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 October 2, 2015

Or
¨ 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: 001-35419

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 23, 2015, there were 27,091,438 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,
2015
 
December 31,
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
11,579

 
$
12,411

Accounts receivable, net
 
233,113

 
234,648

Inventories
 
370,391

 
359,741

Deferred income taxes
 
25,220

 
25,888

Income tax refunds receivable
 
3,493

 
—

Other current assets
 
35,960

 
29,568

Total current assets
 
679,756

 
662,256

Property, plant and equipment, net of accumulated depreciation of $197,253 and $183,829, respectively
 
150,042

 
147,825

Goodwill
 
246,035

 
238,581

Other intangible assets, net
 
89,635

 
94,491

Deferred income taxes
 
33,401

 
34,784

Other assets
 
24,835

 
23,268

Total assets
 
$
1,223,704

 
$
1,201,205

Liabilities and Shareholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of long-term debt
 
$
5,000

 
$
10,000

Accounts payable – trade
 
132,668

 
116,787

Accrued salaries and wages
 
35,136

 
42,214

Advances on contracts
 
13,916

 
2,406

Other accruals and payables
 
50,154

 
47,583

Income taxes payable
 
3,252

 
2,734

Total current liabilities
 
240,126

 
221,724

Long-term debt, excluding current portion
 
251,149

 
271,232

Deferred income taxes
 
2,247

 
3,391

Underfunded pension
 
129,682

 
141,546

Other long-term liabilities
 
44,447

 
45,647

Commitments and contingencies (Note 12)
 


 


Shareholders' equity:
 
 

 
 

Preferred stock, $1 par value, 200,000 shares authorized; none outstanding
 
—

 
—

Common stock, $1 par value, 50,000,000 shares authorized; voting; 27,710,821 and 27,518,226 shares issued, respectively
 
27,711

 
27,518

Additional paid-in capital
 
154,912

 
145,845

Retained earnings
 
516,962

 
479,984

Accumulated other comprehensive income (loss)
 
(125,222
)
 
(126,261
)
Less 599,852 and 385,942 shares of common stock, respectively, held in treasury, at cost
 
(18,310
)
 
(9,421
)
Total shareholders’ equity
 
556,053

 
517,665

Total liabilities and shareholders’ equity
 
$
1,223,704

 
$
1,201,205

See accompanying notes to condensed consolidated financial statements.

2

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,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26, 2014
Net sales
 
$
433,742

 
$
456,055

 
$
1,322,848

 
$
1,317,031

Cost of sales
 
303,816

 
326,690

 
933,059

 
945,117

Gross profit
 
129,926

 
129,365

 
389,789

 
371,914

Selling, general and administrative expenses
 
100,153

 
102,073

 
307,660

 
294,423

Net (gain)/loss on sale of assets
 
(10
)
 
55

 
(415
)
 
228

Operating income
 
29,783

 
27,237

 
82,544

 
77,263

Interest expense, net
 
3,208

 
3,438

 
9,757

 
9,942

Other expense, net
 
185

 
220

 
120

 
540

Earnings from continuing operations before income taxes
 
26,390

 
23,579

 
72,667

 
66,781

Income tax expense
 
9,166

 
7,782

 
21,003

 
22,331

Earnings from continuing operations
 
17,224

 
15,797

 
51,664

 
44,450

Losses from discontinued operations, net of taxes
 
—

 
(924
)
 
—

 
(1,926
)
Gain (loss) on disposal of discontinued operations, net of taxes
 
—

 
(94
)
 
—

 
285

Net earnings
 
$
17,224

 
$
14,779

 
$
51,664

 
$
42,809

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 
 
 
Basic earnings per share from continuing operations
 
$
0.63

 
$
0.58

 
$
1.90

 
$
1.64

Basic loss per share from discontinued operations
 
—

 
(0.03
)
 
—

 
(0.07
)
Basic earnings per share from disposal of discontinued operations
 
—

 
—

 
—

 
0.01

Basic earnings per share
 
$
0.63

 
$
0.55

 
$
1.90

 
$
1.58

 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
0.62

 
$
0.57

 
$
1.85

 
$
1.60

Diluted loss per share from discontinued operations
 
—

 
(0.04
)
 
—

 
(0.07
)
Diluted earnings per share from disposal of discontinued operations
 
—

 
—

 
—

 
0.01

Diluted earnings per share
 
$
0.62

 
$
0.53

 
$
1.85

 
$
1.54

Average shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
27,179

 
27,113

 
27,203

 
27,025

Diluted
 
27,770

 
27,862

 
27,915

 
27,766

Dividends declared per share
 
$
0.18

 
$
0.16

 
$
0.54

 
$
0.48


See accompanying notes to condensed consolidated financial statements.



3

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)


 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Net earnings
 
$
17,224

 
$
14,779

 
$
51,664

 
$
42,809

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(1,109
)
 
(5,766
)
 
(3,945
)
 
(4,306
)
Unrealized gain on derivative instruments, net of tax expense of $38 and $6 and $134 and $47, respectively
 
62

 
6

 
221

 
75

Change in pension and post-retirement benefit plan liabilities, net of tax expense of $961 and $405 and $2,883 and $1,215, respectively
 
1,587

 
669

 
4,763

 
2,006

Other comprehensive income (loss)
 
540

 
(5,091
)
 
1,039

 
(2,225
)
Comprehensive income
 
$
17,764

 
$
9,688

 
$
52,703

 
$
40,584


See accompanying notes to condensed consolidated financial statements.


4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)
 
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
Cash flows from operating activities:
 
 

 
 

Earnings from continuing operations
 
$
51,664

 
$
44,450

Adjustments to reconcile earnings from continuing operations to net cash provided by (used in) operating activities of continuing operations:
 
 

 
 

Depreciation and amortization
 
27,809

 
26,308

Accretion of convertible notes discount
 
1,516

 
1,439

Provision for doubtful accounts
 
1,925

 
241

Net (gain)/loss on sale of assets
 
(415
)
 
228

Net loss on derivative instruments
 
423

 
615

Stock compensation expense
 
5,304

 
4,307

Excess tax benefit from share-based compensation arrangements
 
(324
)
 
(766
)
Deferred income taxes
 
(2,001
)
 
8,669

Changes in assets and liabilities, excluding effects of acquisitions/divestitures:
 
 
 
 

Accounts receivable
 
1,583

 
(41,505
)
Inventories
 
(10,430
)
 
18,969

Income tax refunds receivable
 
(3,493
)
 
(1,037
)
Other current assets
 
(6,498
)
 
(1,064
)
Accounts payable - trade
 
18,051

 
(5,539
)
Accrued contract losses
 
28

 
(1,613
)
Advances on contracts
 
11,511

 
(8,119
)
Other accruals and payables
 
(5,807
)
 
11,592

Income taxes payable
 
529

 
(977
)
Pension liabilities
 
(4,225
)
 
(8,430
)
Other long-term liabilities
 
(2,323
)
 
(2,636
)
Net cash provided by operating activities of continuing operations
 
84,827

 
45,132

Net cash used in operating activities of discontinued operations
 
—

 
(1,378
)
Net cash provided by operating activities
 
84,827

 
43,754

Cash flows from investing activities:
 
 

 
 

Proceeds from sale of assets
 
660

 
28

Expenditures for property, plant & equipment
 
(23,130
)
 
