2019 2018 2017
In thousands ASC 606 Revenue recognized for performance obligations satisfied Point-in-time$ 466,866 $ 383,109 $ - Over time 294,742 352,885 - Total revenue recognized for performance obligations satisfied$ 761,608 $ 735,994
$ -
% of Net sales - Point-in-time 61.3 % 52.1 % - % % of Net sales - Over time 38.7 % 47.9 % - % % of Net sales - Performance obligations satisfied 100.0 % 100.0 % - %
The following table illustrates the amount revenue recognized under the percentage-of-completion method prior to the adoption of ASC 606.
2019 2018 2017
In thousands ASC 605 Revenue recognized under percentage of completion method Units-of-delivery $ - $ -$ 317,906 Cost-to-cost - - 55,119 Total revenue recognized under percentage of completion method $ - $
-
% of Net sales - Units-of-delivery - - 43.9 % % of Net sales - Cost-to-cost - - 7.6 % % of Net sales - Percentage-of-completion method - %
- % 51.5 %
Effect if Actual Results Differ From Assumptions While we do not believe there is a reasonable likelihood there will be a material change in estimates or assumptions used to calculate our long-term revenues and costs, estimating the percentage of work complete on certain programs is a complex task. As a result, changes to these estimates could have a significant impact on our results of operations. These programs include the Sikorsky BLACK HAWK program, the JPF program with the USG, the Boeing A-10 program, the AH-1Z program, our other Bell Helicopter programs and several other programs. Estimating the ultimate total cost of these programs is challenging due to the complexity of the programs, unanticipated increases in production requirements, the nature of the materials needed to complete these programs, change orders related to the programs and the need to manage our customers' expectations. These programs are an important element in our continuing strategy to increase operating efficiencies and profitability as well as broaden our business base. Management continues to monitor and update program cost estimates quarterly for these contracts. A significant change in an estimate on one or more of these programs could have a material effect on our financial position and results of operations. The company recognized a reduction in revenue of$4.6 million for the year endedDecember 31, 2019 . The amount of revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods was$6.7 million for the year endedDecember 31, 2018 . The net increase in our operating income from changes in contract estimates totaled$5.7 million for the year endedDecember 31, 2017 .
Allowance for Doubtful Accounts
Methodology
The allowance for doubtful accounts represents management's best estimate of
probable losses inherent in the receivable balance. These estimates are based on
known past due amounts and historical write-off experience, as well as trends
and factors
51
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impacting the credit risk associated with specific customers. In an effort to
identify adverse trends for trade receivables, we perform ongoing reviews of
account balances and the aging of receivables. Amounts are considered past due
when payment has not been received within a pre-determined time frame based upon
the credit terms extended. For our government and commercial contracts, we
evaluate, on an ongoing basis, the amount of recoverable costs. The
recoverability of costs is evaluated on a contract-by-contract basis based upon
historical trends of payments, program viability and the customer's
credit-worthiness.
Judgment and Uncertainties
Write-offs are charged against the allowance for doubtful accounts only after we
have exhausted all collection efforts. Actual write-offs and adjustments could
differ from the allowance estimates due to unanticipated changes in the business
environment as well as factors and risks associated with specific customers.
Effect if Actual Results Differ From Assumptions
As of December 31, 2019 and 2018, our allowance for doubtful accounts was $1.2
million and $2.5 million , respectively. Receivables written off, net of
recoveries, in 2019 and 2018 were $0.8 million in both periods.
Currently we do not believe that we have a significant amount of risk relative
to the allowance for doubtful accounts. A 10% change in the allowance would have
a $0.1 million effect on pre-tax earnings.
Inventory Valuation
Methodology
We have four types of inventory (a) raw materials, (b) contracts in process, (c)
other work in process and (d) finished goods. Raw material includes certain
general stock materials but primarily relates to purchases that were made in
anticipation of specific programs that have not been started as of the balance
sheet date. Raw materials are stated at the lower of the cost of the inventory
or its fair market value. Contracts in process, other work in process and
finished goods are valued at production cost comprised of material, labor and
overhead. Contracts in process, other work in process and finished goods are
reported at the lower of cost or net realizable value.
