Edgar Filing: KAMAN CORP

KAMN - 9.28.2012 -10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 28, 2012

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

For the transition period from _____ to ______

Commission File Number: 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 ¨

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 (§232.405 of this chapter)

during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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 ¨ Non-accelerated filer ¨ Smaller reporting company ¨

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

Yes ¨ No x

At October 19, 2012, there were 26,545,557 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)



	September 28, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	12,241		$	14,985
Accounts receivable, net	210,488			190,081
Inventories	364,213			339,846
Deferred income taxes	25,872			25,018
Income tax refunds receivable	—			527
Other current assets	26,903			29,645
Total current assets	639,717			600,102
Property, plant and equipment, net of accumulated depreciation of $148,541 and $142,657, respectively	120,691			111,895
Goodwill	193,153			153,267
Other intangible assets, net	93,599			73,816
Deferred income taxes	34,987			38,434
Other assets	16,830			18,884
Total assets	$	1,098,977		$	996,398
Liabilities and Shareholders’ Equity
Current liabilities:
Notes payable	$	628		$	1,685
Current portion of long-term debt	5,000			5,000
Accounts payable – trade	116,595			106,025
Accrued salaries and wages	39,261			35,766
Current portion of amount due to Commonwealth of Australia	6,657			6,487
Other accruals and payables	56,440			62,748
Income taxes payable	926			987
Total current liabilities	225,507			218,698
Long-term debt, excluding current portion	268,567			198,522
Deferred income taxes	6,387			6,827
Underfunded pension	127,198			135,829
Due to Commonwealth of Australia, excluding current portion	—			6,566
Other long-term liabilities	52,691			56,885
Commitments and contingencies	—			—
Shareholders' equity:
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding	—			—
Common stock, $1 par value, 50,000,000 shares authorized; voting; 26,807,272 and 26,495,828 shares issued, respectively	26,807			26,496
Additional paid-in capital	119,715			109,584
Retained earnings	389,568			361,389
Accumulated other comprehensive income (loss)	(110,375		)	(117,946		)
Less 271,998 and 258,424 shares of common stock, respectively, held in treasury, at cost	(7,088		)	(6,452		)
Total shareholders’ equity	418,627			373,071
Total liabilities and shareholders’ equity	$	1,098,977		$	996,398

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 Nine Months Ended
	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
Net sales	$	414,613		$	356,520		$	1,208,815		$	1,119,429
Cost of sales	299,309			254,868			872,114			806,628
Gross profit	115,304			101,652			336,701			312,801
Selling, general and administrative expenses	90,142			80,319			265,892			242,794
Net (gain)/loss on sale of assets	53			14			21			50
Operating income	25,109			21,319			70,788			69,957
Interest expense, net	2,924			2,733			8,634			8,624
Other (income) expense, net	(71		)	(176		)	(234		)	(590		)
Earnings before income taxes	22,256			18,762			62,388			61,923
Income tax expense	7,274			5,797			21,524			20,739
Net earnings	$	14,982		$	12,965		$	40,864		$	41,184

Net earnings per share:
Basic net earnings per share	$	0.57		$	0.49		$	1.55		$	1.57
Diluted net earnings per share	$	0.56		$	0.49		$	1.54		$	1.55
Average shares outstanding:
Basic	26,455			26,339			26,380			26,250
Diluted	26,623			26,561			26,540			26,530
Dividends declared per share	$	0.16		$	0.16		$	0.48		$	0.44

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

KAMAN CORPORATION AND SUBSIDIARIES

(In thousands) (Unaudited)



	For the Three Months Ended					For the Nine Months Ended
	September 28, 2012		September 30, 2011			September 28, 2012		September 30, 2011
Net earnings	$	14,982	$	12,965		$	40,864	$	41,184
Other comprehensive income, net of tax:
Foreign currency translation adjustments	2,961		(6,088		)	3,487		(1,386		)
Change in unrealized loss on derivative instruments, net of tax expense of $0 and $81, and $0 and $231, respectively	—		135			—		378
Pension plan adjustments, net of tax expense of $834 and $288, and $2,503 and $866, respectively	1,361		471			4,084		1,413
Comprehensive income	$	19,304	$	7,483		$	48,435	$	41,589

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

KAMAN CORPORATION AND SUBSIDIARIES

(In thousands) (Unaudited)



	For the Nine Months Ended
	September 28, 2012			September 30, 2011
Cash flows from operating activities:
Net earnings	$	40,864		$	41,184
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	20,440			16,562
Accretion of convertible notes discount	1,296			1,230
Change in allowance for doubtful accounts	(764		)	98
Net (gain) loss on sale of assets	21			50
Change in amount Due to Commonwealth of Australia, net of gain (loss) on derivative instruments	(287		)	(123		)
Stock compensation expense	4,809			5,720
Excess tax (benefit) from share-based compensation arrangements	(720		)	(742		)
Deferred income taxes	(10		)	4,634
Changes in assets and liabilities, excluding effects of acquisitions/divestitures:
Accounts receivable	(5,289		)	(18,342		)
Inventories	(15,768		)	(9,563		)
Income tax refunds receivable	527			(2,420		)
Other current assets	5,763			13,353
Accounts payable - trade	(529		)	3,880
Accrued contract losses	(1,349		)	(31		)
Advances on contracts	(138		)	453
Other accruals and payables	(10,345		)	(22,176		)
Income taxes payable	(73		)	854
Pension liabilities	(1,843		)	(14,708		)
Other long-term liabilities	1,472			(4,416		)
Net cash provided by (used in) operating activities	38,077			15,497
Cash flows from investing activities:
Proceeds from sale of assets	337			242
Expenditures for property, plant & equipment	(19,565		)	(19,416		)
Acquisition of businesses including earn out adjustments, net of cash received	(83,390		)	(12,965		)
Other, net	(407		)	252
Cash provided by (used in) investing activities	(103,025		)	(31,887		)
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements	71,383			4,490
Debt repayment	(3,750		)	(3,750		)
Net change in book overdraft	1,707			9,239
Proceeds from exercise of employee stock awards	5,730			4,537
Purchase of treasury shares	(733		)	(3,372		)
Dividends paid	(12,637		)	(10,998		)
Debt issuance costs	(50		)	(715		)
Windfall tax benefit	720			742
Other	—			(636		)
Cash provided by (used in) financing activities	62,370			(463		)
Net increase (decrease) in cash and cash equivalents	(2,578		)	(16,853		)
Effect of exchange rate changes on cash and cash equivalents	(166		)	(159		)
Cash and cash equivalents at beginning of period	14,985			32,232
Cash and cash equivalents at end of period	$	12,241		$	15,220