(22,177
)
Acquisition of businesses (net of cash acquired)
 
(11,877
)
 
(77,018
)
Other, net
 
(696
)
 
(1,205
)
Cash used in investing activities of continuing operations
 
(35,043
)
 
(100,372
)
Cash provided by investing activities of discontinued operations
 
—

 
2

Cash used in investing activities
 
(35,043
)
 
(100,370
)
Cash flows from financing activities:
 
 

 
 

Net borrowings (repayments) under revolving credit agreements
 
(43,291
)
 
66,978

Proceeds from issuance of long-term debt
 
100,000

 
—

Debt repayment
 
(82,500
)
 
(5,000
)
Net change in book overdraft
 
(3,537
)
 
1,893

Proceeds from exercise of employee stock awards
 
4,024

 
5,387

Purchase of treasury shares
 
(8,642
)
 
(845
)
Dividends paid
 
(14,140
)
 
(12,950
)
Debt issuance costs
 
(2,271
)
 
—

Other
 
(117
)
 
—

Windfall tax benefit
 
324

 
766

Cash provided by (used in) financing activities of continuing operations
 
(50,150
)
 
56,229

Cash provided by (used in) financing activities of discontinued operations
 
—

 
—

Cash provided by (used in) financing activities
 
(50,150
)
 
56,229

Net decrease in cash and cash equivalents
 
(366
)
 
(387
)
Effect of exchange rate changes on cash and cash equivalents
 
(466
)
 
(237
)
Cash and cash equivalents at beginning of period
 
12,411

 
10,384

Cash and cash equivalents at end of period
 
$
11,579

 
$
9,760


See accompanying notes to condensed consolidated financial statements.

5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)


1. BASIS OF PRESENTATION

The December 31, 2014, 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 ("US GAAP"). In the opinion of management, the condensed consolidated 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. 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, 2014. 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 quarters for 2015 and 2014 ended on October 2, 2015, and September 26, 2014, respectively.

2. RECENT ACCOUNTING STANDARDS

In September 2015, the FASB issued ASU 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments.” This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard becomes effective the first quarter of fiscal year 2016. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which amends ASC 835-30, “Interest - Imputation of Interest”. The ASU clarifies the presentation and subsequent measurement of debt issuance costs associated with lines of credit. These costs may be presented as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. The standard becomes effective the first quarter of fiscal year 2016. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330) - Simplifying the Measurement of Inventory." ASU 2015-11 requires an entity to measure inventory within the scope of the standard at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." ASU No. 2015-03 amends the FASB Accounting Standards Codification (the "Codification") to require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related liability. Such treatment is consistent with the current presentation of debt discounts or premiums. As it stood prior to amendment, debt issuance costs were reported in the balance sheet as an asset (i.e., a deferred charge), whereas debt discounts and premiums were, and remain, reported as deductions from or additions to the debt itself. Recognition and measurement guidance for debt issuance costs is not affected by amendments to the Codification. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810)." ASU 2015-02 focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The adoption of this standard is not expected to have a material impact on the Company's financial statements.


6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

2. RECENT ACCOUNTING STANDARDS (CONTINUED)

In January 2015, the FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)." The new standard eliminates the concept of extraordinary items and their segregation from the results of ordinary operations and expands presentation and disclosure guidance to include items that are both unusual in nature and occur infrequently. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (ASC Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." The new standard provides guidance regarding management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, ending after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (ASC Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could Be Achieved after the Requisite Service Period." The objective of this standard update is to eliminate inconsistent practices with regards to the accounting treatment of share-based payment awards. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2015. The adoption of this standard is not expected to have a material impact on the Company's financial statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (ASC Topic 606)." The objective of this standard update is to remove inconsistent practices with regards to revenue recognition between US GAAP and International Financial Reporting Standards ("IFRS"). The standard intends to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. On August 12, 2015, the FASB issued ASU No. 2015-14, deferring the effective date by one year for ASU No. 2014-09. The provisions of ASU No. 2014-09 will be effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016. The Company is currently assessing the potential impact of this standard on its consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." This standard update requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity's financial results or a business activity classified as held for sale should be reported as discontinued operations. The standard also expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. The provisions of this ASU are effective for annual periods beginning on or after December 15, 2014, and interim periods beginning on or after December 15, 2015. The adoption of this standard is not expected to have a material impact on the Company's 2015 financial statements.

3. DISCONTINUED OPERATIONS

On December 19, 2014, the Company sold the Distribution segment's Mexican business unit, Delamac de Mexico, S.A. de C.V. ("Delamac"). As a result, the Company has reported the results of operations and consolidated financial position of this component as discontinued operations within the condensed consolidated financial statements for all periods presented. For the three-month and nine-month fiscal periods ended October 2, 2015, there were no earnings or losses from these discontinued operations. For the three-month fiscal period ended September 26, 2014, the Company recorded $6.3 million in net sales from discontinued operations, $1.3 million of losses and a related tax benefit of $0.4 million, resulting in $0.9 million of net loss from discontinued operations. For the nine-month fiscal period ended September 26, 2014, the Company recorded $18.3 million in net sales from discontinued operations, $2.7 million of losses and a related tax benefit of $0.8 million, resulting in $1.9 million of net loss from discontinued operations.

On December 31, 2012, the Company sold substantially all of the assets and liabilities of the Distribution's segment's Canadian operations. As a result, the Company has reported the results of operations and financial position of this component as discontinued operations within the condensed consolidated financial statements for all periods presented. For the three-month and nine-month fiscal periods ended October 2, 2015, there were no earnings or losses from these discontinued operations. For the three months and nine months ended September 26, 2014, the Company recorded gain (loss) on disposal of discontinued operations of $(0.1) million, and $0.3 million, respectively, primarily related to a pension settlement that resulted from the 2012 disposal of these operations.

7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)


4. ACQUISITIONS

On January 30, 2015, the Company acquired substantially all of the operating assets of G.C. Fabrication, Inc. ("GCF") for a purchase price of $9.5 million. Located in Northvale, New Jersey, GCF is a premier Schneider Electric/Square D distributor and carries a variety of electrical power, automation, process controls, specialized HVAC, water and wastewater systems, communication and networking devices from a premier set of global manufacturers. The acquisition of GCF has expanded the Company's automation, control and energy product offerings into the New York metro market. This acquisition is immaterial to the Company's results of operations and financial position.

5. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consists of the following:
 
 
October 2,
2015
 
December 31,
2014
In thousands
 
 
 
 
Trade receivables
 
$
150,196

 
$
141,481

U.S. Government contracts:
 
 

 
 

Billed
 
14,987

 
21,909

Costs and accrued profit – not billed
 
1,931

 
1,581

Commercial and other government contracts:
 
 

 
 

Billed
 
68,414

 
51,166

Costs and accrued profit – not billed
 
1,748

 
21,719

Less allowance for doubtful accounts
 
(4,163
)
 
(3,208
)
Accounts receivable, net
 
$
233,113

 
$
234,648


Accounts receivable, net includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:
 
 
October 2,
2015
 
December 31,
2014
In thousands
 
 
 
 
Contract changes, negotiated settlements and claims for unanticipated contract costs
 
$
900

 
$
4,561

Total
 
$
900

 
$
4,561


The decrease in the above balance primarily relates to receipt of payment from a customer for claims related to a composite aerostructures program.

6. FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: 
•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
•
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

6. FAIR VALUE MEASUREMENTS (CONTINUED)

The following table presents the carrying value and fair value of financial instruments that are not carried at fair value:
 
 
October 2, 2015
 
December 31, 2014
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
In thousands
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
Level 1
 
$
110,540

 
$
134,798

 
$
109,024

 
$
145,188

Level 2
 
145,609

 
135,345

 
172,208

 
164,204

Total
 
$
256,149

 
$
270,143

 
$
281,232

 
$
309,392


The above fair values were computed based on quoted market prices (Level 1) and discounted future cash flows (Level 2 observable inputs), as applicable. Differences from carrying values are attributable to interest rate changes subsequent to when the transactions occurred.

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

Recurring Fair Value Measurements

The Company holds derivative instruments for foreign exchange contracts and interest rate swaps that are measured at fair value using observable market inputs such as forward rates and 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 Sheet at October 2, 2015, and December 31, 2014. Based on the Company's 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. These contracts and the activity related to these contracts were not material to the Company's Condensed Consolidated Financial Statements as of and for the three-month and nine-month fiscal periods ended October 2, 2015, and September 26, 2014.

The Company evaluated the credit risk associated with the counterparties to these derivative instruments and determined that as of October 2, 2015, such credit risks have not had an adverse impact on the fair value of these instruments.

7. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to fluctuations in foreign currency exchange rates and interest rates. Derivative financial instruments are recognized on the Condensed Consolidated Balance Sheets as either assets or liabilities and are measured at fair value. Changes in the fair values of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is effective as part of a hedged transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive income 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 are 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.

The Term Loan Facility of the Company's Credit Agreement (“Term Loan”) contains floating rate obligations and is subject to interest rate fluctuations. During 2013, the Company entered into interest rate swap agreements for the purposes of hedging the eight quarterly variable-rate interest payments under its Term Loan due in 2014 and 2015. These interest rate swap agreements were 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 on the Company’s earnings and cash flows of interest rate fluctuations attributable to changes in LIBOR rates. These agreements and the activity related to these agreements were not material to the Company's Condensed Consolidated Financial Statements as of and for the three-month and nine-month fiscal periods ended October 2, 2015, and September 26, 2014.


9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

7. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

During the second quarter of 2014, the Company entered into 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. These contracts were entered into as a result of forecasted foreign currency transactions associated with the New Zealand contract to deliver ten SH-2G(I) aircraft and were designated as cash flow hedges. During the third quarter of 2014, the Company dedesignated these forward contracts, due to a change in the timing of payments. These contracts and the activity related to these contracts were not material to the Company's Condensed Consolidated Financial Statements as of and for the three-month and nine-month fiscal periods ended October 2, 2015, and September 26, 2014.

8. INVENTORIES

Inventories consist of the following:
 
 
October 2,
2015
 
December 31,
2014
In thousands
 
 
 
 
Merchandise for resale
 
$
148,362

 
$
149,837

Raw materials
 
24,201

 
19,954

Contracts and other work in process
 
185,697

 
179,002

Finished goods (including certain general stock materials)
 
12,131

 
10,948

Total
 
$
370,391

 
$
359,741


Inventories include amounts associated with matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:
 
 
October 2,
2015
 
December 31,
2014
In thousands
 
 
 
 
Contract changes, negotiated settlements and claims for unanticipated contract costs
 
$
23,095

 
$
13,337

Total
 
$
23,095

 
$
13,337


The increase in this balance primarily relates to the AH-1Z matter as discussed in Note 12, Commitments and Contingencies.

K-MAX® inventory of $17.0 million and $17.2 million as of October 2, 2015, and December 31, 2014, 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 October 2, 2016, in connection with the production of the new build helicopters and the support of the fleet for the foreseeable future.

At October 2, 2015, and December 31, 2014, $11.7 million and $23.5 million, respectively, of SH-2G(I), formerly SH-2G(A), inventory was included on the Company's balance sheet in contracts and other work in process inventory. On May 8, 2013, the Company announced that it had entered into a $120.6 million contract with the New Zealand Ministry of Defence for the sale of ten SH-2G(I) Super Seasprite aircraft, spare parts, a full mission flight simulator, and related logistics support. Although a substantial portion of the SH-2G(I) inventory was used in the performance of this contract, management believes that $6.2 million of the SH-2G(I) inventory will be sold after October 2, 2016.


10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

8. INVENTORIES (CONTINUED)

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. For the three-month and nine-month fiscal periods ended October 2, 2015, there were increases in the Company's operating income attributable to changes in contract estimates of $2.1 million and $5.0 million, respectively. The increases were primarily a result of improved performance on the Joint Programmable Fuze ("JPF") program and another legacy bomb fuze program. There was a net increase to the Company's operating income from changes in contract estimates of $1.3 million and $1.5 million, respectively, for the three-month and nine-month fiscal periods ended September 26, 2014. The increases were primarily a result of improved performance on the New Zealand SH-2G(I) program, the JPF program and a mix of other legacy fuze and composite programs. These improvements were slightly offset by cost growth on the Sikorsky BLACK HAWK helicopter program and Boeing A-10 program.

9. 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:
 
 
Distribution
 
Aerospace
 
Total
In thousands
 
 
 
 
 
 
Gross balance at December 31, 2014
 
$
141,612

 
$
113,221

 
$
254,833

Accumulated impairment
 
—

 
(16,252
)
 
(16,252
)
Net balance at December 31, 2014
 
141,612

 
96,969

 
238,581

Additions
 
5,559

 
3,165

 
8,724

Impairments
 
—

 
—

 
—

Foreign currency translation
 
—

 
(1,270
)
 
(1,270
)
Ending balance at October 2, 2015
 
$
147,171

 
$
98,864

 
$
246,035


Additions to goodwill for the Company's Distribution segment relate to the acquisition completed during 2015, as discussed in Note 4, Acquisitions. Additions to goodwill for the Company's Aerospace segment relate to an earnout payment associated with a previous acquisition.

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, performed during the fourth quarter. Based upon information obtained to this point in the forecast process, management notes that there have been changes to expected future cash flows for two reporting units. Rather than performing a qualitative assessment for these reporting units, the Company will perform a quantitative assessment for the Aerosystems reporting unit and Distribution reporting unit. The goodwill amounts associated with the Aerosystems and Distribution reporting units are $55.2 million and $147.2 million, respectively.


11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

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

Other intangible assets consisted of:
 
 
 
 
At October 2,
 
At December 31,
 
 
 
 
2015
 
2014
 
 
Amortization
Period
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
In thousands
 
 
 
 
 
 
 
 
 
 
Customer lists / relationships
 
6-21 years
 
$
126,291

 
$
(39,001
)
 
$
123,005

 
$
(31,868
)
Trademarks / trade names
 
3-8 years
 
3,635

 
(2,433
)
 
3,546

 
(2,080
)
Non-compete agreements and other
 
1-9 years
 
6,753

 
(5,720
)
 
6,719

 
(4,948
)
Patents
 
17 years
 
523

 
(413
)
 
523

 
(406
)
Total
 
 
 
$
137,202

 
$
(47,567
)
 
$
133,793

 
$
(39,302
)

The changes in other intangible assets are attributable to changes in foreign currency exchange rates and the acquisition completed during 2015.

