Edgar Filing: KAMAN CORP

form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2009

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ______

Commission File Number: 0-1093

KAMAN CORPORATION

(Exact name of registrant as specified in its charter)

Connecticut	06-0613548

(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1332 Blue Hills Avenue

Bloomfield, Connecticut 06002

(Address of principal executive offices) (Zip Code)

(860) 243-7100

(Registrant’s telephone number, including area code)

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.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

At October 30, 2009, there were 25,750,386 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)

	October 2,			December 31,
	2009			2008
Assets
Current assets:
Cash and cash equivalents	$	16,620		$	8,161
Accounts receivable, net		145,146			173,847
Inventories		280,070			255,817
Deferred income taxes		20,648			23,851
Income taxes receivable		936			3,450
Other current assets		20,931			21,390
Total current assets		484,351			486,516
Property, plant and equipment, net		79,884			79,476
Goodwill		87,501			83,594
Other intangibles assets, net		28,759			28,211
Deferred income taxes		71,143			71,926
Other assets		21,517			12,890
Total assets	$	773,155		$	762,613

Liabilities and Shareholders’ Equity
Current liabilities:
Notes payable	$	1,669		$	1,241
Current portion of long-term debt		5,000			5,000
Accounts payable – trade		72,597			84,059
Accrued salaries and wages		20,952			21,104
Accrued pension costs		1,107			5,878
Accrued contract losses		1,044			9,714
Advances on contracts		2,142			10,612
Other accruals and payables		43,164			40,105
Income taxes payable		535			1,464
Total current liabilities		148,210			179,177
Long-term debt, excluding current portion		72,038			87,924
Deferred income taxes		8,241			7,926
Liability for pension benefits		165,070			168,148
Due to Commonwealth of Australia		33,434			-
Other long-term liabilities		46,337			45,167
Commitments and contingencies
Shareholders' equity:
Capital stock, $1 par value per share:
Preferred stock, 200,000 shares authorized; none outstanding		-			-
Common stock, 50,000,000 shares authorized, 25,731,931 and
25,514,525 shares issued, respectively		25,732			25,515
Additional paid-in capital		88,547			85,073
Retained earnings		297,410			283,789
Accumulated other comprehensive income (loss)		(111,332	)		(119,658	)
Less 48,182 and 43,907 shares of common stock, respectively,
held in treasury, at cost		(532	)		(448	)
Total shareholders’ equity		299,825			274,271
Total liabilities and shareholders’ equity	$	773,155		$	762,613

See accompanying notes to the 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 Nine Months Ended
	October 2,		September 26,			October 2,			September 26,
	2009		2008			2009			2008

Net sales	$	289,901	$	335,133		$	877,159		$	937,199
Cost of sales		213,209		246,260			644,301			685,463
Gross profit		76,692		88,873			232,858			251,736

Selling, general and administrative expenses		62,023		64,726			192,659			191,198
Goodwill impairment		-		-			-			7,810
Net (gain)/loss on sale of assets		3		(301	)		(37	)		(94	)
Operating income from continuing operations		14,666		24,448			40,236			52,822
Interest expense, net		1,270		1,341			3,909			2,336
Other expense, net		621		1,977			1,235			1,906

Earnings from continuing operations
before income taxes		12,775		21,130			35,092			48,580
Income tax expense		3,151		7,600			10,698			20,092
Net earnings from continuing operations		9,624		13,530			24,394			28,488

Gain on disposal of discontinued operations		-		-			-			506
Income tax expense		-		-			-			183
Net earnings from disposal of discontinued operations		-		-			-			323

Net earnings	$	9,624	$	13,530		$	24,394		$	28,811

Net earnings per share:
Basic earnings per share
from continuing operations	$	0.37	$	0.53		$	0.95		$	1.13
Basic earnings per share
from disposal of discontinued operations		-		-			-			0.01
Basic earnings per share	$	0.37	$	0.53		$	0.95		$	1.14

Diluted earnings per share
from continuing operations	$	0.37	$	0.53		$	0.95		$	1.12
Diluted earnings per share
from disposal of discontinued operations		-		-			-			0.01
Diluted earnings per share	$	0.37	$	0.53		$	0.95		$	1.13

Average shares outstanding:
Basic		25,672		25,405			25,615			25,321
Diluted		25,831		25,548			25,717			25,479

Dividends declared per share	$	0.14	$	0.14		$	0.42		$	0.42

See accompanying notes to the condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

KAMAN CORPORATION AND SUBSIDIARIES

(In thousands) (Unaudited)

	For the Nine Months Ended
	October 2,			September 26,
	2009			2008
Cash flows from operating activities:
Net earnings from continuing operations	$	24,394		$	28,488
Adjustments to reconcile net earnings from continuing operations to
net cash provided by (used in) operating activities of continuing operations:
Depreciation and amortization		11,802			9,056
Provision for doubtful accounts		175			(23	)
Net (gain) loss on sale of assets		(37	)		(94	)
Loss on change in Australian Payable, net of gain on derivative instruments		1,497			-
Goodwill impairment		-			7,810
Share-based compensation expense		2,406			1,971
Excess tax benefit from share-based compensation arrangements		(96	)		(348	)
Deferred income taxes		3,700			1,783
Changes in assets and liabilities, excluding effects of acquisitions/divestures:
Accounts receivable, net		(10,797	)		(37,908	)
Inventories		30,084			(24,906	)
Income tax receivable		2,514			-
Other current assets		777			2,820
Accounts payable - trade		(10,610	)		4,956
Accrued contract losses		(2,605	)		926
Advances on contracts		61			-
Accrued expenses and payables		1,762			(11,115	)
Income taxes payable		(1,118	)		(10,894	)
Pension liabilities		(4,971	)		(8,722	)
Other long-term liabilities		(438	)		(2,279	)
Cash provided by (used in) operating activities of continuing operations		48,500			(38,479	)
Cash provided by (used in) operating activities of discontinued operations		-			(183	)
Cash provided by (used in) operating activities		48,500			(38,662	)

Cash flows from investing activities:
Proceeds from sale of assets		51			122
Net proceeds from the sale of discontinued operations		-			447
Expenditures for property, plant & equipment		(8,869	)		(9,995	)
Acquisition of businesses including earn out adjustments, net of cash acquired		(576	)		(100,168	)
Other, net		(1,735	)		(2,277	)
Cash provided by (used in) investing activities		(11,129	)		(111,871	)

Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements		(11,892	)		88,263
Debt repayment		(3,750	)		-
Net change in book overdraft		(1,637	)		8,723
Proceeds from employee stock plan transactions		1,333			3,359
Dividends paid		(10,742	)		(10,615	)
Windfall tax benefit		96			348
Payment of debt issuance costs		(3,401	)		-
Other		133			1,641
Cash provided by (used in) financing activities		(29,860	)		91,719

Net increase (decrease) in cash and cash equivalents		7,511			(58,814	)
Effect of exchange rate changes on cash and cash equivalents		948			(250	)
Cash and cash equivalents at beginning of period		8,161			73,898
Cash and cash equivalents at end of period	$	16,620		$	14,834

See accompanying notes to the condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

1. BASIS OF PRESENTATION

The December 31, 2008 condensed consolidated balance sheet amounts have been derived from the previously audited consolidated balance sheet of Kaman Corporation and subsidiaries. In the opinion of management, the balance of the condensed financial information reflects all adjustments necessary for a fair presentation of the company’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this report. Certain amounts in the prior period condensed consolidated financial statements 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 Form 10-K for the year ended December 31, 2008. The results of operations for the interim period presented are not necessarily indicative of trends or of results to be expected for the entire year.

During the second quarter of 2009, the Company implemented modifications to its system of reporting, resulting from changes to its internal organization over the preceeding year, which changed its reportable segments to Industrial Distribution and Aerospace. The Company previously had five reportable business segments, Industrial Distribution and four Aerospace segments. See Note 16, Segment Information, for further discussion of the change in the Company’s segments.

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 third quarter for 2009 and 2008 ended on October 2, 2009 and September 26, 2008, respectively.

2. RECENT ACCOUNTING STANDARDS

In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification TM (Codification) which became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative. The Codification is effective for interim and annual reporting periods ending after September 15, 2009. The adoption of the Codification did not have an impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued guidance which established principles and requirements for recognition and disclosure of subsequent events. In particular, it sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. This guidance is to be applied to the accounting for and disclosure of subsequent events not addressed in other applicable GAAP and is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of these principles and requirements did not have an impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued guidance which amends the provisions for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The guidance eliminated the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria for business combinations. The guidance is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The nature and magnitude of the specific effects of this guidance, if any, on the Company’s future results of operations will depend upon the nature and magnitude of any contingencies associated with future acquisitions.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

3. ADDITIONAL CASH FLOW INFORMATION

Cash payments for interest were $4.2 million and $2.8 million for the nine months ended October 2, 2009, and September 26, 2008, respectively. Cash payments for income taxes, net of refunds, for the same periods were $4.8 million and $28.1 million, respectively.

On February 12, 2009, the Company completed the transfer of ownership of the Australian SH-2G(A) Super Seasprite Program inventory and equipment. As a result, the Company recorded a non-cash inventory acquisition of $52.7 million, which represented the elimination of $32.0 million of net unbilled receivables, the elimination of $6.1 million of accrued contract losses, the recognition of the $25.8 million minimum payment liability due to the Commonwealth of Australia and $1.0 million of additional costs required to close out the program. See Note 7, Inventories, for further discussion.

4. ACCOUNTS RECEIVABLE, NET

Accounts receivable consist of the following (in thousands):

	October 2,			December 31,
	2009			2008

Trade receivables	$	74,799		$	77,071
U.S. Government contracts:
Billed		37,386			28,361
Costs and accrued profit – not billed		5,359			2,450
Commercial and other government contracts:
Billed		28,623			26,845
Costs and accrued profit – not billed		1,442			41,292
Less allowance for doubtful accounts		(2,463	)		(2,172	)
Accounts receivable, net	$	145,146		$	173,847

Accounts receivable, net also includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs, which totaled $0.9 million and $2.9 million at October 2, 2009 and December 31, 2008, respectively. The Company records revenue associated with these matters only when recovery can be estimated reliably and realization is probable.

On February 12, 2009, the unbilled receivables associated with the SH-2G(A) program were $40.6 million and the balance of amounts received as advances on this contract were $8.6 million. These balances, totaling a net $32.0 million, were eliminated in connection with the transfer of the Australian program inventory and equipment to the Company. See Note 7, Inventories, for further discussion.

5. 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 us 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 for 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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

The table below segregates all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine their fair value at the measurement date (in thousands):

	Total Carrying				Significant other		Significant
	Value at		Quoted prices in		observable		unobservable
	October 2,		active markets		inputs		inputs
	2009		(Level 1)		(Level 2)		(Level 3)

Derivative instruments	$	5,895	$	-	$	5,895	$	-
Total Assets	$	5,895	$	-	$	5,895	$	-

Derivative instruments	$	610	$	-	$	610	$	-
Total Liabilities	$	610	$	-	$	610	$	-

The Company’s derivative instruments are limited to foreign exchange contracts and interest rate swaps that are measured at fair value using observable market inputs such as forward rates and our counterparties’ credit risks. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy and have been included in other current assets, other assets and other long-term liabilities on the Condensed Consolidated Balance Sheet at October 2, 2009. Based on the continued ability to trade and enter into forward contracts and interest rate swaps, we consider the markets for our 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 October 2, 2009, such credit risks have not had an adverse impact on the fair value of these instruments.

6. DERIVATIVE FINANCIAL INSTRUMENTS

On January 1, 2009, the Company adopted guidance which amends and expands the disclosure requirements for derivative instruments and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.

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 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 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.

Derivatives Designated as Cash Flow Hedges

The Company’s Term Loan Credit Agreement (“Term Loan”) contains floating rate obligations and is subject to interest rate fluctuations. During the first quarter of 2009, the Company entered into interest rate swap agreements for the purposes of hedging the eight quarterly variable-rate interest payments on its Term Loan due in 2010 and 2011. These interest rate swap agreements are designated as cash flow hedges and are intended to manage interest rate risk associated with the Company’s variable-rate borrowings and minimize the impact of interest rate fluctuations on the Company’s earnings and cash flows attributable to changes in LIBOR rates. The Company will include in earnings amounts previously included in accumulated other comprehensive income upon payment of its eight quarterly variable-rate interest payments.