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

1. BASIS OF PRESENTATION

The December 31, 2011, Condensed Consolidated Balance Sheet amounts have been derived from the previously audited Consolidated Balance Sheet of Kaman Corporation and subsidiaries (collectively, the “Company”), but do not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the remainder 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 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, 2011. The results of operations for the interim periods presented are not necessarily indicative of trends or of results to be expected for the entire year.

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 2012 and 2011 ended on September 28, 2012 and September 30, 2011, respectively.

Pension Accounting

In 2011, the Company elected to change its method of recognizing pension expense. Previously, for its non-contributory qualified defined benefit pension plan ("Qualified Pension Plan"), the Company used the market-related value of plan assets reflecting changes in the fair value of plan assets amortized over a four-year period. Under the new accounting method, the market-related value of plan assets reflects the actual change in the fair value of plan assets for the year. While the historical policy of recognizing pension expense is considered acceptable under U.S. GAAP, the Company believes that the new policy is preferable as it eliminates the delay in recognition of the change in fair value of plan assets for the calculation of market-related value of plan assets.

The impacts of all adjustments attributable to the change in the Company's method of recognizing pension expense made to the condensed consolidated financial statements are summarized below:

Condensed Consolidated Statements of Operations



	For the Three Months Ended September 30, 2011
In thousands	Previously Reported		Revised		Effect of Change
Cost of sales	$	255,219	$	254,868	$	(351	)
Gross profit	$	101,301	$	101,652	$	351
Selling, general and administrative expenses	$	80,945	$	80,319	$	(626	)
Operating income	$	20,342	$	21,319	$	977
Earnings before income taxes	$	17,785	$	18,762	$	977
Income tax expense	$	5,426	$	5,797	$	371
Net earnings	$	12,359	$	12,965	$	606
Basic net earnings per share	$	0.47	$	0.49	$	0.02
Diluted net earnings per share	$	0.47	$	0.49	$	0.02

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)


1.	BASIS OF PRESENTATION (CONTINUED)

Pension Accounting (Continued)



	For the Nine Months Ended September 30, 2011
In thousands	Previously Reported		Revised		Effect of Change
Cost of sales	$	807,681	$	806,628	$	(1,053	)
Gross profit	$	311,748	$	312,801	$	1,053
Selling, general and administrative expenses	$	244,672	$	242,794	$	(1,878	)
Operating income	$	67,026	$	69,957	$	2,931
Earnings before income taxes	$	58,992	$	61,923	$	2,931
Income tax expense	$	19,626	$	20,739	$	1,113
Net earnings	$	39,366	$	41,184	$	1,818
Basic net earnings per share	$	1.50	$	1.57	$	0.07
Diluted net earnings per share	$	1.48	$	1.55	$	0.08

Condensed Consolidated Statements of Comprehensive Income



	For the Three Months Ended September 30, 2011
In thousands	Previously Reported		Revised		Effect of Change
Other comprehensive income:
Net earnings	$	12,359	$	12,965	$	606
Pension plan adjustments, net of tax	$	1,077	$	471	$	(606	)



	For the Nine Months Ended September 30, 2011
In thousands	Previously Reported		Revised		Effect of Change
Other comprehensive income:
Net earnings	$	39,366	$	41,184	$	1,818
Pension plan adjustments, net of tax	$	3,231	$	1,413	$	(1,818	)

Condensed Consolidated Statements of Cash Flows



	For the Nine Months Ended September 30, 2011
In thousands	Previously Reported			Revised			Effect of Change
Cash flows from operating activities:
Net earnings	$	39,366		$	41,184		$	1,818
Change in pension liabilities	$	(12,890	)	$	(14,708	)	$	(1,818	)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

2. RECENT ACCOUNTING STANDARDS

In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2012-02, "Intangibles - Goodwill and Other (Accounting Standards Codification ("ASC") Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment." ASU No. 2012-02 establishes an optional two-step analysis for impairment testing of indefinite-lived intangibles other than goodwill. The two-step analysis establishes an optional qualitative assessment to precede the quantitative assessment, if necessary. The update is effective for financial statement periods beginning after September 15, 2012 with early adoption permitted. The adoption of this standard will not have a material impact on the Company's results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220) - Presentation of Comprehensive Income.” ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The guidance, which the Company adopted during the first quarter of 2012, requires changes in presentation only.

3. ACQUISITIONS

On August 31, 2012, the Company acquired substantially all of the assets and certain liabilities of Zeller Corporation ("Zeller"). Zeller, formed in 1961, is a value added distributor of electrical and automation components and solutions, including motion control, programmable logic controller based automation, machine vision, electrical controls and power distribution products. Zeller is headquartered in Rochester, NY with other locations in Syracuse and Buffalo, NY; Foxboro, MA; and Winston-Salem, NC.

On July 2, 2012, the Company acquired substantially all of the assets of Florida Bearings, Inc. ("FBI"). FBI is a distributor of bearings, power transmission and pump products as well as a provider of value-add services such as predictive maintenance and motor, gearbox and pump repair to diverse industries, such as the water, wastewater, municipal, food and aggregate industries. FBI is headquartered in Miami, FL with locations in Hialeah, Ft. Lauderdale, Riviera Beach and Orlando, FL.