10. DEBT

On May 6, 2015, the Company closed on an amended and restated $700.0 million Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and Citizens Bank, N.A. as Co-Syndication Agents and SunTrust Bank, KeyBank National Association, TD Bank, N.A., Branch Banking & Trust Company and Fifth Third Bank, as Co-Documentation Agents. The Credit Agreement amends and restates the Company's previously existing credit facility in its entirety to, among other things: (i) extend the maturity date to May 6, 2020; (ii) increase the aggregate amount of revolving commitments from $400.0 million to $600.0 million; (iii) reinstate the aggregate amount of outstanding Term Loans to $100.0 million; (iv) modify the affirmative and negative covenants set forth in the facility; and (v) effectuate a number of additional modifications to the terms and provisions of the facility, including its pricing. Capitalized terms used but not defined within this Note 10, Debt shall have the meanings ascribed thereto in the Credit Agreement.

The term loan commitment requires quarterly payments of principal (which commenced on June 30, 2015) at the rate of $1.25 million, increasing to $1.875 million on June 30, 2017, and then to $2.5 million on June 30, 2019, with $65.0 million payable in the final quarter of the facility's term. The facility includes an accordion feature that allows the Company to increase the aggregate amount available to up to $900.0 million with additional commitments from the Lenders.

The revolving credit facility permits the Company to pay cash dividends. The Lenders have been granted a security interest in substantially all of the Company's and its domestic subsidiaries' personal property and other assets (including intellectual property but excluding real estate), including 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 Credit Agreement. At October 2, 2015, there was $48.1 million of Revolving Loans outstanding under the Credit Agreement, excluding letters of credit, with $369.2 million available for borrowing. Letters of credit are considered borrowings for purposes of the Credit Agreement. A total of $25.1 million in letters of credit was outstanding under the Credit Agreement at October 2, 2015, $19.2 million of which related to the New Zealand SH-2G(I) sales contract. At December 31, 2014, there was $92.2 million of Revolving Loans outstanding under the Credit Agreement, excluding letters of credit, with $248.6 million available for borrowing. A total of $59.2 million in letters of credit was outstanding under the Credit Agreement at December 31, 2014, $54.5 million of which related to the New Zealand SH-2G(I) sales contract.

Interest rates on amounts outstanding under the Credit Agreement are variable, and are determined based on the Consolidated Senior Secured Leverage Ratio. At October 2, 2015, the interest rate for the outstanding amounts on both the revolving credit facility and term loan commitment was 1.62%. In addition, the Company is required to pay a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.175% to 0.300% per annum, based on the Consolidated Senior Secured Leverage Ratio. Fees for outstanding letters of credit range from 1.25% to 2.00%, based on the Consolidated Senior Secured Leverage Ratio.


12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)


10. DEBT (CONTINUED)

The financial covenants associated with the Credit Agreement include a requirement that (i) the Consolidated Senior Secured Leverage Ratio cannot be greater than 3.50 to 1.00, with an available election to increase the maximum to 3.75 to 1.00 for four consecutive quarters, in connection with a Permitted Acquisition with consideration in excess of $125.0 million; (ii) the Consolidated Total Leverage Ratio, as defined in the Credit Agreement, cannot be greater than 4.00 to 1.00, with an available election to increase the maximum to 4.25 to 1.00 for four consecutive quarters, in connection with a Permitted Acquisition with consideration in excess of $125.0 million; (iii) the Consolidated Interest Coverage Ratio cannot be less than 4.00 to 1.00; and (iv) Liquidity: (a) as of the last day of the fiscal quarter of the Company ending two full fiscal quarters prior to the stated maturity of the Specified Convertible Notes, cannot be less than an amount equal to 50% of the outstanding principal amount of the Specified Convertible Notes, and (b) as of the last day of each fiscal quarter of the Company ending thereafter, cannot be less than an amount equal to the outstanding principal amount of the Specified Convertible Notes as of such day. The Company is in compliance with the financial covenants as of and for the quarter ended October 2, 2015, and does not anticipate noncompliance in the foreseeable future.

11. 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
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
In thousands
 
 
 
 
 
 
 
 
Service cost for benefits earned during the year
 
$
3,533

 
$
2,940

 
$
52

 
$
64

Interest cost on projected benefit obligation
 
6,878

 
7,208

 
79

 
85

Expected return on plan assets
 
(11,032
)
 
(10,262
)
 
—

 
—

Amortization of prior service cost
 
15

 
23

 
—

 
—

Amortization of net loss
 
2,479

 
1,028

 
54

 
23

Net pension cost
 
$
1,873

 
$
937

 
$
185

 
$
172


 
 
For the Nine Months Ended
 
 
Qualified Pension Plan
 
SERP
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
In thousands
 
 
 
 
 
 
 
 
Service cost for benefits earned during the year
 
$
10,598

 
$
8,820

 
$
155

 
$
192

Interest cost on projected benefit obligation
 
20,635

 
21,625

 
238

 
256

Expected return on plan assets
 
(33,097
)
 
(30,785
)
 
—

 
—

Amortization of prior service cost
 
44

 
68

 
—

 
—

Amortization of net loss
 
7,438

 
3,085

 
164

 
68

  Net pension cost
 
$
5,618

 
$
2,813

 
$
557

 
$
516


The Company contributed $10.0 million to the qualified pension plan and $0.4 million to the SERP through the end of the third quarter. There are no further contributions expected to be made to the qualified pension plan during 2015. The Company plans to contribute an additional $0.1 million to the SERP in 2015. For the 2014 plan year, the Company contributed $10.0 million to the qualified pension plan and $0.8 million to the SERP.


13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

12. COMMITMENTS AND CONTINGENCIES

Pension Freeze

Effective December 31, 2015, the Company's qualified pension plan will be frozen with respect to future benefit accruals. Under U.S. Government Cost Accounting Standard (“CAS”) 413 the Company must determine the U.S. Government’s share of any pension curtailment adjustment calculated in accordance with CAS. Such adjustments can result in an amount due to the U.S. Government for pension plans that are in a surplus position or an amount due to the contractor for plans that are in a deficit position. The Company is unable to make a determination at this time as to the financial implications this curtailment adjustment will have, if any, on the Company's balance sheet as of December 31, 2015, and the current year's results of operations. 

AH-1Z Program

The Company is currently engaged in discussions with its customer to resolve the technical and design issues that caused production and delivery delays on the AH-1Z attack helicopter program. Engineering design changes were made after the contract date, resulting in excess costs associated with design modification and rework of parts. As a result of these technical issues and schedule delays, the Company incurred additional costs outside the scope of work for its original contract and, under the provisions of the contract, filed claims with its customer requesting additional consideration for work performed. Costs associated with these claims is included in inventory as of October 2, 2015. See Note 8, Inventories, for amounts capitalized into inventory associated with unanticipated contract costs.
 