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 previously included in accumulated other comprehensive income upon recognition of cost of sales related to the underlying transaction.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

6. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

Derivatives Designated as Cash Flow Hedges - continued

The following table shows the fair value of derivative instruments designated as cash flow hedging instruments (in thousands):

		Fair Value
	Balance Sheet	October 2,		December 31,		Notional
	Location	2009		2008		Amount
Derivative Assets
Foreign exchange contracts (a)	Other current assets	$	-	$	212	933 Euro
Foreign exchange contracts (b)	Other assets		-		779	36,516 Australian Dollars
Total		$	-	$	991

Derivative Liabilities
Interest rate swap contracts	Other liabilities	$	527	$	-	$	40,000 - $45,000
Total		$	527	$	-

(a) Forward exchange contracts dedesignated on July 4, 2009. See information below for fair value after dedesignation.

(b) Forward exchange contracts dedesignated on February 12, 2009. See information below for fair value after dedesignation.

The following table shows the gain or (loss) recognized in other comprehensive income for derivatives designated as cash flow hedges (in thousands):

	For the three months ended					For the nine months ended
	October 2,			September 26,		October 2,			September 26,
	2009			2008		2009			2008

Foreign exchange contracts (a)	$	-		$	-	$	(37	)	$	-
Foreign exchange contracts (b)		-			-		(1,941	)		-
Interest rate swap contracts		(360	)		-		(527	)		-
Total	$	(360	)	$	-	$	(2,505	)	$	-

(a)	Forward exchange contract dedesignated on July 4, 2009. See information below for amounts recognized in the Condensed Consolidated Statement of Operations after dedesignation.

(b)	Forward exchange contract dedesignated on February 12, 2009. See information below for amounts recognized in the Condensed Consolidated Statement of Operations after dedesignation.

During the three months and nine months ended October 2, 2009, the loss reclassified to income from other comprehensive income for derivative instruments designated as cash flow hedges was not material. No amounts were reclassified from other comprehensive income for the three months or nine months ended September 26, 2008. Over the next twelve months, the Company expects to reclassify income of approximately $0.1 million from other comprehensive income.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

6. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

Derivatives Designated as Cash Flow Hedges - continued

During the three months and nine months ended October 2, 2009, the gain recorded in other income for the ineffective portion of derivative instruments designated as cash flow hedges was not material. No such amounts were recorded for the three months or nine months ended September 26, 2008.

Derivatives Not Designated as Hedging Instruments

The following table shows the fair value of derivative instruments not designated as hedging instruments (in thousands):

		Fair Value
	Balance Sheet	October 2,		December 31,		Notional
	Location	2009		2008		Amount
Derivative Assets
Foreign exchange contracts	Other current assets	$	39	$	-	$	275
Foreign exchange contracts	Other current assets		142		-	933 Euro
Foreign exchange contracts	Other assets		5,714		-	36,516 Australian Dollars
Total		$	5,895	$	-

Derivative Liabilities
Foreign exchange contracts	Other current liabilities	$	83	$	-	$	1,900
Total		$	83	$	-

On February 12, 2009, the Company dedesignated the forward contract it had entered into to hedge $36.5 million (AUD) of its $39.5 million (AUD) future minimum required payments to the Commonwealth of Australia. At October 2, 2009, the U.S. dollar value of the $36.5 million (AUD) payable was $31.6 million.

On July 4, 2009, the Company dedesignated the forward contract it had entered into to hedge future Euro obligations, due to a change in the timing of those payments.

The following table shows the location and amount of the gain or (loss) recognized on the Condensed Consolidated Statements of Operations for derivatives not designated as hedge instruments (in thousands):

		For the three months ended					For the nine months ended
	Income Statement	October 2,			September 26,		October 2,			September 26,
	Location	2009			2008		2009			2008
Derivative Assets
Foreign exchange contracts	Other expense, net	$	(3	)	$	-	$	38		$	-
Foreign exchange contracts	Other expense, net		42			-		42			-
Foreign exchange contracts	Other expense, net		2,035			-		6,607			-
Total		$	2,074		$	-	$	6,687		$	-

Derivative Liabilities
Foreign exchange contracts	Other expense, net	$	(85	)	$	-	$	(85	)	$	-
Total		$	(85	)	$	-	$	(85	)	$	-

For the three months and nine months ended October 2, 2009, the Company recorded expense of $2.5 million and $7.8 million, respectively, to other expense related to the change in the value of the previously hedged $36.5 million (AUD) payable.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

6. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

Hedges of a Net Investment in Foreign Operations

The Company also maintains an approximately $7.6 million Euro note, part of the revolving credit facility, which qualifies and has been designated as an effective hedge against the Company’s investment in its German subsidiary (RWG). The U.S. dollar value of the Euro note at October 2, 2009, was $11.1 million.

The following table shows the amount of the cumulative translation gain or (loss) recorded in other comprehensive income (in thousands):

		For the three months ended					For the nine months ended
		October 2,		September 26,			October 2,		September 26,
	Location	2009		2008			2009		2008

Euro note	Cumulative Translation Adjustment	$	448	$	(895	)	$	656	$	(116	)
Total		$	448	$	(895	)	$	656	$	(116	)

The Company did not reclassify any amounts from other comprehensive income to earnings during the three or nine months ended October 2, 2009 or September 26, 2008. Over the next twelve months, the Company does not expect to reclassify any amounts from other comprehensive income.

7. INVENTORIES

Inventories consist of the following (in thousands):

	October 2,		December 31,
	2009		2008

Merchandise for resale	$	88,882	$	106,757
Contracts and other work in process		172,099		130,299
Finished goods		19,089		18,761
Total	$	280,070	$	255,817

K-MAX® inventory of $24.1 million and $23.6 million as of October 2, 2009 and December 31, 2008, respectively, is included in other work in process and finished goods. Management believes that a significant portion of this K-MAX inventory will be sold after October 2, 2010, based upon the anticipation of supporting the fleet for the foreseeable future.

Inventories also include amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs, which totaled $11.4 million and $10.0 million at October 2, 2009 and December 31, 2008, respectively. The Company records revenue associated with these matters only when recovery can be estimated reliably and realization is probable.