The acquisitions were accounted for as business combinations. The value of the assets acquired and liabilities assumed were recorded based on their fair value at the date of acquisition. The fair value of assets acquired and liabilities assumed are as follows:



in thousands
Cash	$	4
Accounts receivable	13,156
Inventories	7,384
Property, plant and equipment	3,370
Other tangible assets	738
Goodwill	38,619
Other intangible assets	24,117
Liabilities	(10,545		)
Total of net assets acquired	76,843
Less cash received	(4		)
Total consideration	$	76,839

The Company has paid $75.1 million of the total consideration of $76.8 million for these acquisitions through September 28, 2012. The goodwill associated with these acquisitions is tax deductible. The goodwill is the result of expected synergies from combining the operations of the acquired businesses with the Company's operations and intangible assets that do not qualify for separate recognition, such as an assembled workforce. There is $11.1 million of revenue from these acquisitions included in the Condensed Consolidated Statements of Operations for the three months and nine months ended September 28, 2012.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

3. ACQUISITIONS (CONTINUED)

The fair value of the identifiable intangible assets of $24.1 million, consisting of trade names, customer lists/relationships and non-compete agreements, was determined using the income approach. Specifically, the relief-from-royalty method was utilized for the trade names and the discounted cash flows method was utilized for the customer relationships and non-compete agreements. The trade names, $0.8 million, are being amortized over a 5 year period; the non-compete agreements, $1.2 million, are being amortized over periods ranging from 4 to 5 years; and the customer relationships, $22.1 million, are being amortized over periods ranging from 6 to 12 years, the estimated lives of the assets.

4. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consists of the following:



	September 28, 2012			December 31, 2011
In thousands
Trade receivables	$	147,224		$	123,081
U.S. Government contracts:
Billed	23,227			18,726
Costs and accrued profit – not billed	1,408			2,494
Commercial and other government contracts:
Billed	41,259			48,023
Costs and accrued profit – not billed	143			1,051
Less allowance for doubtful accounts	(2,773		)	(3,294		)
Accounts receivable, net	$	210,488		$	190,081

Accounts receivable, net includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:



	September 28, 2012		December 31, 2011
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	397	$	119
Total	$	397	$	119

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 following table presents the carrying value and fair value of financial instruments that are not carried at fair value at September 28, 2012 and December 31, 2011:



	September 28, 2012				December 31, 2011
In thousands	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt	$	273,567	$	304,120	$	203,522	$	218,048

The above fair values were computed based on quoted market prices and discounted future cash flows, as applicable. Differences from carrying values are attributable to interest rate changes subsequent to when the transaction occurred. The increase in fair value of the long-term debt is driven by increased borrowings and an increase in the quoted market price for the Company's convertible notes.

The fair values of Cash and cash equivalents, Accounts receivable, net, Notes payable, and Accounts payable - trade approximate their carrying amounts due to the short-term maturities of these instruments.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

5. FAIR VALUE MEASUREMENTS (CONTINUED)

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 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.

Recurring Fair Value Measurements

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:



	Total Carrying Value at		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
In thousands	September 28, 2012		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Derivative instruments	$	1,464	$	—	$	1,464	$	—
Total assets	$	1,464	$	—	$	1,464	$	—

Contingent consideration	$	3,138	$	—	$	—	$	3,138
Total liabilities	$	3,138	$	—	$	—	$	3,138



	Total Carrying Value at		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
In thousands	December 31, 2011		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Derivative instruments	$	3,518	$	—	$	3,518	$	—
Total assets	$	3,518	$	—	$	3,518	$	—

Contingent consideration	$	3,355	$	—	$	—	$	3,355
Total liabilities	$	3,355	$	—	$	—	$	3,355

The Company’s derivative instruments are foreign exchange contracts 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 and other assets on the Condensed Consolidated Balance Sheets at September 28, 2012 and December 31, 2011. Based on the continued ability to trade and enter into forward contracts, 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 September 28, 2012, such credit risks have not had an adverse impact on the fair value of these instruments.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

5. FAIR VALUE MEASUREMENTS (CONTINUED)

Recurring Fair Value Measurements (Continued)

The Company’s contingent consideration liability, included in Other accruals and payables and Other long-term liabilities on the Condensed Consolidated Balance Sheets, is associated with the 2011 acquisition of the assets of Target Electronic Supply ("Target"). This liability was measured at fair value based on the potential payments of the liability associated with the unobservable input of the estimated post-acquisition financial results of Target through 2014 and, therefore, is a Level 3 liability. The table below presents a rollforward of the instruments valued using Level 3 inputs:



In thousands
Balance at December 31, 2011	$	3,355
Reduction of liability released to income	(483		)
Accretion of implicit interest expense	266
Balance at September 28, 2012	$	3,138

6. DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives Overview

The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to fluctuations in foreign currency exchange 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 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.

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 were designated as cash flow hedges. The Company will include in earnings amounts currently included in accumulated other comprehensive income upon recognition of cost of sales related to the underlying transaction. During the three and nine months ended September 30, 2011, the loss reclassified to earnings from other comprehensive income for derivative instruments formerly designated as cash flow hedges was $0.2 million and $0.7 million, respectively. No amounts were reclassified to income from other comprehensive income for derivative instruments formerly designated as cash flow hedges during the three or nine months ended September 28, 2012. Over the next twelve months, the income related to cash flow hedges expected to be reclassified from other comprehensive income is $0.1 million.