On April 23, 2015, the Company received a $24.0 million warranty claim from its customer for costs incurred due to rework performed on delivered cabins. The Company has evaluated this claim; however, based on the Company's understanding it does not believe there is a legitimate basis for the claim. The Company has agreed to enter into non-binding mediation in order to attempt to resolve all pending claims and disputes associated with this program. If a mutually acceptable resolution cannot be agreed upon, the Company intends to vigorously defend itself in this matter. Additionally, through the mediation process, the Company was made aware that the customer received notification of a claim from the U.S. government of approximately $9.4 million that they are in the process of evaluating. As such, this claim has increased the scope of the Company's mediation discussions with the customer. As of October 2, 2015, no amounts have been accrued for this matter. If the Company is unsuccessful in settling the claims it has against the customer and/or settling the customer's claims against the Company, this could have a material impact on the Company's financial results and cash flows.

The Company is also in discussions with its customer regarding a scope change to the current contract. The Company has submitted change in scope proposals to the customer and the parties are currently in negotiations. Depending upon the outcome of these discussions and the disposition of the matters described above, the Company may be required to accrue amounts associated with its customer's claim or write-off a portion of the amounts currently recorded in inventory; however, the resolution of these matters cannot be determined at this time. There is no gross margin being recorded on sales associated with this program. Total program inventory is $45.0 million as of October 2, 2015, and there are currently sales orders of $6.0 million in backlog associated with this program.

New Hartford Property

In connection with the sale of the Company’s Music segment in 2007, the Company assumed responsibility for meeting certain requirements of the Connecticut Transfer Act (the “Transfer Act”) that applied to the transfer of the New Hartford, Connecticut, facility leased by that segment for guitar manufacturing purposes (“Ovation”). Under the Transfer Act, those responsibilities essentially consist of assessing the site's environmental conditions and remediating environmental impairments, if any, caused by Ovation's operations prior to the sale. The site is a multi-tenant industrial park, in which Ovation and other unrelated entities lease space. The environmental assessment process, which began in 2008, has been completed.

The Company's estimate of its portion of the cost to assess the environmental conditions and remediate this site is $2.3 million, all of which has been accrued. The total amount paid to date in connection with these environmental remediation activities is $1.2 million. A portion ($0.4 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.


14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

12. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Bloomfield Property

In connection with the Company’s 2008 purchase of the portion of the Bloomfield campus that a Company subsidiary had leased from the Naval Air Systems Command ("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 Connecticut Department of Energy & Environmental Protection. 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 $10.0 million. At October 2, 2015, the Company has $4.7 million accrued for this environmental matter. A portion ($1.2 million) of the accrual related to this property is included in other accruals and payables, and the balance ($3.5 million) 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.

Other Environmental Matters

The Company has been notified by the Environmental Protection Agency that it is a potentially responsible party ("PRP") at a Superfund Site. At October 2, 2015, 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 remediation of this site. In making this determination, the Company considered all available information related to the site; specifically, the continued identification of PRPs and the inability to determine the proportion of total responsibility attributable to each PRP at this time. As more information is received, the Company will reassess its ability to estimate its portion of the cost for remediation, taking into consideration the financial resources of other PRPs involved in the site, their proportionate share of the total responsibility for waste at the site, the existence of insurance and the financial viability of the insurer.



15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

13. COMPUTATION OF EARNINGS PER SHARE

The computation of basic earnings per share is based on net earnings divided by the weighted average number of shares of common stock outstanding for each period. The computation of diluted earnings per share reflects the common stock equivalency of dilutive options granted to employees under the Company's stock incentive plan and shares issuable on redemption of its Convertible Notes.
   
 
For the Three Months Ended
 
For the Nine Months Ended
  
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
In thousands, except per share amounts
 
 
 
 
 
 
 
 
Earnings from continuing operations
 
$
17,224

 
$
15,797

 
$
51,664

 
$
44,450

Losses from discontinued operations, net of tax
 
—

 
(924
)
 
—

 
(1,926
)
Gain (loss) on disposal of discontinued operations, net of taxes
 
—

 
(94
)
 
—

 
285

Net earnings
 
$
17,224

 
$
14,779

 
$
51,664

 
$
42,809

 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
 
27,179

 
27,113

 
27,203

 
27,025

 
 
 
 
 
 
 
 
 
Earnings per share from continuing operations
 
$
0.63

 
$
0.58

 
$
1.90

 
$
1.64

Loss per share from discontinued operations
 
—

 
(0.03
)
 
—

 
(0.07
)
Earnings per share from disposal of discontinued operations
 
—

 
—

 
—

 
0.01

Basic earnings per share
 
$
0.63

 
$
0.55

 
$
1.90

 
$
1.58

Diluted:
 
 

 
 

 
 
 
 
Weighted average number of shares outstanding
 
27,179

 
27,113

 
27,203

 
27,025

Weighted average shares issuable on exercise of dilutive stock options
 
119

 
142

 
136

 
152

Weighted average shares issuable on redemption of convertible notes
 
472

 
607

 
576

 
589

Total
 
27,770

 
27,862

 
27,915

 
27,766

 
 
 
 
 
 
 
 
 
Earnings per share from continuing operations
 
$
0.62

 
$
0.57

 
$
1.85

 
$
1.60

Loss per share from discontinued operations
 
—

 
(0.04
)
 
—

 
(0.07
)
Earnings per share from disposal of discontinued operations
 
—

 
—

 
—

 
0.01

Diluted earnings per share
 
$
0.62

 
$
0.53

 
$
1.85

 
$
1.54


Equity awards

For the three-month and nine-month fiscal periods ended October 2, 2015, respectively, 507,917 and 488,868 shares issuable under equity awards granted to employees were excluded from the calculation of diluted earnings per share as they were anti-dilutive based on the average stock price during the period. For the three-month and nine-month fiscal periods ended September 26, 2014, respectively, 310,192 and 356,841 shares issuable under equity awards granted to employees were excluded from the calculation of diluted earnings per share as they were anti-dilutive based on the average stock price during the period.


16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

13. COMPUTATION OF EARNINGS PER SHARE (CONTINUED)

Convertible Notes

In November 2010, the Company issued Convertible Notes due on November 15, 2017, in the aggregate principal amount of $115.0 million. The Convertible Notes will mature on November 15, 2017, unless earlier redeemed, repurchased by the Company or converted. Upon conversion, the Convertible Notes require net share settlement, where the aggregate principal amount of the notes will be paid in cash and remaining amounts due, if any, will be settled in cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election.

For the three-month and nine-month fiscal periods ended October 2, 2015, and September 26, 2014, respectively, shares issuable under the Convertible Notes that were dilutive during the period were included in the calculation of earnings per share as the conversion price for the Convertible Notes was less than the average share price of the Company's stock.

Warrants

Excluded from the diluted earnings per share calculation for the three-month and nine-month fiscal periods ended October 2, 2015, are 3,424,229 and 3,420,743 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-month and nine-month fiscal periods ended September 26, 2014, are 3,412,339 and 3,410,690 shares, respectively, issuable under the warrants sold in connection with the Company’s convertible note offering as they would be anti-dilutive.

14. SHARE-BASED ARRANGEMENTS

General

The Company accounts for stock options, restricted stock awards, restricted stock units and performance shares as equity awards and measures the cost of all share-based payments, including stock options, at fair value on the grant date and recognizes this cost in the statement of operations. The Company also has an employee stock purchase plan which is accounted for as a liability award.

Compensation expense for stock options, restricted stock awards and restricted stock units is recognized on a straight-line basis over the vesting period of the awards. Share-based compensation expense recorded for the three-month and nine-month fiscal periods ended October 2, 2015, was $1.3 million and $5.3 million, respectively. Share-based compensation expense recorded for the three-month and nine-month fiscal periods ended September 26, 2014, was $1.0 million and $4.3 million, respectively.