Judgment and Uncertainties
The process for evaluating inventory obsolescence or market value often requires
the Company to make subjective judgments and estimates concerning future sales
levels, quantities and prices at which such inventory will be sold in the normal
course of business. We adjust our inventory by the difference between the
estimated market value and the actual cost of our inventory to arrive at net
realizable value. Changes in estimates of future sales volume may necessitate
future write-downs of inventory value. At December 31, 2019 , $43.6 million of
K-MAX® inventory was included in contracts and other work in process and
finished goods, of which management believes that approximately $22.5 million
will be sold after December 31, 2020 , based upon the anticipation of additional
aircraft manufacturing and supporting the fleet for the foreseeable future. We
believe it is stated at net realizable value, although lack of demand for spare
parts in the future could result in additional write-downs of the inventory
value. Overall, management believes that our inventory is appropriately valued
and not subject to further obsolescence in the near term.
At December 31, 2019 , $3.6 million of SH-2G(I) inventory was included in
contracts and other work in process inventory on the Company's Consolidated
Balance Sheets. Management believes $3.2 million of the SH-2G(I) inventory will
be sold after December 31, 2020 . This balance represents spares requirements and
inventory to be used in SH-2G programs.
Effect if Actual Results Differ From Assumptions
Management reviews the K-MAX® inventory balance on an annual basis to determine
whether any additional write-downs are necessary. We believe this inventory is
stated at net realizable value, although lack of demand for spare parts in the
future could result in additional write-downs of the inventory value. Overall,
management believes that our inventory is appropriately valued and not subject
to further obsolescence in the near term. If such a write-down were to occur,
this could have a significant impact on our operating results. A 10% write-down
of the December 31, 2019 K-MAX® inventory balance would have affected pre-tax
earnings by approximately $4.4 million in 2019.
The balance of SH-2G(I) inventory projected to be sold after December 31, 2019 ,
represents spares requirements and inventory to be used to support the SH-2G
programs in future periods and as such is appropriately valued as of December
31, 2019 .
52
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Goodwill and Other Intangible Assets
Methodology
Goodwill and certain intangible assets that have indefinite lives are evaluated
at least annually for impairment. The annual evaluation is generally performed
during the fourth quarter, using forecast information. All intangible assets are
also reviewed for possible impairment whenever changes in conditions indicate
that their carrying value may not be recoverable. For reporting units that
qualify for a qualitative assessment, management will perform the two-step
impairment test after a period of three years has elapsed since the test was
last performed.
In accordance with generally accepted accounting principles, we test goodwill
for impairment at the reporting unit level and other long-lived intangible
assets (excluding goodwill) for impairment at the lowest level for which
identifiable cash flows are available. The identification and measurement of
goodwill impairment involves the estimation of fair value of the reporting unit
as compared to its carrying value. The identification and measurement of other
long-lived intangible asset impairment involves the estimation of future cash
flows of the business unit as compared to its carrying value. Goodwill is tested
one level below the segment level, and components are not aggregated for
purposes of goodwill testing.
The carrying value of goodwill as of December 31, 2019 was $195.3 million . The
specific reporting units contributing to the total goodwill balance were as
follows: Precision Products Orlando facility ("KPP-Orlando"), $41.4 million ;
Specialty Bearings and Engineered Products, $103.0 million ; and Aerosystems,
$50.9 million . During 2019, it was determined that the two-step impairment test
would be performed for all reporting units. See Note 12, Goodwill and Other
Intangible Assets, Net, in the Notes to Consolidated Financial Statements for
additional information regarding these assets.
The carrying value of other intangible assets as of December 31, 2019 , was $53.4
million . During the third quarter of 2018, management identified a triggering
event for possible impairment at a certain asset group in its U.K. business
based on a review of historical performance, the current forecast for the
remainder of the year and the loss of future orders from one of its significant
customers, requiring the Company to evaluate the intangible assets for
impairment. No such triggering events were identified in 2019. See Note 12,
Goodwill and Other Intangible Assets, Net, in the Notes to Consolidated
Financial Statements for additional information regarding these assets.
Judgment and Uncertainties
In years that management performs a qualitative assessment we consider the
following qualitative factors: general economic conditions in the markets served
by the reporting units carrying goodwill, relevant industry-specific performance
statistics, changes in the carrying value of the individual reporting units and
assumptions used in the most recent fair value calculation, including forecasted
results of operations, the weighted average cost of capital and recent
transaction multiples.
For Step 1 of the two-step impairment test, management estimated the fair value
of the reporting units using an income methodology based on management's
estimates of forecasted cash flows, with those cash flows discounted to present
value using rates commensurate with the risks associated with those cash flows.
