UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | April 1, 2022March 31, 2023 |
Or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to ______
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Commission File Number: | 001-35419 |
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KAMAN CORPORATION |
(Exact name of registrant as specified in its charter) |
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Connecticut | 06-0613548 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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1332 Blue Hills Avenue, | Bloomfield, | Connecticut | | | 06002 |
(Address of principal executive offices) | | | (Zip Code) |
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(860) | 243-7100 |
(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock ($1 par value) | | KAMN | | New York Stock Exchange LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ |
| | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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At April 22, 2022,28, 2023, there were | 27,977,50728,175,986 | | shares of Common Stock outstanding. |
PART I
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except share and per share amounts) (Unaudited)
| | | | April 1, 2022 | | December 31, 2021 | | | March 31, 2023 | | December 31, 2022 |
Assets | Assets | | | | | Assets | | | | |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 129,097 | | | $ | 140,800 | | Cash and cash equivalents | | $ | 53,986 | | | $ | 24,154 | |
Accounts receivable, net | Accounts receivable, net | | 68,824 | | | 73,524 | | Accounts receivable, net | | 101,292 | | | 87,659 | |
Contract assets | Contract assets | | 99,360 | | | 112,354 | | Contract assets | | 116,168 | | | 113,182 | |
Contract costs, current portion | | 841 | | | 850 | | |
Inventories | Inventories | | 209,527 | | | 193,100 | | Inventories | | 186,495 | | | 176,468 | |
Income tax refunds receivable | Income tax refunds receivable | | 14,241 | | | 13,832 | | Income tax refunds receivable | | 1,321 | | | 13,981 | |
Other current assets | Other current assets | | 14,506 | | | 12,083 | | Other current assets | | 22,975 | | | 16,114 | |
Total current assets | Total current assets | | 536,396 | | | 546,543 | | Total current assets | | 482,237 | | | 431,558 | |
Property, plant and equipment, net of accumulated depreciation of $256,512 and $251,888, respectively | | 197,073 | | | 197,822 | | |
Property, plant and equipment, net of accumulated depreciation of $274,458 and $268,089, respectively | | Property, plant and equipment, net of accumulated depreciation of $274,458 and $268,089, respectively | | 203,266 | | | 201,606 | |
Operating right-of-use assets, net | Operating right-of-use assets, net | | 10,066 | | | 11,011 | | Operating right-of-use assets, net | | 6,618 | | | 7,391 | |
Goodwill | Goodwill | | 238,074 | | | 240,681 | | Goodwill | | 382,504 | | | 379,854 | |
Other intangible assets, net | Other intangible assets, net | | 134,990 | | | 138,074 | | Other intangible assets, net | | 365,427 | | | 372,331 | |
Deferred income taxes | Deferred income taxes | | 15,601 | | | 15,717 | | Deferred income taxes | | 47,818 | | | 47,385 | |
Contract costs, noncurrent portion | | 10,114 | | | 10,249 | | |
Other assets | Other assets | | 37,941 | | | 38,385 | | Other assets | | 50,788 | | | 51,207 | |
Total assets | Total assets | | $ | 1,180,255 | | | $ | 1,198,482 | | Total assets | | $ | 1,538,658 | | | $ | 1,491,332 | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | Liabilities and Shareholders’ Equity | | | | |
Current liabilities: | Current liabilities: | | | | | Current liabilities: | | | | |
Accounts payable – trade | Accounts payable – trade | | $ | 41,446 | | | $ | 42,134 | | Accounts payable – trade | | $ | 47,194 | | | $ | 48,277 | |
Accrued salaries and wages | Accrued salaries and wages | | 27,668 | | | 38,892 | | Accrued salaries and wages | | 26,258 | | | 31,395 | |
Contract liabilities, current portion | Contract liabilities, current portion | | 2,808 | | | 2,945 | | Contract liabilities, current portion | | 6,044 | | | 4,081 | |
Operating lease liabilities, current portion | Operating lease liabilities, current portion | | 4,333 | | | 4,502 | | Operating lease liabilities, current portion | | 3,121 | | | 3,332 | |
Income taxes payable | Income taxes payable | | 443 | | | 386 | | Income taxes payable | | 170 | | | 393 | |
Other current liabilities | Other current liabilities | | 35,002 | | | 32,076 | | Other current liabilities | | 44,210 | | | 39,097 | |
Total current liabilities | Total current liabilities | | 111,700 | | | 120,935 | | Total current liabilities | | 126,997 | | | 126,575 | |
Long-term debt, excluding current portion, net of debt issuance costs | Long-term debt, excluding current portion, net of debt issuance costs | | 197,297 | | | 189,421 | | Long-term debt, excluding current portion, net of debt issuance costs | | 609,325 | | | 561,061 | |
Deferred income taxes | Deferred income taxes | | 6,137 | | | 6,506 | | Deferred income taxes | | 6,365 | | | 6,079 | |
Underfunded pension | Underfunded pension | | 16,310 | | | 21,786 | | Underfunded pension | | 51,459 | | | 52,309 | |
Contract liabilities, noncurrent portion | Contract liabilities, noncurrent portion | | 16,528 | | | 16,528 | | Contract liabilities, noncurrent portion | | 20,329 | | | 20,515 | |
Operating lease liabilities, noncurrent portion | Operating lease liabilities, noncurrent portion | | 6,380 | | | 7,140 | | Operating lease liabilities, noncurrent portion | | 3,905 | | | 4,534 | |
Other long-term liabilities | Other long-term liabilities | | 39,155 | | | 39,837 | | Other long-term liabilities | | 36,322 | | | 36,280 | |
Commitments and contingencies (Note 15) | | 0 | | 0 | |
Commitments and contingencies (Note 12) | | Commitments and contingencies (Note 12) | |
Shareholders' equity: | Shareholders' equity: | | | | | Shareholders' equity: | | | | |
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding | Preferred stock, $1 par value, 200,000 shares authorized; none outstanding | | — | | | — | | Preferred stock, $1 par value, 200,000 shares authorized; none outstanding | | — | | | — | |
Common stock, $1 par value, 50,000,000 shares authorized; voting; 30,550,123 and 30,434,269 shares issued, respectively | | 30,550 | | | 30,434 | | |
Common stock, $1 par value, 50,000,000 shares authorized; voting; 30,766,419 and 30,640,068 shares issued, respectively | | Common stock, $1 par value, 50,000,000 shares authorized; voting; 30,766,419 and 30,640,068 shares issued, respectively | | 30,766 | | | 30,640 | |
Additional paid-in capital | Additional paid-in capital | | 238,417 | | | 248,153 | | Additional paid-in capital | | 247,812 | | | 245,436 | |
Retained earnings | Retained earnings | | 755,519 | | | 750,445 | | Retained earnings | | 682,812 | | | 688,457 | |
Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | | (115,841) | | | (111,385) | | Accumulated other comprehensive income (loss) | | (154,793) | | | (158,421) | |
Less 2,591,242 and 2,573,896 shares of common stock, respectively, held in treasury, at cost | | (121,897) | | | (121,318) | | |
Less 2,632,334 and 2,607,841 shares of common stock, respectively, held in treasury, at cost | | Less 2,632,334 and 2,607,841 shares of common stock, respectively, held in treasury, at cost | | (122,641) | | | (122,133) | |
Total shareholders’ equity | Total shareholders’ equity | | 786,748 | | | 796,329 | | Total shareholders’ equity | | 683,956 | | | 683,979 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 1,180,255 | | | $ | 1,198,482 | | Total liabilities and shareholders’ equity | | $ | 1,538,658 | | | $ | 1,491,332 | |
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except per share amounts) (Unaudited)
| | | | For the Three Months Ended | | | For the Three Months Ended |
| | | April 1, 2022 | | April 2, 2021 | | | March 31, 2023 | | April 1, 2022 |
Net sales | Net sales | | $ | 158,048 | | | $ | 171,616 | | Net sales | | $ | 194,542 | | | $ | 158,048 | |
Cost of sales | Cost of sales | | 107,461 | | | 118,711 | | Cost of sales | | 126,998 | | | 107,461 | |
Gross profit | Gross profit | | 50,587 | | | 52,905 | | Gross profit | | 67,544 | | | 50,587 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 39,721 | | | 38,128 | | Selling, general and administrative expenses | | 43,698 | | | 39,721 | |
Research and development costs | Research and development costs | | 5,113 | | | 4,226 | | Research and development costs | | 5,907 | | | 5,113 | |
Intangible asset amortization expense | Intangible asset amortization expense | | 2,467 | | | 2,637 | | Intangible asset amortization expense | | 7,152 | | | 2,467 | |
Costs from transition services agreement | | — | | | 705 | | |
Restructuring and severance costs | Restructuring and severance costs | | 169 | | | 1,352 | | Restructuring and severance costs | | 2,190 | | | 169 | |
Loss on sale of business | | — | | | 234 | | |
Net loss on sale of assets | | 60 | | | 10 | | |
Net (gain) loss on sale of assets | | Net (gain) loss on sale of assets | | (31) | | | 60 | |
Operating income | Operating income | | 3,057 | | | 5,613 | | Operating income | | 8,628 | | | 3,057 | |
Interest expense, net | Interest expense, net | | 2,481 | | | 4,251 | | Interest expense, net | | 9,604 | | | 2,481 | |
Non-service pension and post retirement benefit income | | (5,263) | | | (6,643) | | |
Income from transition services agreement | | — | | | (475) | | |
Other expense, net | | 504 | | | 289 | | |
Earnings before income taxes | | 5,335 | | | 8,191 | | |
Income tax expense | | 1,307 | | | 207 | | |
Net earnings | | $ | 4,028 | | | $ | 7,984 | | |
Non-service pension and post-retirement benefit income | | Non-service pension and post-retirement benefit income | | (381) | | | (5,263) | |
Other (income) expense, net | | Other (income) expense, net | | (571) | | | 504 | |
(Loss) earnings before income taxes | | (Loss) earnings before income taxes | | (24) | | | 5,335 | |
Income tax (benefit) expense | | Income tax (benefit) expense | | (5) | | | 1,307 | |
Net (loss) earnings | | Net (loss) earnings | | $ | (19) | | | $ | 4,028 | |
| Earnings per share: | | | | | |
Basic earnings per share | | $ | 0.14 | | | $ | 0.29 | | |
Diluted earnings per share | | $ | 0.14 | | | $ | 0.29 | | |
Earnings (loss) per share: | | Earnings (loss) per share: | | | | |
Basic (loss) earnings per share | | Basic (loss) earnings per share | | $ | (0.00) | | | $ | 0.14 | |
Diluted (loss) earnings per share | | Diluted (loss) earnings per share | | $ | (0.00) | | | $ | 0.14 | |
Average shares outstanding: | Average shares outstanding: | | | | | Average shares outstanding: | | | | |
Basic | Basic | | 27,950 | | | 27,815 | | Basic | | 28,117 | | | 27,950 | |
Diluted | Diluted | | 28,082 | | | 27,867 | | Diluted | | 28,117 | | | 28,082 | |
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
Net earnings | | $ | 4,028 | | | $ | 7,984 | |
Other comprehensive income (loss), net of tax: | | | | |
Foreign currency translation adjustments and other | | (5,218) | | | 15,513 | |
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $228 and $250, respectively | | 762 | | | 842 | |
Other comprehensive (loss) income | | (4,456) | | | 16,355 | |
Comprehensive (loss) income | | $ | (428) | | | $ | 24,339 | |
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
Net (loss) earnings | | $ | (19) | | | $ | 4,028 | |
Other comprehensive income (loss), net of tax: | | | | |
Foreign currency translation adjustments | | 2,538 | | | (5,218) | |
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $434 and $228, respectively | | 1,441 | | | 762 | |
Loss on derivative instruments, net of tax benefit of $106 and $0, respectively | | (351) | | | — | |
Other comprehensive income (loss) | | 3,628 | | | (4,456) | |
Comprehensive income (loss) | | $ | 3,609 | | | $ | (428) | |
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS KAMAN CORPORATION AND SUBSIDIARIES (In thousands) (Unaudited) |
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
Cash flows from operating activities: | | | | |
Net earnings | | $ | 4,028 | | | $ | 7,984 | |
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | | | | |
Depreciation and amortization | | 8,832 | | | 9,209 | |
Amortization of debt issuance costs | | 442 | | | 424 | |
Accretion of convertible notes discount | | — | | | 738 | |
Provision for doubtful accounts | | 135 | | | 173 | |
Loss on sale of business | | — | | | 234 | |
Net loss on sale of assets | | 60 | | | 10 | |
Net loss on derivative instruments | | 449 | | | 590 | |
Stock compensation expense | | 2,081 | | | 1,743 | |
Deferred income taxes | | (1,247) | | | 1,793 | |
Changes in assets and liabilities, excluding effects of acquisitions/divestitures: | | | | |
Accounts receivable | | 4,307 | | | 50,254 | |
Contract assets | | 12,973 | | | (5,704) | |
Contract costs | | 144 | | | (432) | |
Inventories | | (17,285) | | | (13,655) | |
Income tax refunds receivable | | (410) | | | 418 | |
Operating right of use assets | | 915 | | | 799 | |
Other assets | | (2,249) | | | 1,042 | |
Accounts payable - trade | | (612) | | | (14,707) | |
Contract liabilities | | (137) | | | (5,439) | |
Operating lease liabilities | | (899) | | | (908) | |
Acquired retention plan payments | | — | | | (25,108) | |
Other current liabilities | | (10,581) | | | (6,796) | |
Income taxes payable | | 53 | | | 1,173 | |
Pension liabilities | | (1,876) | | | (5,452) | |
Other long-term liabilities | | (140) | | | (798) | |
Net cash used in operating activities | | (1,017) | | | (2,415) | |
Cash flows from investing activities: | | | | |
Proceeds from sale of business, net of cash on hand | | — | | | (3,428) | |
Expenditures for property, plant & equipment | | (6,877) | | | (4,678) | |
Other, net | | 424 | | | 6 | |
Net cash used in investing activities | | (6,453) | | | (8,100) | |
Cash flows from financing activities: | | | | |
Purchase of treasury shares | | (575) | | | (344) | |
Dividends paid | | (5,572) | | | (5,545) | |
Other, net | | 2,112 | | | 1,205 | |
Net cash used in financing activities | | (4,035) | | | (4,684) | |
Net decrease in cash and cash equivalents | | (11,505) | | | (15,199) | |
Effect of exchange rate changes on cash and cash equivalents | | (198) | | | (166) | |
Cash and cash equivalents and restricted cash at beginning of period (See Note 3) | | 140,800 | | | 136,089 | |
Cash and cash equivalents and restricted cash at end of period | | $ | 129,097 | | | $ | 120,724 | |
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
Cash flows from operating activities: | | | | |
Net (loss) earnings | | $ | (19) | | | $ | 4,028 | |
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | | | | |
Depreciation and amortization | | 13,154 | | | 8,832 | |
Amortization of debt issuance costs | | 883 | | | 442 | |
Provision for doubtful accounts | | 805 | | | 135 | |
Net (gain) loss on sale of assets | | (31) | | | 60 | |
Net (gain) loss on derivative instruments | | (283) | | | 449 | |
Stock compensation expense | | 2,003 | | | 2,081 | |
Deferred income taxes | | (669) | | | (1,247) | |
Changes in assets and liabilities, excluding effects of acquisitions/divestitures: | | | | |
Accounts receivable | | (14,177) | | | 4,307 | |
Contract assets | | (2,973) | | | 12,973 | |
Inventories | | (9,596) | | | (17,285) | |
Income tax refunds receivable | | 12,663 | | | (410) | |
Operating right of use assets | | 785 | | | 915 | |
Other assets | | (6,431) | | | (2,105) | |
Accounts payable - trade | | (1,151) | | | (612) | |
Contract liabilities | | 1,776 | | | (137) | |
Operating lease liabilities | | (852) | | | (899) | |
Other current liabilities | | (2,483) | | | (10,581) | |
Income taxes payable | | (222) | | | 53 | |
Pension liabilities | | 936 | | | (1,876) | |
Other long-term liabilities | | 429 | | | (140) | |
Net cash used in operating activities | | (5,453) | | | (1,017) | |
Cash flows from investing activities: | | | | |
Expenditures for property, plant & equipment | | (5,948) | | | (6,877) | |
Acquisition of businesses | | (1,487) | | | — | |
Other, net | | (1,363) | | | 424 | |
Net cash used in investing activities | | (8,798) | | | (6,453) | |
Cash flows from financing activities: | | | | |
Borrowings under revolving credit agreement | | 94,000 | | | — | |
Repayments under revolving credit agreement | | (46,000) | | | — | |
Purchase of treasury shares | | (503) | | | (575) | |
Dividends paid | | (5,606) | | | (5,572) | |
Other, net | | 2,079 | | | 2,112 | |
Net cash provided by (used in) financing activities | | 43,970 | | | (4,035) | |
Net increase (decrease) in cash and cash equivalents | | 29,719 | | | (11,505) | |
Effect of exchange rate changes on cash and cash equivalents | | 113 | | | (198) | |
Cash and cash equivalents at beginning of period | | 24,154 | | | 140,800 | |
Cash and cash equivalents at end of period | | $ | 53,986 | | | $ | 129,097 | |
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
1. BASIS OF PRESENTATION
Following the sale of the Company's Distribution business in 2019, the Company operated as one segment. In the fourth quarter of 2021, our Chief Operating Decision Maker ("CODM") established a new structure for the Company to better align the Company's businesses to support capital allocation plans, portfolio management and growth. This new structure resulted in the introduction of three reportable segments: Engineered Products, Precision Products and Structures. See Note 5, Revenue and Segment Information, for 2022 financial results by segment and a recast of financial results by segment for the three-month fiscal period ended April 2, 2021.
In the opinion of management, the condensed consolidated financial information reflects all adjustments necessary for a fair statement of the Company's financial position, results of operations and cash flows for the interim periods presented, but do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). All such adjustments are of a normal recurring nature, unless otherwise disclosed in this report. Certain amounts in prior year financial statements and notes thereto have been reclassified to conform to current year presentation. The statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
The Company has a calendar year-end; however, its first three fiscal quarters follow a 13-week convention, with each quarter ending on a Friday. The first quarters for 20222023 and 20212022 ended on March 31, 2023, and April 1, 2022, and April 2, 2021, respectively.
