Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide readers of our condensed consolidated financial statements with the perspectives of management. It presents, in narrative and tabular form, information regarding our financial condition, results of operations, liquidity and certain other factors that may affect our future results, and is designed to enable the readers of this report to obtain an understanding of our businesses, strategies, current trends and future prospects. It should be read in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2020 ("2020 Form 10-K") and the Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q.
OVERVIEW OF BUSINESS
Kaman Corporation (the "Company" or "Kaman") currently conducts business in the aerospace and defense, industrial and medical markets. Kaman 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.
Executive Summary
In the first quarter, consolidated net sales from continuing operations decreased by 17.2% to$171.6 million , primarily due to a reduction in sales on our safe and arms device and commercial business and general aviation programs. Gross margin decreased in the quarter to 30.8% compared to 32.7% in the prior year period. This performance was driven in part by the mix of joint programmable fuze ("JPF") sales in the quarter and lower sales and associated gross profit on our commercial bearings products due to the impacts of COVID-19. Selling, general and administrative expenses ("S,G&A") decreased by 26.2%, driven by the absence ofBal Seal acquisition costs and lower employee-related costs as we realize the benefits of the workforce reductions implemented in the prior year. Operating income in the period benefited from the absence of costs associated with the acquired retention plans incurred in the prior year and lower costs related to the transition services agreement ("TSA").Bal Seal was able to recover quickly from the interruption to its information technology systems, and, as such, there was no material impact to our first quarter results. GAAP diluted earnings per share of$0.29 in the first quarter was the result of the activity discussed above and higher pension-related income, partially offset by lower income from theTSA .
Other financial highlights
•Earnings from continuing operations was$8.0 million for the three-month fiscal period endedApril 2, 2021 , compared to a loss from continuing operations of$0.4 million in the comparable fiscal period in the prior year. This change was primarily driven by the absence ofBal Seal acquisition costs and costs associated with the acquired retention plans incurred in the prior year, partially offset by lower sales and gross profit. •Cash used in operating activities of continuing operations during the three-month fiscal period endedApril 2, 2021 , was$2.4 million , a$53.0 million improvement to the comparable fiscal period in the prior year. This change was primarily due to the collection of payments on outstanding receivables, more specifically significant receivables under a JPF direct commercial sales ("DCS") contract, and the absence of a$10.0 million pension contribution in the current period, partially offset by approximately$25.1 million in nonrecurring payments to eligible participants ofBal Seal's employee retention plans. •Total unfulfilled performance obligations ("backlog") decreased 10.9% to$562.4 million compared to total backlog atDecember 31, 2020 , driven by deliveries of direct commercial JPF orders and bearings products, partially offset by new orders of our bearings products.
Recent events
•InApril 2021 , the K-MAX TITANTM , our new unmanned helicopter, successfully completed its first test flight. •InApril 2021 ,Ian K. Walsh , President and CEO, was appointed Chairman of the Board of Directors andJennifer Pollino assumed the role of Lead Independent Director. •InMarch 2021 , we opened our first production cell for highly engineered products utilizing our proprietary Titanium Diffusion Hardening process. •InMarch 2021 , we were awarded a contract by Boeing to manufacture the refueling boom assembly for the MH-47 program. The program is expected to start in the second half of 2021. 23 -------------------------------------------------------------------------------- •InFebruary 2021 , we completed the sale of ourUK Composites business. •InJanuary 2021 , we received a signed purchase agreement for a K-MAX® medium-to-heavy lift helicopter. Delivery of this aircraft was completed inMarch 2021 . •InJanuary 2021 , the Agencia Nacional de Aviação Civil ("ANAC") inBrazil issued the Type Certificate for the Kaman K-1200 K-MAX® helicopter. We have been marketing the K-MAX® helicopter to various Brazilian operators, power line, oil and gas firms, and engineering companies over the past two years, and this certification clears the path for K-MAX® operations inBrazil .