Net unbilled accounts receivable*	$	32,041
Accrued contract loss eliminated		(6,072	)
USD equivalent of $39.5 million (AUD) minimum liability due to the
Commonwealth of Australia (translated at the exchange rate in
effect on the transaction date, which was 0.6522)		25,772
Additional costs required to close out program		1,000
Total inventory recorded on February 12, 2009	$	52,741

* The unbilled receivables associated with the SH-2G(A) program were $40.6 million and the balance of amounts received as advances on this contract were $8.6 million. These balances, netting to $32.0 million, were eliminated in connection with the transfer of the Australian program inventory and equipment to the Company.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009, and September 26, 2008

(Unaudited)

7. INVENTORIES (Continued)

Management believes that a significant portion of this inventory will be sold after October 2, 2010, based upon the time needed to market the aircraft and prepare them for sale. For more information on the SH-2G(A) inventory see Note 12, Commitments and Contingencies.

8. ACCRUED CONTRACT LOSSES

The following is a summary of activity and balances associated with accrued contract losses (in thousands):

Balance at December 31, 2008	$	9,714
Additions to accrual		1,846
Costs incurred		(1,913	)
Release to income		(2,531	)
Elimination of Australian loss accrual		(6,072	)
Balance at October 2, 2009	$	1,044

The transfer of ownership of the SH-2G(A) Super Seasprite program inventory and equipment effectively ended the associated production and service contracts. As a result, accrued contract losses of $6.1 million were eliminated.

9. ENVIRONMENTAL COSTS

The following table displays the activity and balances associated with accruals related to environmental costs included in other accruals and payables and other long-term liabilities (in thousands):

Balance at December 31, 2008	$	16,136
Additions to accrual		547
Payments		(1,050	)
Changes in foreign currency		204
Balance at October 2, 2009	$	15,837

For further discussion of these matters see Note 12, Commitments and Contingencies.

10. PENSION PLANS

Components of net pension cost for the qualified pension plan and Supplemental Employees’ Retirement Plan (SERP) are as follows (in thousands):

	Qualified Pension Plan						SERP
	For the three months ended						For the three months ended
	October 2,			September 26,			October 2,			September 26,
	2009			2008			2009			2008

Service cost for benefits earned	$	3,356		$	3,069		$	97		$	184
Interest cost on projected
benefit obligation		7,616			7,338			253			443
Expected return on plan assets		(7,904	)		(8,681	)		-			-
Effect of settlement		-			-			-			1,381
Net amortization and deferral		871			15			(168	)		209
Net pension cost	$	3,939		$	1,741		$	182		$	2,217

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

10. PENSION PLANS (Continued)

	Qualified Pension Plan						SERP
	For the nine months ended						For the nine months ended
	October 2,			September 26,			October 2,			September 26,
	2009			2008			2009			2008

Service cost for benefits earned	$	10,068		$	9,207		$	292		$	553
Interest cost on projected
benefit obligation		22,847			22,014			759			1,232
Expected return on plan assets		(23,712	)		(26,043	)		-			-
Effect of settlement		-			-			767			2,387
Net amortization and deferral		2,613			46			(504	)		915
Net pension cost	$	11,816		$	5,224		$	1,314		$	5,087

For the 2009 plan year, the Company contributed $10.9 million to the qualified pension plan in April 2009 and does not expect to make any further contributions for this plan year. In the first quarter of 2009, the Company also made a $1.7 million contribution to the qualified pension plan for the 2008 plan year. For the 2009 plan year, the Company expects to make payments of $5.7 million for the SERP of which $0.3 million and $5.5 million were made in the three months and nine months ended October 2, 2009, respectively.

11. CREDIT ARRANGEMENTS

On September 17, 2009, the Company entered into a three-year $225 million senior secured revolving credit facility with co-lead arrangers Bank of America, The Bank of Nova Scotia, and RBS Citizens and a syndicate of lenders (“Revolving Credit Agreement”), which replaced its then existing $200 million senior revolving credit facility which was due to expire on August 5, 2010 (the “Former Revolving Credit Agreement”). The Revolving Credit Agreement includes an “accordion” feature that allows the Company to increase the aggregate amount available to $300 million, subject to additional commitments from lenders. The Revolving Credit Agreement may be used for working capital, letters of credit and other general corporate purposes, including acquisitions.

The Revolving Credit Agreement permits the Company to pay cash dividends. The lenders have been granted a security interest in substantially all of the Company’s personal property and the other assets (excluding real estate) including those of its domestic subsidiaries and a pledge of 66% of the Company’s equity interest in certain foreign subsidiaries and 100% of the Company’s equity interest in its domestic subsidiaries, as collateral for the Company’s obligations under the Revolving Credit Agreement. At October 2, 2009, there was $70.7 million outstanding under the Revolving Credit Agreement, with $154.3 million available for borrowing, including letters of credit. Letters of credit are considered borrowings for purposes of the Revolving Credit Agreement. A total of $39.9 million in letters of credit was outstanding under the Revolving Credit Agreement at October 2, 2009, $34.1 million of which was related to the guaranteed minimum payments to Australia in connection with the ownership transfer of the 11 SH-2G(A) helicopters (along with spare parts and associated equipment). At December 31, 2008, there was $70.6 million outstanding under the Former Revolving Credit Agreement, with $129.4 million available for borrowing, including letters of credit. A total of $27.7 million in letters of credit was outstanding under the Former Revolving Credit Agreement at December 31, 2008, $20.4 million of which was related to the Australian SH-2G(A) Super Seasprite Program.

Interest rates on amounts outstanding under the Revolving Credit Agreement are variable, and are determined based on the Consolidated Senior Secured Leverage Ratio, as defined in the Revolving Credit Agreement. At October 2, 2009, the interest rate for the outstanding amounts on the Revolving Credit Agreement was 3.80%. In addition, the Company is required to pay a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.50% to 0.75% per annum, based on the Consolidated Senior Secured Leverage Ratio. Fees for outstanding letters of credit range from 2.75% to 4.50%, based on the Consolidated Senior Secured Leverage Ratio.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

11. CREDIT ARRANGEMENTS (Continued)

On October 29, 2008, the Company executed a Term Loan Credit Agreement (“Term Loan Agreement”). The Term Loan Agreement, which is in addition to the Revolving Credit Agreement, is a $50 million facility with a four-year term, including quarterly payments of principal at the rate of 2.5% with 62.5% of the initial aggregate principal payable in the final quarter. The Company may increase the term loan, by up to an aggregate of $50 million with additional commitments from the banks or new commitments from acceptable financial institutions. In conjunction with the entry into the Revolving Credit Agreement on September 17, 2009, the Term Loan Agreement was amended to allow for security interests and financial covenants consistent with those defined in the Revolving Credit Agreement. As of October 2, 2009 and December 31, 2008, $46.3 million and $50.0 million was outstanding, respectively, on the Term Loan Agreement.