2. RECENT ACCOUNTING STANDARDSBUSINESS COMBINATIONS AND INVESTMENTS
Recent Accounting Standards AdoptedAircraft Wheel & Brake
In May 2021,On September 16, 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2021-04, "Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensusCompany acquired all of the FASB Emerging Issues Task Force)".assets and related liabilities of Parker-Hannifin Corporation's ("Parker") Aircraft Wheel and Brake division, of Avon, Ohio, at a purchase price of $442.8 million. Aircraft Wheel and Brake is a leader in the design, development, qualification, manufacturing and assembly, product support and repair of wheels, brakes and related hydraulic components for fixed-wing aircraft and rotorcraft. With this acquisition, the Company has expanded its portfolio of engineered products, broadening the number of offerings available to serve customers across a range of critical applications and has increased the Company's exposure within the aerospace and defense end markets.
This acquisition was accounted for under the acquisition method. The objectiveassets acquired and liabilities assumed were recorded based on their fair values at the date of this standard update isacquisition as follows (in thousands): | | | | | | | | |
Accounts receivable | | $ | 7,635 | |
Contract assets | | 171 | |
Inventories | | 11,246 | |
Property, plant and equipment | | 7,686 | |
Goodwill | | 171,277 | |
Other intangible assets(1) | | 250,500 | |
Contract costs, noncurrent | | 41 | |
Liabilities | | (5,729) | |
Net assets acquired | | 442,827 | |
Less cash received | | — | |
Net consideration | | $ | 442,827 | |
(1)Refer to clarifyNote 3, Business Combinations and reduce diversityInvestments, in an issuer's accountingthe Annual Report on Form 10-K for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The guidance clarifies whether an issuer should accountthe year ended December 31, 2022 for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as either an adjustment to equity and, if so, the related earnings per share ("EPS") effects, if any, or as an expense and, if so, the manner and pattern of recognition. The standard update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption was permitted, including adoption in an interim period. The Company adopted this standard on January 1, 2022. The adoption of this standard update did not have a material impactinformation on the Company's consolidated financial statements.determination of the fair value of identifiable assets.
In August 2020,During the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity". The objectivefirst quarter of this standard update is to simplify the accounting for certain financial instruments with characteristics of liabilities and equity. The update removes certain separation models between a debt component and equity or derivative component for certain convertible instruments. Entities that previously required separate accounting for conversion features will report less interest expense as those conversion features were recorded as debt discounts which were amortized over the term of the debt. In addition, this ASU adds new disclosure requirements for convertible instruments to improve the decision usefulness and relevance of the information being provided to users of financial statements, clarifies the guidance for determining whether a contract qualifies for a scope exception from derivative accounting, and requires the application of the if-converted method when calculating diluted EPS guidance to improve consistency. The standard update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption of the standard was permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. An entity should adopt the guidance as of the beginning of its annual fiscal year and can do so using a modified retrospective method or fully retrospective method of transition. On January 1, 2022,2023, the Company adopted ASU 2020-06 usingpaid Parker an additional $1.5 million for the modified retrospective basisworking capital adjustment, which resulted in a cumulative effect adjustmentan increase to goodwill. All purchase price allocations were finalized within the one-year measurement period and no further adjustments are expected.
The goodwill associated with this acquisition is tax deductible and is the result of expected synergies from combining the operations of the acquired business with the Company's operations and intangible assets that do not qualify for separate recognition, such as an assembled workforce. The goodwill associated with this acquisition was recognized in the Engineered Products segment.
Aircraft Wheel and Brake's results of operations have been included in the Company's financial statements for the period subsequent to the opening balance sheet. The prior period condensed consolidated financial statements have not been retroactively adjustedcompletion of the acquisition on September 16, 2022. Aircraft Wheel and continue to be reported under the accounting standard in effectBrake contributed $18.5 million of revenue and $0.8 million of operating income for the period.three-month fiscal period ended March 31, 2023.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)
Recent Accounting Standards Adopted - continued
The cumulative effect of the adjustments recorded to the opening balance sheet on January 1, 2022 for the adoption of ASU 2020-06 was as follows:
| | | | | | | | | | | | | | | | | | | | |
in thousands | | Balance at December 31, 2021 | | Adjustments due to ASU 2020-06 | | Balance at January 1, 2022 |
Assets | | | | | | |
Deferred income taxes | | $ | 15,717 | | | $ | 1,770 | | | $ | 17,487 | |
| | | | | | |
Liabilities | | | | | | |
Long-term debt, excluding current portion, net of debt issuance costs | | $ | 189,421 | | | $ | 7,624 | | | $ | 197,045 | |
| | | | | | |
Equity | | | | | | |
Additional paid-in capital | | $ | 248,153 | | | $ | (12,489) | | | $ | 235,664 | |
Retained earnings | | 750,445 | | | 6,635 | | | 757,080 | |
Beginning in 2022, the Company will calculate diluted EPS using the if-converted method for its convertible debt instruments, which is not expected to have a material impact on the consolidated results. Historically, the Company used the treasury stock method to calculate diluted EPS for its convertible debt instruments. In the first quarter of 2022, there was no impact as diluted EPS calculated to $0.14 using both the if-converted method and treasury stock method.
Refer to Note 13, Debt, for further information on the Company's convertible notes.
Recent Accounting Standards Yet to be Adopted
In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method". The amendments in this standard update expand the current last-of-layer method of hedge accounting that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. This standard update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted on any date on or after the issuance of this update for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period. If an entity adopts the amendments in an interim period, the effect of adopting the amendments related to basis adjustments should be reflected as of the beginning of the fiscal year of adoption. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements; however, the impact will be dependent on future hedging activity.
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers". The amendments in this standard update address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination and require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. This standard update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the standard is permitted, including adoption in an interim period. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements; however, the impact will be dependent on future business combinations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended April 1, 2022 and April 2, 2021
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)
Recent Accounting Standards Yet to be Adopted - continued
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The objective of the standard is to address operational challenges likely to arise in accounting for contract modifications and hedge accounting due to reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The standard update is effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by topic or industry subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Once elected for a topic or industry subtopic, the amendments in this standard update must be applied prospectively for all eligible contract modifications for that topic or industry subtopic. An entity may elect to apply the amendments for eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. If an entity elects to apply any of the amendments for an eligible hedging relationship existing as of the beginning of the interim period that includes March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of that interim period. If an entity elects to apply any of the amendments for a new hedging relationship entered into between the beginning of the interim period that includes March 12, 2020 and March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of the hedging relationship. In December 2021, the Company amended its credit agreement to move its LIBOR benchmark for non-USD borrowings to other non-USD benchmark rates. Future USD borrowings under this current Credit Agreement will continue be based on LIBOR. The impact of the adoption of this standard update is dependent on the Company's contracts modifications as a result of reference rate reform; however, the Company does not expect the adoption of the amendments associated with hedging relationships to have a material impact on the Company's consolidated financial statements.
Subsequent to the issuance of ASU 2020-04, the FASB issued the following update: ASU 2021-01, "Reference Rate Reform (Topic 848) - Scope". The amendments in this update affect the guidance within ASU 2020-04 and are being assessed with ASU 2020-04.
3. DISPOSALS
UK Composites Business
In the fourth quarter of 2020, the Company received approval from its Board of Directors to sell its United Kingdom ("UK") Composites division. The sale of the UK Composites business did not meet the criteria set forth in ASC 205-20 for discontinued operations as it did not reflect a significant shift in the Company's strategy. As a result of the approved plan, the UK Composites division met the criteria set forth in ASC 205-20 for held for sale presentation at December 31, 2020. At December 31, 2020, the assets of the UK Composites business were considered impaired as the estimated fair value of the disposal group was lower than the estimated carrying value of the UK Composites business. As such, the assets of the UK Composites business were written off and the related liabilities of the UK division to be sold were reclassified to liabilities held for sale, as of December 31, 2020 on the Company's Consolidated Balance Sheets. The Company recorded an impairment loss of $36.3 million in the year ended December 31, 2020. The Company sold its UK Composites division in a transaction that closed on February 2, 2021. In the three-month fiscal period ended April 2, 2021, when the sale was finalized, the Company recorded an additional loss of $0.2 million, resulting in a total loss on the sale of the UK Composites business of $36.5 million.
Cash and cash equivalents and restricted cash at the beginning of the period on the Company's Condensed Consolidated Statement of Cash Flows for the three-month fiscal period ended April 2, 2021 included $6.6 million of cash that was included in the UK Composites business disposal group. Given the assets of the disposal group were recognized net of the impairment recorded in the year ended December 31, 2020, such amounts were not reflected on the Company's Condensed Consolidated Balance Sheet at December 31, 2020.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended April 1, 2022 and April 2, 2021
(Unaudited)
3. DISPOSALS (CONTINUED)
Distribution Business
On August 26, 2019, the Company completed the sale of its Distribution business. Upon closing, the Company entered into a transition services agreement ("TSA") with the buyer, pursuant to which the Company agreed to support the information technology ("IT"), human resources and benefits, tax and treasury functions of the Distribution business for six to twelve months. The buyer exercised an option to extend the support period for up to one additional year for certain services. During the third quarter of 2021, the TSA expired and all services were completed as of the end of the period. As such, there was no activity associated with the TSA in 2022. Through the term of the TSA, the Company incurred $18.9 million in costs and earned $13.0 million in income associated with the TSA. Of these amounts, $0.7 million in costs were incurred and $0.5 million in income was earned in three-month fiscal period ended April 2, 2021. These amounts were included in costs from transition services agreement and income from transition services agreement on the Company's Condensed Consolidated Statements of Operations, respectively.
Since the sale of the Distribution business, cash outflows from the Company to its former Distribution business totaled $8.7 million through April 1, 2022, which primarily related to Distribution employee and employee-related costs incurred prior to the sale. There were no cash flows from the Company to its former Distribution business in the three-month fiscal periods ended April 1, 2022 and April 2, 2021. Since the sale of the Distribution business, cash inflows from the Company's former Distribution business to the Company totaled $18.9 million through April 1, 2022, which primarily related to cash received for services performed under the TSA and the $5.2 million working capital adjustment settled in the first quarter of 2020. Cash inflows from the Company's former Distribution business received in the three-month fiscal period ended April 2, 2021 totaled $0.5 million. Cash inflows from the former Distribution business were not material in 2022.
4. BUSINESS COMBINATIONS
On January 3, 2020, the Company acquired all of the equity interests of Bal Seal Engineering ("Bal Seal"), of Foothill Ranch, California, at a purchase price of $317.5 million. Upon closing, the Company funded $24.7 million associated with employee retention plans at Bal Seal. This amount and related interest was included in restricted cash on the Company's Consolidated Balance Sheets as of December 31, 2020. Eligible participants received an allocation of the escrow balance one year following the acquisition date, which was reflected in the Company's cash flows from operating activities for the three-month fiscal period ended April 2, 2021.
5. REVENUE AND SEGMENT INFORMATION
The Company is organized based upon the nature of its products and services, and is composed of three operating segments, each overseen by a segment manager. These segments are reflective of how the Company’s Chief Executive Officer, who is its CODM,Chief Operating Decision Maker ("CODM"), reviews operating results for the purposes of allocating resources and assessing performance. The Company has not aggregated operating segments for purposes of identifying reportable segments.
The Engineered Products segment serves the aerospace and defense, industrial and medical markets providing sophisticated proprietary aircraft bearings and components; super precision, miniature ball bearings; and proprietary spring energized seals, springs and contacts.contacts; and wheels, brakes and related hydraulic components for helicopters and fixed-wing and unmanned aerial vehicle ("UAV") aircraft.
The Precision Products segment serves the aerospace and defense markets providing precision safe and arming solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; restoration, modification and support of the Company's SH-2G Super Seasprite maritime helicopters; manufacture and support of the heavy lift K-MAX®K-MAX® manned helicopter,helicopter; and development of the K-MAX TITAN unmanned aerial system and the KARGO UAV unmanned aerial system, a purpose built autonomous medium lift logistics vehicle.
The Structures segment serves the aerospace and defense and medical end markets providing sophisticated complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft, and medical imaging solutions.
Summarized financial information by business segment is as follows:
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
In thousands | | | | |
Net sales: | | | | |
Engineered Products | | $ | 123,326 | | | $ | 81,452 | |
Precision Products | | 37,971 | | | 47,549 | |
Structures | | 33,245 | | | 29,047 | |
Net sales | | $ | 194,542 | | | $ | 158,048 | |
Operating income (loss): | | | | |
Engineered Products | | $ | 19,356 | | | $ | 11,042 | |
Precision Products | | 1,674 | | | 3,409 | |
Structures | | (237) | | | (617) | |
Corporate expense | | (10,006) | | | (10,548) | |
Other unallocated expenses, net(1) | | (2,159) | | | (229) | |
Operating income | | $ | 8,628 | | | $ | 3,057 | |
Interest expense, net | | 9,604 | | | 2,481 | |
Non-service pension and post retirement benefit income, net | | (381) | | | (5,263) | |
Other (income) expense, net | | (571) | | | 504 | |
(Loss) earnings before income taxes | | $ | (24) | | | $ | 5,335 | |
(1) Other unallocated expenses, net include restructuring and severance costs and net (gain) loss on sale of assets.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
5.3. REVENUE AND SEGMENT INFORMATION (CONTINUED)
Summarized financial information by business segment is as follows:
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
In thousands | | | | |
Net sales: | | | | |
Engineered Products | | $ | 81,452 | | | $ | 71,779 | |
Precision Products | | 47,549 | | | 60,533 | |
Structures | | 29,047 | | | 39,304 | |
Net sales | | $ | 158,048 | | | $ | 171,616 | |
Operating income (loss): | | | | |
Engineered Products | | $ | 11,042 | | | $ | 4,906 | |
Precision Products | | 3,409 | | | 13,053 | |
Structures | | (617) | | | 320 | |
Corporate expense | | (10,548) | | | (10,365) | |
Other unallocated expenses, net(1) | | (229) | | | (2,301) | |
Operating income | | $ | 3,057 | | | $ | 5,613 | |
(1) Other unallocated expenses, net include costs from the TSA, restructuring and severance costs, loss on sale of business, and net loss on sale of assets.
Disaggregation of Revenue
The following table disaggregatestables disaggregate segment revenue by major product line:
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | March 31, 2023 |
| | Engineered Products | | Precision Products | | Structures | | Total | | Engineered Products | | Precision Products | | Structures | | Total |
In thousands | In thousands | | | | | | | | | In thousands | | | | | | | | |
Defense | Defense | | $ | 9,653 | | | $ | 5,322 | | | $ | 16,255 | | | $ | 31,230 | | Defense | | $ | 20,023 | | | $ | 5,586 | | | $ | 18,805 | | | $ | 44,414 | |
Safe and Arm Devices | Safe and Arm Devices | | — | | | 37,322 | | | — | | | 37,322 | | Safe and Arm Devices | | — | | | 26,242 | | | — | | | 26,242 | |
Commercial, Business & General Aviation | Commercial, Business & General Aviation | | 32,378 | | | 3,767 | | | 10,813 | | | 46,958 | | Commercial, Business & General Aviation | | 59,685 | | | 5,013 | | | 12,504 | | | 77,202 | |
Medical | Medical | | 21,149 | | | — | | | 1,979 | | | 23,128 | | Medical | | 24,935 | | | — | | | 1,936 | | | 26,871 | |
Industrial & Other | Industrial & Other | | 18,272 | | | 1,138 | | | — | | | 19,410 | | Industrial & Other | | 18,683 | | | 1,130 | | | — | | | 19,813 | |
Total revenue | Total revenue | | $ | 81,452 | | | $ | 47,549 | | | $ | 29,047 | | | $ | 158,048 | | Total revenue | | $ | 123,326 | | | $ | 37,971 | | | $ | 33,245 | | | $ | 194,542 | |
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 2, 2021 | | April 1, 2022 |
| | Engineered Products | | Precision Products | | Structures | | Total | | Engineered Products | | Precision Products | | Structures | | Total |
In thousands | In thousands | | | | | | | | | In thousands | | | | | | | | |
Defense | Defense | | $ | 11,228 | | | $ | 6,994 | | | $ | 25,389 | | | $ | 43,611 | | Defense | | $ | 9,653 | | | $ | 5,322 | | | $ | 16,255 | | | $ | 31,230 | |
Safe and Arm Devices | Safe and Arm Devices | | — | | | 41,586 | | | — | | | 41,586 | | Safe and Arm Devices | | — | | | 37,322 | | | — | | | 37,322 | |
Commercial, Business & General Aviation | Commercial, Business & General Aviation | | 25,072 | | | 10,902 | | | 11,984 | | | 47,958 | | Commercial, Business & General Aviation | | 32,378 | | | 3,767 | | | 10,813 | | | 46,958 | |
Medical | Medical | | 18,652 | | | — | | | 1,931 | | | 20,583 | | Medical | | 21,149 | | | — | | | 1,979 | | | 23,128 | |
Industrial & Other | Industrial & Other | | 16,827 | | | 1,051 | | | — | | | 17,878 | | Industrial & Other | | 18,272 | | | 1,138 | | | — | | | 19,410 | |
Total revenue | Total revenue | | $ | 71,779 | | | $ | 60,533 | | | $ | 39,304 | | | $ | 171,616 | | Total revenue | | $ | 81,452 | | | $ | 47,549 | | | $ | 29,047 | | | $ | 158,048 | |
The following table disaggregates total revenue by product types.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 |
| | Engineered Products | | Precision Products | | Structures | | Total |
Original Equipment Manufacturer | | 45 | % | | 2 | % | | 17 | % | | 64 | % |
Aftermarket | | 18 | % | | 5 | % | | — | % | | 23 | % |
Safe and Arm Devices | | — | % | | 13 | % | | — | % | | 13 | % |
Total revenue | | 63 | % | | 20 | % | | 17 | % | | 100 | % |
| | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 |
| | Engineered Products | | Precision Products | | Structures | | Total |
Original Equipment Manufacturer | | 41 | % | | 2 | % | | 18 | % | | 61 | % |
Aftermarket | | 11 | % | | 4 | % | | — | % | | 15 | % |
Safe and Arm Devices | | — | % | | 24 | % | | — | % | | 24 | % |
Total revenue | | 52 | % | | 30 | % | | 18 | % | | 100 | % |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
5.3. REVENUE AND SEGMENT INFORMATION (CONTINUED)
Disaggregation of Revenue - continued
COVID-19
The impact of the novel coronavirus (“COVID-19”) and the precautionary measures instituted by governments and businesses to mitigate the spread, including limiting non-essential travel, have contributed to a general slowdown in the global economy. The Company has implemented strategies to limit the risk to its operations with a continued focus on the health of its employees and the satisfaction of its customers’ requirements. Despite all of these efforts to mitigate the risks associated with COVID-19, the effects of the pandemic have adversely impacted our commercial end markets, more specifically Commercial, Business and General Aviation customers. Management is encouraged by the recoveries for these products and the strong order intake seen in the first three months of 2022. The extent and duration of time to which COVID-19 may adversely impact the Company depends on future developments, which continue to be uncertain and unpredictable.