COVID-19 Discussion
The impact of the novel coronavirus ("COVID-19") and the precautionary measures instituted by governments and businesses to mitigate the spread, including limiting non-essential gatherings of people, ceasing all non-essential travel, ordering certain businesses and government agencies to cease non-essential operations at physical locations and issuing "shelter-in-place" orders, have contributed to a general slowdown in the global economy and significant volatility in financial markets, including a decrease in our stock price. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and across the geographies in which we operate and serve customers, and we are working to assess the extent to which it has impacted and will continue to impact our customers, suppliers and other business partners. Impact on our Business Kaman is operating as an essential business inthe United States and in most of the markets in which it operates around the world. Despite efforts to mitigate the risks associated with COVID-19, we expect our operations to continue to be adversely impacted through at least the first half of 2021. Additionally, certain of our customers and suppliers have temporarily shut down operations; however, disruptions to our supply chain have been limited to date and we continue to meet the demands of our customers. While we did not incur significant disruptions related to the COVID-19 pandemic during the first quarter of 2021, we continued to see declines in our commercial aerospace products in the first quarter of 2021 as compared to the corresponding period in 2020 which was minimally impacted by COVID-19. As the pandemic continues, we anticipate further challenges in our commercial aerospace programs through the first half of 2021; however, we expect a meaningful ramp in sales for these products in the second half of the year due to the increase in air traffic and vaccination rates inthe United States . We saw recoveries in our medical and industrial end markets during the first quarter and expect improved performance through the remainder of 2021. Our defense and safe and arm device end markets have not been impacted by COVID-19 and we do not expect future declines due to COVID-19 on the results of these end markets. The extent to which COVID-19 may adversely impact the Company depends on future developments, which are highly uncertain and unpredictable at this time. Steps to Protect our Workforce The health and safety of our employees, their families and communities, and our customers are our highest priorities. To maintain employee productivity and minimize the risk of exposure while working, we continue to adhere to the policies and procedures implemented in the prior year to allow our employees to work with confidence knowing that their health and safety is a key priority. All employees who are able to work from home have been encouraged to do so for the foreseeable future to limit contact points and reduce the risk of exposure. For those on-site, we continue to operate in segregated workspaces to maintain physical distancing within our facilities, better trace employee contacts, and limit risk of exposure while in the facility. We have also restricted free flow of employees throughout the factories and prevented non-essential employees and business associates from entering these facilities. In addition, we continue to require daily temperature checks and face masks for all persons entering our facilities. Resources are available to our employees via the Company's benefits website, which include the latest news on COVID-19, steps to prevent illness and resources for mental health. Our senior management team meets regularly to review the status of our operations, including the health and safety of our employees, and the impact of COVID-19 on our customers, suppliers and communities. Our Board of Directors are updated regularly on the realized and expected impacts of COVID-19 and the Company's response to COVID-19, including steps to protect the workforce and cost-savings initiatives. Additionally, the management team has benchmarked our efforts with peer companies to adopt best practices, improve our processes and share challenges that we are facing as we manage through the crisis. Refer to the Liquidity and Capital Resources section of Management's Discussion and Analysis for information on the impact of COVID-19 on the liquidity of the Company. 24
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RESULTS OF OPERATIONS
For the Three Months Ended
April 2, April 3, 2021 2020 (in thousands) Organic sales$ 169,912 $ 198,836 Sales of disposed businesses that did not qualify for discontinued operations 1,704 8,486 Net sales$ 171,616 $ 207,322 $ change (35,706) 40,888 % change (17.2) % 24.6 % Net sales decreased for the three-month fiscal period endedApril 2, 2021 , as compared to the corresponding period in 2020, due to a 14.5% decrease in organic sales and$6.8 million in lower sales due to the sale of ourUK Composites business. The decrease in organic sales was primarily driven by$16.4 million in lower sales under our safe and arm devices programs, a$12.5 million decrease in sales on our commercial business and general aviation programs and a$1.2 million decrease in sales on our defense programs, excluding safe and arm devices. These decreases were partially offset by a$1.5 million increase in sales in industrial and other commercial programs. Sales under our medical programs remained relatively flat when compared to the corresponding period in 2020. Foreign currency exchange rates relative to theU.S. dollar had a favorable impact of$1.7 million on net sales for the three-month fiscal period endedApril 2, 2021 . The decrease in sales on our safe and arm device programs was attributable to lower direct commercial sales of our JPF to foreign militaries, partially offset by higher sales under our JPF program with the USG and an increase in sales on our ATACMS fuzing contract. The decrease in sales under our commercial business and general aviation programs was primarily attributable to lower sales volume of our commercial bearings products, driven by lower sales to Boeing and Airbus due to the impacts of COVID-19, and a decrease in sales under certain structures programs. These decreases, totaling$19.1 million , were partially offset by a K-MAX® aircraft delivery in the current period. The decrease in sales under our defense programs, excluding safe and arm devices was primarily due to lower sales under the AH-1Z program, the Sikorsky BLACK HAWK helicopter program and a certain structures program. These decreases, totaling$4.8 million , were partially offset by higher sales on the A-10 program. The increase in sales under our industrial and other commercial programs was primarily attributable to$1.3 million in higher sales volume of our bearings products.