Facility fees and interest rates under the Term Loan Agreement are determined on the basis of our credit rating from Standard & Poor's. In April 2009, Standard & Poor's re-affirmed our rating as investment grade BBB- with an outlook of stable. Under the terms of the current Term Loan Agreement, if this rating should decrease, the effect would be to increase facility fees as well as the interest rates charged.

The financial covenants associated with the Revolving Credit Agreement and Term Loan Agreement include a requirement that i) the ratio of Consolidated Senior Secured Indebtedness to EBITDA, as defined in the Revolving Credit Agreement, cannot be greater than 3.00 to 1.00, ii) the ratio of Consolidated Total Indebtedness to EBITDA, as defined in the Revolving Credit Agreement, cannot be greater than 3.50 to 1.00, and iii) the ratio of (a) EBITA, as defined in the Revolving Credit Agreement, to the sum of (i) net interest expense, (ii) the aggregate principal amount of all regularly scheduled principal payments of outstanding indebtedness for borrowed money, (iii) all dividends or other distributions with respect to any equity interests of the Company and (iv) the aggregate amount of Federal, state, local, and foreign income taxes paid in cash cannot be less than 1.05 to 1.00 for any measurement period between September 17, 2009 – March 31, 2011, 1.25 to 1.00 for any measurement period between April 1, 2011 to September 30, 2011 or 1.35 to 1.00 for any measurement period on or after October 1, 2011. The Company was in compliance with those financial covenants as of and for the quarter ended October 2, 2009 and management does not anticipate noncompliance in the foreseeable future.

The Company incurred $3.4 million in debt issuance costs in connection with the Revolving Credit Agreement and Term Loan Agreement amendment. These costs have been capitalized and will be amortized over the term of the facility. Total amortization expense for the three months and nine months ended October 2, 2009 was $0.1 million and $0.3 million, respectively. Total amortization expense related to the Former Revolving Credit Agreement for the three months and nine months ended September 26, 2008 was approximately $0.1 million and $0.2 million, respectively.

12. COMMITMENTS AND CONTINGENCIES

Legal Matters

There continue to be two warranty-related matters that impact the FMU-143 program at the Aerospace segment’s Orlando facility (“Orlando Facility”). The items involved are an impact switch embedded in certain bomb fuzes that was recalled by a supplier and an incorrect version of a part, called a bellows motor, found to be contained in bomb fuzes manufactured for the U.S. Army utilizing systems which originated before the Orlando Facility was acquired by the Company. The U.S. Army Sustainment Command (“USASC”), the procurement agency that administers the FMU-143 contract, had authorized warranty rework for the bellows motor matter in late 2004/early 2005; however, the Company was not permitted to finish the rework due to issues raised by the USASC primarily related to administrative matters and requests for verification of the accuracy of test equipment (which accuracy was subsequently verified).

In late 2006, the USASC informed the Company that it was changing its remedy under the contract from performance of warranty rework to an "equitable adjustment" to the contract price. The Company responded, explaining its view that it had complied with contract requirements. In June 2007, the USASC affirmed its position and gave instructions for disposition of the subject fuzes, including both the impact switch and bellows motor-related items, to a Navy facility and the Company complied with that direction. In April 2009, the United States Government (“USG”) notified the Company that it was contemplating civil litigation, alleging liability associated with this matter, including specific claims of about $6.0 million (treble damages) in connection with allegedly "false claims" by the Company for payment for fuzes containing the incorrect version of the part and $3.0 million in connection with rework. The Company believes that the allegations are unfounded and will vigorously defend itself in the event such a suit is brought, which has not occurred to date. By letter dated July 16, 2009, USASC informed the Company that it also demands payment of $9.8 million under the contract related to warranty rework. The Company has filed an appeal before the Armed Services Board of Contract Appeals (the "Board") contesting the substance and amount of the USASC claims. At October 2, 2009, the Company had no amount accrued for this demand.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

12. COMMITMENTS AND CONTINGENCIES (Continued)

Legal Matters - continued

As reported previously, a separate contract dispute between the Orlando Facility and the USASC relative to the FMU-143 fuze program is now in litigation. The USASC has basically alleged the existence of latent defects in certain fuzes due to unauthorized rework during production and has sought to revoke their acceptance. Management believes that the Orlando Facility has performed in accordance with the contract and it is the government that has materially breached its terms in several ways; as a result, during the fourth quarter of 2007, the Company cancelled the contract and, in January 2008, commenced litigation before the Board requesting a declaratory judgment that the cancellation was proper. At about the same time, the USASC notified the Company that it was terminating the contract for default, making the allegations noted above, and the Company filed a second complaint with the Board appealing that termination decision. The litigation process continues. In the same July 2009 letter referenced above, USASC also demanded for these alleged latent defects a repayment by the Company of $5.7 million. The Company also contests this demand and has filed an appeal before the Board. At October 2, 2009, the Company had no amount accrued for these matters as it believes that the likelihood of an adverse outcome to this litigation is remote.

Revenue Sharing Agreement with the Commonwealth of Australia

As previously reported, the Company has agreed to share proceeds from its sale of the former SH-2G (A) aircraft (along with spare parts and associated equipment) with the Commonwealth of Australia on a predetermined basis. Total payments of at least $39.5 million (AUD) will be made to the Commonwealth regardless of sales, with at least $26.7 million (AUD) to be paid by March 2011, and, to the extent cumulative payments have not yet reached $39.5 million (AUD), additional payments of $6.4 million (AUD) each in March of 2012 and 2013. In late 2008, the Company entered into forward contracts for the purpose of hedging these required payments. These contracts allow the Company to settle $36.5 million (AUD) of the $39.5 million (AUD) required payments for a total of $23.7 million in 2011, 2012 and 2013. See Note 6, Derivative Financial Instruments, for further discussion of these instruments. In addition, to secure these payments, the Company has provided the Commonwealth with a $39.5 million (AUD) unconditional letter of credit, which will be reduced as such payments are made. At October 2, 2009, the Company has made required payments of $0.9 million (AUD). As of that date, the U.S. dollar value of the remaining $38.6 million (AUD) required payment was $33.4 million.