The following table disaggregates total revenue by product types.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 |
| | Engineered Products | | Precision Products | | Structures | | Total |
Original Equipment Manufacturer | | 41 | % | | 2 | % | | 18 | % | | 61 | % |
Aftermarket | | 11 | % | | 4 | % | | — | % | | 15 | % |
Safe and Arm Devices | | — | % | | 24 | % | | — | % | | 24 | % |
Total revenue | | 52 | % | | 30 | % | | 18 | % | | 100 | % |
| | | | | | | | |
| | For the Three Months Ended |
| | April 2, 2021 |
| | Engineered Products | | Precision Products | | Structures | | Total |
Original Equipment Manufacturer | | 32 | % | | 8 | % | | 23 | % | | 63 | % |
Aftermarket | | 10 | % | | 3 | % | | — | % | | 13 | % |
Safe and Arm Devices | | — | % | | 24 | % | | — | % | | 24 | % |
Total revenue | | 42 | % | | 35 | % | | 23 | % | | 100 | % |
Disaggregation of Research and Development Costs
The following table presents research and development costs by segment:
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
In thousands | | | | |
Engineered Products | | $ | 2,243 | | | $ | 2,822 | |
Precision Products | | 2,803 | | | 1,402 | |
Structures | | 67 | | | 2 | |
Total research and development costs | | $ | 5,113 | | | $ | 4,226 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended April 1, 2022 and April 2, 2021
(Unaudited)
5. REVENUE AND SEGMENT INFORMATION (CONTINUED) | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
In thousands | | | | |
Engineered Products | | $ | 2,439 | | | $ | 2,243 | |
Precision Products | | 3,458 | | | 2,803 | |
Structures | | 10 | | | 67 | |
Total research and development costs | | $ | 5,907 | | | $ | 5,113 | |
Other
For contracts in which revenue is recognized over time, the Company performs detailed quarterly reviews of the progress and execution of its performance obligations under these contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables. Based upon these reviews, the Company will record the effects of adjustments in profit estimates each period. If at any time management determines that in the case of a particular contract total costs will exceed total contract revenue, a provision for the entire anticipated contract loss is recorded at that time.
Net changes in revenue associated with cost growth on the Company's over time contracts were as follows:
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 | | March 31, 2023 | | April 1, 2022 |
In thousands | In thousands | | | | | In thousands | | | | |
Net change in revenue due to change in profit estimates | | $ | 905 | | | $ | 2,865 | | |
Net (decrease) increase in revenue due to change in profit estimates | | Net (decrease) increase in revenue due to change in profit estimates | | $ | (1,269) | | | $ | 905 | |
In the three-month fiscal periodsperiod ended April 1, 2022 and April 2, 2021,March 31, 2023, the net increasesdecrease in revenue werewas primarily related to cost growth on certain structures and precision products contracts, partially offset by favorable cost performance on the joint programmable fuze ("JPF") contract with the U.S. Government ("USG"), and the JASSM contract. In the three-month fiscal period ended April 1, 2022, the net increase in revenue was primarily related to favorable cost performance on the JPF contract with the USG, partially offset by cost growth on certain structures programs and legacy fuzing contracts.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022
(Unaudited)
3. REVENUE AND SEGMENT INFORMATION (CONTINUED)
Unfulfilled Performance Obligations
Unfulfilled performance obligations ("backlog") represents the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts. Backlog at April 1, 2022March 31, 2023 and December 31, 2021,2022, and the portion of backlog the Company expects to recognize revenue on over the next twelve months is as follows:
| | | | | | | | | | | | | | |
| | April 1, 2022(1) | | December 31, 2021 |
In thousands | | | | |
Backlog | | $ | 705,023 | | | $ | 700,923 | |
| | | | | | | | | | | | | | |
| | March 31, 2023(1) | | December 31, 2022 |
| | (in thousands) |
Engineered Products | | $ | 369,713 | | | $ | 322,452 | |
Precision Products | | 111,750 | | | 134,903 | |
Structures | | 251,531 | | | 263,581 | |
Total Backlog | | $ | 732,994 | | | $ | 720,936 | |
(1) The Company expects to recognize revenue on approximately 62%73% of backlog as of April 1, 2022March 31, 2023 over the next twelve months.
6.4. RESTRUCTURING AND SEVERANCE COSTS
Cost Reduction Initiative
The Company continues to evaluate its cost structure with the objective of a lean organizational structure that improves operational efficiencyRestructuring and provides a scalable infrastructure which facilitates future growth opportunities. We have identified workforce reductions and other reductions in certain general and administrative expenses to support the cost savings initiative. In the three-month fiscal periods ended April 1, 2022 and April 2, 2021, the Company incurred $0.2 million and $1.4 million in severance costs associated with these cost reduction efforts, which wereare included in restructuring and severance costs on the Company's Condensed Consolidated Statements of Operations.Operations and other unallocated expenses, net within in Note 3, Revenue and Segment Information.
Transformation Restructuring
In December 2022, the Company began a review of all businesses and programs to increase efficiencies, improve working capital management and focus on sustainable and consistent revenue and profit generating activities. As a result of this review, the Company identified areas to reduce annualized costs in the Precision Products segment and at Corporate through streamlining processes, consolidating the production of fuzes for the JPF program at its Middletown facility, discontinuing K-MAX® helicopter production and right-sizing the Company's total cost structure. In the three-month fiscal period ended March 31, 2023, the Company incurred $2.2 million in severance costs associated with these actions. Of this amount, $0.3 million was related to share-based compensation expense.
The following table summarizes the accrual balances by cost type for the restructuring actions:
| | | | | | | | | | | | | | | | | | | | |
| | Severance | | Other(1) | | Total |
In thousands | | | | | | |
Restructuring accrual balance at December 31, 2022(2) | | $ | 6,629 | | | $ | — | | | $ | 6,629 | |
Provision | | 1,730 | | | 136 | | | 1,866 | |
Cash payments | | (3,616) | | | (136) | | | (3,752) | |
Changes in foreign currency exchange rates | | 25 | | | — | | | 25 | |
Restructuring accrual balance at March 31, 2023(2) | | $ | 4,768 | | | $ | — | | | $ | 4,768 | |
(1) Includes costs associated with the consolidation of facilities.
(2) Of the above accrual balance, $1.0 million was included in other long-term liabilities on the Company's Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022. The remainder is included in other current liabilities.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
7.5. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
| | | | April 1, 2022 | | December 31, 2021 | | | March 31, 2023 | | December 31, 2022 |
In thousands | In thousands | | | | | In thousands | | | | |
Trade receivables | Trade receivables | | $ | 24,239 | | | $ | 19,228 | | Trade receivables | | $ | 41,989 | | | $ | 31,126 | |
U.S. Government contracts: | U.S. Government contracts: | | U.S. Government contracts: | |
Billed | Billed | | 13,386 | | | 14,748 | | Billed | | 15,576 | | | 14,150 | |
Cost and accrued profit - not billed | Cost and accrued profit - not billed | | 149 | | | 167 | | Cost and accrued profit - not billed | | 1,588 | | | 661 | |
Commercial and other government contracts | Commercial and other government contracts | | Commercial and other government contracts | |
Billed | Billed | | 31,486 | | | 36,787 | | Billed | | 42,615 | | | 41,520 | |
Cost and accrued profit - not billed | Cost and accrued profit - not billed | | 900 | | | 4,141 | | Cost and accrued profit - not billed | | 2,268 | | | 2,268 | |
Less allowance for doubtful accounts | Less allowance for doubtful accounts | | (1,336) | | | (1,547) | | Less allowance for doubtful accounts | | (2,744) | | | (2,066) | |
Accounts receivable, net | Accounts receivable, net | | $ | 68,824 | | | $ | 73,524 | | Accounts receivable, net | | $ | 101,292 | | | $ | 87,659 | |
The Company performs ongoing evaluations of its customers’ current creditworthiness, as determined by the review of their credit information, to determine if events have occurred subsequent to the recognition of revenue and the related receivable that provide evidence that such receivable will be realized in an amount less than that recognized at the time of sale. Estimates of credit losses are based on historical losses, current economic conditions, geographic considerations, and in some cases, evaluating specific customer accounts for risk of loss.
The following table summarizes the activity in the allowance for doubtful accounts in the three-month fiscal period ended April 1, 2022:March 31, 2023:
| | | | | | | | |
In thousands | | |
Balance at December 31, 20212022 | | $ | (1,547)(2,066) | |
Provision | | (135)(805) | |
Amounts written off | | 13757 | |
Recoveries | | 20871 | |
Changes in foreign currency exchange rates | | 1 (1) | |
Balance at April 1, 2022March 31, 2023 | | $ | (1,336)(2,744) | |
AccountsThere were no amounts included in accounts receivable, net includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:
| | | | | | | | | | | | | | |
| | April 1, 2022 | | December 31, 2021 |
In thousands | | | | |
Contract changes, negotiated settlements and claims for unanticipated contract costs | | $ | 900 | | | $ | 900 | |
costs at March 31, 2023 and December 31, 2022.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
8.6. CONTRACT ASSETS, CONTRACT COSTS AND CONTRACT LIABILITIES
Activity related to contract assets, contract costs and contract liabilities was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | $ Change | | % Change |
In thousands | | | | | | | | |
Contract assets | | $ | 116,168 | | | $ | 113,182 | | | $ | 2,986 | | | 2.6 | % |
| | | | | | | | |
Contract costs, current portion(1) | | $ | 531 | | | $ | 695 | | | $ | (164) | | | (23.6) | % |
Contract costs, noncurrent portion(2) | | $ | 693 | | | $ | 673 | | | $ | 20 | | | 3.0 | % |
| | | | | | | | |
Contract liabilities, current portion | | $ | 6,044 | | | $ | 4,081 | | | $ | 1,963 | | | 48.1 | % |
Contract liabilities, noncurrent portion | | $ | 20,329 | | | $ | 20,515 | | | $ | (186) | | | (0.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 1, 2022 | | December 31, 2021 | | $ Change | | % Change |
In thousands | | | | | | | | |
Contract assets | | $ | 99,360 | | | $ | 112,354 | | | $ | (12,994) | | | (11.6) | % |
| | | | | | | | |
Contract costs, current portion | | $ | 841 | | | $ | 850 | | | $ | (9) | | | (1.1) | % |
Contract costs, noncurrent portion | | $ | 10,114 | | | $ | 10,249 | | | $ | (135) | | | (1.3) | % |
| | | | | | | | |
Contract liabilities, current portion | | $ | 2,808 | | | $ | 2,945 | | | $ | (137) | | | (4.7) | % |
Contract liabilities, noncurrent portion | | $ | 16,528 | | | $ | 16,528 | | | $ | — | | | — | % |
(1) Contract costs, current portion are included within other current assets on the Company's Condensed Consolidated Balance Sheets.(2) Contract costs, noncurrent portion are included within other assets on the Company's Condensed Consolidated Balance Sheets.
Contract Assets
The decreaseincrease in contract assets was primarily due to higher amounts billed in the current period compared to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations for work performed and not yet billed on certain programs with Boeing and the AH-1 blade program compared to lower amounts billed in the current period on the JPF program, the KAflex® program and certain structures programs.program. There were no significant impairment losses related to the Company's contract assets during the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021.2022.
ContractThere were no amounts included in contract assets includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts were as follows:
| | | | | | | | | | | | | | |
| | April 1, 2022 | | December 31, 2021 |
In thousands | | | | |
Contract changes, negotiated settlements and claims for unanticipated contract costs | | $ | 695 | | | $ | 682 | |
costs at March 31, 2023 and December 31, 2022.
Contract Costs
At April 1, 2022March 31, 2023 and December 31, 2021,2022, costs to fulfill a contract were $11.0$1.2 million and $11.1$1.4 million, respectively. These amounts were included in contract costs,other current portionassets and contract costs, noncurrent portionother assets on the Company's Condensed Consolidated Balance Sheets at April 1, 2022March 31, 2023 and December 31, 2021.2022. There were no costs to obtain a contract at April 1, 2022March 31, 2023 and December 31, 2021.2022.
Contract costs, current portion at April 1, 2022 remained relatively flatMarch 31, 2023 decreased compared to the balance at December 31, 2021.2022. This was primarily attributable to the amortization of contract costs, mostly offset by the reclassification of a portion of costs to fulfill certain structures programs from contract costs, noncurrent portion. For the three-month fiscal periods ended April 1, 2022 and April 2, 2021, amortizationcosts. Amortization of contract costs was $0.1 million for the three-month fiscal periods ended March 31, 2023 and $1.9 million, respectively.April 1, 2022.
The decrease in contractContract costs, noncurrent portion was attributableat March 31, 2023 remained relatively flat when compared to the reclassification of costs on certain structures programs to contract costs, current portion.balance at December 31, 2022.
Contract Liabilities
The decrease in contractContract liabilities, current portion at March 31, 2023 increased compared to the balance at December 31, 2022. This was primarily due to revenue recognized on our seals, springs and contacts, partially offset by advances received for the SH-2G program forwith New Zealand.Zealand and the reclassification of liabilities on the FireburstTM enhanced fuzing capability program from contract liabilities, noncurrent portion, partially offset by revenue recognized on the JASSM® program. Revenue recognized related to contract liabilities, current portion was $0.5 million and $9.4 million in the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021, respectively.
2022.
Contract liabilities, noncurrent portion at March 31, 2023 decreased compared to the balance at December 31, 2022 due to the reclassification of liabilities on the FireBurstTM enhanced fuzing capability program to contract liabilities, current portion, partially offset by advances received for the JPF program. For the three-month fiscal periods ended March 31, 2023 and April 1, 2022, the Company did not recognize revenue against contract liabilities, noncurrent portion. Refer to Note 12, Commitments and Contingencies, for further information on the Company's offset agreements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
8. CONTRACT ASSETS, CONTRACT COSTS AND CONTRACT LIABILITIES (CONTINUED)
Contract Liabilities - continued
Contract liabilities, noncurrent portion at April 1, 2022 remained flat compared to the balance at December 31, 2021. For the three-month fiscal periods ended April 1, 2022 and April 2, 2021, the Company did not recognize revenue against contract liabilities, noncurrent portion.
9.7. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
•Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following table presents the carrying value and fair value of financial instruments that are not carried at fair value:
| | | April 1, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
In thousands | In thousands | | | | | | | | | In thousands | | | | | | | | |
Debt (1) | Debt (1) | | $ | 199,500 | | | $ | 203,470 | | | $ | 191,876 | | | $ | 213,222 | | Debt (1) | | $ | 610,500 | | | $ | 592,533 | | | $ | 562,500 | | | $ | 547,393 | |
(1) These amounts are classified within Level 2.
The above fair values were computed based on quoted market prices and discounted future cash flows (observable inputs), as applicable. Differences from carrying values are attributable to interest rate changes subsequent to when the transactions occurred.
The fair values of cash and cash equivalents, accounts receivable, net and accounts payable - trade approximate their carrying amounts due to the short-term maturities of these instruments. The Company's cash and cash equivalents at April 1, 2022March 31, 2023 and December 31, 20212022 included $65.5$35.1 million and $0.1 million, respectively, of Level 1 money market funds in both periods.funds.
Recurring Fair Value Measurements
The Company holds derivative instruments for foreign exchange contracts and interest rate swaps that are measured at fair value using observable market inputs such as forward rates and its counterparties’ credit risks. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy. At April 1, 2022March 31, 2023, the interest rate swaps were included in other current liabilities and other long-term liabilities on the Company's Condensed Consolidated Balance Sheets. At March 31, 2023 and December 31, 2021,2022, the derivative instrumentsforeign exchange contracts were included in other current assets and other current liabilities on the Company's Condensed Consolidated Balance Sheets. Based on the Company's continued ability to trade and enter into forward contracts and interest rate swaps, the Company considers the markets for its fair value instruments to be active.
The Company evaluated the credit risk associated with the counterparties to these derivative instruments and determined that as of April 1, 2022,March 31, 2023, such credit risks had not had an adverse impact on the fair value of these instruments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended April 1, 2022 and April 2, 2021
(Unaudited)
10.8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to fluctuations in foreign currency exchange rates and interest rates. Derivative financial instruments are recognized on the Condensed Consolidated Balance Sheets as either assets or liabilities and are measured at fair value. Changes in the fair values of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is effective as part of a hedged transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive income (loss) are subsequently included in earnings in the periods in which earnings are affected by the hedged item. The Company does not use derivative instruments for speculative purposes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022
(Unaudited)
8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Cash Flow Hedges
Interest Rate Swaps
The Company's Credit Agreement (as defined in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below) contains floating rate obligations and is subject to interest rate fluctuations. In late 2022, the Company entered into interest rate swap agreements with a notional value of $200.0 million, effective January 1, 2023, for the purposes of hedging the eight quarterly variable-rate Credit Agreement interest payments due in 2023 and 2024. These interest rate swap agreements were designated as cash flow hedges and intended to manage interest rate risk associated with the Company's variable-rate borrowings and minimize the impact on earnings and cash flows of interest rate fluctuations attributable to changes in the Secured Overnight Financing Rate. These interest rate swaps were not material to the Company's Condensed Consolidated Financial Statements for the three-month fiscal period ended March 31, 2023. Over the next twelve months, the income related to cash flow hedges expected to be reclassified from other comprehensive income is $0.3 million.
Forward Exchange Contracts
The Company holds forward exchange contracts designed to hedge forecasted transactions denominated in foreign currencies and to minimize the impact of foreign currency fluctuations on the Company’s earnings and cash flows. Some of these contracts are designated as cash flow hedges. The Company will include in earnings amounts currently included in accumulated other comprehensive income (loss) upon recognition of cost of sales related to the underlying transaction. These contracts were not material to the Company's Condensed Consolidated Balance Sheets as of April 1, 2022March 31, 2023 and December 31, 2021.2022. The activity related to these contracts was not material to the Company's Condensed Consolidated Financial Statements for the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021.2022.
11.9. INVENTORIES
Inventories consisted of the following:
| | | | April 1, 2022 | | December 31, 2021 | | | March 31, 2023 | | December 31, 2022 |
In thousands | In thousands | | | | | In thousands | | | | |
Raw materials | Raw materials | | $ | 21,119 | | | $ | 19,123 | | Raw materials | | $ | 27,595 | | | $ | 25,798 | |
Contracts and other work in process (including certain general stock materials) | Contracts and other work in process (including certain general stock materials) | | 151,927 | | | 138,737 | | Contracts and other work in process (including certain general stock materials) | | 124,953 | | | 110,609 | |
Finished goods | Finished goods | | 36,481 | | | 35,240 | | Finished goods | | 33,947 | | | 40,061 | |
Inventories | Inventories | | $ | 209,527 | | | $ | 193,100 | | Inventories | | $ | 186,495 | | | $ | 176,468 | |
Inventories includeThere were no amounts included in inventories associated with matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts were as follows:
| | | | | | | | | | | | | | |
| | April 1, 2022 | | December 31, 2021 |
In thousands | | | | |
Contract changes, negotiated settlements and claims for unanticipated contract costs | | $ | 622 | | | $ | 552 | |
costs at March 31, 2023 and December 31, 2022.