Gross Profit from Continuing Operations
For the Three Months Ended April 2, April 3, 2021 2020 (in thousands) Gross profit$ 52,905 $ 67,702 $ change (14,797) 13,181 % change (21.9) % 24.2 % % of net sales 30.8 % 32.7 % Gross profit decreased for the three-month fiscal period endedApril 2, 2021 , as compared to the corresponding period in 2020. This decrease was primarily attributable to lower direct commercial sales of our JPF to foreign militaries and lower sales and associated gross profit on our commercial bearings products. These decreases, totaling$17.4 million , were partially offset by higher sales and associated gross profit under our JPF program with the USG. 25 -------------------------------------------------------------------------------- Selling, General & Administrative Expenses (S,G&A) from Continuing Operations For the Three Months Ended April 2, April 3, 2021 2020 (in thousands) S,G&A$ 44,991 $ 60,989 $ change (15,998) 19,038 % change (26.2) % 45.4 % % of net sales 26.2 % 29.4 % S,G&A decreased for the three-month fiscal period endedApril 2, 2021 , when compared to the corresponding period in 2020. This was primarily attributable to the absence of$8.5 million inBal Seal acquisition costs and$1.8 million in third party costs associated with our efforts to reduce general and administrative expenses in the prior year, lower employee-related costs due to the cost reductions efforts implemented in the prior year, and a decrease in travel expenses and trade show costs due to restrictions imposed to limit the spread of COVID-19.
Costs from Transition Service Agreement
For the Three Months EndedApril 2 ,April 3, 2021 2020 (in thousands)
Costs from transition services agreement$ 705 $ 4,140 Upon closing the sale of our former Distribution business, the Company entered into aTSA 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 exercised the option to extend the support period for up to a maximum of an additional year for certain information technology services. The buyer has the right to terminate individual services at any point over the renewal term and began to terminate certain services in 2020. Substantially all services were completed as of the end of the first quarter of 2021; however, theTSA is expected to be fully completed by the third quarter of 2021. We incurred$0.7 million and$4.1 million in costs associated with theTSA in the three-month fiscal periods endedApril 2, 2021 andApril 3, 2020 , respectively. These costs were partially offset by$0.5 million and$3.0 million in income earned from theTSA in the three-month fiscal periods endedApril 2, 2021 andApril 3, 2020 , respectively, included in income from transition services agreement, which is below operating income on the Company's Condensed Consolidated Statement of Operations.