Derivatives Not Designated as Hedging Instruments

The following table shows the fair value of derivative instruments not designated as hedging instruments:



		Fair Value
	Balance Sheet	September 28,		December 31,		Notional
In thousands	Location	2012		2011		Amount
Derivative Assets
Foreign exchange contracts	Other current assets /Other assets	$	1,301	$	3,517	$3,408 / $9,816 Australian Dollars
Foreign exchange contracts	Other current assets	163		1		$4,503 / $5,481
Total		$	1,464	$	3,518

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

6. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

Derivatives Not Designated as Hedging Instruments (Continued)

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 September 28, 2012, the U.S. dollar value of the remaining hedged $3.4 million (AUD) payable was $3.5 million.

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:



		For the Three Months Ended					For the Nine Months Ended
	Income Statement Location	September 28, 2012		September 30, 2011			September 28, 2012		September 30, 2011
In thousands
Derivative Assets
Foreign exchange contracts (a)	Other (income) expense, net	$	79	$	(835	)	$	362	$	(110	)
Foreign exchange contracts	Other (income) expense, net	104		71			176		71
Total		$	183	$	(764	)	$	538	$	(39	)
Derivative Liabilities
Foreign exchange contracts	Other (income) expense, net	$	—	$	—		$	—	$	(2	)
Total		$	—	$	—		$	—	$	(2	)

a) For the three months and nine months ended September 28, 2012, the Company recorded expense of $0.1 million and $0.2 million, respectively, to other expense related to the change in the value of the previously hedged AUD payable. For the three months and nine months ended September 30, 2011, the Company recorded income of $1.1 million and $0.8 million, respectively, to other income related to the change in value of the previously hedged AUD payable.

7. INVENTORIES

Inventories consist of the following:



	September 28, 2012		December 31, 2011
In thousands
Merchandise for resale	$	127,105	$	129,345
Contracts and other work in process	222,781		195,299
Finished goods (including certain general stock materials)	14,327		15,202
Total	$	364,213	$	339,846

Inventories include amounts associated with matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:



	September 28, 2012		December 31, 2011
In thousands
Contract changes, negotiated settlements and claims for unanticipated contract costs	$	6,326	$	7,432
Total	$	6,326	$	7,432

During the third quarter, the Company settled one of these claims which resulted in a one-time loss of $0.6 million.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

7. INVENTORIES (CONTINUED)

K-MAX® inventory of $18.1 million and $20.3 million as of September 28, 2012, and December 31, 2011, respectively, is included in contracts and other work in process inventory and finished goods. Management believes that a significant portion of this K-MAX® inventory will be sold after September 28, 2013, based upon the anticipation of supporting the fleet for the foreseeable future.

SH-2G(I), formerly SH-2G(A), inventory of $52.6 million and $52.7 million as of September 28, 2012 and December 31, 2011, respectively, is included in contracts and other work in process inventory. Management believes that a significant portion of this inventory will be sold after September 28, 2013, based upon the time needed to market the aircraft and prepare them for sale. For more information on the SH-2G(I) inventory, see Note 10, Commitments and Contingencies.

Long-term Contracts

For long-term aerospace contracts, the Company generally recognizes revenue and cost based on the percentage-of-completion method of accounting, which allows for recognition of revenue as work on a contract progresses. The Company recognizes revenues and cost based on either (1) the cost-to-cost method, in which sales and profit are recorded based upon the ratio of costs incurred to estimated total costs to complete the contract, or (2) the units-of-delivery method, in which sales are recognized as deliveries are made and cost of sales is computed on the basis of the estimated ratio of total cost to total sales.

Revenue and cost estimates for all significant long-term contracts for which revenue is recognized using the percentage-of-completion method of accounting are reviewed and reassessed quarterly. Based upon these reviews, the Company records the effects of adjustments in profit estimates each period. If at any time the Company determines that in the case of a particular contract total costs will exceed total contract revenue, the Company will record a provision for the entire anticipated contract loss at that time. The net decrease in our operating income from changes in contract estimates totaled $0.3 million and $1.8 million for the three-month and nine-month periods ended September 28, 2012, and $0.2 million and $2.6 million for the three-month and nine-month periods ended September 30, 2011, respectively.

8. 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:



	Industrial Distribution		Aerospace			Total
In thousands
Gross balance at December 31, 2011	$	59,112	$	108,336		$	167,448
Accumulated impairment	—		(14,181		)	(14,181		)
Net balance at December 31, 2011	59,112		94,155			153,267
Additions	38,619		—			38,619
Impairments	—		—			—
Foreign currency translation	60		1,207			1,267
Ending balance at September 28, 2012	$	97,791	$	95,362		$	193,153

In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible impairment on at least an annual basis. The Company is currently in the process of preparing its forecast, which it will use to complete its annual evaluation. As a result of this forecast process, management notes that there are external factors that could impact the expected future cash flows for two of its reporting units.

The Company's VT Composites reporting unit has experienced delays on certain programs that are driven by changes in our customers' requirements. The changes in these requirements did not result in the loss of any of the reporting unit’s contracted orders, but shifted revenues and related cash flows into future periods. The goodwill associated with this reporting unit is $18.8 million.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)

Goodwill (Continued)

The Company's U.K. reporting unit has been successful in winning new orders during 2011 and 2012; however, this reporting unit has incurred higher than expected working capital requirements related to start-up expenditures associated with these new contracts. The goodwill associated with this reporting unit is $31.8 million.