At April 1, 2022March 31, 2023 and December 31, 2021, $73.52022, $25.6 million and $69.2$24.7 million, respectively, of K-MAX® inventory was included in contracts and other work in process inventory and finished goods on the Company's Condensed Consolidated Balance Sheets. Management believes that approximately $41.2$23.4 million of the K-MAX® inventory will be sold after April 1, 2023,March 31, 2024, based upon the anticipation of additional aircraft manufacturing and the requirements to support the fleet for the foreseeable future. In December 2022, the Company began a review of all businesses and programs to increase efficiencies, improving working capital management and focus on sustainable and consistent revenue and profit generating activities. As a result, the Company determined it would discontinue K-MAX® aircraft production and wrote off $44.5 million of inventory associated with the program as of December 31, 2022. There were no additional inventory write-offs for the period ended March 31, 2023; however, production material for the K-MAX® includes long lead parts, which the Company evaluates for alternative use as received. Any write-offs related to these parts are not expected to have a material adverse effect on the Company's results of operations or financial position.
At April 1, 2022March 31, 2023 and December 31, 2021, $5.72022, $6.4 million and $6.0$6.2 million, respectively, of SH-2G(I) inventory was included in contracts and other work in process inventory on the Company's Condensed Consolidated Balance Sheets. Management believes that approximately $4.1$5.3 million of the SH-2G(I) inventory will be sold after April 1, 2023.March 31, 2024. This balance represents spares requirements and inventory to be used on SH-2G programs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
12.10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company:
| | | Engineered Products | | Precision Products | | Structures | | Total | | Engineered Products | | Precision Products | | Structures | | Total |
In thousands | In thousands | | | | | | | | | In thousands | | | | | | | | |
Gross balance at December 31, 2021 | | $ | 199,306 | | | $ | 41,375 | | | $ | 66,559 | | | $ | 307,240 | | |
Gross balance at December 31, 2022 | | Gross balance at December 31, 2022 | | $ | 363,785 | | | $ | 41,375 | | | $ | 66,559 | | | $ | 471,719 | |
Accumulated impairment | Accumulated impairment | | — | | | — | | | (66,559) | | | (66,559) | | Accumulated impairment | | — | | | (25,306) | | | (66,559) | | | (91,865) | |
Net balance at December 31, 2021 | | 199,306 | | | 41,375 | | | — | | | 240,681 | | |
Net balance at December 31, 2022 | | Net balance at December 31, 2022 | | 363,785 | | | 16,069 | | | — | | | 379,854 | |
Additions | Additions | | — | | | — | | | — | | | — | | Additions | | 1,487 | | | — | | | — | | | 1,487 | |
Impairments | Impairments | | — | | | — | | | — | | | — | | Impairments | | — | | | — | | | — | | | — | |
Foreign currency translation | Foreign currency translation | | (2,607) | | | — | | | — | | | (2,607) | | Foreign currency translation | | 1,163 | | | — | | | — | | | 1,163 | |
Ending balance at April 1, 2022 | | $ | 196,699 | | | $ | 41,375 | | | $ | — | | | $ | 238,074 | | |
Ending balance at March 31, 2023 | | Ending balance at March 31, 2023 | | $ | 366,435 | | | $ | 16,069 | | | $ | — | | | $ | 382,504 | |
| Accumulated impairment at end of period | Accumulated impairment at end of period | | $ | — | | | $ | — | | | $ | (66,559) | | | $ | (66,559) | | Accumulated impairment at end of period | | $ | — | | | $ | (25,306) | | | $ | (66,559) | | | $ | (91,865) | |
Other Intangible Assets
Other intangible assets consisted of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | At March 31, | | At December 31, |
| | | | 2023 | | 2022 |
| | Amortization Period | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
In thousands | | | | | | | | | | |
Customer lists / relationships | | 6-38 years | | $ | 363,846 | | | $ | (45,025) | | | $ | 363,549 | | | $ | (41,695) | |
Developed technologies | | 7-20 years | | 45,139 | | | (18,615) | | | 45,028 | | | (17,508) | |
Trademarks / trade names | | 15-40 years | | 16,747 | | | (3,339) | | | 16,681 | | | (3,153) | |
Non-compete agreements and other | | 1-15 years | | 17,356 | | | (10,745) | | | 17,336 | | | (7,974) | |
Patents | | 17 years | | 551 | | | (488) | | | 551 | | | (484) | |
Total intangible assets | | | | $ | 443,639 | | | $ | (78,212) | | | $ | 443,145 | | | $ | (70,814) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | At April 1, | | At December 31, |
| | | | 2022 | | 2021 |
| | Amortization Period | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
In thousands | | | | | | | | | | |
Customer lists / relationships | | 6-38 years | | $ | 126,540 | | | $ | (36,095) | | | $ | 127,206 | | | $ | (35,096) | |
Developed technologies | | 7-20 years | | 44,922 | | | (14,513) | | | 45,170 | | | (13,591) | |
Trademarks / trade names | | 15-40 years | | 16,834 | | | (2,756) | | | 16,982 | | | (2,659) | |
Non-compete agreements and other | | 1-15 years | | 4,583 | | | (4,572) | | | 4,629 | | | (4,617) | |
Patents | | 17 years | | 523 | | | (476) | | | 523 | | | (473) | |
Total | | | | $ | 193,402 | | | $ | (58,412) | | | $ | 194,510 | | | $ | (56,436) | |
13. DEBT
Convertible Notes
During May 2017, the Company issued $200.0 million aggregate principal amount of convertible senior unsecured notes due May 2024 (the "2024 Notes") pursuant to an indenture (the "Indenture"), dated May 12, 2017, between the Company and U.S. Bank National Association, as trustee. In connection therewith, the Company entered into certain capped call transactions that cover, collectively, the number of shares of the Company's common stock underlying the 2024 Notes.
On May 12, 2017, the Company issued $175.0 million in principal amount of 2024 Notes, in a private placement offering. On May 24, 2017, the Company issued an additional $25.0 million in principal amount of 2024 Notes pursuant to the initial purchasers' exercise of their overallotment option, resulting in the issuance of an aggregate $200.0 million principal amount of 2024 Notes. The 2024 Notes bear 3.25% interest per annum on the principal amount, payable semiannually in arrears on May 1 and November 1 of each year, beginning on November 1, 2017. The 2024 Notes will mature on May 1, 2024, unless earlier repurchased by the Company or converted. The Company 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended April 1, 2022 and April 2, 2021
(Unaudited)
13. DEBT (CONTINUED)
Convertible Notes - continued
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 on September 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 conversion rate at the date of issuance of the 2024 Notes:
| | | | | | | | |
2024 Notes | | |
Conversion Rate per $1,000 principal amount (1)
| | 15.3227 | |
Conversion Price (2)
| | 65.2626 | |
Contingent Conversion Price (3)
| | 84.8413 | |
Aggregate shares to be issued upon conversion (4)
| | 3,056,879 | |
(1)Represents the number of shares of Common Stock hypothetically issuable per each $1,000 principal amount of 2024 Notes, subject to adjustments upon the occurrence of certain specified events in accordance with the terms of the Indenture.
(2)Represents $1,000 divided by the conversion rate as of such date. The conversion price reflects the strike price of the embedded option within the 2024 Notes. If the Company's share price exceeds the conversion price at conversion, the noteholders would be entitled to receive additional consideration either in cash, shares or a combination thereof, the form of which is at the sole discretion of the Company.
(3)Prior to November 1, 2023, the notes are convertible only in the following circumstances: (1) during any fiscal quarter commencing after July 1, 2017, and only during any such fiscal quarter, if the last reported sale price of the Company's common stock was greater than or equal to 130% of the applicable conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter, (2) during the five consecutive business day period following any ten consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day or (3) upon the occurrence of specified corporate events. On or after November 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. If the Company undergoes a fundamental change (as defined in the Indenture), holders of the notes may require the Company to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount to be repurchased, plus any accrued and unpaid interest. As of April 1, 2022, none of the conditions permitting the holders of the 2024 Notes to convert had been met. Therefore, the 2024 Notes are classified as long-term debt.
(4)This represents the number of shares hypothetically issuable upon conversion of 100% of the outstanding aggregate principal amount of the 2024 Notes at each date; however, the terms of the 2024 Notes state that the Company may pay or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election. The Company currently intends to settle the aggregate principal amount in cash. Amounts due in excess of the principal, if any, also may be settled in cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election.
In connection with the 2024 Notes offering, the Company entered into capped call transactions with certain of the initial purchasers or their respective affiliates. These transactions are intended to reduce the potential dilution to the Company's shareholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon any future conversion of the notes in the event that the market price per share of the Company's common stock is greater than the strike price of the capped call transactions, with such reduction and/or offset subject to a cap based on the cap price of the capped call transactions. Under the terms of the capped call transactions, the strike price ($65.2626) and the cap price ($88.7570) are each subject to adjustment in certain circumstances. In connection with establishing their initial hedges of the capped call transactions, the option counterparties or their respective affiliates entered into various derivative transactions with respect to the Company’s common stock concurrently with or shortly after the pricing of the notes. The capped call transactions, which cost an aggregate $20.5 million, were recorded as a reduction of additional paid-in capital.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended April 1, 2022 and April 2, 2021
(Unaudited)
13. DEBT (CONTINUED)
Convertible Notes - continued
ASC Topic 815 - Derivatives and Hedging ("ASC 815") provides that contracts are initially classified as equity if (1) the contract requires physical settlement or net-share settlement, or (2) the contract gives the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The settlement terms of our capped call transactions require net-share settlement. Based on the guidance in ASC 815, the capped call transactions were recorded as a reduction of equity as of the trade date. ASC 815 states that a reporting entity shall not consider contracts to be derivative instruments if the contract issued or held by the reporting entity is both indexed to its own stock and classified in shareholders' equity in its balance sheet. The Company concluded the capped call transactions should be accounted for in shareholders' equity and are, therefore, not to be considered a derivative instrument.
At issuance, ASC 470-20 "Debt with Conversion and Other Options" (“ASC 470-20”) clarified the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. ASC 470-20 specified that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflects the issuer's non-convertible debt borrowing rate which interest costs are to be recognized in subsequent periods. The note payable principal balance for the 2024 Notes at the date of issuance of $200.0 million was bifurcated into the debt component of $179.5 million and the equity component of $20.5 million. The difference between the note payable principal balance and the fair value of the debt component representing the debt discount was being accreted to interest expense over the term of the 2024 Notes. The fair value of the debt component was recognized using a 5.0% discount rate, representing the Company's borrowing rate at the date of issuance for a similar debt instrument without a conversion feature with an expected life of seven years. At January 1, 2022, the Company adopted ASU 2020-06, which removed certain separation models between a debt component and equity component for certain convertible instruments. As a result, the convertible notes balance consists solely of a debt component as of the adoption. Refer to Note 2, Recent Accounting Standards, for further information on the cumulative effect adjustment recorded at adoption.
The Company 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 at issuance. 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 was being amortized over the term of the 2024 Notes. As a result of the adoption of ASU 2020-06, the amount recorded to additional paid-in capital was reclassified to retained earnings in the cumulative effect adjustment. The remaining balance of debt issuance costs is being amortized over the term of the convertible notes. Total amortization expense for the three-month fiscal periods ended April 1, 2022 and April 2, 2021 was $0.2 million in both periods.
The carrying amount of the equity component and the principal amount of the liability component, the unamortized discount and the net carrying value of the liability are as follows: | | | | | | | | | | | | | | |
| | 2024 Notes |
| | April 1, 2022 | | December 31, 2021 |
In thousands | | | | |
Principal amount of liability | | $ | 199,500 | | | $ | 199,500 | |
Unamortized discount(1) | | — | | | 7,624 | |
Carrying value of liability | | $ | 199,500 | | | $ | 191,876 | |
| | | | |
Equity component(1) | | $ | — | | | $ | 20,408 | |
(1)At January 1, 2022, the Company adopted ASU 2020-06, which removed certain separation models between a debt component and equity component for certain convertible instruments. Refer to Note 2, Recent Accounting Standards, for further information on the cumulative effect adjustment recorded at adoption.
Because the embedded conversion option is indexed to the Company’s own stock and would be classified in shareholders’ equity, it does not meet the criterion under ASC 815 that would require separate accounting as a derivative instrument.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended April 1, 2022 and April 2, 2021
(Unaudited)
13. DEBT (CONTINUED)
Convertible Notes - continued
Interest expense associated with the 2024 Notes consisted of the following: | | | | | | | | | | | |
| For the Three Months Ended |
| April 1, 2022 | | April 2, 2021 |
In thousands | | | |
Contractual coupon rate of interest | $ | 1,621 | | | $ | 1,621 | |
Accretion of convertible notes discount(1) | — | | | 737 | |
Interest expense - convertible notes | $ | 1,621 | | | $ | 2,358 | |
(1)In accordance with ASU 2020-06, entities that previously required separate accounting for conversion features will report less interest expense as those conversion features were recorded as debt discounts which were amortized over the term of the debt. Refer to Note 2, Recent Accounting Standards, for further information on the adoption of ASU 2020-06.
The weighted average interest rate on long-term borrowings outstanding as of April 1, 2022 and December 31, 2021 was 3.25% in both periods.
14.11. PENSION PLANS
Components of net pension cost for the Qualified Pension Plan and Supplemental Employees’ Retirement Plan ("SERP") were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | Qualified Pension Plan | | SERP |
| | April 1, 2022 | | April 2, 2021 | | April 1, 2022 | | April 2, 2021 |
In thousands | | | | | | | | |
Service cost | | $ | 800 | | | $ | 1,300 | | | $ | — | | | $ | — | |
Interest cost on projected benefit obligation | | 4,250 | | | 3,525 | | | 22 | | | 15 | |
Expected return on plan assets | | (10,525) | | | (11,275) | | | — | | | — | |
Amortization of net loss | | 975 | | | 1,075 | | | 15 | | | 17 | |
Net pension (income) cost | | $ | (4,500) | | | $ | (5,375) | | | $ | 37 | | | $ | 32 | |
No contributions are expected to be made to the qualified pension plan during 2022. The Company contributed $0.1 million to the SERP through the end of the first quarter of 2022 and plans to contribute an additional $0.4 million to the SERP in 2022. For the 2021 plan year, the Company contributed $10.0 million to the qualified pension plan and $2.7 million to the SERP.
15. COMMITMENTS AND CONTINGENCIES
Pension Freeze
Effective December 31, 2015, the Company's qualified pension plan was frozen with respect to future benefit accruals. Under USG Cost Accounting Standard (“CAS”) 413, the Company must determine the USG’s share of any pension curtailment adjustment calculated in accordance with CAS. Such adjustments can result in an amount due to the USG for pension plans that are in a surplus position or an amount due to the contractor for plans that are in a deficit position. During the fourth quarter of 2016, the Company accrued a $0.3 million liability representing its estimate of the amount due to the USG based on the Company's pension curtailment adjustment calculation, which was submitted to the USG for review in December 2016. The Company maintained its accrual at $0.3 million as of April 1, 2022. There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations, financial position and cash flows.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | Qualified Pension Plan | | SERP |
| | March 31, 2023 | | April 1, 2022 | | March 31, 2023 | | April 1, 2022 |
In thousands | | | | | | | | |
Service cost | | $ | 1,450 | | | $ | 800 | | | $ | — | | | $ | — | |
Interest cost on projected benefit obligation | | 7,250 | | | 4,250 | | | 44 | | | 22 | |
Expected return on plan assets | | (9,550) | | | (10,525) | | | — | | | — | |
Amortization of net loss | | 1,875 | | | 975 | | | — | | | 15 | |
Net pension cost (income) | | $ | 1,025 | | | $ | (4,500) | | | $ | 44 | | | $ | 37 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
15.11. PENSION PLANS (CONTINUED)
No contributions are expected to be made to the qualified pension plan during 2023. The Company contributed $0.1 million to the SERP through the end of the first quarter of 2023 and plans to contribute an additional $0.4 million to the SERP in 2023. No contributions were made to the qualified pension plan during 2022. For the 2022 plan year, the Company contributed $0.5 million to the SERP.
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
New Hartford Property
In connection with the sale of the Company’s Music segment in 2007, the Company assumed responsibility for meeting certain requirements of the Connecticut Transfer Act (the “Transfer Act”) that applied to the transfer of the New Hartford, Connecticut, facility leased by that segment for guitar manufacturing purposes (“Ovation”). Under the Transfer Act, those responsibilities essentially consist of assessing the site's environmental conditions and remediating environmental impairments, if any, caused by Ovation's operations prior to the sale. The site is a multi-tenant industrial park, in which Ovation and other unrelated entities lease space. The environmental assessment process, which began in 2008, has been completed and site remediation is in process.
The Company's estimate of its portion of the cost to assess the environmental conditions and remediate this site is $2.3 million, all of which has been accrued. The remediation has been nearly completed and the Company continues to monitor the results of the remediation. The total amount paid to date in connection with these environmental remediation activities is $1.7$1.8 million. At April 1, 2022,March 31, 2023, the Company had $0.6$0.5 million accrued for these environmental remediation activities. A portion ($0.1 million) of the accrual related to this property is included in other current liabilities and the balance is included in other long-term liabilities. The remaining balance of the accrual reflects the total anticipated cost of completing these environmental remediation activities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.
Bloomfield Property
In connection with the Company’s 2008 purchase of the portion of the Bloomfield campus that Kaman Aerospace Corporation had leased from NAVAIR, the Company assumed responsibility for environmental remediation at the facility as may be required under the Transfer Act and is currently remediating the property under the guidance of the Connecticut Department of Environmental Protection. The assumed environmental liability of $10.3 million was determined by taking the undiscounted estimated remediation liability of $20.8 million and discounting it at a rate of 8%. This remediation process will take many years to complete. The total amount paid to date in connection with these environmental remediation activities is $14.9$15.4 million. At April 1, 2022,March 31, 2023, the Company had $2.3$2.1 million accrued for these environmental remediation activities. A portion ($0.2 million) of the accrual related to this property is included in other current liabilities, and the balance is included in other long-term liabilities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.