In addition, management used a market-based valuation method involving analysis
of market multiples of revenues and earnings before interest, taxes,
depreciation and amortization ("EBITDA") for (i) a group of comparable public
companies and (ii) recent transactions, if any, involving comparable companies.
In estimating the fair value of the reporting units, a weighting of 80% to the
income approach and 20% to the market-based valuation method was selected,
consistent with the prior year. A higher weighting was applied to the estimate
derived from the income approach as it is based on management's assumptions
specific for the reporting units, which are the outcome of an internal planning
process. While the selected companies in the market based valuation method have
comparability to the reporting units, they may not fully reflect the market
share, product portfolio and operations of the reporting units. The estimated
fair value of the reporting units is adjusted for an excess net working capital
assumption, which represents management's identification of specific
contract-related assets that will generate cash flows in the future.
In performing our step one test for the reporting units, we assumed terminal
growth rates ranging from 2.0% - 3.0%. The discount rate utilized to reflect the
risk and uncertainty in the financial markets and specifically in our internally
developed earnings projections ranged from 8.5% - 12.5% for these reporting
units. Changes in these estimates and assumptions could materially affect the
results of our tests for goodwill impairment.
Under Step 2, an impairment loss is recognized for any excess of the carrying
amount of the reporting unit's goodwill over the implied fair value of that
goodwill. The implied fair value of goodwill is determined by allocating the
fair value of the reporting unit in a manner similar to a purchase price
allocation. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. The results of the Step 1 tests indicated
that the Company did not need to proceed to Step 2 for any of the reporting
units tested.
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Effect if Actual Results Differ From Assumptions
We performed the Step 1 test for the KPP-Orlando, Specialty Bearings and
Aerosystems reporting units. KPP-Orlando and Specialty Bearings' fair values
exceeded their respective carrying values in excess of 100% and Aerosystems'
fair value exceeded the carrying value by approximately 17%. A one percentage
point decrease in our terminal growth rate or an increase of one percentage
point in our discount rate would not result in a fair value calculation less
than the carrying value for these reporting units.
During the third quarter of 2018, we identified a triggering event for possible
impairment at a certain asset group in our U.K. business based on a review of
its historical performance, the current forecast for the remainder of the year
and the loss of future orders from one of our significant customers, requiring
us to evaluate the intangible assets for impairment. We performed a
recoverability test on the intangibles for a certain asset group in our U.K.
business by comparing the undiscounted cash flows of the asset group to its
carrying value, and the estimated future cash flows of the business did not
exceed the carrying value of the assets. Based on these results, we calculated
the fair value of the asset group using an income approach, which resulted in an
impairment charge of $10.0 million , or the remaining balance of the customer
lists/relationships at a certain asset group within the U.K. business. This
charge was included in the operating results of the Aerospace business.
As with all assumptions, there is an inherent level of uncertainty and actual
results, to the extent they differ from those assumptions, could have a material
impact on fair value. For example, multiples for similar type reporting units
could deteriorate due to changes in technology or a downturn in economic
conditions. A reduction in customer demand would impact our assumed growth rate
resulting in a reduced fair value. Potential events or circumstances could have
a negative effect on the estimated fair value. The loss of a major customer or
program could have a significant impact on the future cash flows of the
reporting unit(s). Advances in technology by our competitors could result in our
products becoming obsolete.
We do not currently believe there to be a reasonable likelihood that actual
results will vary materially from estimates and assumptions used to test
goodwill and other intangible assets for impairment losses. However, if actual
results are not consistent with our estimates or assumptions, we may be exposed
to an impairment charge that could be material. Our estimates of the fair value
of the Aerosystems reporting unit include estimated cash flows related to the
K-MAX® unmanned aircraft system and composite blades.
Long-Term Incentive Programs
Methodology
The Company maintains a Management Incentive Plan, which provides for cash and
share-based payment awards, including non-statutory stock options, restricted
stock, stock appreciation rights and long-term incentive program ("LTIP")
awards. We determine the fair value of our non-qualified stock option awards at
the date of grant using a Black-Scholes model. We determine the fair value of
our restricted share awards at the date of grant using the closing price the day
prior to the grant.
LTIP awards provide certain senior executives an opportunity to receive
long-term incentive award payments, generally in cash, for achieving targets
established by the Personnel Compensation Committee of the Board of Directors.
Prior to 2018, LTIP grants were based on the Company's financial results
compared to the Russell 2000 indices for the same periods based upon the
following metrics: (a) average return on total capital, (b) average earnings per
share growth and (c) total return to shareholders for the performance period.