Other intangible assets consisted of:



		At September 28,					At December 31,
		2012					2011
	Amortization Period	Gross Amount		Accumulated Amortization			Gross Amount		Accumulated Amortization
In thousands
Customer lists / relationships	6-21 years	$	102,741	$	(13,595	)	$	79,517	$	(9,017	)
Trademarks / trade names	3-7 years	2,655		(995		)	1,824		(703		)
Non-compete agreements and other	1-9 years	5,494		(2,850		)	4,280		(2,254		)
Patents	17 years	636		(487		)	636		(467		)
Total		$	111,526	$	(17,927	)	$	86,257	$	(12,441	)

9. PENSION PLANS

Components of net pension cost for the Qualified Pension Plan and Supplemental Employees’ Retirement Plan ("SERP") are as follows:



	For the Three Months Ended
	Qualified Pension Plan						SERP
	September 28, 2012			September 30, 2011			September 28, 2012		September 30, 2011
In thousands
Service cost for benefits earned during the year	$	3,519		$	3,021		$	96	$	90
Interest cost on projected benefit obligation	6,578			7,082			105		129
Expected return on plan assets	(9,470		)	(8,926		)	—		—
Amortization of prior service credit (cost)	24			25			—		—
Recognized net loss	1,962			1,038			39		38
Net pension benefit cost	$	2,613		$	2,240		$	240	$	257

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

9. PENSION PLANS (CONTINUED)



	For the Nine Months Ended
	Qualified Pension Plan						SERP
	September 28, 2012			September 30, 2011			September 28, 2012		September 30, 2011
In thousands
Service cost for benefits earned during the year	$	10,557		$	9,061		$	287	$	270
Interest cost on projected benefit obligation	19,734			21,244			315		387
Expected return on plan assets	(28,409		)	(26,482		)	—		—
Amortization of prior service credit (cost)	74			74			—		—
Recognized net loss	5,883			2,823			118		114
Additional amount recognized due to curtailment/settlement	—			—			—		560
Net pension benefit cost	$	7,839		$	6,720		$	720	$	1,331

The following tables show the amount of the contributions made during each period and the amount of contributions the Company expects to make to the Qualified Pension Plan and SERP during the fourth quarter of 2012:

Contributions paid-to-date:



	Qualified Pension Plan				SERP
	As of September 28, 2012		As of December 31, 2011		As of September 28, 2012		As of December 31, 2011
In thousands
Contributions paid-to-date	$	10,000	$	19,600	$	401	$	4,400

Expected Additional Contributions in 2012:



	Qualified Pension Plan		SERP
In thousands
Expected additional contributions	$	—	$	1,100

During the third quarter of 2012, the Company announced the retirement of a senior executive. This announcement resulted in an increase in the expected SERP contribution for 2012.

10. COMMITMENTS AND CONTINGENCIES

Legal Matters

Wichita Subpoena Matter

In 2011, the U.S. District Court for the District of Kansas issued a grand jury subpoena to the Aerospace segment's Wichita facility regarding a government investigation of record keeping associated with the manufacture of certain composite parts. Management is cooperating with the government's investigation and believes that it has fully complied with its legal obligations in connection with the manufacture of the parts in question. At September 28, 2012, the Company had no amount accrued for this matter, as it is unable to estimate the amount of costs, if any, that might be incurred in connection with the resolution of this matter at this time. The Company believes that the likelihood of an adverse outcome to this matter is remote.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Legal Matters (Continued)

40 mm

The Orlando facility is one of five defendants in a qui tam suit under the False Claims Act brought in 2011 by John D. King, a former employee of one of the other defendants. The case, United States ex rel. King v. DSE, Inc., et al., No. 9:08-cv-02416 (M.D. Fla.), is currently pending in the U.S. District Court for the Middle District of Florida. The United States Department of Justice has declined to intervene in the suit, and the case is being brought by Mr. King. The suit alleges that the Orlando facility knowingly submitted false claims or made false statements in connection with its work on 40 mm grenade programs. Management believes that it has fully complied with its legal obligations in connection with this program. At September 28, 2012, the Company had no amount accrued for this matter, as it is unable to estimate the amount of costs, if any, that might be incurred in connection with the resolution of this matter at this time. The Company believes that the likelihood of an adverse outcome to this matter is remote.

Other Matters

Revenue Sharing Agreement with the Commonwealth of Australia

The Company is actively engaged in efforts to resell the former Australia SH-2G(A) (now designated the SH-2G(I)) aircraft, spare parts and equipment to other potential customers. Pursuant to the terms of its revenue sharing agreement with the Commonwealth of Australia, the Company will share all proceeds from the resale of the aircraft, spare parts, and equipment with the Commonwealth on a predetermined basis, and total payments of at least $39.5 million (AUD) must be made to the Commonwealth regardless of sales. Cumulative payments of $33.1 million (AUD) have been made through September 28, 2012. An additional payment of $6.4 million (AUD) must be paid in March of 2013 to the extent that cumulative payments have not yet reached $39.5 million (AUD) at that date.

To secure these payments, the Company has provided the Commonwealth of Australia with an unconditional letter of credit, which is being reduced as such payments are made. The letter of credit balance at September 28, 2012, was $6.7 million. The letter of credit balance will continue to be reduced as payments are made to the Commonwealth of Australia. As of September 28, 2012, the U.S. dollar value of the remaining $6.4 million (AUD) required payment was $6.7 million, which is due in March 2013. In late 2008, the Company entered into foreign currency exchange contracts that limit the foreign currency risks associated with these required payments. See Note 6, Derivative Financial Instruments, for further discussion.

Moosup

This facility is currently being held for disposal. 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 $4.3 million, unchanged from the previously reported estimate, all of which has been accrued. The total amount paid to date in connection with environmental remediation activities at this location is $2.4 million. A portion ($0.1 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 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.

New Hartford

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 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 ongoing.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Other Matters (Continued)

New Hartford (Continued)

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 the previously reported estimate, all of which has been accrued. The total amount paid to date in connection with these environmental remediation activities is $0.5 million. 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 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 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 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, all of which has been accrued, 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 $4.9 million. A portion ($1.5 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. 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 U.K. Composites, the Company accrued, £1.6 million for environmental compliance at the facilities. The remaining balance of the accrual at September 28, 2012 was £0.5 million, with £0.9 million having been paid to date in connection with these environmental remediation activities and £0.2 million released to income in 2011. The U.S. dollar equivalent of the remaining environmental compliance liability as of September 28, 2012, is $0.8 million, which is included in other accruals and payables. The Company continues to assess the work that may be required, which may result in a change to this accrual. 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 September 28, 2012 and September 30, 2011

(Unaudited)

11. 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 year. The computation of diluted earnings per share includes the common stock equivalency of dilutive options granted to employees under the Stock Incentive Plan.