Offset Agreement
During January 2018, theThe Company has entered into an offset agreementagreements as a condition to obtaining orders from a foreignMiddle Eastern customer for the Company's JPF product. This agreement isOffset agreements are designed to return economic value to the foreign country by requiring the Company to engage in activities supporting local defense or commercial industries, promoting a balance of trade, developing in-country technology capabilities or addressing other local development priorities. The offset agreementSuch agreements 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 agreementThe agreements may also be satisfied through the Company's use of cash for activities, such as subcontracting with local partners, purchasing supplies from in-country vendors, providing financial support for in-country projects and making investments in local ventures. At April 1, 2022,March 31, 2023, the aggregate amount of the Company's offset agreementagreements had an outstanding notional value of approximately $194.0$220.9 million, which is equal to 60sixty percent of the contract value of $324.0 million as defined by the agreement between the customer and the Company. The amount ultimately applied against the offset agreementagreements 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
15.12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Offset Agreement - continued
The Company continues to work with the customer to further define the requirements to satisfy the offset agreement.agreements. In February 2023, the Company announced that it received a Business Plan Approval Letter to establish a manufacturing and final assembly facility in collaboration with an in-country vendor, which will enhance the technological capabilities available in this country. Offset programs typically extend over several years and may provide for penalties in the event the Company fails to perform according to offset requirements. The satisfaction of the offset requirements will be determined by the customer and is expected to occur over a seven-year period. Deliveries under the contract were completed prior to satisfaction of the offset requirements.customer. In the event the offset requirements of the contract are not met, the Company could be liable for potential penalties up to $16.5$18.8 million payable to the customer. Failure to satisfy the offset requirementrequirements could also negatively impact the Company's ability to attract future orders from this customer. The Company began recognizing revenue associated with this contract in the third quarter of 2019 and has considered theconsiders these potential penalties of $16.5 million asto be a reduction to the transaction price in its determination of the value of the performance obligations within this contract.these contracts. At April 1, 2022, $16.5March 31, 2023, $18.8 million in contract liabilities associated with the potential penalties of the offset requirements were included on the Company's Condensed Consolidated Balance Sheets.
GuaranteeGuarantees
During 2020, the Company and the USG entered into a Guaranty Agreement, pursuant to which the Company agreed to guarantee the full, complete and satisfactory performance of its subsidiary, Kaman Precision Products, Inc. ("KPPI") under all current and future contracts with the USG. As of the date of this filing, the only contract in place between KPPI and the USG relates to the production and sale of the JPF. KPPI is currently fulfilling the requirements of Option 15 and Option 16. The guarantee was provided in lieu of a periodic financial capability review by the Financial Capacity Team ("FCT") of the Defense Contract Management Agency ("DCMA"). The Company is unable to estimate the maximum potential amount of future payments under the guarantee as it is dependent on costs incurred by the USG in the event of default. Although the Company believes the risk of default is low given the maturity and operational performance of the JPF program, there can be no assurance that the guarantee will not have a material adverse effect on the Company's results of operations, financial position and cash flows.
On September 16, 2022, the Company acquired all of the assets and related liabilities of Parker's Aircraft Wheel and Brake division. In association with the acquisition, the Company entered into a novation agreement in which Parker's contractual obligations with respect to Aircraft Wheel and Brake at the time of the acquisition were transferred to the Company. There can be no assurance that this agreement will not have a material adverse effect on the Company's results of operations, financial position and cash flows.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
16.13. COMPUTATION OF EARNINGS PER SHARE
The computation of basic earnings per share is based on net earnings divided by the weighted average number of shares of common stock outstanding for each period. The computation of diluted earnings per share reflects the common stock equivalency of dilutive options granted to employees under the Company's stock incentive plan, shares issuable on redemption of its convertible notes and shares issuable upon redemption of outstanding warrants.
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
In thousands, except per share amounts | | | | |
Net earnings | | $ | 4,028 | | | $ | 7,984 | |
| | | | |
Basic: | | | | |
Weighted average number of shares outstanding | | 27,950 | | | 27,815 | |
Basic earnings per share | | $ | 0.14 | | | $ | 0.29 | |
| | | | |
Diluted(1): | | | | |
Weighted average number of shares outstanding | | 27,950 | | | 27,815 | |
Weighted average shares issuable on exercise of dilutive stock options | | 132 | | | 52 | |
Total | | 28,082 | | | 27,867 | |
| | | | |
Diluted earnings per share | | $ | 0.14 | | | $ | 0.29 | |
(1)As a result of the adoption of ASU 2020-06, the Company began calculating diluted earnings per share using the if-converted method for its convertible debt instruments in 2022. Prior to the adoption, the Company calculated diluted earnings per share for its convertible debt instruments using the treasury stock method. The Company adopted ASU 2020-06 using the modified retrospective approach; therefore, prior period results have not been retroactively adjusted. Refer to Note 2, Recent Accounting Standards, for further information on the adoption of ASU 2020-06. | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
In thousands, except per share amounts | | | | |
Net (loss) earnings | | $ | (19) | | | $ | 4,028 | |
| | | | |
Basic: | | | | |
Weighted average number of shares outstanding | | 28,117 | | | 27,950 | |
Basic (loss) earnings per share | | $ | (0.00) | | | $ | 0.14 | |
| | | | |
Diluted: | | | | |
Weighted average number of shares outstanding | | 28,117 | | | 27,950 | |
Weighted average shares issuable on exercise of dilutive stock options | | — | | | 132 | |
Total | | 28,117 | | | 28,082 | |
| | | | |
Diluted (loss) earnings per share | | $ | (0.00) | | | $ | 0.14 | |
Equity awards
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022, respectively, 698,648 and April 2, 2021, respectively, 645,403 and 440,959 shares issuable under equity awards granted to employees were excluded from the calculation of diluted earnings per share as they were anti-dilutive based on the average stock price during the periods.
All outstanding stock awards were excluded in the computation of diluted earnings per share in the three-month fiscal period ended March 31, 2023 because their effect was antidilutive due to the net loss. For the three-month fiscal periods ended March 31, 2023, an additional 149,699 shares issuable under equity awards, which would have been dilutive if exercised based on the average market price being higher than the exercise price, were excluded from the computation of diluted earnings per share as their effect was antidilutive due to the net loss.
2024 Convertible Notes
For theboth three-month fiscal periodperiods ended March 31, 2023 and April 1, 2022, 3,056,879 shares issuable under Convertible Notes due 2024 were excluded from the diluted earnings per share calculation because their effect was antidilutive. For the three-month fiscal period ended April 2, 2021, shares issuable under the Convertible Notes due 2024 were excluded from the diluted earnings per share calculation because the conversion price was more than the average market price of the Company's stock during the periods.
17.14. SHARE-BASED ARRANGEMENTS
The Company accounts for stock options, restricted stock awards ("RSAs"), restricted stock units ("RSUs") and performance stock units ("PSUs") as equity awards and measures the cost of all share-based payments, including stock options, at fair value on the grant date and recognizes this cost in the statement of operations. The Company also has an employee stock purchase plan, which is accounted for as a liability award. Compensation expense for stock options, RSAs, restricted stock unitsRSUs and PSUs is recognized on a straight-line basis over the vesting period of the awards. Throughout the course of the vesting period, the Company monitors the achievement level for the ROICreturn on invested capital ("ROIC") metric of the PSUs compared to the ROIC target and adjusts the number of shares expected to be earned, and the related compensation expense recorded thereafter, to reflect the most probable outcome. The PSUs granted in 2023 and 2022 assumed a 100% achievement level. Share-based compensation expense recorded for the three-month fiscal periods ended March 31, 2023 and April 1, 2022 was $2.0 million and April 2, 2021 was $2.1 million, respectively. For the three-month fiscal period ended March 31, 2023, $0.3 million was recorded to restructuring and $1.7 million, respectively. These amounts wereseverance costs and the remaining amount was recorded to selling, general and administrative expenses on the Company's Condensed Consolidated Statements of Operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022 and April 2, 2021
(Unaudited)
17.14. SHARE-BASED ARRANGEMENTS (CONTINUED)
Stock option activity was as follows: | | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | March 31, 2023 |
| | Options | | Weighted - average exercise price | | Options | | Weighted - average exercise price |
Options outstanding at beginning of period | Options outstanding at beginning of period | | 746,240 | | | $ | 55.14 | | Options outstanding at beginning of period | | 710,782 | | | $ | 54.12 | |
Granted | Granted | | — | | | $ | — | | Granted | | — | | | $ | — | |
Exercised | Exercised | | (9,676) | | | $ | 41.63 | | Exercised | | — | | | $ | — | |
Forfeited or expired | Forfeited or expired | | (3,071) | | | $ | 61.76 | | Forfeited or expired | | (24,061) | | | $ | 43.07 | |
Options outstanding at April 1, 2022 | | 733,493 | | | $ | 55.29 | | |
Options outstanding at March 31, 2023 | | Options outstanding at March 31, 2023 | | 686,721 | | | $ | 54.51 | |
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. No options were granted in the three-month fiscal periodperiods ended March 31, 2023 and April 1, 2022. The following table indicates the weighted-average assumptions used in estimating fair value for the three-month fiscal period ended April 2, 2021:
| | | | | | | | |
| | For the Three Months Ended |
| | April 2, 2021 |
Expected option term (years) | | 4.9 |
Expected volatility | | 35.7 | % |
Risk-free interest rate | | 0.5 | % |
Expected dividend yield | | 1.6 | % |
Per share fair value of options granted | | $14.89 | |
Restricted stock award and restricted stock unit activity were as follows: | | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | March 31, 2023 |
| | | Restricted Stock | | Weighted- average grant date fair value | | | Restricted Stock | | Weighted- average grant date fair value |
Restricted Stock outstanding at beginning of period | Restricted Stock outstanding at beginning of period | | 135,351 | | | $ | 53.53 | | Restricted Stock outstanding at beginning of period | | 159,521 | | | $ | 45.78 | |
Granted | Granted | | 80,115 | | | $ | 41.64 | | Granted | | 102,600 | | | $ | 25.24 | |
Vested | Vested | | (46,598) | | | $ | 52.85 | | Vested | | (62,488) | | | $ | 47.14 | |
Forfeited or expired | Forfeited or expired | | (4,077) | | | $ | 52.90 | | Forfeited or expired | | (4,366) | | | $ | 47.51 | |
Restricted Stock outstanding at April 1, 2022 | | 164,791 | | | $ | 47.96 | | |
Restricted Stock outstanding at March 31, 2023 | | Restricted Stock outstanding at March 31, 2023 | | 195,267 | | | $ | 34.51 | |
Performance stock unit activity was as follows: | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 |
| | Performance Stock | | Weighted- average grant date fair value |
Performance Stock outstanding at beginning of period | | 70,163 | | | $ | 70.17 | |
Granted(1) | | 117,885 | | | $ | 54.87 | |
Vested | | — | | | $ | — | |
Forfeited or expired | | (3,643) | | | $ | 61.07 | |
Performance Stock outstanding at April 1, 2022 | | 184,405 | | | $ | 60.98 | |
(1) The PSUs granted in 2022 and 2021 assumed a 100% achievement level.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended April 1, 2022 and April 2, 2021
(Unaudited)
17. SHARE-BASED ARRANGEMENTS (CONTINUED) | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 |
| | Performance Stock | | Weighted- average grant date fair value |
Performance Stock outstanding at beginning of period | | 172,144 | | | $ | 60.44 | |
Granted | | 178,385 | | | $ | 32.03 | |
Vested | | — | | | $ | — | |
Forfeited or expired | | (30,345) | | | $ | 56.88 | |
Performance Stock outstanding at March 31, 2023 | | 320,184 | | | $ | 44.95 | |
The fair value of the PSUs based on TSRtotal shareholder return ("TSR") was estimated on the date of grant using a Monte-Carlo simulation model. The following table indicates the weighted-average assumptions used in estimating fair value:
| | | For the Three Months Ended | | For the Three Months Ended |
| | | April 1, 2022 | | April 2, 2021 | | | March 31, 2023 | | April 1, 2022 |
Expected term (years) | Expected term (years) | | 2.9 | | 2.9 | Expected term (years) | | 2.9 | | 2.9 |
Expected volatility | Expected volatility | | 39.4 | % | | 41.3 | % | Expected volatility | | 41.2 | % | | 39.4 | % |
Risk-free interest rate | Risk-free interest rate | | 1.7 | % | | 0.2 | % | Risk-free interest rate | | 4.4 | % | | 1.7 | % |
Expected dividend yield | Expected dividend yield | | 1.9 | % | | 1.4 | % | Expected dividend yield | | 3.3 | % | | 1.9 | % |
Per share fair value of performance stock granted | Per share fair value of performance stock granted | | $ | 68.10 | | $ | 84.49 | | Per share fair value of performance stock granted | | $ | 38.83 | | $ | 68.10 | |
18.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022
(Unaudited)
15. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in shareholders’ equity for the three-month fiscal periods ended March 31, 2023, and April 1, 2022, and April 2, 2021, were as follows:
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 | | March 31, 2023 | | April 1, 2022 |
In thousands | In thousands | | | | | In thousands | | | | |
Beginning balance | Beginning balance | | $ | 796,329 | | | $ | 746,438 | | Beginning balance | | $ | 683,979 | | | $ | 796,329 | |
Comprehensive (loss) income | | (428) | | | 24,339 | | |
Comprehensive income (loss) | | Comprehensive income (loss) | | 3,609 | | | (428) | |
Dividends declared (per share of common stock, $0.20 and $0.20, respectively) | Dividends declared (per share of common stock, $0.20 and $0.20, respectively) | | (5,590) | | | (5,562) | | Dividends declared (per share of common stock, $0.20 and $0.20, respectively) | | (5,627) | | | (5,590) | |
Employee stock plans and related tax benefit | Employee stock plans and related tax benefit | | 785 | | | 880 | | Employee stock plans and related tax benefit | | 495 | | | 785 | |
Purchase of treasury shares | Purchase of treasury shares | | (575) | | | (344) | | Purchase of treasury shares | | (503) | | | (575) | |
Share-based compensation expense | Share-based compensation expense | | 2,081 | | | 1,743 | | Share-based compensation expense | | 2,003 | | | 2,081 | |
Impact of change in accounting standard(1) | Impact of change in accounting standard(1) | | (5,854) | | | (275) | | Impact of change in accounting standard(1) | | — | | | (5,854) | |
Ending balance | Ending balance | | $ | 786,748 | | | $ | 767,219 | | Ending balance | | $ | 683,956 | | | $ | 786,748 | |
(1)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended AprilAt January 1, 2022, the Company adopted Accounting Standard Update 2020-06, "Debt - Debt with Conversion and April 2, 2021
(Unaudited)
18. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED)Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity" ("ASU 2020-06"). Refer to Note 1, Summary of Significant Accounting Policies, of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for further information on the adoption of ASU 2020-06.
The components of accumulated other comprehensive income (loss) are shown below:
| | | For the Three Months Ended | | For the Three Months Ended |
| | | April 1, 2022 | | April 2, 2021 | | | March 31, 2023 | | April 1, 2022 |
In thousands | In thousands | | | | | In thousands | | | | |
Foreign currency translation and other: | | |
Foreign currency translation: | | Foreign currency translation: | |
Beginning balance | Beginning balance | | $ | 8,772 | | | $ | (717) | | Beginning balance | | $ | (2,071) | | | $ | 8,765 | |
Net loss on foreign currency translation | | (5,218) | | | (7,322) | | |
Reclassification to net income(1) | | — | | | 22,835 | | |
Net gain (loss) on foreign currency translation | | Net gain (loss) on foreign currency translation | | 2,538 | | | (5,218) | |
Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | | (5,218) | | | 15,513 | | Other comprehensive income (loss), net of tax | | 2,538 | | | (5,218) | |
Ending balance | Ending balance | | $ | 3,554 | | | $ | 14,796 | | Ending balance | | $ | 467 | | | $ | 3,547 | |
| Pension and other post-retirement benefits(2): | | |
Pension and other post-retirement benefits(1): | | Pension and other post-retirement benefits(1): | |
Beginning balance | Beginning balance | | $ | (120,157) | | | $ | (130,104) | | Beginning balance | | $ | (156,350) | | | $ | (120,157) | |
Amortization of net loss, net of tax expense of $228 and $250, respectively | | 762 | | | 842 | | |
Amortization of net loss, net of tax expense of $434 and $228, respectively | | Amortization of net loss, net of tax expense of $434 and $228, respectively | | 1,441 | | | 762 | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | | 762 | | | 842 | | Other comprehensive income, net of tax | | 1,441 | | | 762 | |
Ending balance | Ending balance | | $ | (119,395) | | | $ | (129,262) | | Ending balance | | $ | (154,909) | | | $ | (119,395) | |
| Derivative instruments(2): | | Derivative instruments(2): | |
Beginning balance | | Beginning balance | | $ | — | | | $ | 7 | |
Loss on derivative instruments, net of tax benefit of $78 and $0, respectively | | Loss on derivative instruments, net of tax benefit of $78 and $0, respectively | | (260) | | | — | |
Reclassification to net income, net of tax benefit of $28 and $0, respectively | | Reclassification to net income, net of tax benefit of $28 and $0, respectively | | $ | (91) | | | $ | — | |
Other comprehensive (loss) income, net of tax | | Other comprehensive (loss) income, net of tax | | (351) | | | — | |
Ending balance | | Ending balance | | $ | (351) | | | $ | 7 | |
| Total accumulated other comprehensive loss | Total accumulated other comprehensive loss | | $ | (115,841) | | | $ | (114,466) | | Total accumulated other comprehensive loss | | $ | (154,793) | | | $ | (115,841) | |
(1) The foreign currency translation reclassified to net income relates to the sale of the Company's UK Composites business. This balance was included in the loss accrual recorded in impairment on assets held for sale on the Company's Consolidated Statement of Operations in the year ended December 31, 2020 (see Note 3, Disposals, for additional information).(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost.
(See Note 14,11, Pension Plans, for additional information.)
(2) See Note 8, Derivative Financial Instruments, for additional information regarding derivative instruments.
19.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month fiscal periods ended March 31, 2023 and April 1, 2022
(Unaudited)
16. INCOME TAXES
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
| | | | |
Effective Income Tax Rate | | 24.5 | % | | 2.5 | % |
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
| | | | |
Effective Income Tax Rate | | 20.8 | % | | 24.5 | % |
The effective income tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the period. The increasedecrease in the effective tax rate for the three-month fiscal period ended April 1, 2022March 31, 2023 as compared to the corresponding rate in the prior year period was primarily causeddriven by a discrete benefit recordedlower net earnings in the prior period related to the sale of the Company’s former UK Composites business.current period.