Other Matters

Moosup

The Connecticut Department of Environmental Protection (“CTDEP”) has given the Company approval for reclassification of groundwater in the vicinity of the Moosup, CT facility consistent with the character of the area. This facility is currently being held for disposal. The Company has completed the process of connecting neighboring properties to public drinking water in accordance with such approval and in coordination with the CTDEP and local authorities. Site characterization of the environmental condition of the property, which began in 2008, is continuing.

The total anticipated cost of the environmental remediation activities associated with the Moosup property is $4.1 million, all of which has been accrued. A portion ($0.6 million) of the accrual related to this property is included in other accruals and payables and the balance is included in other long-term liabilities. The total amount paid to date in connection with these environmental remediation activities is $1.8 million. 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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

12. COMMITMENTS AND CONTINGENCIES (Continued)

Other Matters – continued

New Hartford

In connection with sale of the Music segment in 2007, the Company assumed responsibility for meeting certain requirements of the Connecticut Transfer Act (the “Transfer Act”) that applied to our 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, is still in process.

The Company's estimate of its portion of the cost to assess the environmental conditions and remediate this site is $2.2 million, unchanged from previously reported estimates, all of which has been accrued. A portion ($0.3 million) of the accrual related to this property is included in other accruals and payables and the balance is included in other long-term liabilities. The total amount paid to date in connection with these environmental remediation activities is $0.3 million. 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

In connection with the 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 continues the effort to define the scope of the remediation that will be required by the CTDEP. The assumed environmental liability of $10.3 million was determined by taking the undiscounted remediation liability of $20.8 million and discounting it at a rate of 8%. This remediation process will take many years to complete. 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.

United Kingdom

In connection with the purchase of Brookhouse Holdings Ltd. (“U.K. Composites”), the Company accrued, at the time of acquisition, £1.6 million for environmental compliance at the facilities. The total amount paid to date in connection with these environmental remediation activities is £0.1 million. The U.S. dollar equivalent of the remaining environmental compliance liability as of October 2, 2009, is $2.4 million. The Company continues to assess the work that may be required, which may result in a change to this accrual.

In December 2008, a workplace accident occurred at one of the Company’s U.K. Composites facilities in which one employee died and another was seriously injured. In accordance with U.K. law, the matter has been the subject of an investigation carried out jointly by Lancashire Police and the Health and Safety Executive (“HSE”) to determine whether criminal charges are appropriate in this case. Although the Company has not received official notification that the police investigation has ended with no recommendation of criminal charges, it believes that this is the case because the matter has now been transferred to the regional Coroner to conduct an inquest, which is customary in cases where the local police have not sought prosecution. The inquest is preliminarily scheduled for April 2010. Following the inquest, the Company expects that the HSE will conduct proceedings under U.K. Health and Safety legislation. The Company currently estimates that the total potential financial exposure of the U.K. Composites operation with respect to these government proceedings is not likely to be material to our consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

13. COMPUTATION OF EARNINGS PER SHARE

Effective January 1, 2009, in accordance with guidance issued by the FASB, the Company treats unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend-equivalents as participating securities in its calculation of earnings per share. The Company is required to apply this accounting retrospectively to all prior periods presented. The inclusion of these securities did not have a material impact on the calculation 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 year. The computation of diluted earnings per share includes the common stock equivalency of dilutive options and unvested restricted stock awards granted to employees under the Stock Incentive Plan.

	For the three months ended				For the nine months ended
	October 2,		September 26,		October 2,		September 26,
	2009		2008		2009		2008
	(in thousands, except per share amount)
Net Earnings:
Net earnings from continuing operations	$	9,624	$	13,530	$	24,394	$	28,488
Net earnings from discontinued
operations, net of tax		-		-		-		323
Net earnings	$	9,624	$	13,530	$	24,394	$	28,811

Basic:
Weighted average basic shares outstanding		25,672		25,405		25,615		25,321

Basic earnings per share from
continuing operations	$	0.37	$	0.53	$	0.95	$	1.13
Basic earnings per share from
discontinued operations		-		-		-		0.01
Basic earnings per share	$	0.37	$	0.53	$	0.95	$	1.14

Diluted:
Weighted average basic shares outstanding		25,672		25,405		25,615		25,321
Weighted average shares issuable on
exercise of dilutive stock options and
unvested restricted stock		159		143		102		158
Weighted average diluted shares outstanding		25,831		25,548		25,717		25,479

Diluted earnings per share from
continuing operations	$	0.37	$	0.53	$	0.95	$	1.12
Diluted earnings per share from
discontinued operations		-		-		-		0.01
Diluted earnings per share	$	0.37	$	0.53	$	0.95	$	1.13

Excluded from the diluted earnings per share calculation are 634,577 and 675,294 anti-dilutive shares granted to employees, for the three months and nine months ended October 2, 2009, respectively, based on average stock price. Excluded from the diluted earnings per share calculation are 278,517 and 242,260 anti-dilutive shares granted to employees, for the three months and nine months ended September 26, 2008, respectively, based on average stock price.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

14. SHARE-BASED ARRANGEMENTS

The following table summarizes share-based compensation expense recorded during each period presented (in thousands):

	For the three months ended				For the nine months ended
	October 2,		September 26,		October 2,		September 26,
	2009		2008		2009		2008
Stock options	$	244	$	163	$	906	$	973
Restricted stock awards		300		234		1,296		1,269
Stock appreciation rights		71		410		22		(426	)
Employee stock purchase plan		64		52		182		155
Total share-based compensation	$	679	$	859	$	2,406	$	1,971

Stock option activity was as follows:

	For the three months ended					For the nine months ended
	October 2, 2009					October 2, 2009
	Stock Options			Weighted-average exercise price		Stock Options			Weighted-average exercise price
Stock Options outstanding at beginning of period		918,129		$	18.31		743,679		$	18.81
Granted		-			-		213,210			16.35
Exercised		(4,000	)		10.61		(28,560	)		14.09
Forfeited or expired		(3,200	)		14.14		(17,400	)		20.16
Stock Options outstanding at October 2, 2009		910,929		$	18.36		910,929		$	18.36

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The following table indicates the weighted-average assumptions used in estimating fair value:

	For the three months ended					For the nine months ended
	October 2,		September 26,			October 2,			September 26,
		2009 *		2008			2009			2008
Expected option term		-	6.5 years			6.5 years			6.5 years
Expected volatility		-		44.4	%		47.7	%		41.0	%
Risk-free interest rate		-		3.4	%		2.0	%		3.2	%
Expected dividend yield		-		1.9	%		2.2	%		1.8	%
Per share fair value of options granted	$	-	$	8.76		$	6.43		$	9.70

* There were no stock options granted during the three months ended October 2, 2009.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

14. SHARE-BASED ARRANGEMENTS (Continued)

Restricted Stock activity was as follows:

	For the three months ended					For the nine months ended
	October 2, 2009					October 2, 2009
	Restricted Stock Awards			Weighted-average grant date fair value		Restricted Stock Awards			Weighted-average grant date fair value
Restricted Stock outstanding at beginning of period		232,404		$	22.11		149,794		$	26.39
Granted		-			-		122,050			16.07
Vested		(11,000	)		30.33		(50,440	)		22.02
Forfeited or expired		-			-		-			-
Restricted Stock outstanding at October 2, 2009		221,404		$	21.70		221,404		$	21.70

Stock Appreciation Rights activity was as follows:

	For the three months ended				For the nine months ended
	October 2, 2009				October 2, 2009
	Stock Appreciation Rights (SAR)		Weighted-average exercise price		Stock Appreciation Rights (SAR)			Weighted-average exercise price
SARs outstanding at beginning of period		21,700	$	10.66		39,700		$	10.32
Granted		-		-		-			-
Exercised		-		-		(18,000	)		9.90
Forfeited or expired		-		-		-			-
SARs outstanding at October 2, 2009		21,700	$	10.66		21,700		$	10.66

Total cash paid to settle stock appreciation rights (at intrinsic value) during the nine months ended October 2, 2009, was $0.1 million. No cash was paid to settle stock appreciation rights during the three months ended October 2, 2009. Total cash paid to settle stock appreciation rights (at intrinsic value) during the three and nine months ended September 26, 2008, was $0.3 million and $0.5 million, respectively. SARs are re-evaluated on a quarterly basis using the Black-Scholes valuation model.

15. GOODWILL

The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company for the period ended October 2, 2009 (in thousands):

	Balance at						Foreign			Balance at
	December 31,						Currency			October 2,
	2008		Additions		Impairments		Adjustments			2009

Industrial Distribution	$	15,615	$	21	$	-	$	(237	)	$	15,399
Aerospace		67,979		79		-		4,044			72,102
Total	$	83,594	$	100	$	-	$	3,807		$	87,501

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

16. SEGMENT INFORMATION

During the second quarter of 2009, the Company implemented modifications to its system of reporting, resulting from changes to its internal organization over the preceding year, which changed its reportable segments. These changes to the internal organization included the creation of the Aerospace Group management team and the establishment of the President of Kaman Aerospace Group, Inc. as the segment manager of the combined Aerospace companies. The Industrial Distribution segment, which has been under the leadership of a segment manager for some time, was not impacted by these changes. Following these changes, the Company determined that it has two reportable segments, Industrial Distribution and Aerospace. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company’s CODM is its Chief Executive Officer. Prior period disclosures have been adjusted to reflect the change in reportable segments. Summarized financial information by segment is as follows (in thousands):

	For the three months ended						For the nine months ended
	October 2,			September 26,			October 2,			September 26,
	2009			2008			2009			2008
Net sales:
Industrial Distribution	$	162,921		$	204,275		$	495,781		$	589,773
Aerospace		126,980			130,858			381,378			347,426
Net sales	$	289,901		$	335,133		$	877,159		$	937,199

Operating income:
Industrial Distribution	$	3,388		$	10,704		$	9,232		$	29,512
Aerospace		19,906			20,865			56,803			46,920	*
Net gain (loss) on sale of assets		(3	)		301			37			94
Corporate expense		(8,625	)		(7,422	)		(25,836	)		(23,704	)
Operating income		14,666			24,448			40,236			52,822

Interest expense, net		1,270			1,341			3,909			2,336
Other expense, net		621			1,977			1,235			1,906

Earnings before income taxes		12,775			21,130			35,092			48,580
Income tax expense		3,151			7,600			10,698			20,092
Net earnings from continuing operations		9,624			13,530			24,394			28,488
Net earnings from discontinued operations		-			-			-			323
Net earnings	$	9,624		$	13,530		$	24,394		$	28,811

* Includes a non-cash, non-tax-deductible, impairment charge of $7.8 million recorded in the second quarter of 2008.

17. SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Changes in shareholders’ equity for the nine months ended October 2, 2009, were as follows (in thousands):

Balance, December 31, 2008	$	274,271
Net earnings		24,394
Change in pension & post-retirement benefit plans, net		1,576
Foreign currency translation adjustment, net		8,310
Unrealized gain (loss) on derivative instruments, net		(1,560	)
Dividends declared		(10,772	)
Employee stock plans and related tax benefit		1,223
Share-based compensation activity		2,383
Balance, October 2, 2009	$	299,825

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

17. SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Continued)

Total comprehensive income (loss) is shown below (in thousands):

	For the three months ended
	October 2,			September 26,
	2009			2008

Net income	$	9,624		$	13,530
Change in pension and post-retirement benefit plans,
net of tax of expense of $225 and $579		367			959
Foreign currency translation adjustment,
net of tax benefit of $170 and tax expense of $340		(2,367	)		(6,065	)
Unrealized gain (loss) on derivative
instruments, net of tax benefit of $133		276			-
Total comprehensive income	$	7,900		$	8,424

	For the three months ended
	October 2,			September 26,
	2009			2008

Net income	$	24,394		$	28,811
Change in pension and post-retirement benefit plans,
net of tax of expense of $966 and $1,070		1,576			1,790
Foreign currency translation adjustment,
net of tax benefit of $249 and tax expense of $34		8,310			(4,569	)
Unrealized gain (loss) on derivative
instruments, net of tax benefit of $956		(1,560	)		-
Total comprehensive income	$	32,720		$	26,032

Amounts reclassified from other comprehensive income into net income for changes in pension and post-retirement benefit plans were $0.4 million and $1.6 million for the three months and nine months ended October 2, 2009, respectively. Corresponding amounts for the three months and nine months ended September 26, 2008, were $1.0 million and $1.8 million, respectively.