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2012		September 30, 2011		September 28, 2012		September 30, 2011
In thousands, except per share amounts
Net earnings	$	14,982	$	12,965	$	40,864	$	41,184

Basic:
Weighted average number of shares outstanding	26,455		26,339		26,380		26,250
Net earnings per share	$	0.57	$	0.49	$	1.55	$	1.57
Diluted:
Weighted average number of shares outstanding	26,455		26,339		26,380		26,250
Weighted average shares issuable on exercise of dilutive stock options	168		222		160		238
Weighted average shares issuable on exercise of convertible notes	—		—		—		42
Total	26,623		26,561		26,540		26,530
Diluted net earnings per share	$	0.56	$	0.49	$	1.54	$	1.55

Excluded from the diluted earnings per share calculation for the three and nine months ended September 28, 2012, respectively, are 336,893 and 351,103 shares of equity awards granted to employees that are anti-dilutive based on the average stock price during those periods. Excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2011, respectively, are 165,482 and 233,965 shares of equity awards granted to employees that are anti-dilutive based on the average stock price during those periods.

In November 2010, the Company issued Convertible Notes due on November 15, 2017, in the aggregate principal amount of $115.0 million. Shares issuable under the Convertible Notes were excluded from the diluted earnings per share calculation for the three-month and nine-month periods ended September 28, 2012 because the conversion price was greater than the average market price of our stock during those periods. For the nine-month period ended September 30, 2011, shares issuable under the Convertible Notes that were dilutive during the period were included in the calculation of earnings per share as the exercise price for the Convertible Notes was less than the average share price. Excluded from the diluted earnings per share calculation for the three and nine months ended September 28, 2012 are 3,397,902 and 3,395,861 shares, respectively, issuable under the warrants sold in connection with the Company’s convertible note offering as they would be anti-dilutive. Excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2011, are 3,386,739 shares issuable under the warrants sold in connection with the Company’s convertible note offering as they would be anti-dilutive.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

12. SHARE-BASED ARRANGEMENTS

General

The Company accounts for stock options and restricted stock as equity awards whereas the stock appreciation rights and employee stock purchase plan are accounted for as liability awards. Compensation expense for stock options and restricted stock awards is recognized on a straight-line basis over the vesting period of the awards.

The following table summarizes share-based compensation expense recorded during each period presented:



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2012		September 30, 2011		September 28, 2012		September 30, 2011
In thousands
Stock options	$	403	$	351	$	1,474	$	1,385
Restricted stock awards	711		627		3,007		3,912
Stock appreciation rights	—		—		—		179
Employee stock purchase plan	115		87		328		244
Total share-based compensation	$	1,229	$	1,065	$	4,809	$	5,720

Stock option activity is as follows:



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2012				September 28, 2012
	Options		Weighted - average exercise price		Options		Weighted - average exercise price
Options outstanding at beginning of period	1,090,204		$	25.45	979,658		$	23.35
Granted	—		—		181,620		33.59
Exercised	(98,767	)	20.47		(154,198	)	19.29
Forfeited or expired	—		—		(15,643	)	17.66
Options outstanding at September 28, 2012	991,437		25.95		991,437		25.95

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
	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
Expected option term (years)							5.4			6.5
Expected volatility	—		%	—		%	46.5		%	43.9		%
Risk-free interest rate	—		%	—		%	0.9		%	2.9		%
Expected dividend yield	—		%	—		%	1.9		%	2.2		%
Per share fair value of options granted	$	—		$	—		$	12.00		$	12.05

No stock options were granted during the three months ended September 28, 2012 and September 30, 2011.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

12. SHARE-BASED ARRANGEMENTS (CONTINUED)

Restricted Stock activity is as follows:



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2012				September 28, 2012
	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	293,879		$	28.00	309,533		$	25.74
Granted	—		—		94,392		33.67
Vested	(17,623	)	29.06		(125,867	)	26.98
Forfeited or expired	—		—		(1,802	)	23.54
Restricted Stock outstanding at September 28, 2012	276,256		27.94		276,256		27.94

13. SEGMENT AND GEOGRAPHIC INFORMATION

The Company is organized based upon the nature of its products and services, and is composed of two operating segments each overseen by a segment manager. These segments are reflective of how the Company’s Chief Executive Officer, who is its 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 Industrial Distribution segment is the third largest power transmission/motion control industrial distributor in North America. The segment provides products including bearings, mechanical and electrical power transmission, fluid power, motion control, automation, material handling components, electrical control and power distribution, and MRO supplies to a broad spectrum of industrial markets throughout North America.

The Aerospace segment produces and/or markets widely used proprietary aircraft bearings and components; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; safe and arm solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; support for the Company’s SH-2G Super Seasprite maritime helicopters and K-MAX® medium-to-heavy lift helicopters; and engineering services.