20.17. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the issuance date of these financial statements. No material subsequent events were identified that require disclosure.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 ended December 31, 20212022 ("20212022 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") conducts business through three business segments:
•The Engineered Products segment serves the aerospace and defense, industrial and medical markets providing sophisticated, proprietary aircraft bearings and components; super precision, miniature ball bearings; and proprietary spring energized seals, springs and contacts.contacts; and wheels, brakes and related hydraulic components for helicopters and fixed-wing and UAV aircraft.
•The Precision Products segment serves the aerospace and defense markets providing precision safe and arming solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; restoration, modification and support of ourthe Company's SH-2G Super Seasprite maritime helicopters; manufacture and support of ourthe heavy lift K-MAX® manned helicopter,helicopter; and development of the TITAN UAV aerial system and the KARGO UAV unmanned aerial system, a purpose built autonomous medium lift logistics vehicle.
•The Structures segment serves the aerospace and defense and medical end markets providing sophisticated complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft, and medical imaging solutions.
Executive Summary
In the first quarter, consolidatedConsolidated net sales decreasedincreased by 7.9%23.1% to $158.0$194.5 million compared to the prior year primarilyperiod, due to loweran 11.4% increase in organic sales onand $18.5 million in sales from our safeAircraft Wheel and arm devices and defense programs.Brake acquisition. Gross margin as a percentage of sales increased in the quarter to 32.0%34.7% compared to 30.8%32.0% in the prior year period, due to the addition of gross profit associated with our Aircraft Wheel and Brake acquisition and higher sales and improved performance on our seals, springsK-MAX® spares and contacts and bearings products.support. Selling, general and administrative expenses ("S,G&A") increased by 4.2%10.0% primarily due to higher travel expensesthe addition of S,G&A from Aircraft Wheel and trade show costs.Brake. Operating income in the period decreasedincreased as a result of lower sales and gross profit and higher SG&A and research and development costs,the drivers discussed above, partially offset by a $4.7 million increase in intangible asset amortization expense driven by the absence of costs related to the transition services agreement ("TSA")Aircraft Wheel and lowerBrake acquisition and $2.0 million in higher restructuring and severance costs.
Other financial highlights
•Net earnings were $4.0 millionThere was a negligible net loss for the three-month fiscal period ended April 1, 2022,March 31, 2023, compared to $4.0 million lower thanof net earnings in the comparable fiscal period in the prior year. This reductiondecrease in net earnings was primarily driven by the decreasean increase in operating income discussed above,interest expense and lower non-service pension and post retirementpost-retirement benefit income, and a normalized income tax rate, which resulted in higher income tax expense. These changes were partially offset by higher operating income and lower interestincome tax expense. The resulting GAAP diluted loss per share was $(0.00) in the three-month fiscal period ending March 31, 2023, compared to earnings per share wasof $0.14 in the first quarter of 2022.prior year period.
•Cash used in operating activities during the three-month fiscal period ended April 1, 2022,March 31, 2023, was $1.0$5.5 million, a $1.4$4.4 million improvement tomore than cash used in the comparable fiscal period in the prior year.2022. This change was largely driven by the absence of approximately $25.1 million in nonrecurring payments to eligible participants of Bal Seal's employee retention plans implemented prior to our acquisition, partially offset by the timing of collection of payments in our Engineered Products segment and the timing of work performed on outstanding receivablesthe JPF program, partially offset by lower incentive compensation payments and income tax refunds received in the prior year, more specifically significant receipts on joint programmable fuze ("JPF") direct commercial sales ("DCS") receivables.current period.
•Total unfulfilled performance obligations ("backlog") increased 0.6%1.7% to $705.0$733.0 million compared to total backlog at December 31, 2021,2022, driven by new orders of our bearings products and seals, springs and contacts,in the Engineered Products segment, partially offset by sales on our JPF program withrevenue recognized for the U.S. Government ("USG") and deliveries of our bearing products and seals, springs and contacts.period.
Recent events
•In April 2022, our BoardMarch 2023, Kaman Corporation and PHI Aviation LLC (“PHI”) announced at the 2023 HAI Heli-Expo that Kaman’s subsidiary, Kaman Aerospace Corporation (“Kaman”) and PHI have entered into a master commercial agreement for the promotion, sales and support of Directors approved a share repurchase program authorizing the repurchasecommercial version of up to $50.0 million of our common stock.Kaman’s KARGO UAV unmanned aerial
•In March 2022, we secured $7.0 million in USG fundingsystem, including collaboration relating to its ongoing design and certification. PHI also placed a 50 unit non-binding order for our K-MAX® Autonomous Logistics Systems.
•In March 2022, we announced that our Jacksonville division received a follow on award from Sikorsky for the HH-60W Combat Rescue Helicopter ("CRH") cockpit. This award secures deliveries from 2022 through 2025.KARGO UAV unmanned aerial systems.
•In February 2022, Kamatics Corporation introduced new P-54 contoured, anti-wear components2023, Kaman Precision Products, Inc. ("KPPI"), and the Tawazun Council signed a Business Plan Approval Letter for Kaman EMEA, Inc. to establish a Height of Burst manufacturing and final assembly facility in collaboration with Remah International Group – Sole Proprietorship LLC at the maintenance, repair, and overhaul ("MRO") of legacy helicopter gearboxes.
•In February 2022, Kineco Kaman Composites India Private Limited, our joint venture with Goa-based Kineco Limited, delivered its 600th Mission Crew Workstation Console to BAE Systems USA, used in the Boeing P-8 Poseidon maritime patrol aircraft.
•In February 2022, our FAA Part 145 Repair Station in Wichita, Kansas earned Federal Aviation Approval ("FAA") approval for two new composite repair capabilities.
•In January 2022, we announced the expansion of our medical imaging program through a partnership with Mirion Technologies ("Mirion"). We will supply surgical C-Arm tabletops to Mirion with deliveries expected to begin in the second quarter of 2022.
•In January 2022, we announced that our Kamatics business will support the new James Webb Telescope with its KAron® high technology, self-lubricating bearings.Tawazun Industrial Park.
Impacts from Current Economy
We are currently operating in a period of global economic uncertainty, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Ukraine and Russia.Russia, continuing U.S. sanctions on China's microchip manufacturing, the coronavirus ("COVID-19") pandemic and inflation and rising interest rates. U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions, including the start of the military conflict in Ukraine and the resulting sanctions imposed on Russia. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in credit and capital markets, increases in commodity prices, and supply chain interruptions, as well as the potential for increased risk of cyber disruptions. We are continuing to monitor the situation in Ukraine, including its global effects, and assessing its potential impact on our business, including the timing of our sales as certain customers purchase safety stock for their own supply chains. Although our business has not been materially impacted by the ongoing military conflict in Ukraine as of the date of this filing, itwe have experienced higher utility costs at our Germany operations in light of the European Union’s sanctions on Russia. It is impossible to predict the extent to which our operations, or those of our customers or suppliers, will be impacted, or the ways in which the conflict may impact our business, cash flows or results of operations.
We also continue to monitor the impact of the coronavirus ("COVID-19") pandemicCOVID-19 on all aspects of our business and across the geographies in which we operate and serve customers, as well as the extent to which it has impacted and willmay continue to impact our customers, suppliers and other business partners. We are operating below pre-pandemic levels for ourcertain commercial aerospace products and we have seen some disruptions to our supply chain, such as delays in materials and components used in our manufacturing process; however, we continue to meet the demands of our customers.products. We are encouraged by the recoveries for these products and the strong order intake we saw in the first three months of 2022; however, the developments related to COVID-19 variants make it difficult to predict the timing and magnitude of the recovery.2023.
The U.S. economy is experiencing broadabove forces have impacted our supply chain; we are seeing quality issues and rapid inflation as well asdefects, part shortages and increased lead times for certain parts. In addition to supply issues in material, servicechain impacts, we have been and labor duebelieve we will continue to economic policy, the pandemic and, more recently, the war in Ukraine.be impacted by higher interest expense given our outstanding borrowings under our revolving credit facility with a floating interest rate. These impacts are likely to persist through 20222023 and beyond. To mitigate risks associated with the floating interest rate on our credit facility, we entered into interest rate swap agreements, effective January 1, 2023, for the purposes of hedging the eight quarterly variable-rate Credit Agreement interest payments due in 2023 and 2024. These swaps will provide a fixed interest rate on approximately 70% of the Company's total long-term debt. We cannot predict the impact on the Company’s end markets or input costs nor the ability of the Company to recover cost increases through pricing.
RESULTS OF OPERATIONS
Refer to Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of the Quarterly Report on Form 10-Q for the period ended April 2, 20211, 2022 for a discussion of changes for the earliest periods presented.
Net Sales
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 | | March 31, 2023 | | April 1, 2022 |
| | (in thousands) | | (in thousands) |
Net sales | Net sales | | $ | 158,048 | | | $ | 171,616 | | Net sales | | $ | 194,542 | | | $ | 158,048 | |
$ change | $ change | | (13,568) | | | (35,706) | | $ change | | 36,494 | | | (13,568) | |
% change | % change | | (7.9) | % | | (17.2) | % | % change | | 23.1 | % | | (7.9) | % |
| Sales of disposed businesses that did not qualify for discontinued operations | | — | | | 1,704 | | |
Acquisition sales | | Acquisition sales | | 18,543 | | | $ | — | |
Organic sales | Organic sales | | $ | 158,048 | | | $ | 169,912 | | Organic sales | | $ | 175,999 | | | $ | 158,048 | |
$ change | $ change | | (11,864) | | | $ change | | 17,951 | | |
% change | % change | | (7.0) | % | | % change | | 11.4 | % | |
Net sales for the three-month fiscal period ended April 1, 2022 decreasedMarch 31, 2023 increased when compared to the corresponding period in 2021, primarily due2022, attributable to a 7.0% decreasean 11.4% increase in organic sales and $1.7$18.5 million in lower sales due to the sale offrom our former United Kingdom ("UK") Composites business in early 2021.Aircraft Wheel and Brake acquisition. The decreaseincrease in organic sales was attributable to $13.0driven by $23.3 million in lowerhigher organic sales in our Precisionat the Engineered Products segment and $8.6a $4.2 million in lower organic sales at our Structures segment. These decreases were partially offset by an increase in sales at the Structures segment, partially offset by lower sales at our EngineeredPrecision Products segment. Foreign currency exchange rates relative to the U.S. dollar had an unfavorable impact of $2.0$1.3 million on net sales. See Segment Results of Operations and Financial Condition below for further discussion of segment net sales.
The table below summarizes the changes in organic net sales by product line for the three-month fiscal period ended April 1, 2022,March 31, 2023, compared to the corresponding period in 2021.2022.
| Product Line | Product Line | | Increase (Decrease) | | $ (in millions) | | % | Product Line | | Increase (Decrease) | | $ (in millions) | | % |
Defense | Defense | | ↓ | | $(11.4) | | (26.7)% | Defense | | ↑ | | $5.9 | | 18.9% |
Safe and Arm Devices | Safe and Arm Devices | | ↓ | | $(4.3) | | (10.3)% | Safe and Arm Devices | | ↓ | | $(11.0) | | (29.7)% |
Commercial, Business and General Aviation | Commercial, Business and General Aviation | | ↓ | | $(0.3) | | (0.7)% | Commercial, Business and General Aviation | | ↑ | | $19.0 | | 40.5% |
Medical | Medical | | ↑ | | $2.5 | | 12.4% | Medical | | ↑ | | $3.7 | | 16.2% |
Industrial | Industrial | | ↑ | | $1.5 | | 8.6% | Industrial | | ↑ | | $0.4 | | 2.1% |
Gross Profit
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 | | March 31, 2023 | | April 1, 2022 |
| | (in thousands) | | (in thousands) |
Gross profit | Gross profit | | $ | 50,587 | | | $ | 52,905 | | Gross profit | | $ | 67,544 | | | $ | 50,587 | |
$ change | $ change | | (2,318) | | | (14,797) | | $ change | | 16,957 | | | (2,318) | |
% change | % change | | (4.4) | % | | (21.9) | % | % change | | 33.5 | % | | (4.4) | % |
% of net sales | % of net sales | | 32.0 | % | | 30.8 | % | % of net sales | | 34.7 | % | | 32.0 | % |
Gross profit decreasedincreased for the three-month fiscal period ended April 1, 2022,March 31, 2023, as compared to the corresponding period in 2021.2022. This decreaseincrease was primarily attributable to the mixaddition of JPFgross profit associated with our Aircraft Wheel and Brake acquisition and higher sales in the quarter and lower sales and associated gross profit on our militarycommercial and defense bearings products, springs, seals and contacts used in medical applications and our K-MAX® program.spares and support. These decreases,increases, totaling $10.8$21.5 million, were partially offset by higherlower sales and associated gross profit on our springs, sealsJPF program and contactscost growth on our AH-1Z program, Sikorsky UH-60 BLACK HAWK program and commercial bearings products.FireBurst program.
Gross profit as a percentage of sales increased for the three-month fiscal period ended April 1, 2022,March 31, 2023, as compared to the corresponding period in 2021,2022. This increase was primarily dueattributable to the addition of gross profit associated with programs at Aircraft Wheel and Brake and improved performance on our seals, springsK-MAX® spares and contactssupport and bearings products.certain composite programs. These increaseschanges were partially offset by cost growth on our K-MAX® programcertain legacy fuzing and certain structures programs.
Selling, General & Administrative Expenses (S,G&A)
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
| | (in thousands) |
S,G&A | | $ | 43,698 | | | $ | 39,721 | |
$ change | | 3,977 | | | 1,593 | |
% change | | 10.0 | % | | 4.2 | % |
% of net sales | | 22.5 | % | | 25.1 | % |
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
| | (in thousands) |
S,G&A | | $ | 39,721 | | | $ | 38,128 | |
$ change | | 1,593 | | | (15,201) | |
% change | | 4.2 | % | | (28.5) | % |
% of net sales | | 25.1 | % | | 22.2 | % |
S,G&A increased for the three-month fiscal period ended April 1, 2022,March 31, 2023, when compared to the corresponding period in 2021. This was primarily attributable to an increase in travel expenses and trade show costs as restrictions imposed to limit the spread of COVID-19 are lifting.
S,G&A decreased for the three-month period ended April 2, 2021 when compared to the corresponding period in 2020.2022. This was primarily attributable to the absenceaddition of $8.5 million in Bal Seal acquisition costsS,G&A from Aircraft Wheel 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 Ended |
| | April 1, 2022 | | April 2, 2021 |
| | (in thousands) |
Costs from transition services agreement | | $ | — | | | $ | 705 | |
Upon closing the sale of our former Distribution business, the Company entered into a TSA with the buyer, pursuant to which the Company agreed to support the information technology ("IT"), human resources and benefits, tax and treasury functions of the Distribution business for six to twelve months. The buyer exercised an option to extend the support period for up to one additional year for certain services. During the third quarter of 2021, the TSA expired and all services were completed as of the end of the period. As such, there were no costs incurred associated with TSA and no income earned from the TSA in the three-month fiscal period ended April 1, 2022. The Company incurred $0.7 million in costs associated with the TSA, which were partially offset by $0.5 million in income earned from the TSA in the three-month fiscal period ended April 2, 2021. The income earned from the TSA was included below operating income in income from transition services agreement on the Company's Condensed Consolidated Statement of Operations.Brake.
Restructuring and Severance Costs
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
| | (in thousands) |
Restructuring and severance costs | | $ | 169 | | | $ | 1,352 | |
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
| | (in thousands) |
Restructuring and severance costs | | $ | 2,190 | | | $ | 169 | |
TheIn December 2022, the Company continuesbegan a review of all businesses and programs to evaluateincrease efficiencies, improve working capital management and focus on sustainable and consistent revenue and profit generating activities. As a result of this review, the Company identified areas to reduce annualized costs in the Precision Products segment and at Corporate through streamlining processes, consolidating the production of fuzes for the JPF program at its Middletown facility, discontinuing K-MAX® helicopter production and right-sizing the Company's total cost structure. In connection with these restructuring actions, the Company currently expects to incur approximately $10.0 to $12.0 million in total pre-tax restructuring charges, consisting of approximately $9.0 to $10.0 million of cash expenditures relating to various headcount reduction and personnel initiatives and approximately $1.0 to $2.0 million of cash expenditures relating to facility closing costs, with the objective of a lean organizational structure that provides a scalable infrastructure, which facilitates future growth opportunities.we anticipate will generate approximately $25.0 million in total annualized costs savings by 2024. In the three-month fiscal period ended April 1, 2022,March 31, 2023, the Company incurred $0.2$2.2 million in severance costs and costs associated with these actions. Since the consolidationannouncement of facilities. Actions taken throughout 2021 and 2022these actions, we have started to generate savings in the first half of 2022, with total annualized cost savings of approximately $8.3 million being realized by 2024.
Loss on Sale of Business
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
| | (in thousands) |
Loss on sale of business | | $ | — | | | $ | 234 | |
In 2020, we received approval from our Board of Directors to sell our UK 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 the UK Composites business. We recorded an additional loss of $0.2incurred $8.8 million in the three-month fiscal period ended April 2, 2021 when the sale was finalized.costs through March 31, 2023.
Operating Income
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 | | March 31, 2023 | | April 1, 2022 |
| | (in thousands) | | (in thousands) |
Operating income | Operating income | | $ | 3,057 | | | $ | 5,613 | | Operating income | | $ | 8,628 | | | $ | 3,057 | |
$ change | $ change | | (2,556) | | | 10,035 | | $ change | | 5,571 | | | (2,556) | |
% change | % change | | (45.5) | % | | 226.9 | % | % change | | 182.2 | % | | (45.5) | % |
% of net sales | % of net sales | | 1.9 | % | | 3.3 | % | % of net sales | | 4.4 | % | | 1.9 | % |
Operating income decreasedincreased for the three-month fiscal period ended April 1, 2022,March 31, 2023, as compared to the corresponding period in 2021.2022. This decreaseincrease was primarily driven by lower operating income at the Precision Products and Structures segments. These changes were partially offset by higher operating income at the Engineered Products segment, partially offset by lower severance costs andoperating income at the absence of costs related to the TSA.Precision Products segment. See Segment Results of Operations and Financial Condition below for further discussion of segment operating income.