During the first quarter of 2015, the Company issued additional stock awards with market and performance based conditions, bringing the total of these shares to 8,238, assuming a 100% achievement level. The Company measures the cost of these awards based on their grant date fair value to the extent of the probable number of shares to be earned upon vesting. Amortization of this cost will be recorded on a straight-line basis over the requisite service period. Throughout the course of the requisite service period, the Company will monitor the level of achievement compared to the target and adjust the number of shares expected to be earned, and the related compensation expense recorded thereafter, to reflect the updated most probable outcome. Compensation expense for these awards for the three-month and nine-month fiscal periods ended October 2, 2015, and September 26, 2014, was not material.

Stock option activity was as follows:
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2, 2015
 
October 2, 2015
 
 
Options
 
Weighted - average
exercise price
 
Options
 
Weighted - average exercise price
Options outstanding at beginning of period
 
1,049,716

 
$
33.15

 
904,091

 
$
31.26

Granted
 
—

 
$
—

 
202,345

 
$
39.54

Exercised
 
(4,807
)
 
$
20.40

 
(57,702
)
 
$
24.53

Forfeited or expired
 
(1,573
)
 
$
34.61

 
(5,398
)
 
$
36.88

Options outstanding at October 2, 2015
 
1,043,336

 
$
33.21

 
1,043,336

 
$
33.21


17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

14. SHARE-BASED ARRANGEMENTS (CONTINUED)

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 Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
Expected option term (years)
 
5.1

 
5.1

Expected volatility
 
29.0
%
 
37.5
%
Risk-free interest rate
 
1.6
%
 
1.5
%
Expected dividend yield
 
1.6
%
 
1.7
%
Per share fair value of options granted
 
$
9.28

 
$
11.60


Restricted Stock Award and Restricted Stock Unit activity was as follows:
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2, 2015
 
October 2, 2015
 
 
Restricted  Stock
 
Weighted-
average grant
date fair value
 
Restricted Stock
 
Weighted- average grant date fair value
Restricted Stock outstanding at beginning of period
 
187,692

 
$
37.99

 
196,553

 
$
36.29

Granted
 
—

 
$
—

 
79,494

 
$
40.33

Vested
 
(100
)
 
$
23.75

 
(87,152
)
 
$
36.30

Forfeited or expired
 
(561
)
 
$
34.60

 
(1,864
)
 
$
35.87

Restricted Stock outstanding at October 2, 2015
 
187,031

 
$
38.00

 
187,031

 
$
38.00


15. 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 Distribution segment is a leading power transmission, motion control, and fluid power industrial distributor with operations throughout the United States. Distribution conducts business in the mechanical power transmission and bearings, electrical, automation and control, and fluid power product platforms and provides total solutions from system design and integration to machine parts and value-added services to the manufacturing industry.

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; K-MAX® medium-to-heavy lift helicopters; support for our SH-2G Super Seasprite maritime helicopters and K-MAX® aircraft; and engineering design, analysis and certification services.


18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)

15. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)

Summarized financial information by business segment is as follows:
 
 
For the Three Months Ended
 
For the Nine Months Ended
In thousands
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
Net sales:
 
 
 
 
 
 
 
 
Distribution
 
$
296,312

 
$
302,294

 
$
911,832

 
$
859,305

Aerospace
 
137,430

 
153,761

 
411,016

 
457,726

Net sales
 
$
433,742

 
$
456,055

 
$
1,322,848

 
$
1,317,031

Operating income:
 
 

 
 

 
 
 
 
Distribution
 
$
14,422

 
$
14,561

 
$
42,789

 
$
42,470

Aerospace
 
27,801

 
26,813

 
78,775

 
75,515

Net gain/(loss) on sale of assets
 
10

 
(55
)
 
415

 
(228
)
Corporate expense
 
(12,450
)
 
(14,082
)
 
(39,435
)
 
(40,494
)
Operating income from continuing operations
 
29,783

 
27,237

 
82,544

 
77,263

Interest expense, net
 
3,208

 
3,438

 
9,757

 
9,942

Other (income) expense, net
 
185

 
220

 
120

 
540

Earnings before income taxes from continuing operations
 
26,390

 
23,579

 
72,667

 
66,781

Income tax expense
 
9,166

 
7,782

 
21,003

 
22,331

Earnings from continuing operations
 
$
17,224

 
$
15,797

 
$
51,664

 
$
44,450


16. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in shareholders’ equity for the nine-month fiscal periods ended October 2, 2015, and September 26, 2014, were as follows:
 
 
For the Nine Months Ended
 
 
October 2, 2015
 
September 26, 2014
In thousands
 
 
 
 
Beginning balance
 
$
517,665

 
$
511,292

Comprehensive income
 
52,703

 
40,584

Dividends declared
 
(14,686
)
 
(12,988
)
Employee stock plans and related tax benefit
 
4,024

 
5,387

Purchase of treasury shares
 
(8,957
)
 
(845
)
Share-based compensation expense
 
5,304

 
4,307

Ending balance
 
$
556,053

 
$
547,737



19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)


16. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED)

The components of accumulated other comprehensive income (loss) are shown below:
 
 
For the Three Months Ended
 
 
October 2, 2015
 
September 26, 2014
In thousands
 
 
 
 
Foreign currency translation:
 
 
 
 
Beginning balance
 
$
(23,512
)
 
$
(12,759
)
Net gain/(loss) on foreign currency translation
 
(1,109
)
 
(5,766
)
Reclassification to net income
 
—

 
—

Other comprehensive income/(loss), net of tax
 
(1,109
)
 
(5,766
)
Ending balance
 
$
(24,621
)
 
$
(18,525
)
 
 
 
 
 
Pension and other post-retirement benefits(a):
 
 
 
 
Beginning balance
 
$
(102,088
)
 
$
(64,980
)
Reclassifications to net income:
 
 
 
 
Amortization of prior service cost, net of tax expense of $5 and $9, respectively
 
9

 
14

Amortization of net loss, net of tax expense of $956 and $396, respectively
 
1,578

 
655

Other comprehensive income/(loss), net of tax
 
1,587

 
669

Ending balance
 
$
(100,501
)
 
$
(64,311
)
 
 
 
 
 
Derivative instruments(b):
 
 
 
 
Beginning balance
 
$
(162
)
 
$
(516
)
Net loss on derivative instruments, net of tax benefit of $6 and $62, respectively
 
(10
)
 
(104
)
Reclassification to net income, net of tax expense of $44 and $68, respectively
 
72

 
110

Other comprehensive income/(loss), net of tax
 
62

 
6

Ending balance
 
$
(100
)
 
$
(510
)
 
 
 
 
 
Total accumulated other comprehensive income (loss)
 
$
(125,222
)
 
$
(83,346
)


20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)


16. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED)

 
 
For the Nine Months Ended
 
 
October 2, 2015
 
September 26, 2014
In thousands
 
 
 
 
Foreign currency translation:
 
 
 
 
Beginning balance
 
$
(20,676
)
 
$
(14,219
)
Net gain/(loss) on foreign currency translation
 
(3,945
)
 
(4,306
)
Reclassification to net income
 
—

 
—

Other comprehensive income/(loss), net of tax
 
(3,945
)
 