Summarized financial information by business segment is as follows:



	For the Three Months Ended						For the Nine Months Ended
In thousands	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
Net sales:
Industrial Distribution	$	263,328		$	239,132		$	779,082		$	717,309
Aerospace	151,285			117,388			429,733			402,120
Net sales	$	414,613		$	356,520		$	1,208,815		$	1,119,429
Operating income:
Industrial Distribution	$	13,171		$	12,252		$	40,596		$	37,002
Aerospace	24,410			19,173			66,469			62,952
Net gain (loss) on sale of assets	(53		)	(14		)	(21		)	(50		)
Corporate expense	(12,419		)	(10,092		)	(36,256		)	(29,947		)
Operating income	25,109			21,319			70,788			69,957
Interest expense, net	2,924			2,733			8,634			8,624
Other expense (income), net	(71		)	(176		)	(234		)	(590		)
Earnings before income taxes	22,256			18,762			62,388			61,923
Income tax expense	7,274			5,797			21,524			20,739
Net earnings	$	14,982		$	12,965		$	40,864		$	41,184

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

For the three months and nine months ended September 28, 2012 and September 30, 2011

(Unaudited)

14. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in shareholders’ equity for the nine months ended September 28, 2012, were as follows:



in thousands
Balance at December 31, 2011	$	373,071
Comprehensive income	48,435
Dividends declared	(12,685		)
Employee stock plans and related tax benefit	5,730
Purchase of treasury shares	(733		)
Share-based compensation expense	4,809
Balance at September 28, 2012	$	418,627

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



	As of
	September 28, 2012			December 31, 2011
in thousands
Changes in pension and post-retirement benefit plans	$	(92,027	)	$	(96,111	)
Foreign currency translation adjustment	(17,878		)	(21,365		)
Unrealized gain (loss) on derivative instruments	(470		)	(470		)
Accumulated other comprehensive income (loss)	$	(110,375	)	$	(117,946	)

No amounts were reclassified from other comprehensive income into net earnings for foreign currency translation adjustments for the three months and nine months ended September 28, 2012.

15. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the issuance date of these financial statements. No material subsequent events were identified that required 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 ("MD&A") is intended to provide readers of our condensed consolidated financial statements with the perspectives of management. MD&A presents, in narrative form, information regarding our financial condition, results of operations, liquidity and certain other factors that may affect our future results. MD&A is designed to enable the readers of this report to obtain a comprehensive understanding of our businesses, strategies, current trends and future prospects. Our MD&A should be read in conjunction with our 2011 Annual Report on Form 10-K.

OVERVIEW OF BUSINESS

Kaman Corporation (the "Company") 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 and defense markets.

Financial performance


•	Net sales increased 16.3% and 8.0% for the three months and nine months ended September 28, 2012, respectively, compared to the comparable periods in the prior year.


•	Net earnings increased 15.6% for the three months ended September 28, 2012, and decreased 0.8% for the nine months ended September 28, 2012, compared to the comparable periods in the prior year.


•	Diluted earnings per share increased to $0.56 for the three months ended September 28, 2012, an increase of $0.07 compared to the comparable period in prior year. Diluted earnings per share decreased by $0.01 to $1.54 for the nine months ended September 28, 2012, compared to the comparable period in the prior year.


•	Cash flows provided by operating activities were $38.1 million for the nine months ended September 28, 2012, an increase of $22.6 million when compared to the comparable period in the prior year.


•	We achieved record sales at our Industrial Distribution segment for the quarter ended September 28, 2012.

Acquisitions


•	On July 2, 2012, the Company acquired substantially all of the assets of Florida Bearings, Inc. ("FBI"). FBI has become part of the Company's Industrial Distribution segment.


•	On August 31, 2012, the Company acquired substantially all of the assets and certain liabilities of Zeller Corporation ("Zeller"). Zeller has become part of the Company's Industrial Distribution segment.

Key events


•	We delivered 10,113 fuzes under our Joint Programmable Fuze ("JPF") program with the U.S. Government during the third quarter of 2012, for a total of 20,427 fuzes in the first nine months of 2012.

•

On September 4, 2012, a definitive agreement was signed by Kaman Aerospace Group and Kineco Private Limited to form a manufacturing joint venture in Goa, India, Kineco Kaman Composites - India. We completed our due diligence procedures during the third quarter of 2012 and anticipate that limited operations will begin in the fourth quarter. The newly formed company will manufacture advanced composite structures for aerospace, medical and other industries.


•	On August 7, 2012, Ms. Candace A. Clark, Senior Vice President, Chief Legal Officer, and Secretary of the Company, notified the Company’s Board of Directors of her decision to retire on November 30, 2012. She will be succeeded by Mr. Shawn G. Lisle, who will become the Company’s Senior Vice President and General Counsel on December 1, 2012.


•	In July 2012, the U.S. Marine Corp approved the deployment extension of the Unmanned K-MAX®. This extension allows for K-MAX service in Afghanistan for an additional six months through March 2013, and includes an option to extend its time through September 2013.


•	In July 2012, we entered into a five-year contract with Aircelle to produce composite structures at our UK Composites facility.

Outlook

We are lowering our full year outlook for 2012, due to lower than expected sales and operating margin during the first nine months, additional customer driven program deferrals in Aerospace and weakening end market demand at Industrial Distribution which is expected in the fourth quarter. Although JPF sales increased substantially during the third quarter and are expected to exceed expectations for the full year, this increase is expected to be offset by lower deliveries on other Aerospace programs. At Industrial Distribution, fourth quarter sales are expected to benefit from the acquisitions of FBI and Zeller operating assets, however organic growth is expected to remain flat due to an anticipated decline in activity for certain end markets. We are managing costs across the company in an effort to ensure that we maintain our profit margins and be in a position to react to changing market conditions.

The Company's updated expectations for 2012 are as follows:


•	Industrial Distribution:


◦	Sales of $1,040 million to $1,055 million


◦	Operating margin between 5.1% and 5.3%


•	Aerospace:


◦	Sales of $585 million to $595 million


◦	Operating margin between 15.7% and 16.0%


•	Corporate expenses of approximately $49 million


•	Interest expense of approximately $11.5 million


•	Estimated tax rate of between 34.5% and 35.0%


•	Free cash flow in the range of $25 million to $30 million.