Interest Expense, Net
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
| | (in thousands) |
Interest expense, net | | $ | 2,481 | | | $ | 4,251 | |
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
| | (in thousands) |
Interest expense, net | | $ | 9,604 | | | $ | 2,481 | |
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. The decrease in interestInterest expense, net for the three-month fiscal period ended April 1,March 31, 2023 increased when compared to the corresponding period in 2022, was primarily attributabledue to lowera $5.9 million increase in interest expense on our revolving credit agreement as a result of higher borrowings and higher interest expense associated with our deferred compensation plan and $0.7 million in lower interest on our convertible notes, which was a result of the adoption of Accounting Standard Update ("ASU") 2020-06 on January 1, 2022. Refer to Note 2, Recent Accounting Standards, for further information on the adoption of ASU 2020-06.plan.
Effective Income Tax Rate
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
| | |
Effective income tax rate | | 24.5 | % | | 2.5 | % |
| | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
| | |
Effective income tax rate | | 20.8 | % | | 24.5 | % |
The effective income tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the period. The increasedecrease in the effective tax rate for the three-month fiscal period ended April 1, 2022March 31, 2023 as compared to the corresponding rate in the prior year period was primarily causeddriven by a discrete benefit recordedlower net earnings in the prior period related to the sale of the Company’s former UK Composites business.
Backlog
| | | | | | | | | | | | | | |
| | April 1, 2022 | | December 31, 2021 |
| | (in thousands) |
Backlog | | $ | 705,023 | | | $ | 700,923 | |
Backlog increased during the first three months of 2022. The increase was primarily attributable to new orders for our bearings products and seals, springs and contacts. These increases were partially offset by revenue recognized on the JPF program with the USG and the Sikorsky UH-60 BLACK HAWK program and deliveries of our bearings products and springs, seals and contacts.current period.
SEGMENT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Engineered Products Segment
Results of Operations
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 | | March 31, 2023 | | April 1, 2022 |
| | (in thousands) | | (in thousands) |
Net sales | Net sales | | $ | 81,452 | | | $ | 71,779 | | Net sales | | $ | 123,326 | | | $ | 81,452 | |
$ change | $ change | | 9,673 | | | (13,997) | | $ change | | 41,874 | | | 9,673 | |
% change | % change | | 13.5 | % | | (16.3) | % | % change | | 51.4 | % | | 13.5 | % |
| Operating income | Operating income | | $ | 11,042 | | | $ | 4,906 | | Operating income | | $ | 19,356 | | | $ | 11,042 | |
$ change | $ change | | 6,136 | | | (5,674) | | $ change | | 8,314 | | | 6,136 | |
% change | % change | | 125.1 | % | | (53.6) | % | % change | | 75.3 | % | | 125.1 | % |
% of net sales | % of net sales | | 13.6 | % | | 6.8 | % | % of net sales | | 15.7 | % | | 13.6 | % |
Net Sales
Net sales for 2022the three-month fiscal period ended March 31, 2023 increased compared to the corresponding period in 2021,2022, driven by higher sales volume of our commercial and medicaldefense bearings products, aftermarket parts and springs, seals and contacts including products used in medical implantablesapplications, as well as $18.5 million in revenue from our newly-acquired Aircraft Wheel and defense and industrial applications. These improvements, totaling $13.1Brake division. For the three-month fiscal period ended March 31, 2023, foreign currency exchange rates relative to the U.S. dollar had an unfavorable impact of $1.3 million were partially offset by lower sales volume of our defense bearings products.on net sales.
Operating Income
Operating income for 2022the three-month fiscal period ended March 31, 2023 increased when compared to 2021,the corresponding period in 2022, primarily due to the contribution of gross profit from our Aircraft Wheel and Brake acquisition and higher sales and associated gross profit on our commercial and defense bearings products and seals, springs and contacts and commercial bearings products.used in medical applications. These increases in gross profit, of $8.4totaling $18.9 million, were partially offset by lower sales volumethe addition of S,G&A and associated gross profit$4.8 million in intangible asset amortization from Aircraft Wheel and Brake. Foreign currency exchange rates relative to the U.S. dollar had an unfavorable impact of our defense bearings products.$0.6 million on operating income.
Precision Products Segment
Results of Operations
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 | | March 31, 2023 | | April 1, 2022 |
| | (in thousands) | | (in thousands) |
Net sales | Net sales | | $ | 47,549 | | | $ | 60,533 | | Net sales | | $ | 37,971 | | | $ | 47,549 | |
$ change | $ change | | (12,984) | | | (6,329) | | $ change | | (9,578) | | | (12,984) | |
% change | % change | | (21.4) | % | | (9.5) | % | % change | | (20.1) | % | | (21.4) | % |
| Operating income | Operating income | | $ | 3,409 | | | $ | 13,053 | | Operating income | | $ | 1,674 | | | $ | 3,409 | |
$ change | $ change | | (9,644) | | | (2,540) | | $ change | | (1,735) | | | (9,644) | |
% change | % change | | (73.9) | % | | (16.3) | % | % change | | (50.9) | % | | (73.9) | % |
% of net sales | % of net sales | | 7.2 | % | | 21.6 | % | % of net sales | | 4.4 | % | | 7.2 | % |
Net Sales
Net sales for 2022the three-month fiscal period ended March 31, 2023 decreased when compared to 2021,the corresponding period in 2022, primarily due to the absence of a K-MAX® aircraft sale in the current period, the mix of JPF sales in the quarter and a decrease inlower sales on the HarpoonJPF program and our measuring programs. These decreases, totaling $12.6 million, were partially offset by higher sales on our K-MAX® spares and support and the JASSM® fuzing program.
Operating Income
Operating income for 2022the three-month fiscal period ended March 31, 2023 decreased when compared to 2021,the corresponding period in 2022, primarily attributable to $8.0 million in lower gross profit, driven by the mix of JPF sales in the quarter and lower gross profit on our K-MAX®the JPF program, cost growth on the ATACMS program and the FireBurst program, and higher research and development costs for the KARGO UAV unmanned aerial system. These changes, totaling $5.0 million, were partially offset by higher gross profit on our K-MAX® spares and support and the JASSM® fuzing program.
Major Programs/Product Lines
Below is a discussion of significant changes in major programs withwithin the Precision Products segment during the first three months of 2022.2023. See our 20212022 Form 10-K, including Item 1A, "Risk Factors", for a complete discussion of our major programs.
FMU-152 A/B – JPF
We manufacture and produce the JPF,FMU 152 A/B (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 USG,U.S. Government ("USG"), Foreign Military Sales ("FMS") through the USG and Direct Commercial Sales (“DCS”) to foreign militaries that, although not funded by or sold through the USG, require regulatory approvals from the USG.
A total of 6,0206,704 fuzes were delivered to our customers during the first quarter of 2023. We expect to deliver 9,000 to 12,000 fuzes in 2023. Total JPF backlog at March 31, 2023 was $4.8 million, down from $20.0 million at December 31, 2022. We expect to deliver 25,000 to 30,000 fuzes in 2022. Total JPFrecognize the majority of this backlog at April 1, 2022 was $76.1 million, down from $103.4 million at December 31, 2021. Ofwithin the $76.1 million in backlog at April 1, 2022, $3.3 million requires the receiptfirst half of export approvals, licenses or authorizations from the USG before we are permitted to ship the fuzes outside of the United States. The timing and receipt of any such export approvals, licenses, or authorizations are subject to political and geopolitical conditions that are beyond our control. Therefore, there can be no assurance that this portion of our backlog will be converted to a firm sale and, even if it is, the timing of the conversion is unknown.2023.
Our JPF program continues to move throughwind down as it moves to the end of its product lifecycle, reflecting the previously announced decision of the United States Air Force ("USAF") to move from the JPF to the FMU-139 D/B (which we do not manufacture or produce) as its primary fuze system. During 2021, we beganWe expect to satisfy the requirements under Option 15, which relates solely to the procurement of fuzes by 25 foreign militaries and has an expected value of approximately $57.3 million, and, in 2022, we began to satisfy the requirements undercomplete Option 16 which has an expected total value of approximately $43.0 million. Similar to Option 15, this orderour JPF contract with the USG in the first half of 2023, which relates solely to the procurement of fuzes by or in support of foreign militaries and does not include any sales to the USAF. Option 16 extends FMU-152 A/B production into 2023. We have been advised by our customerThe USG has indicated that Option 16they will benot award us any future options; therefore, the last order under our JPF contract with the USG. While we do not expect the close-outfuture viability of our JPF contract with the USG to adversely impactprogram will depend entirely on our ability to continue to market and sell the FMU-152 A/B directlyJPF to foreign militaries in direct commercial sales transactions, in the event the
foreign militaries move to the FMU-139 D/B, our financial condition and results of operations would be materially adversely impacted.DCS transactions. We are currently in discussions with two Middle Eastern customers for one or more follow-on orders aggregating to a minimum of $45.0 million. The final value of these orders will be dependent on volume and pricing agreed upon in the completed contracts. If received, these ordersmillion that would continue tofurther extend the life of the program. DCSprogram, but there can be no assurance as to the receipt, magnitude and timing of these orders. Moreover, any such orders, areif received, would be subject to the receipt of all necessary export approvals, licenses or authorizations. The timing and receipt of any such export approvals, licenses, orother authorizations needed to effectuate the sales, which are subject to political and geopolitical conditions that are beyond our control.
In the fourth quarter of 2022, we announced a restructuring plan that will lead to the permanent closure of our Orlando, Florida manufacturing facility by the end of 2024. The Company has begun to consolidate JPF production in its Middletown, Connecticut, facility as the facility has the potential capacity to deliver against future DCS orders.
Structures Segment
Results of Operations
| | | For the Three Months Ended | | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 | | March 31, 2023 | | April 1, 2022 |
| | (in thousands) | | (in thousands) |
Net sales | Net sales | | $ | 29,047 | | | $ | 39,304 | | Net sales | | $ | 33,245 | | | $ | 29,047 | |
$ change | $ change | | (10,257) | | | (15,380) | | $ change | | 4,198 | | | (10,257) | |
% change | % change | | (26.1) | % | | (28.1) | % | % change | | 14.5 | % | | (26.1) | % |
| Operating (loss) income | | $ | (617) | | | $ | 320 | | |
Operating loss | | Operating loss | | $ | (237) | | | $ | (617) | |
$ change | $ change | | (937) | | | (3,034) | | $ change | | (380) | | | (937) | |
% change | % change | | (292.8) | % | | (90.5) | % | % change | | (61.6) | % | | (292.8) | % |
% of net sales | % of net sales | | (2.1) | % | | 0.8 | % | % of net sales | | (0.7) | % | | (2.1) | % |
Net Sales
Net sales for 2022 decreasedthe three-month fiscal period ended March 31, 2023 increased when compared to 2021,the corresponding period in 2022, primarily due to higher sales on our programs with Rolls Royce, certain Sikorsky programs and composites programs. These increases, totaling $7.4 million, were partially offset by the wind down of the AH-1Z program timing of sales on the A-10 program,and lower sales on certain composite programs and the absence of sales from our former UK Composites business, which was sold in early 2021. These decreases, totaling $11.5 million, were partially offset by higher sales on our programs with Rolls Royce.Sikorsky UH-60 BLACK HAWK program.
Operating (Loss) IncomeLoss
The Structures segment incurred ana lower operating loss of $0.6 million for 2022the three-month fiscal period ended March 31, 2023 when compared to operating income of $0.3 millionthe corresponding period in 2021. This change was2022, primarily due to lowerdriven by higher sales and associated gross profit on the AH-1Z programour programs with Rolls Royce and our composite bladecertain composites programs. These decreasesincreases in gross profit, of $1.1totaling $1.0 million, were partially offset by higherlower sales and gross profit on ourthe UH-60 Sikorsky BLACK HAWK program and lower gross profit on the Sikorsky Combat Rescue Helicopter programHelicopter.
Backlog
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | (in thousands) |
Engineered Products | | $ | 369,713 | | | $ | 322,452 | |
Precision Products | | 111,750 | | | 134,903 | |
Structures | | 251,531 | | | 263,581 | |
Total Backlog | | $ | 732,994 | | | $ | 720,936 | |
The increase in backlog during the first three months of 2023 was primarily attributable to new orders for our bearings products, our seals, springs and a certain structures programcontacts, and our aircraft wheels and brakes and under our programs with Boeing.Rolls Royce. These increases were partially offset by revenue recognized in the period.
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'sCompany's business and operations generally, as described under the heading “Risk Factors” and “Forward-Looking Statements” in Item 1A of Part I of our 20212022 Form 10-K.
A summary of our consolidated cash flows is as follows:
| | | For the Three Months Ended | | For the Three Months Ended |
| | | April 1, 2022 | | April 2, 2021 | | 2022 vs. 2021 | | | March 31, 2023 | | April 1, 2022 | | 2023 vs. 2022 |
| | | (in thousands) | | | (in thousands) |
Total cash provided by (used in): | Total cash provided by (used in): | | | | | | | Total cash provided by (used in): | | | | | | |
Operating activities | Operating activities | | $ | (1,017) | | | $ | (2,415) | | | $ | 1,398 | | Operating activities | | $ | (5,453) | | | $ | (1,017) | | | $ | (4,436) | |
Investing activities | Investing activities | | (6,453) | | | (8,100) | | | 1,647 | | Investing activities | | (8,798) | | | (6,453) | | | (2,345) | |
Financing activities | Financing activities | | (4,035) | | | (4,684) | | | 649 | | Financing activities | | 43,970 | | | (4,035) | | | 48,005 | |
| Free Cash Flow (a) | Free Cash Flow (a) | | | | | | | Free Cash Flow (a) | | | | | | |
Net cash provided by (used in) operating activities | | $ | (1,017) | | | $ | (2,415) | | | $ | 1,398 | | |
Net cash used in operating activities | | Net cash used in operating activities | | $ | (5,453) | | | $ | (1,017) | | | $ | (4,436) | |
Expenditures for property, plant and equipment | Expenditures for property, plant and equipment | | (6,877) | | | (4,678) | | | (2,199) | | Expenditures for property, plant and equipment | | (5,948) | | | (6,877) | | | 929 | |
Free cash flow | Free cash flow | | $ | (7,894) | | | $ | (7,093) | | | $ | (801) | | Free cash flow | | $ | (11,401) | | | $ | (7,894) | | | $ | (3,507) | |
(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 $1.0$5.5 million for the three-month fiscal period ended April 1, 2022, a $1.4March 31, 2023, $4.4 million improvement to cash used in the comparable period in 2021. This change was largely driven by the absence of approximately $25.1 million in nonrecurring payments to eligible participants of Bal Seal's employee retention plans paid in the prior year and the timing of accounts payable cash disbursements, partially offset by the timing of collection of payments on outstanding receivables, more specifically significant receipts on JPF DCS receivables in the prior year, higher material receipts on the K-MAX® program and lower net earnings in the current period.
Net cash used in investing activities was $6.5 million for the three-month fiscal period ended April 1, 2022, $1.6 million less than cash used in the comparable period in 2021.2022. This change was primarily attributable tolargely driven by the cash impacttiming of collection of payments in our Engineered Products segment and the saletiming of our former UK Composites business inwork performed on the prior year,JPF program, partially offset by higher capital expenditures.lower incentive compensation payments and the receipt of approximately $10.0 million in income tax refunds in the current period.
Net cash used in financinginvesting activities was $4.0$8.8 million for the three-month fiscal period ended April 1, 2022, relatively flat withMarch 31, 2023, $2.3 million more than cash used in the comparable period in 2021.2022. This increase was primarily attributable to the settlement of the working capital adjustment associated with the acquisition of Aircraft Wheel and Brake. Refer to Note 2, Business Combinations and Investments, for further information on this acquisition.
Net cash provided by financing activities was $44.0 million for the three-month fiscal period ended March 31, 2023, compared to net cash used of $4.0 million in the comparable period in 2022. This change was primarily due to borrowings under our Credit Agreement 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 our working capital requirements. These could include one or more of the following:
•the matters described in Note 15,12, Commitments and Contingencies, in the Notes to Condensed 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 share repurchase programs;
•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.
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. Our long-term debt instruments will mature in 2024, as discussed below. We are currently assessing potential options for the refinancing of these instruments prior to their scheduled maturity. Refer to Note 14, Debt, in the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of the 20212022 Form 10-K for further information on our Financing Arrangements.
Convertible Notes
During May 2017, we issued $200.0 million aggregate principal amount of convertible senior unsecured notes due May 2024 (the "2024 Notes") pursuant to an indenture, dated May 12, 2017, between the Company and U.S. Bank National Association, as trustee (as amended by the First Supplemental Indenture thereto, dated July 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 on May 1 and November 1 of each year, beginning on November 1, 2017. The 2024 Notes will mature on May 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 on September 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,purchased, plus accrued and unpaid interest.
We incurred $7.4 million of debt issuance costs in connection with the sale of the 2024 Notes, which were allocated between the debt and equity components of the instrument at issuance. 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 was being amortized over the term of the 2024 Notes. As a result of the adoption of ASU 2020-06, the amount recorded to additional paid-in capital was reclassified to retained earnings in the cumulative effect adjustment.adjustment recorded on January 1, 2022. The remaining balance of debt issuance costs is being amortized over the term of the convertible notes. Total amortization expense for the three-month fiscal periods ended March 31, 2023 and April 1, 2022 was $0.3 million and April 2, 2021 was $0.2 million, in both periods. Refer to Note 2, Recent Accounting Standards, for further information on the adoption and impacts of ASU 2020-06.respectively.
Credit Agreement
On December 13, 2019, the Company closed an amended and restated $800.0 million Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A., as Administrative Agent and as Collateral Agent. The Credit Agreement matures on December 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 10.4310.42 to our 20212022 Form 10-K.
At March 31, 2023, $411.0 million was outstanding under the revolving credit facility. 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. These reforms may cause LIBOR to perform differently than in the past, and LIBOR may ultimately cease to exist. Alternative benchmark rate(s) may replace LIBOR and could affect the Company's debt securities, derivative instruments, receivables, debt payments and receipts. An alternative rate may create additional basis risk for market participants as an alternative index is utilized alongside LIBOR. Key regulatory authorities have requested that banks cease entering into new contracts that use USD LIBOR as a reference rate, and do not permit new or existing non-USD LIBOR borrowings, by no later than December 31, 2021. Additionally, the Alternative Reference Rates Committee has recommended replacing USD LIBOR with the Secured Overnight Financing Rate (“SOFR”("SOFR"), which is calculated by short-term repurchase agreements. There can be no guarantee that SOFR will become widely used, or that any alternatives may or may not be developed.
In 2021, the Company amended its Credit Agreement to move its LIBOR benchmark for non-USD borrowings to other non-USD benchmark rates. Future USD borrowings under our current Credit Agreement will continue be based on LIBOR. At this time, it is not possible to predict the effect of any changes to LIBOR, the 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.