Beginning in 2018, the performance metrics were changed to the following: (a)
average return on total capital and (b) total return to shareholders, both
compared to the Russell 2000 indices for the same performance period. No awards
will be payable if the Company's performance is below the 25th percentile of the
designated indices. The maximum award is payable if performance reaches the 75th
percentile of the designated indices. Awards will be paid out at 100% at the
50th percentile. Awards for performance between the 25th and 75th percentiles
are determined by straight-line interpolation between 0% and 200%.
In order to estimate the liability associated with LTIP awards, management must
make assumptions as to how our current performance compares to current Russell
2000 data based upon the Russell 2000's historical results. This analysis is
performed on a quarterly basis. When sufficient Russell 2000 data for a year is
available, which typically will not be until May or June of the following year,
management will adjust the liability to reflect its best estimate of the total
award. Actual results could differ significantly from management's estimates.
The total estimated liability as of December 31, 2019 , was $22.6 million .
Judgment and Uncertainties
Option-pricing models and generally accepted valuation techniques require
management to make assumptions and to apply judgment to determine the fair value
of our awards. These assumptions and judgments include estimating the future
volatility of
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our stock price, expected dividend yield, future employee turnover rates and
future employee stock option exercise behaviors. Changes in these assumptions
can materially affect the fair value estimate.
Our LTIP requires management to make assumptions regarding the likelihood of
achieving long-term Company goals as well as estimate future Russell 2000
results.
Effect if Actual Results Differ From Assumptions
We do not currently believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions we use to determine cash and
share-based compensation expense. However, if actual results are not consistent
with our estimates or assumptions, we may be exposed to changes in cash and
share-based compensation expense that could be material.
If actual results are not consistent with the assumptions used, the share-based
compensation expense reported in our financial statements may not be
representative of the actual economic cost of the share-based compensation. A
10% change in our share-based compensation expense from continuing operations
for the year ended December 31, 2019 , would have affected pre-tax earnings by
approximately $0.5 million in 2019.
Due to the timing of availability of the Russell 2000 data, there is a risk that
the amount we have recorded as LTIP expense could be different from the actual
payout. A 10% increase in the total estimated liability for our LTIP would
result in a reduction of 2019 pretax earnings of $2.3 million .
Pension Plans
Methodology
We maintain a qualified defined benefit pension, as well as a non-qualified
Supplemental Employees Retirement Plan ("SERP") for certain key executives. See
Note 17, Pension Plans, in the Notes to Consolidated Financial Statements
included in this Form 10-K for further discussion of these plans.
Expenses and liabilities associated with each of these plans are determined
based upon actuarial valuations. Integral to these actuarial valuations are a
variety of assumptions including expected return on plan assets and discount
rates. We regularly review these assumptions, which are updated at the
measurement date, December 31st . In accordance with generally accepted
accounting principles, the impact of differences between actual results and the
assumptions are accumulated and generally amortized over future periods, which
will affect expense recognized in future periods.
We utilize a "spot rate approach" in the calculation of pension interest and
service cost. The spot rate approach applies separate discount rates for each
projected benefit payment in the calculation of pension interest and service
cost.
Judgment and Uncertainties
The discount rate represents the interest rate used to determine the present
value of future cash flows currently expected to be required to settle the
pension obligation. Management uses the Financial Times Stock Exchange ("FTSE")
Pension Liability Index for discount rate assumptions. This index was designed
to provide a market average discount rate to assist plan sponsors in valuing the
liabilities associated with postretirement obligations. Additionally, we
reviewed the changes in the general level of interest rates since the last
measurement date noting that overall rates had decreased when compared to 2018.
Based upon this information, we used a 3.14% discount rate as of December 31,
2019 , for the qualified defined benefit pension plan. This rate takes into
consideration the participants in our pension plan and the anticipated payment
stream as compared to the Above Median Double-A Curve. For the SERP, we used the
same methodology as the pension plan and derived a discount rate of 2.76% in
2019 for the benefit obligation. The difference in the discount rates is
primarily due to the expected duration of SERP payments, which is shorter than
the anticipated duration of benefit payments to be made to the average
participant in the pension plan. The qualified defined benefit pension plan and
SERP used discount rates of 4.17% and 3.88% at December 31, 2018 , respectively,
for purposes of calculating the benefit obligation.