Cost of Acquired Retention Plans
For the Three Months Ended April 2, April 3, 2021 2020 (in thousands) Costs of acquired retention plans $ -
Bal Seal's previous owner implemented employee retention plans prior to our acquisition in the first quarter of 2020. Upon closing, we funded$24.7 million of the purchase price into escrow accounts associated with these employee retention plans. As of the date of acquisition,Bal Seal had$1.9 million in costs accrued for these employee retention plans, and the remaining$22.8 million in compensation expense associated with these retention plans was incurred ratably throughout the year endedDecember 31, 2020 . This amount and related interest was included in restricted cash on the Company's Consolidated Balance Sheets as ofDecember 31, 2020 . Eligible participants received an allocation of the escrow balance one year following the acquisition date, which is reflected in the Company's cash flows from operating activities for the three-month fiscal period endedApril 2, 2021 . 26 --------------------------------------------------------------------------------
Restructuring and Severance Costs
For the Three Months EndedApril 2 ,April 3, 2021 2020 (in thousands)
Restructuring and severance costs$ 1,352
The Company continues to evaluate its costs with the objective of a lean organizational structure that provides a scalable infrastructure which facilitates future growth opportunities. In the three-month fiscal period endedApril 2, 2021 , the Company incurred$1.4 million in severance costs associated with these cost reduction efforts. These actions are expected to contribute total annualized cost savings of approximately$3.7 million , which were factored in the Company's 2021 outlook. Following the sale of our former distribution business, we announced that we would undertake a comprehensive review of our general and administrative functions in order to improve operational efficiency and to align our costs with our revenues. We identified information technology functions to be outsourced, workforce reductions and other reductions in certain general and administrative expenses which were completed in 2020 to support the cost savings initiative. These actions resulted in$1.3 million in severance costs in the three-month fiscal period endedApril 3, 2020 . Actions taken since the announcement of the cost savings initiative through 2020 are expected to contribute total annualized cost savings of approximately$18.2 million . In addition to the severance costs associated with the cost savings initiative discussed above, we incurred$0.5 million in severance costs as we integrated the acquisition ofBal Seal in the year endedDecember 31, 2020 .
Loss (Gain) on Sale of Business
For the Three Months Ended April 2, April 3, 2021 2020 (in thousands) Loss (gain) on sale of business $ 234$ (493) In 2020, we received approval from our Board of Directors to sell ourUK Composites business. In the fourth quarter of 2020, we accrued a loss of$36.3 million on the anticipated sale. In the first quarter of 2021, we closed on a transaction to sell theUK Composites business. We recorded an additional loss of$0.2 million in the three-month fiscal period endedApril 2, 2021 associated with the sale. During 2018, we sold ourUK Tooling business to better position the Company for increased profitability. In 2019, we incurred a 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 theUK Tooling business as this balance was deemed not likely to be collected. In the three-month fiscal period endedApril 3, 2020 , we collected$0.5 million of the note receivables written off in 2019. Operating Income (Loss) For the Three Months Ended April 2, April 3, 2021 2020 (in thousands) Operating income (loss)$ 5,613 $ (4,422) $ change 10,035 (16,791) % change 226.9 % (135.8) % % of net sales 3.3 % (2.1) % The Company had operating income of$5.6 million for the three-month fiscal period endedApril 2, 2021 , compared to an operating loss of$4.4 million in the comparable period in 2020. The change in operating income was primarily driven by lower costs related to theTSA , the absence ofBal Seal acquisition costs and the costs associated with the acquired retention plans 27 --------------------------------------------------------------------------------
incurred in the prior year and lower employee-related costs due to the cost reduction efforts implemented in the prior year. These changes were partially offset by lower sales and gross profit, as discussed above.
Interest Expense, Net For the Three Months Ended April 2, April 3, 2021 2020 (in thousands) Interest expense, net$ 4,251 $ 3,247 Interest expense, net, generally consists of interest charged on our Credit Agreement, which includes a revolving credit facility, our convertible notes and the amortization of debt issuance costs, offset by interest income. Interest expense, net increased for the three-month fiscal period endedApril 2, 2021 . This increase was primarily attributable to an increase in interest expense associated with our deferred compensation plan and lower interest income, partially offset by lower average borrowings.
Effective Income Tax Rate from Continuing Operations
For the Three Months Ended
April 2, April 3, 2021 2020 Effective income tax rate from continuing operations 2.5 % 52.1 % The effective income tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings from continuing operations for the period. The decrease in the effective tax rate from continuing operations for the three-month fiscal period endedApril 2, 2021 , compared to the corresponding rate in the prior year was primarily caused by a discrete benefit received in the current period related to the sale of ourUK Composites business and the positive earnings in the current period versus a loss in the prior period. See Note 18, Income Taxes, for further information on the Company's valuation allowance for deferred tax assets. Backlog April 2, December 31, 2021 2020 (in thousands) Backlog$ 562,407 $ 631,236 Backlog decreased during the first three months of 2021. The decrease was primarily attributable to revenue recognized for deliveries of direct commercial JPF orders, bearings and medical products and work performed on our structures and legacy fuzing programs. These decreases were partially offset by orders of our bearings and medical products.