RESULTS OF CONTINUING OPERATIONS

Consolidated Results

Net Sales



	For the Three Months Ended						For the Nine Months Ended
	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
	(in thousands)
Net Sales	$	414,613		$	356,520		$	1,208,815		$	1,119,429
$ change	58,093			(3,025		)	89,386			166,025
% change	16.3		%	(0.8		)%	8.0		%	17.4		%

The increase in net sales for the three months and nine months ended September 28, 2012, versus the comparable periods in 2011 was attributable to an increase in sales at both our segments. The increase was primarily a result of the contribution of sales from our 2011 and 2012 acquisitions and increased shipments to the United States Government ("USG") of the JPF. Partially offsetting these increases were the unfavorable impact of foreign currency exchange rates on sales of $1.6 million and $5.0 million during the three months and nine months ended September 28, 2012, respectively. (See segment discussions below for additional information.)

Gross Profit



	For the Three Months Ended						For the Nine Months Ended
	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
	(in thousands)
Gross Profit	$	115,304		$	101,652		$	336,701		$	312,801
$ change	13,652			7,889			23,900			63,023
% change	13.4		%	8.4		%	7.6		%	25.2		%
% of net sales	27.8		%	28.5		%	27.9		%	27.9		%

Gross profit increased for the three months and nine months ended September 28, 2012, versus the comparable periods in 2011 primarily due to the contribution of gross profit from our 2011 and 2012 acquisitions and an increase in organic gross profit in our Aerospace segment.

The increase in organic gross profit for the three months and nine months ended September 28, 2012 in our Aerospace segment was due to increased shipments of the JPF to the USG, increased gross profit on our helicopter aftermarket programs, including the Egypt SH-2G(E) upgrade program, our Bell blade program and K-MAX spares and related parts and increased sales volume related to our bearing product lines, including the commercial and regional / business jet markets. These increases were partially offset by a lower volume of work on our unmanned K-MAX® aircraft system, and fewer shipments of Sikorsky BLACK HAWK helicopter cockpits due to lower customer requirements.

Selling, General & Administrative Expenses (SG&A)



	For the Three Months Ended						For the Nine Months Ended
	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
	(in thousands)
SG&A	$	90,142		$	80,319		$	265,892		$	242,794
$ change	9,823			5,060			23,098			24,496
% change	12.2		%	6.7		%	9.5		%	11.2		%
% of net sales	21.7		%	22.5		%	22.0		%	21.7		%

SG&A increased for the three months ended September 28, 2012, versus the comparable period in 2011 primarily due to the following:


•	incremental SG&A expenses resulting from our 2011 and 2012 acquisitions; and


•	increases in corporate expense, primarily related to higher acquisition related costs and incentive compensation expense due to an increase in the number of participants in our plans.

In October 2012, we realigned certain operations within our Aerospace segment. This realignment resulted in one-time costs of $0.6 million in the third quarter, primarily related to severance; however, we anticipate that the cost savings in the fourth quarter will offset these one-time costs.

SG&A increased for the nine months ended September 28, 2012, versus the comparable period in 2011 primarily due to the following:


•	incremental SG&A expenses resulting from our 2011 and 2012 acquisitions;


•	organic increases in expenses at our Industrial Distribution segment primarily related to employee related expenses including group health insurance, and an increase in expense associated with the implementation of our new enterprise resource planning ("ERP") system;


•	the absence of the $2.4 million non-recurring benefit received in the first half of 2011 associated with the death of a former executive; and


•	increases in corporate expense, primarily related to higher acquisition related costs and incentive compensation expense.

As noted above, acquisition related costs contributed to the increase in corporate SG&A expenses. For the three months and nine months ended September 28, 2012, these acquisition related costs were approximately $1.0 million and $2.0 million, respectively.

The increases for the nine months ended September 28, 2012 were partially offset by decreases in organic SG&A expenses at our Aerospace segment primarily due to the absence of the legal fees associated with FMU-143 program litigation matters in 2011.

Operating Income



	For the Three Months Ended						For the Nine Months Ended
	September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
	(in thousands)
Operating Income	$	25,109		$	21,319		$	70,788		$	69,957
$ change	3,790			2,830			831			37,962
% change	17.8		%	15.2		%	1.2		%	118.6		%
% of net sales	6.1		%	6.0		%	5.9		%	6.2		%

The increase in operating income for the three months and nine months ended September 28, 2012, versus the comparable period in 2011 was due to an increase in both our Aerospace and Industrial Distribution segments operating income, slightly offset by an increase in corporate expenses. (See segment discussion below for additional information.)

Interest Expense, Net



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2012		September 30, 2011		September 28, 2012		September 30, 2011
	(in thousands)
Interest Expense, net	$	2,924	$	2,733	$	8,634	$	8,624

Interest expense, net, generally consists of interest charged on the revolving credit facility and other borrowings and the amortization of debt issuance costs, offset by interest income. The increase in interest expense, net for the three months ended September 28, 2012, versus the comparable period in 2011 was primarily due to higher average borrowings and a higher average interest rate for the period. At September 28, 2012, the interest rate for outstanding amounts on both the Revolving Credit Agreement and Term Loan Agreement was 1.72% compared to 1.61% at September 30, 2011.

Effective Income Tax Rate



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2012		September 30, 2011		September 28, 2012		September 30, 2011

Effective Income Tax Rate	32.7	%	30.9	%	34.5	%	33.5	%

The effective income tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the year. The effective tax rates for the three-month periods ending September 28, 2012, and September 30, 2011, were favorably impacted by discrete quarterly adjustments, including enacted tax rate decreases in the U.K. The increase in the effective tax rate for the three months and nine months ended September 28, 2012 compared to the prior year was due principally to the receipt of non-taxable life insurance proceeds in 2011. We anticipate the effective tax rate for the full year 2012 to be in the range of 34% to 35%.

Industrial Distribution Segment

Results of Operations



	For the Three Months Ended				For the Nine Months Ended
	September 28, 2012		September 30, 2011		September 28, 2012		September 30, 2011
	(in thousands)
Net Sales	$	263,328	$	239,132	$	779,082	$	717,309
$ change	24,196		16,005		61,773		103,999