(4,306
)
Ending balance
 
$
(24,621
)
 
$
(18,525
)
 
 
 
 
 
Pension and other post-retirement benefits(a):
 
 
 
 
Beginning balance
 
$
(105,264
)
 
$
(66,317
)
Reclassifications to net income:
 
 
 
 
Amortization of prior service cost, net of tax expense of $16 and $26, respectively
 
27

 
42

Amortization of net loss, net of tax expense of $2,867 and $1,189, respectively
 
4,736

 
1,964

Other comprehensive income/(loss), net of tax
 
4,763

 
2,006

Ending balance
 
$
(100,501
)
 
$
(64,311
)
 
 
 
 
 
Derivative instruments(b):
 
 
 
 
Beginning balance
 
$
(321
)
 
$
(585
)
Net loss on derivative instruments, net of tax benefit of $41 and $140, respectively
 
(68
)
 
(233
)
Reclassification to net income, net of tax expense of $175 and $187, respectively
 
289

 
308

Other comprehensive income/(loss), net of tax
 
221

 
75

Ending balance
 
$
(100
)
 
$
(510
)
 
 
 
 
 
Total accumulated other comprehensive income (loss)
 
$
(125,222
)
 
$
(83,346
)

(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost.
(See Note 11, Pension Plans for additional information.)

(b) See Note 7, Derivative Financial Instruments, for additional information regarding our derivative instruments.


21
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and nine-month fiscal periods ended October 2, 2015 and September 26, 2014
(Unaudited)


17. INCOME TAXES
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
 
 
 
 
 
 
 
 
Effective Income Tax Rate
 
34.7
%
 
33.0
%
 
28.9
%
 
33.4
%

The effective income tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the period. The increase in the effective tax rate for the three-month fiscal period ended October 2, 2015, compared to the corresponding quarter in the prior year, was primarily due to return to provision adjustments recorded during the quarter ended September 26, 2014. The decrease in the effective tax rate for the nine months ended October 2, 2015, when compared to the corresponding period in the prior year, was primarily the result of discrete items recognized in 2015 relating to changes in tax laws. Prior to the law changes the Company had established valuation allowances against certain net operating loss carryforwards. Such allowances are no longer deemed necessary as the changes to the tax laws now make it more likely than not that these benefits will be realized in the future.

18. SUBSEQUENT EVENTS

On October 21, 2015, the Company announced that its Aerospace segment acquired Timken Alcor Aerospace Technologies, Inc. ("TAAT") of Mesa, Arizona, at a purchase price of approximately $45.0 million. TAAT, which will be renamed “EXTEX Engineered Products, Inc.,” designs and supplies aftermarket parts to support businesses conducting maintenance, repair, and overhauls ("MROs") in aerospace markets primarily located in North America. TAAT had sales of approximately $20.0 million in 2014.

The Company has evaluated subsequent events through the issuance date of these financial statements. Other than the matter noted above, no material subsequent events were identified that required disclosure.

22

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. It presents, in narrative and tabular form, information regarding our financial condition, results of operations, liquidity and certain other factors that may affect our future results, and is designed to enable the readers of this report to obtain an understanding of our businesses, strategies, current trends and future prospects. It should be read in conjunction with our 2014 Annual Report on Form 10-K and the condensed consolidated financial statements included in Item 1 of this Form 10-Q.

OVERVIEW OF BUSINESS

Kaman Corporation (the "Company") is comprised of two business segments:
•
The Distribution segment is a leading power transmission, motion control, electrical and automation, and fluid power industrial distributor with operations throughout the United States. We provide 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 the United States.
•
The Aerospace segment produces and/or markets proprietary aircraft bearings and components; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; safe and arming solutions for missile and bomb systems for the U.S. and allied militaries; K-MAX® medium-to-heavy lift helicopters; support for our SH-2G Super Seasprite maritime helicopters and K-MAX® aircraft; and engineering design, analysis and certification services.

Financial performance

•
Net sales from continuing operations decreased 4.9% for the three-month fiscal period ended October 2, 2015, compared to the comparable fiscal period in the prior year. Net sales from continuing operations increased 0.4% for the nine-month fiscal period ended October 2, 2015, compared to the comparable fiscal period in the prior year.
•
Earnings from continuing operations increased 9.0% and 16.2% for the three-month and nine-month fiscal periods ended October 2, 2015, compared to the comparable fiscal periods in the prior year.
•
Diluted earnings per share from continuing operations increased to $0.62, an increase of $0.05, or 8.8% for the three-month fiscal period ended October 2, 2015, compared to the comparable fiscal period in the prior year. For the nine-month fiscal period ended October 2, 2015, diluted earnings per share from continuing operations increased to $1.85, an increase of $0.25, or 15.6% compared to the comparable period in the prior year.
•
Cash flows provided by operating activities of continuing operations for the nine-month fiscal period ended October 2, 2015, were $84.8 million, $39.7 million more than the comparable fiscal period in the prior year.

Recent events

•
On October 21, 2015, the Company's Aerospace segment acquired Timken Alcor Aerospace Technologies, Inc. ("TAAT") of Mesa, Arizona. TAAT, which will be renamed “EXTEX Engineered Products, Inc.,” designs and supplies aftermarket parts to support businesses conducting maintenance, repair, and overhauls in aerospace markets primarily located in North America.
•
On September 21, 2015, the Company delivered the final two SH-2G(I) Super Seasprite aircraft to the New Zealand Ministry of Defence.
•
On July 16, 2015, the Company announced that its Aerospace segment was awarded a commercial sales order in the amount of $23.0 million, for the procurement of Joint Programmable Fuzes ("JPF"). Delivery of the fuzes is anticipated to occur through 2017.



23

Outlook

We are revising our full-year outlook for 2015, as follows:

•
Distribution:
◦
Sales of $1,175 million to $1,200 million
◦
Operating margins of 4.6% to 4.7%
•
Aerospace:
◦
Sales of $600 million to $610 million
◦
Operating margins of 19.3% to 19.5%
•
Interest expense of approximately $13 million
•
Corporate expenses of $54 million to $55 million
•
Estimated annualized tax rate of approximately 31%
•
Depreciation and amortization expense of approximately $40 million
•
Capital expenditures of $30 million to $40 million
•
Free cash flow in the range of $75 million to $90 million

The following table illustrates the calculation of "Free Cash Flow", a Non-GAAP financial measure:
 
2015 Outlook
In millions
 
 
 
Free Cash Flow(a):
 
 
 
     Net cash provided by operating activities
$
105.0

to
$
130.0

     Expenditures for property, plant and equipment
30.0

to
40.0

          Free Cash Flow
$
75.0

to
$
90.0

(a) Free Cash Flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less expenditures for property, plant and equipment, both of which are presented on our consolidated statements of cash flows. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.