Major Programs/Product Lines
Below is a discussion of significant changes in our major programs during the first three months of 2021. See our 2020 Form 10-K for a complete discussion of our major programs. FMU-152 A/B - JPF We manufacture the JPF, an electro-mechanical bomb safe and arming device, which allows the settings of a weapon to be programmed in flight. 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.
A total of 8,090 fuzes were delivered to our customers during the first quarter of 2021. We expect to deliver 30,000 to 35,000 fuzes in 2021.
Total JPF backlog atApril 2, 2021 was$184.5 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 future export 28 -------------------------------------------------------------------------------- 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 . Given the change in Administration, there can be no assurance that backlog with appropriate approvals will be recognized due to potential future policies to cease shipments to certain countries. As the Administration has indicated its desire to review the sale of defense products to two Middle Eastern countries, this has led to uncertainty on the timing of delivery of fuzes for one of our key customers. The outcome of the review remains uncertain; therefore, we elected to exclude the previously anticipated order from our outlook for 2021. Total JPF backlog atDecember 31, 2020 was$214.7 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 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 demand for the FMU-152 A/B. During the third quarter of 2020, we completed our pricing negotiations for Options 15 and 16 with the USG and we received an order under Option 15 with an expected value of approximately$57.3 million for the procurement of fuzes for 25 foreign militaries. In the first quarter of 2021, we began to satisfy the requirements under Option 15. We expect future orders under Option 16 to extend FMU-152 A/B deliveries into 2023.
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 programs, acquisitions, divestitures, dividends, availability of future credit, share repurchase programs, 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 our 2020 Form 10-K.
COVID-19
We anticipate that the disruptions and delays resulting from the spread of COVID-19 and the measures instituted by governments and businesses to mitigate its spread could impact our liquidity in the next twelve months. AtApril 2, 2021 , the Company had$120.7 million of cash on our Condensed Consolidated Balance Sheet. We are closely managing our daily cash flows to optimize our liquidity position. We also continue to closely monitor the collectability of our receivables from commercial aerospace customers as we recognize there may be delays in payments due to the impacts of COVID-19 on our customers. As of the date of this filing, we do not believe there has been any material impact on the collectability of these receivables. In addition to the daily reviews of collections and payables, management meets with our business units on a regular basis to review liquidity. As of the date of this filing, we believe the Company has adequate liquidity due to the cash we have on hand, the bank financing we have available to us and the other actions we have taken to enhance financial flexibility and reduce the potential impact of the pandemic on the Company. 29 -------------------------------------------------------------------------------- A summary of our consolidated cash flows from continuing operations is as follows: For the Three Months Ended April 2, April 3, 2021 2020 2021 vs. 2020 (in thousands) Total cash provided by (used in): Operating activities$ (2,415) $ (55,442) $ 53,027 Investing activities (8,100) (303,780) 295,680 Financing activities (4,684) 182,878 (187,562) Free Cash Flow (a) Net cash used in operating activities$ (2,415) $ (55,442) $ 53,027 Expenditures for property, plant and equipment (4,678) (5,559) 881 Free cash flow$ (7,093) $ (61,001) $ 53,908 (a) Free Cash Flow, a non-GAAP financial measure, is defined as net cash (used in) provided by operating activities less expenditures for property, plant and equipment, both of which are presented in our Condensed Consolidated Statements of Cash Flows. See Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures for more information regarding Free Cash Flow. Net cash used in operating activities was$2.4 million for the three-month fiscal period endedApril 2, 2021 , a$53.0 million improvement to cash used in the comparable period in 2020. This change was largely driven by the collection of payments on outstanding receivables, more specifically the receipt of approximately$53.0 million in payments on JPF DCS receivables, the absence of a$10.0 million pension contribution and lower material receipts on the K-MAX® program in the current period. These changes were partially offset by approximately$25.1 million in nonrecurring payments to eligible participants ofBal Seal's employee retention plans implemented prior to our acquisition in 2020. Net cash used in investing activities was$8.1 million for the three-month fiscal period endedApril 2, 2021 ,$295.7 million less than cash used in the comparable period in 2020. This change was primarily attributable to cash used to acquireBal Seal in the prior