No amounts were outstanding under the revolving credit facility in the first quarter of 2022; therefore, the. The interest rate for the periodat March 31, 2023 was 0%6.17%. 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. ThereTotal average bank borrowings were no bank borrowings$383.8 million during the three-month fiscal period ended April 1, 2022 andMarch 31, 2023. Total average bank borrowings were $120.7 million during the year ended December 31, 2021.2022. As of March 31, 2023, the Consolidated Total Net Leverage Ratio was 3.78, as calculated in accordance with the Credit Agreement, as compared to the ceiling of 5.00 to 1.00.
The following table shows the amounts available for borrowing under the Company's revolving credit facility:
| | | April 1, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
In thousands | In thousands | | | In thousands | | |
Total facility | Total facility | | $ | 800,000 | | | $ | 800,000 | | Total facility | | $ | 800,000 | | | $ | 800,000 | |
Amounts outstanding, excluding letters of credit | Amounts outstanding, excluding letters of credit | | — | | | — | | Amounts outstanding, excluding letters of credit | | 411,000 | | | 363,000 | |
Amounts available for borrowing, excluding letters of credit | Amounts available for borrowing, excluding letters of credit | | 800,000 | | | 800,000 | | Amounts available for borrowing, excluding letters of credit | | 389,000 | | | 437,000 | |
Letters of credit under the credit facility(1)(2) | Letters of credit under the credit facility(1)(2) | | 91,892 | | | 92,646 | | Letters of credit under the credit facility(1)(2) | | 51,480 | | | 51,630 | |
Amounts available for borrowing | Amounts available for borrowing | | $ | 708,108 | | | $ | 707,354 | | Amounts available for borrowing | | $ | 337,520 | | | $ | 385,370 | |
| Amounts available for borrowing subject to EBITDA, as defined by the Credit Agreement(3) | Amounts available for borrowing subject to EBITDA, as defined by the Credit Agreement(3) | | $ | 378,803 | | | $ | 409,914 | | Amounts available for borrowing subject to EBITDA, as defined by the Credit Agreement(3) | | $ | 193,037 | | | $ | 211,131 | |
(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, $86.3$46.1 million letters of credit relate to a JPF DCS contract in thein both periods ended April 1, 2022March 31, 2023 and December 31, 2021.
(3) Amounts available for borrowing subject to EBITDA reflect the minimum borrowing capacity under EBITDA, subject to adjustments.2022.
WeDebt issuance costs in connection with the Credit Agreement have been capitalized and are being amortized over the term of the agreement. In 2019, we incurred $3.6 million of debt issuance costs in connection with the amendment and restatement of the Credit Agreement. We incurred an additional $4.4 million of debt issuance costs in connection with the amendment of the Credit Agreement in 2022. Total amortization expense for the three-month fiscal periods ended March 31, 2023 and April 1, 2022 was $0.6 million and April 2, 2021 was $0.2 million, respectively.
Interest Rate Swaps
During 2022, we entered into interest rate swap agreements, effective January 1, 2023, for the purposes of hedging the eight quarterly variable-rate Credit Agreement interest payments due in both periods.2023 and 2024. 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 SOFR. These interest rate swaps were not material to the Company's Condensed Consolidated Financial Statements as of March 31, 2023. Over the next twelve months, the income related to cash flow hedges expected to be reclassified from other comprehensive income is $0.3 million.
Other Sources/Uses of Capital
Letters of Credit
Of the standby letters of credit under our credit facility, $86.3$46.1 million in letters of credit relate to 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.
No contributions are expected to be made to the qualified pension plan during 2022.2023. The Company contributed $0.1 million to the SERP through the end of the first quarter of 20222023 and plans to contribute an additional $0.4 million to the SERP in 2022. For the 2021 plan year, the Company contributed $10.0 million2023. No contribution was made to the qualified pension plan and $2.7we paid $0.5 million to the SERP.in SERP benefits in 2022.
Effective December 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 in December 2016. We have maintained our accrual at $0.3 million as of April 1, 2022. 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.
Share-based Arrangements
As of April 1, 2022,March 31, 2023, future compensation costs related to non-vested stock options, restricted stock grants and performance stock grants is $15.6$13.6 million. The Company anticipates that this cost will be recognized over a weighted-average period of 2.3 years.
Stock Repurchase Plans
On April 20, 2022, we announced that our Board of Directors approved a share repurchase program ("2022 Share Repurchase Program") authorizing the repurchase of up to $50.0 million of the common stock, par value $1.00 per share, of the Company. We 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. This plan replaces the authorization approved in April 2015.
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 (in thousands) |
| | For the Three Months Ended |
| | April 1, 2022 | | April 2, 2021 |
Net sales | | $ | 158,048 | | | $ | 171,616 | |
Acquisition sales | | — | | | — | |
Sales of disposed businesses that did not qualify for discontinued operations | | — | | | 1,704 | |
Organic Sales | | $ | 158,048 | | | $ | 169,912 | |
| | | | | | | | | | | | | | |
Organic Sales (in thousands) |
| | For the Three Months Ended |
| | March 31, 2023 | | April 1, 2022 |
Net sales | | $ | 194,542 | | | $ | 158,048 | |
Acquisition sales | | 18,543 | | | — | |
Organic Sales | | $ | 175,999 | | | $ | 158,048 | |
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 2022.2023. See our 20212022 Form 10-K for a discussion of our contractual obligations and off-balance sheet arrangements.
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 20212022 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 regardingThere have been no recent changes in accounting standards is included in Note 2, Recent Accounting Standards,during the first three months of the Notes to Condensed Consolidated Financial Statements in this report.2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the Company’s exposure to market risk during the first three months of 2022.2023. See the Company’s 20212022 Form 10-K for a discussion of the Company’s exposure to market risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934, as amended, as of April 1, 2022.March 31, 2023. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of April 1, 2022,March 31, 2023, our disclosure controls and procedures were effective.
Internal Controls over Financial Reporting
There was no change to our internal control over financial reporting that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
General
From time to time, as a normal incident of the nature and kinds of businesses in which the Company and its subsidiaries are, and were, engaged, various claims or charges are asserted and legal proceedings are commenced by or against the Company and/or one or more of its subsidiaries. Claimed amounts may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitral awards. We record accruals for losses related to those matters that we consider to be probable and that can be reasonably estimated. Gain contingencies, if any, are recognized when they are realized and legal costs generally are expensed when incurred.
We evaluate, on a quarterly basis, developments in legal proceedings that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. Our loss contingencies are subject to substantial uncertainties, however, including for each such contingency the following, among other factors: (i) the procedural status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings involve a large number of parties and/or claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement discussions, if any, and the settlement postures of the parties. Because of these uncertainties, management has determined that, except as otherwise noted below, the amount of loss or range of loss that is reasonably possible in respect of each matter described below (including any reasonably possible losses in excess of amounts already accrued), is not reasonably estimable.
While it is not possible to predict the outcome of these matters with certainty, based upon available information, management believes that all settlements, arbitration awards and final judgments, if any, which are considered probable of being rendered against us in legal proceedings and that can be reasonably estimated are accrued for at April 1, 2022.March 31, 2023. Despite this analysis, there can be no assurance that the final outcome of these matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows.
As of April 1, 2022,March 31, 2023, neither the Company nor any of its subsidiaries was a party, nor was any of its or their property subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company and its subsidiaries. Additional information relating to certain of these matters is set forth in Note 15,12, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements.
Aircraft Safety Matters
The Company designs, manufactures, services and sells complex and sophisticated aerospace parts, subassemblies and aircraft. These products are manufactured according to detailed specifications and are subject to strict approval or certification requirements. Technical, mechanical and other failures may occur as a result of manufacturing or design defects, operational processes or production issues attributable to us, our customers, suppliers, third party integrators or others. Due to the nature of the Company's business, liability claims may arise from accidents involving products the Company has manufactured, including claims for injury or death. Product or system failures could result in product recalls, regulatory directives and product liability and warranty claims (including claims related to the safety or reliability of our products). Such failures could also lead to service, repair and maintenance costs, damages and fines and regulatory and environmental liabilities. While management believes that the Company maintains adequate insurance for these risks, insurance cannot be obtained to protect against all risks and liabilities. It is therefore possible that the insurance coverage may not cover all claims or liabilities, and the Company may be forced to bear unanticipated costs or liabilities. As of March 31, 2023, the Company is party to pending litigation relating to an incident involving a K-MAX® helicopter that resulted in a fatality, and the Company has been notified of potential claims relating to another such incident. Each incident is the subject of one or more investigations undertaken by applicable civil aviation agencies located in the jurisdiction of the incident. While it is not possible to predict the outcome of any investigations, litigation or claims relating to these or other potential incidents, management believes that all such investigations, litigation or claims in existence at March 31, 2023, are not reasonably likely to have a material adverse effect on our business, financial condition and results of operations or cash flows.
Environmental Matters
The Company and its subsidiaries are subject to numerous U.S. federal, state and international environmental laws and regulatory requirements and are involved from time to time in investigations or litigation of various potential environmental issues concerning activities at our facilities or former facilities or remediation as a result of past activities (including past activities of companies we have acquired). From time to time, we receive notices from the U.S. Environmental Protection Agency or equivalent state or international environmental agencies that we are a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent laws. Such notices assert potential liability for cleanup costs at various sites, which may include sites owned by us, sites we previously owned and treatment or disposal sites not owned by us, allegedly containing hazardous substances attributable to us from past operations. While it is not possible to predict the outcome of these proceedings, in the opinion of management, any payments we may be required to make as a result of all such claims in existence at April 1, 2022,March 31, 2023, will not have a material adverse effect on our business, financial condition and results of operations or cash flows.
Item 1A. Risk Factors
Investors should carefully review and consider the information regarding certain factors that could materially affect our business, results of operations, financial condition and cash flows as set forth under Item 1A. “Risk Factors” in our 20212022 Form 10-K. WeExcept as set forth below, we do not believe there have been any material changes to the risk factors previously disclosed in our 20212022 Form 10-K, but we may disclose changes to such factors or disclose additional factors from time to time in future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently believe not to be material may also adversely impact our business, results of operations, financial position and cash flows.
We design, manufacture, service and sell complex aerospace parts, subassemblies and aircraft that subject us to potential risks and liabilities in the event they do not operate as intended.
40The Company designs, manufactures, services and sells complex and sophisticated aerospace parts, subassemblies and aircraft. These products are manufactured according to detailed specifications and are subject to strict approval or certification requirements. Technical, mechanical and other failures have occurred in the past, and may occur in the future, whether as a result of manufacturing or design defects, operational processes or production issues attributable to us, our customers, suppliers, third party integrators or others. Our products could also fail as a result of cyber-attacks, such as those that seize control and result in misuse or unintended use of our products, or other intentional acts. Due to the nature of the Company's business, liability claims have arisen, and may arise in the future, from accidents or disasters involving products the Company has manufactured, including claims for injury or death. Product or system failures could result in negative publicity that could reduce demand for our products, product recalls, regulatory directives and product liability and warranty claims (including claims related to the safety or reliability of our products). Such failures could also lead to service, repair and maintenance costs, damages and fines and regulatory and environmental liabilities. While management believes that the Company maintains adequate insurance for these risks, insurance cannot be obtained to protect against all risks and liabilities. It is therefore possible that the insurance coverage may not cover all claims or liabilities, and the Company may be forced to bear unanticipated costs or liabilities. As of March 31, 2023, the Company is party to pending litigation relating to an incident involving a K-MAX® helicopter that resulted in a fatality, and the Company has been notified of potential claims relating to another such incident. Each incident is the subject of one or more investigations undertaken by applicable civil aviation agencies located in the jurisdiction of the incident. While it is not possible to predict the outcome of any investigations, litigation or claims relating to these or other potential incidents, management believes that all such investigations, litigation or claims in existence at March 31, 2023, are not reasonably likely to have a material adverse effect on our business, financial condition and results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements also may be included in other publicly available documents issued by the Company and in oral statements made by our officers and representatives from time to time. These forward-looking statements are intended to provide management's current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. They can be identified by the use of words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "would," "could," "will" and other words of similar meaning in connection with a discussion of future operating or financial performance. Examples of forward looking statements include, among others, statements relating to future sales, earnings, cash flows, results of operations, uses of cash and other measures of financial performance.
Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and other factors that may cause the Company's actual results and financial condition to differ materially from those expressed or implied in the forward-looking statements. Such risks, uncertainties and other factors include, among others: (i) changes in domestic and foreign economic and competitive conditions in markets served by the Company, particularly the defense, commercial aviation and industrial production markets; (ii) changes in government and customer priorities and requirements (including cost-cutting initiatives, government and customer shut-downs, the potential deferral of awards, terminations or reductions of expenditures to respond to the priorities of Congress and the Administration, or budgetary cuts resulting from Congressional actions or automatic sequestration); (iii) the global economic impact of the COVID-19 pandemic; (iv) risks and uncertainties associated with the successful integration of our Aircraft Wheel and Brake acquisition; (v) changes in geopolitical conditions in countries where the Company does or intends to do business; (v)(vi) the successful conclusion of competitions for government programs (including new, follow-on and successor programs) and thereafter successful contract negotiations with government authorities (both foreign and domestic) for the terms and conditions of the programs; (vi)(vii) the timely receipt of any necessary export approvals and/or other licenses or authorizations from the USG; (vii)(viii) timely satisfaction or fulfillment of material contractual conditions precedents in customer purchase orders, contracts, or similar arrangements; (viii)(ix) the existence of standard government contract provisions permitting renegotiation of terms and termination for the convenience of the government; (ix)(x) the successful resolution of government inquiries or investigations relating to our businesses and programs; (x)(xi) risks and uncertainties associated with the successful implementation and ramp up of significant new programs, including the ability to manufacture the products to the detailed specifications required and recover start-up costs and other investments in the programs; (xi)(xii) potential difficulties associated with variable acceptance test results, given sensitive production materials and extreme test parameters; (xii)(xiii) the receipt and successful execution of production orders under the Company's existing USG JPF contract, including the exercise of all contract options and receipt of orders from allied militaries, but excluding any next generation programmable fuze programs, as all have been assumed in connection with goodwill impairment evaluations; (xiii)(xiv) the continued support of the existing K-MAX® helicopter fleet, including sale of existing K-MAX® spare parts inventory and the receipt of orders for new aircraft sufficient to recover our investments in the K-MAX® production line; (xiv)(xv) the accuracy of current cost estimates associated with environmental remediation activities; (xv)(xvi) the profitable integration of acquired businesses into the Company's operations; (xvi)(xvii) the ability to recover from cyber-based or other security attacks, information technology failures or other disruptions; (xvii)(xviii) changes in supplier sales or vendor incentive policies; (xviii)(xix) the ability of our suppliers to satisfy their performance obligations, including any supply chain disruptions; (xix)(xx) the effects of price increases or decreases; (xx)(xxi) the effects of pension regulations, pension plan assumptions, pension plan asset performance, future contributions and the pension freeze, including the ultimate determination of the USG's share of any pension curtailment adjustment calculated in accordance with CAS 413; (xxi)freeze; (xxii) future levels of indebtedness and capital expenditures; (xxii)(xxiii) compliance with our debt covenants; (xxiv) the continued availability of raw materials and other commodities in adequate supplies and the effect of increased costs for such items; (xxiii)(xxv) the effects of currency exchange rates and foreign competition on future operations; (xxiv)(xxvi) changes in laws and regulations, taxes, interest rates, inflation rates and general business conditions; (xxv)(xxvii) future repurchases and/or issuances of common stock;(xxvi)(xxviii) the occurrence of unanticipated restructuring costs or the failure to realize anticipated savings or benefits from past or future expense reduction actions; (xxvii)(xxix) the ability to recruit and retain skilled employees; (xxx) the successful resolution of all pending and (xxviii)future investigations, litigation or claims relating to the manufacture or design of our products, including, without limitation, the K-MAX® helicopter; and (xxxi) other risks and uncertainties set forth herein and in our 20212022 Form 10-K.
Any forward-looking information provided in this report should be considered with these factors in mind. We assume no obligation to update any forward-looking statements contained in this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases of common stock by the Company during the three-month fiscal period ended April 1, 2022:March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Plan (b) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan(c) (in thousands) |
January 1, 2022 - January 28, 2022 | | 129 | | | $ | 44.72 | | | — | | | $2,168 | |
January 29, 2022 - February 25, 2022 | | 332 | | | $ | 42.53 | | | — | | | $2,168 | |
February 26, 2022 - April 1, 2022 | | 8,442 | | | $ | 43.41 | | | — | | | $2,168 | |
Total | | 8,903 | | | | | — | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Plan (b) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan(b) (in thousands) |
January 1, 2023 - January 27, 2023 | | 6,294 | | | $ | 23.37 | | | — | | | $50,000 | |
January 28, 2023 - February 24, 2023 | | 4,366 | | | $ | 25.23 | | | — | | | $50,000 | |
February 25, 2023 - March 31, 2023 | | 9,467 | | | $ | 26.00 | | | — | | | $50,000 | |
Total | | 20,127 | | | | | — | | | |
(a) During the first quarter of 20222023, the Company purchased 8,90320,127 shares in connection with employee tax withholding obligations as permitted by our equity compensation plans, which are SEC Rule 16b-3 qualified compensation plans. These were not purchases under our publicly announced program.
(b) On April 29, 2015, the Company announced that its Board of Directors approved a $100.0 million share repurchase program. At April 1, 2022, $2.2 million remained available for repurchase under this authorization.
(c) On April 20, 2022, the Company announced that its Board of Directors approved a $50.0 million share repurchase program. This plan replaces the authorization approved in April 2015 (refer to note b above).2015. For additional information, see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Other Sources/Uses of Capital" in this Form 10-Q for the three-month fiscal period ended April 1, 2022.March 31, 2023.
Item 6. Index To Exhibits
| | | | | | | | |
10.1 | | Previously Filed |
10.2 | | Previously Filed |
10.3 | | Previously Filed |
10.4 | | Previously Filed |
10.5 | | Previously Filed |
10.6 | | Previously Filed |
31.1 | | Filed Herewith |
31.2 | | Filed Herewith |
32.1 | | FiledFurnished Herewith |
32.2 | | FiledFurnished Herewith |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101 | |
* Management contract or compensatory plan.
SIGNATURES
Kaman Corporation and Subsidiaries
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
| | KAMAN CORPORATION |
| | Registrant |
Date: | May 2, 20222023 | | | /s/ Ian K. Walsh |
| | By: | | Ian K. Walsh |
| | | | Chairman, President and |
| | | | Chief Executive Officer |
| | | | | | | | | | | | | | |
Date: | May 2, 20222023 | | | /s/ James G. Coogan |
| | By: | | James G. Coogan |
| | | | Senior Vice President, and |
| | | | Chief Financial Officer and Treasurer |