RESULTS OF OPERATIONS

Consolidated Results

Net Sales
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
 
(in thousands)
Net sales
 
$
433,742

 
$
456,055

 
$
1,322,848

 
$
1,317,031

$ change
 
(22,313
)
 
39,235

 
5,817

 
94,150

% change
 
(4.9
)%
 
9.4
%
 
0.4
%
 
7.7
%


24

The following table details the components of the increase (decrease) in net sales as a percentage of consolidated net sales:
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2, 2015
 
October 2, 2015
Organic Sales(1):
 
 
 
 
Distribution
 
(2.4
)%
 
0.4
 %
Aerospace
 
(3.6
)%
 
(3.6
)%
Total Organic Sales
 
(6.0
)%
 
(3.2
)%
 
 
 
 
 
Sales by Recent Acquisitions:
 
 
 
 
Distribution
 
1.1
 %
 
3.6
 %
Aerospace
 
—
 %
 
—
 %
Total Acquisition Sales
 
1.1
 %
 
3.6
 %
 
 
 
 
 
% change in net sales
 
(4.9
)%
 
0.4
 %
(1) Sales contributed by acquisitions are included in organic sales beginning with the thirteenth month following the date of acquisition.

See segment discussions below for additional information regarding the changes in net sales.

Gross Profit
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
 
(in thousands)
Gross profit
 
$
129,926

 
$
129,365

 
$
389,789

 
$
371,914

$ change
 
561

 
11,032

 
17,875

 
24,426

% change
 
0.4
%
 
9.3
%
 
4.8
%
 
7.0
%
% of net sales
 
30.0
%
 
28.4
%
 
29.5
%
 
28.2
%

Gross profit remained flat for the three-month fiscal period ended October 2, 2015, as compared to the same period in 2014. This was a result of higher gross profit at our Aerospace segment, mostly offset by lower gross profit at our Distribution segment. For the nine-month fiscal period ended October 2, 2015, gross profit increased as compared to the same period in 2014, due to higher gross profit at both our Distribution and Aerospace segments. The primary driver of the increases is the contribution of gross margin from our 2014 and 2015 Distribution segment acquisitions. Additionally, gross profit as a percentage of net sales increased for both the three-month and nine-month fiscal period ended October 2, 2015, as compared to the corresponding period in 2014, due to the mix of sales shifting to higher margin programs in our Aerospace segment, specifically higher JPF direct commercial sales.

Selling, General & Administrative Expenses (SG&A)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
 
(in thousands)
SG&A
 
$
100,153

 
$
102,073

 
$
307,660

 
$
294,423

$ change
 
(1,920
)
 
16,132

 
13,237

 
25,020

% change
 
(1.9
)%
 
18.8
%
 
4.5
%
 
9.3
%
% of net sales
 
23.1
 %
 
22.4
%
 
23.3
%
 
22.4
%


25

The following table details the components of the SG&A changes for the three-month and nine-month fiscal periods ended October 2, 2015, as compared to the corresponding 2014 periods:
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2, 2015
 
October 2, 2015
Organic SG&A(1):
 
 
 
 
Distribution
 
(3.0
)%
 
1.0
 %
Aerospace
 
1.5
 %
 
—
 %
Corporate
 
(1.6
)%
 
(0.4
)%
Total Organic SG&A
 
(3.1
)%
 
0.6
 %
 
 
 
 
 
Acquisition SG&A:
 
 
 
 
Distribution
 
1.2
 %
 
3.9
 %
Aerospace
 
—
 %
 
—
 %
Total Acquisition SG&A
 
1.2
 %
 
3.9
 %
 
 
 
 
 
% change in SG&A
 
(1.9
)%
 
4.5
 %
(1)SG&A expense incurred by acquisitions are included in organic SG&A beginning with the thirteenth month following the date of acquisition.

The decrease in SG&A for the three-month fiscal period ended October 2, 2015, was primarily due to lower expenses at our Distribution segment and Corporate. The decrease in expenses at our Distribution segment primarily relates to lower salary and benefit expenses, specifically lower incentive compensation costs. Corporate expenses were $1.6 million lower for the three-month fiscal period ended October 2, 2015, primarily driven by $2.3 million of costs incurred in the prior year in connection with the sale of our Moosup facility and lower long-term incentive compensation, partially offset by an increase in consulting costs. These decreases were partially offset by the addition of SG&A expenses from our 2015 Distribution acquisition and higher expenses at our Aerospace segment, primarily due to an increase in professional fees.

The increase in SG&A for the nine-month fiscal period ended October 2, 2015, was primarily due to higher expenses at our Distribution segment. The increase in expenses relates to the addition of SG&A expenses from our 2014 and 2015 acquisitions, higher salary and benefit expenses and higher depreciation and project expenses in part attributable to the introduction of the new ERP system. This increase was partially offset by a decrease in corporate expenses. The decrease in corporate expenses was primarily due to the absence of $2.3 million of costs incurred in the prior year in connection with the sale of our Moosup facility and lower long-term incentive compensation, partially offset by an increase in consulting costs.

Operating Income
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
 
(in thousands)
Operating income
 
$
29,783

 
$
27,237

 
$
82,544

 
$
77,263

$ change
 
2,546

 
(5,155
)
 
5,281

 
(718
)
% change
 
9.3
%
 
(15.9
)%
 
6.8
%
 
(0.9
)%
% of net sales
 
6.9
%
 
6.0
 %
 
6.2
%
 
5.9
 %

The increases in operating income for the three-month and nine-month fiscal periods ended October 2, 2015, versus the comparable periods in 2014 were primarily due to an increase in operating income at our Aerospace segment, lower corporate expenses and the contribution of operating income from our 2014 and 2015 Distribution acquisitions. The increases were in part offset by lower organic operating income at Distribution. (See segment discussion below for additional information.)



26

Interest Expense, Net
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
 
(in thousands)
Interest expense, net
 
$
3,208

 
$
3,438

 
$
9,757

 
$
9,942


Interest expense, net, generally consists of interest charged on our Credit Agreement (see Note 10, Debt, in the Notes to Condensed Consolidated Financial Statements), which includes a revolving credit facility and a term loan facility, and other borrowings and the amortization of debt issuance costs, offset by interest income. The decrease in interest expense, net for the three-month and nine-month fiscal periods ended October 2, 2015, was primarily attributable to lower average borrowings, as compared to the comparable period ended September 26, 2014. The interest rate for outstanding amounts under the Credit Agreement at October 2, 2015, was 1.62% compared to 1.68% at September 26, 2014.. (See Liquidity and Capital Resources section below for information on our borrowings.)

Effective Income Tax Rate
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
 
 
 
 
 
 
Effective income tax rate
 
34.7
%
 
33.0
%
 
28.9
%
 
33.4
%

The effective income tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the period. The increase in the effective tax rate for the three-month fiscal period ended October 2, 2015, compared to the corresponding quarter in the prior year, was primarily due to return to provision adjustments recorded during the quarter ended September 26, 2014. The decrease in the effective tax rate for the nine months ended October 2, 2015, when compared to the corresponding period in the prior year, was primarily the result of discrete items recognized in 2015 relating to changes in tax laws. Prior to the law changes we had established valuation allowance against certain net operating loss carryforwards. Such allowances are no longer deemed necessary as the changes to the tax laws now make it more likely than not that these benefits will be realized in the future.

Distribution Segment

Results of Operations
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
 
(in thousands)
Net sales
 
$
296,312

 
$
302,294

 
$
911,832

 
$
859,305

$ change
 
(5,982
)
 
36,186

 
52,527

 
79,535

% change
 
(2.0
)%
 
13.6
 %
 
6.1
%
 
10.2
%
 
 
 
 
 
 
 
 
 
Operating income
 
$
14,422

 
$
14,561

 
$
42,789

 
$
42,470

$ change