year. Net cash used in financing activities was$4.7 million for the three-month fiscal period endedApril 2, 2021 , compared to net cash provided by financing activities of$182.9 million in the comparable period in 2020. This change was primarily due to higher net borrowings under our revolving credit facility in the prior year in preparation for the potential impact of the COVID-19 pandemic, partially offset by lower purchases of treasury shares in the current period. We anticipate a variety of items will have an impact on our liquidity during the next twelve months, in addition to the impacts of the COVID-19 pandemic and our working capital requirements. These could include one or more of the following: •the matters described in Note 14, Commitments and Contingencies, in the Notes to Consolidated Financial Statements, including the cost of existing environmental remediation matters; •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 timing of payments and the extension of payment terms by our customers. 30 --------------------------------------------------------------------------------
Financing Arrangements
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 future cash requirements; however, we may decide to borrow additional funds or raise additional equity capital to support other business activities, including potential future acquisitions. We regularly monitor credit market conditions to identify potential issues that may adversely affect, or provide opportunities for, the securing and/or advantageous pricing of additional financing, if any, that may be necessary to continue with our growth strategy and finance working capital requirements. Refer to Note 14, Debt, in the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of the 2020 Form 10-K for further information on our Financing Arrangements.
Convertible 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, datedMay 12, 2017 , between the Company andU.S. Bank National Association , as trustee (as amended by the First Supplemental Indenture thereto, datedJuly 15, 2019 , the "Indenture"). 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 our election. The sale of our former 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 approximately 0.25% of all outstanding notes. Holders of such notes received the repurchase price equal to 100% of the principal amount of the 2024 Notes being purchase, plus accrued and unpaid interest. We incurred$7.4 million of debt issuance costs in connection with the sale of the 2024 Notes, which was allocated between the debt and equity components of the instrument. Of the total amount,$0.7 million was recorded as an offset to additional paid-in capital. The balance,$6.7 million , was recorded as a contra-debt balance and is being amortized over the term of the 2024 Notes. Total amortization expense for three-month fiscal periods endedApril 2, 2021 andApril 3, 2020 was$0.2 million in both periods.
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 matures onDecember 13, 2024 and consists of revolving commitments of$800.0 million . Capitalized terms used but not defined within this discussion of the Credit Agreement have the meanings ascribed thereto in the Credit Agreement, which with amendments is included as Exhibit 10.39 to our 2020 Form 10-K.
We incurred
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. InNovember 2020 , theICE Benchmark Association announced its intention to delay the timeline for the retirement of LIBOR until mid-2023. 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 that terminate after 2023. 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 31 -------------------------------------------------------------------------------- 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. No amounts were outstanding under the revolving credit facility in the first quarter of 2021; therefore, the interest rate for the period was 0%. 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. There were no bank borrowings during the three-month period endedApril 2, 2021 , compared to total average bank borrowings of$111.9 million for the year endedDecember 31, 2020 .
The following table shows the amounts available for borrowing under the Company's revolving credit facility:
April 2, December 31, 2021 2020 In thousands Total facility$ 800,000 $ 800,000 Amounts outstanding, excluding letters of credit - -
Amounts available for borrowing, excluding letters of credit 800,000
800,000 Letters of credit under the credit facility(1)(2) 152,475 165,373 Amounts available for borrowing $
647,525
Amounts available for borrowing subject to EBITDA, as defined by the Credit Agreement(3)
$
346,880
(1) The Company has entered into standby letters of credit issued on the Company's behalf by financial institutions, and directly issued guarantees to third parties primarily related to advances received from customers and the guarantee of future performance on certain contracts. Letters of credit generally are available for draw down in the event the Company does not perform its obligations. (2) Of these amounts,$146.2 million letters of credit relate to a certain JPF DCS contract in both periods. (3) Amounts available for borrowing subject to EBITDA reflect the minimum borrowing capacity under EBITDA, subject to adjustments.