The expected long-term rate of return on plan assets represents the average rate
of earnings expected on the funds invested to provide for anticipated benefit
payments. The expected return on assets assumption is developed based upon
several factors. Such factors include current and expected target asset
allocation, our expected returns by asset class type and our expected investment
performance. Beginning in 2020, the expected long-term rate of return on plan
assets is 6.5%. Historically, the expected long-term rate of return on plan
assets was 7.5%.
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Effect if Actual Results Differ From Assumptions
A lower discount rate increases the present value of benefit obligations and
increases pension expense. A one percentage point decrease in the assumed
discount rate would have increased pension expense in 2019 by $5.7 million . A
one percentage point increase in the assumed discount rate would have decreased
pension expense in 2019 by $4.9 million .
A lower expected rate of return on pension plan assets would increase pension
expense. For 2019 and 2018, the expected rate of return on plan assets was 7.5%.
A one-percentage point increase/decrease in the assumed return on pension plan
assets would have changed pension expense in 2019 by approximately $5.7 million .
During 2019, the actual return on pension plan assets of 22.1% was higher than
our expected long-term rate of return on pension plan assets of 7.5%.
Income Taxes
Methodology
Deferred tax assets and liabilities generally represent temporary differences
between the recognition of tax benefits/expenses in our financial statements and
the recognition of these tax benefits/expenses for tax purposes.
We establish reserves for deferred taxes when, despite our belief that our tax
return positions are valid and defensible, we believe that certain positions may
not prevail if challenged. We adjust these reserves in light of changing facts
and circumstances, such as the progress of a tax audit or changes in tax
legislation. Our effective tax rate includes the impact of reserve provisions
and changes to reserves that we consider appropriate. This rate is then applied
to our quarterly operating results. In the event that there is a significant
unusual or one-time item recognized in our operating results, the tax
attributable to that item would be separately calculated and recorded at the
same time as the unusual or one-time item.
As of December 31, 2019 , we had recorded $28.2 million of deferred tax assets,
net of valuation allowances. The realization of these benefits is dependent in
part on future taxable capital gains and tax planning strategies designed to
realize the benefit associated with the capital loss. For those jurisdictions
where the expiration of tax loss or credit carryforwards or the projection of
operating results indicates that realization is not likely, a valuation
allowance is provided.
Judgment and Uncertainties
Management believes that sufficient income will be earned in the future to
realize deferred income tax assets, net of valuation allowances recorded. The
realization of these deferred tax assets can be impacted by changes to tax laws
or statutory tax rates and future taxable income levels.
Our effective tax rate on earnings was (39.1)% for 2019. This rate was favorably
impacted by an entity classification election related to the investment in the
Company's U.K. business, which had the effect of treating the subsidiary as a
disregarded entity for U.S. tax purposes. This election resulted in a loss for
U.S. tax purposes and a significant tax benefit recognized by the Company in
2019. Additionally, the Company recognized additional benefits from research and
development credits relating to research completed in the three prior years. Our
effective tax rate is based on expected or reported income or loss, statutory
tax rates and tax planning opportunities available to us in the various
jurisdictions in which we operate. Significant judgment is required in
determining our effective tax rate and in evaluating our tax positions.
Effect if Actual Results Differ From Assumptions
We do not anticipate a significant change in our unrecognized tax benefits
within the next twelve months. We file tax returns in numerous U.S. and foreign
jurisdictions, with returns subject to examination for varying periods, but
generally back to and including 2013. It is our policy to record interest and
penalties on unrecognized tax benefits as income taxes. A one percentage point
increase/decrease in our tax rate would have affected our 2019 earnings by $0.4
million .