During the three months and nine months ended October 2, 2009, the income reclassified from other comprehensive income for derivative instruments was not material. No amounts were reclassified from other comprehensive income for derivative instruments for the three months or nine months ended September 26, 2008.

The components of accumulated other comprehensive income (loss) are shown below (in thousands):

	As of
	October 2,			December 31,
	2009			2008

Changes in pension and post-retirement benefit plans	$	(95,319	)	$	(96,895	)
Foreign currency translation adjustment		(15,257	)		(23,567	)
Unrealized gain (loss) on derivative instruments		(756	)		804
Accumulated other comprehensive income (loss)	$	(111,332	)	$	(119,658	)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the three months and nine months ended October 2, 2009 and September 26, 2008

(Unaudited)

18. INCOME TAXES

	For the three months ended						For the nine months ended
	October 2,			September 26,			October 2,			September 26,
	2009			2008			2009			2008

Effective Income Tax Rate		24.7	%		36.0	%		30.5	%		41.4	%

The effective tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the year. The decrease in the effective tax rate for the three months ended October 2, 2009 when compared to the corresponding prior year period is due to the cumulative adjustment of our annualized rate to reflect a one-time tax benefit for foreign exchange losses incurred as part of an international recapitalization, and from a discrete benefit in the quarter due to certain foreign tax incentives. The decrease in the effective tax rate for the nine months ended October 2, 2009 when compared to the corresponding prior year period is due to the aforementioned tax benefits reflected in the current quarter, as well as the $7.8 million non-tax-deductible goodwill impairment charge taken during the second quarter of 2008. The Company anticipates the full-year effective tax rate for 2009 to be approximately 30-32%.

19. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through November 5, 2009, which represents the date the financial statements were issued. No material subsequent events were identified that are required to be disclosed.

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 (“MD&A”) is intended to provide readers of our consolidated financial statements with the perspectives of management. The MD&A presents in narrative form information regarding our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This will allow our shareholders to obtain a comprehensive understanding of our businesses, strategies, current trends and future prospects. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in our 2008 Form 10-K.

MANAGEMENT OVERVIEW

During the third quarter of 2009, we had many positive achievements in a difficult economic environment. We continued to maintain the high quality of earnings from our operations as well as excellent cash flow generation from operations and increased the maximum available borrowings under our credit facility. The increased capacity of our credit facility puts us in a position to take advantage of acquisition opportunities for our business.

Our Aerospace segment sales declined for the quarter; however, this decline was slightly less than we had anticipated. We signed an agreement with Bell Helicopters, expanding on our helicopter subcontract business, and expanded our JPF contract with the U.S. government (“USG”), increasing the contracts value by $6.0 million and improving the near-term profitability of that program. We were also awarded a contract by the U.S. Marine Corps to demonstrate the unmanned K-MAX ® helicopter; if we are ultimately awarded a production contract, this program has the potential to contribute to the Aerospace segment’s growth over the long-term.

Our Industrial Distribution segment had a slight sequential improvement in sales during the quarter, won several new national accounts and improved its margin rate. We are working to expand our existing relationships, pursue new national account business, explore acquisition opportunities, and continue to provide the level of service our customers have come to expect.

OVERVIEW OF BUSINESS

Kaman Corporation is composed of two business segments:

·	Industrial Distribution, the third largest power transmission/motion control industrial distributor in North America.

·	Aerospace, a manufacturer and subcontractor in the international, commercial and military aerospace markets.

The following is a summary of our financial performance and recap of key events that occurred during the three months ended October 2, 2009:

·	Net sales decreased 13.5% and 6.4% for the three months and nine months ended October 2, 2009, respectively, compared to the comparable periods in the prior year.

·	Net earnings from continuing operations decreased 28.9% and 14.4% for the three months and nine months ended October 2, 2009 compared to the comparable periods in the prior year.

·	Diluted earnings per share from continuing operations declined to $0.37 and $0.95 for the three months and nine months ended October 2, 2009, a decrease of 30.2% and 15.2%, respectively, compared to the comparable periods in the prior year.

·	Cash flows provided by operating activities of continuing operations were $48.5 million for the nine months ended October 2, 2009, an increase of $87.0 million when compared to the comparable period in the prior year.

On September 17, 2009 we replaced our five-year $200 million revolving credit facility with a new three-year $225 million senior secured revolving credit facility. The new facility includes an “accordion” feature that allows us to increase the aggregate amount available to $300 million with additional commitments from lenders.

·	We were awarded a five-year contract with a potential value of $53 million to build composite helicopter blade skins and skin core assemblies for Bell Helicopters.

·	We were awarded a $0.9 million contract from the U.S. Marine Corps on behalf of Team K-MAX, which includes Lockheed Martin, to demonstrate the ability of the Unmanned K-MAX® helicopter to deliver cargo to troops in extreme environments and at high altitudes.

CONSOLIDATED RESULTS OF OPERATIONS

Net Sales

	For the three months ended						For the nine months ended
	October 2,			September 26,			October 2,			September 26,
	2009			2008			2009			2008
	(in thousands)
Net sales	$	289,901		$	335,133		$	877,159		$	937,199
$ change		(45,232	)		60,277			(60,040	)		123,431
% change		(13.5	%)		21.9	%		(6.4	%)		15.2	%

The decrease in net sales for the three months ended October 2, 2009 as compared to the comparable period in 2008 was attributable to a decline in organic sales at our Industrial Distribution segment, a slight decline in sales at our Aerospace segment and unfavorable foreign currency exchange rates. The impact of unfavorable foreign currency exchange rates on sales for the three months ended October 2, 2009 was $4.2 million, or 1.4%.

The decrease in net sales for the nine months ended October 2, 2009 as compared to the comparable period in 2008 was attributable to a decline in organic sales at our Industrial Distribution segment and to unfavorable foreign currency exchange rates. These decreases were partially offset by organic sales growth in our Aerospace segment and the addition of $40.4 million in sales for the nine months ended October 2, 2009 from the acquisition of Industrial Supply Corp (“ISC”) in March 2008, the acquisition of Brookhouse Holdings Ltd. (“U.K. Composites”) in June 2008, and the acquisition of Industrial Rubber & Mechanics Incorporated (“INRUMEC”) in October 2008.

Gross Profit

For the three months ended

For the nine months ended

October 2,

September 26,

October 2,

September 26,

2009

2008

2009

2008

(in thousands)

Gross Profit