Other Sources/Uses of Capital
Advance Payments
In 2018, we received$97.2 million in advance payments, which relate to$146.2 million in letters of a 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 obligations, our customer has the ability to draw on the letters of credit. Pension Plans Management regularly monitors pension plan asset performance and the assumptions used in the determination of our benefit obligation, comparing them to actual performance. We continue to believe the assumptions selected are valid due to the long-term nature of our benefit obligation. We contributed$10.0 million to the qualified pension plan subsequent to the end of the first quarter and$0.1 million to the SERP through the end of the first quarter of 2021. No further contributions are expected to be made to the qualified pension plan during 2021. We plan to contribute an additional$2.6 million to the SERP in 2021. For the 2020 plan year, we contributed$10.0 million to the qualified pension plan and$0.5 million to the SERP. EffectiveDecember 31, 2015 , our qualified pension plan was frozen with respect to future benefit accruals. Under USG Cost Accounting Standard ("CAS") 413, we must calculate the USG's share of any pension curtailment adjustment calculated 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 calculation, which was submitted to the USG for review inDecember 2016 . We have maintained our accrual at$0.3 million as ofApril 2, 2021 . 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. 32 --------------------------------------------------------------------------------
Share-based Arrangements
In 2021, the Company modified its long-term incentive program to increase the emphasis on equity. Beginning in the first quarter of 2021, the long-term incentive awards granted to the Company's Named Executive Officers ("NEOs") will consist of a combination of service-based RSAs and PSUs which are intended to be settled in shares, as opposed to cash-based awards that had been utilized in the past. These awards are expected to increase the alignment of interests between the Company's NEOs and shareholders and help build stock ownership for new executives, supporting both executive retention and the Company's long-term financial performance. RSAs will vest over a three-year period on each of the first three anniversaries of the date of grant. The number of PSUs that will vest will be determined based on total shareholder return ("TSR") and return on total invested capital ("ROIC") over a three-year performance period, each of which will remain equally weighted in determining payouts. The achievement level for both factors may range from zero to 200%. As ofApril 2, 2021 , future compensation costs related to non-vested stock options, restricted stock grants and performance stock grants is$12.9 million . The Company anticipates that this cost will be recognized over a weighted-average period of 2.7 years.
NON-GAAP FINANCIAL MEASURES
Management believes the non-GAAP (Generally Accepted Accounting Principles) measures used in this report provide investors with important perspectives into our ongoing business performance. We do not intend for the information to be considered in isolation or as a substitute for the related GAAP measures. Other companies may define the measures differently. We define the non-GAAP measures used in this report and other disclosures as follows:
Organic Sales
Organic Sales is defined as "Net Sales" less sales derived from acquisitions completed or businesses disposed of that did not qualify for accounting as a discontinued operation during the previous twelve months. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, which can obscure underlying trends. We also believe that presenting Organic Sales separately provides management and investors with useful information about the trends impacting our operations and enables a more direct comparison to other businesses and companies in similar industries. Management recognizes that the term "Organic Sales" may be interpreted differently by other companies and under different circumstances. Organic Sales from continuing operations (in thousands) For
the Three Months Ended
April 2, April 3, 2021 2020 Net sales$ 171,616 $ 207,322 Acquisition sales - - Sales of disposed businesses that did not qualify for discontinued operations 1,704 8,486 Organic Sales$ 169,912 $ 198,836 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.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes outside the ordinary course of business in our contractual obligations or off-balance sheet arrangements during the first three months of 2021. See our 2020 Form 10-K for a discussion of our contractual obligations and off-balance sheet arrangements. 33 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Preparation of the Company's financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis and the Notes to Consolidated Financial Statements in the Company's 2020 Form 10-K describe the critical accounting estimates and significant accounting policies used in preparing the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates.
RECENT ACCOUNTING STANDARDS
Information regarding recent changes in accounting standards is included in Note 2, Recent Accounting Standards, of the Notes to Condensed Consolidated Financial Statements in this report.
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