RECENT ACCOUNTING STANDARDS
A summary of recent accounting standards is included in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
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First Second Third Fourth Total
2019 Quarter Quarter Quarter Quarter Year
(in thousands, except per share amounts)
Net sales $ 166,434 $ 174,712 $ 182,670 $ 237,792 $ 761,608
Gross profit $ 54,521 $ 52,589 $ 61,133 $ 72,562 $ 240,805
Earnings from continuing operations,
net of tax $ 5,822 $ 6,389 $ 10,130 $ 34,105 $ 56,446
Earnings from discontinued
operations before gain on disposal,
net of tax 8,303 7,077 9,860 3,787 29,027
Gain on disposal of discontinued
operations, net of tax - - 122,786 1,570 124,356
Net earnings $ 14,125 $ 13,466 $ 142,776 $ 39,462 $ 209,829
Basic earnings per share
From continuing operations $ 0.21 $ 0.23 $ 0.36 $ 1.22 $ 2.02
From discontinued operations 0.30 0.25 4.75 0.19 5.49
Basic earnings per share $ 0.51 $ 0.48 $ 5.11 $ 1.41 $ 7.51
Diluted earnings per share
From continuing operations $ 0.20 $ 0.23 $ 0.36 $ 1.22 $ 2.01
From discontinued operations 0.30 0.25 4.72 0.19 5.46
Diluted earnings per share $ 0.50 $ 0.48 $ 5.08 $ 1.41 $ 7.47
First Second Third Fourth Total
2018 Quarter Quarter Quarter Quarter Year
(in thousands, except per share amounts)
Net sales $ 179,395 $ 178,606 $ 157,134 $ 220,859 $ 735,994
Gross profit $ 53,180 $ 53,441 $ 47,688 $ 73,008 $ 227,317
Earnings from continuing operations,
net of tax $ 4,970 $ 4,778 $ (9,503 ) $ 15,632 $ 15,877
Earnings from discontinued
operations before gain on disposal,
net of tax 9,096 10,316 10,935 7,945 38,292
Net earnings $ 14,066 $ 15,094 $ 1,432 $ 23,577 $ 54,169
Basic earnings per share
From continuing operations $ 0.18 $ 0.17 $ (0.34 ) $ 0.56 $ 0.57
From discontinued operations 0.33 0.37 0.39 0.28 1.37
Basic earnings per share $ 0.51 $ 0.54 $ 0.05 $ 0.84 $ 1.94
Diluted earnings per share
From continuing operations $ 0.18 $ 0.17 $ (0.34 ) $ 0.56 $ 0.56
From discontinued operations 0.32 0.36 0.39 0.28 1.36
Diluted earnings per share $ 0.50 $ 0.53 $ 0.05 $ 0.84 $ 1.92
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Included within certain quarterly results are a variety of unusual or
significant adjustments that may affect comparability. The most significant of
such adjustments are described below as well as within Management's Discussion
and Analysis of Financial Condition and Results of Operations and the Notes to
Consolidated Financial Statements. Additionally, due to the nature of the
earnings per share calculation, the sum of quarterly earnings per share data may
not equal the cumulative earnings per share data for the year.
Items within the 2019 quarterly results that may affect comparability are as
follows:
First Second Third Fourth Total
2019 Quarter Quarter Quarter Quarter Year
(in thousands)
Tax benefit associated with
entity classification for
investment in U.K. business $ - $ - $ - $ (25,710 ) $ (25,710 )
(Reductions) additions in
revenue associated with changes
in profit estimates for over
time contracts $ (781 ) $ 467 $ (1,243 ) $ (3,067 ) $ (4,624 )
Cost associated with corporate
development activities $ - $ - $ 2,993 $ 7,097 $ 10,090
Restructuring and severance
costs $ 266 $ 206 $ 81 $ 1,005 $ 1,558
Costs from transition services
agreement $ - $ - $ 1,154 $ 3,519 $ 4,673
Income from transition services
agreement $ - $ - $ (944 ) $ (2,729 ) $ (3,673 )
Loss on sale of U.K. Tooling
business $ - $ - $ - $ 3,739 $ 3,739
Items within the 2018 quarterly results that may affect comparability are as
follows:
First Second Third Fourth Total
2018 Quarter Quarter Quarter Quarter Year
(in thousands)
Additions in revenue associated
with changes in profit
estimates for over time
contracts $ 1,556 $ 1,513 $ 1,736 $ 1,871 $ 6,676
Non-cash intangible asset
impairment charge $ - $ - $ 10,039 $ - $ 10,039
Non-cash write-off of inventory $ - $ - $ 709 $ - $ 709
Employee tax-related matters in
foreign operations $ - $ - $ 1,279 $ 1,761 $ 3,040
Cost associated with corporate
development activities $ - $ - $ 1,051 $ 30 $ 1,081
Gain on the sale of land $ - $ (1,520 ) $ - $ - $ (1,520 )
Restructuring and severance
costs $ 1,693 $ 1,804 $ 1,214 $ 2,642 $ 7,353
Loss on sale of U.K. Tooling
business $ - $ - $ - $ 5,722 $ 5,722
Loss on sale of assets and
liabilities of Engineering
Services business $ - $ - $ - $ 661 $ 661
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