Document
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 June 30, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
At July 21, 2017, there were 27,898,505 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)
|
| | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 27,766 |
| | $ | 41,205 |
|
Accounts receivable, net | | 270,094 |
| | 230,864 |
|
Inventories | | 392,600 |
| | 393,814 |
|
Income tax refunds receivable | | 5,038 |
| | 6,065 |
|
Other current assets | | 29,257 |
| | 26,605 |
|
Total current assets | | 724,755 |
| | 698,553 |
|
Property, plant and equipment, net of accumulated depreciation of $240,509 and $226,366, respectively | | 182,311 |
| | 176,521 |
|
Goodwill | | 345,979 |
| | 337,894 |
|
Other intangible assets, net | | 122,210 |
| | 126,444 |
|
Deferred income taxes | | 50,224 |
| | 59,373 |
|
Other assets | | 23,656 |
| | 27,501 |
|
Total assets | | $ | 1,449,135 |
| | $ | 1,426,286 |
|
Liabilities and Shareholders’ Equity | | |
| | |
|
Current liabilities: | | |
| | |
|
Current portion of long-term debt, net of debt issuance costs | | $ | 18,910 |
| | $ | 119,548 |
|
Accounts payable – trade | | 118,872 |
| | 116,663 |
|
Accrued salaries and wages | | 42,827 |
| | 43,165 |
|
Advances on contracts | | 5,314 |
| | 13,356 |
|
Income taxes payable | | 784 |
| | 1,165 |
|
Other current liabilities | | 57,913 |
| | 59,989 |
|
Total current liabilities | | 244,620 |
| | 353,886 |
|
Long-term debt, excluding current portion, net of debt issuance costs | | 414,765 |
| | 296,598 |
|
Deferred income taxes | | 7,491 |
| | 6,875 |
|
Underfunded pension | | 139,979 |
| | 156,427 |
|
Other long-term liabilities | | 41,866 |
| | 44,916 |
|
Commitments and contingencies (Note 10) | |
|
| |
|
|
Temporary equity, convertible notes | | 68 |
| | 1,797 |
|
Shareholders' equity: | | |
| | |
|
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding | | — |
| | — |
|
Common stock, $1 par value, 50,000,000 shares authorized; voting; 29,051,030 and 28,162,497 shares issued, respectively | | 29,051 |
| | 28,162 |
|
Additional paid-in capital | | 179,535 |
| | 171,162 |
|
Retained earnings | | 568,938 |
| | 560,200 |
|
Accumulated other comprehensive income (loss) | | (135,460 | ) | | (156,393 | ) |
Less 1,152,340 and 1,054,364 shares of common stock, respectively, held in treasury, at cost | | (41,718 | ) | | (37,344 | ) |
Total shareholders’ equity | | 600,346 |
| | 565,787 |
|
Total liabilities and shareholders’ equity | | $ | 1,449,135 |
| | $ | 1,426,286 |
|
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 Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
Net sales | | $ | 449,006 |
| | $ | 470,642 |
| | $ | 884,947 |
| | $ | 921,840 |
|
Cost of sales | | 314,043 |
| | 326,876 |
| | 625,168 |
| | 643,644 |
|
Gross profit | | 134,963 |
| | 143,766 |
| | 259,779 |
| | 278,196 |
|
Selling, general and administrative expenses | | 107,556 |
| | 113,905 |
| | 218,184 |
| | 230,013 |
|
Net (gain) loss on sale of assets | | 15 |
| | 14 |
| | (5 | ) | | (14 | ) |
Operating income | | 27,392 |
| | 29,847 |
| | 41,600 |
| | 48,197 |
|
Interest expense, net | | 6,122 |
| | 3,988 |
| | 10,282 |
| | 7,795 |
|
Other expense (income), net | | (69 | ) | | 489 |
| | (228 | ) | | 575 |
|
Earnings before income taxes | | 21,339 |
| | 25,370 |
| | 31,546 |
| | 39,827 |
|
Income tax expense | | 7,881 |
| | 8,875 |
| | 11,797 |
| | 13,555 |
|
Net earnings | | $ | 13,458 |
| | $ | 16,495 |
| | $ | 19,749 |
| | $ | 26,272 |
|
| | | | | | | | |
Earnings per share: | | |
| | |
| | | | |
Basic earnings per share | | $ | 0.49 |
| | $ | 0.61 |
| | $ | 0.72 |
| | $ | 0.97 |
|
Diluted earnings per share | | $ | 0.48 |
| | $ | 0.59 |
| | $ | 0.70 |
| | $ | 0.94 |
|
Average shares outstanding: | | |
| | |
| | | | |
Basic | | 27,557 |
| | 27,101 |
| | 27,351 |
| | 27,080 |
|
Diluted | | 27,842 |
| | 27,944 |
| | 28,370 |
| | 27,875 |
|
Dividends declared per share | | $ | 0.20 |
| | $ | 0.18 |
| | $ | 0.40 |
| | $ | 0.36 |
|
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 Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
Net earnings | | $ | 13,458 |
| | $ | 16,495 |
| | $ | 19,749 |
| | $ | 26,272 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | |
Foreign currency translation adjustments | | 13,777 |
| | (7,178 | ) | | 16,374 |
| | 35 |
|
Unrealized gain (loss) on derivative instruments, net of tax expense (benefit) of $5 and ($94) and $115 and ($431), respectively | | 7 |
| | (155 | ) | | 191 |
| | (712 | ) |
Change in pension and post-retirement benefit plan liabilities, net of tax expense of $1,335 and $1,215 and $2,670 and $2,428, respectively | | 2,159 |
| | 2,005 |
| | 4,368 |
| | 4,010 |
|
Other comprehensive income | | 15,943 |
| | (5,328 | ) | | 20,933 |
| | 3,333 |
|
Comprehensive income | | $ | 29,401 |
| | $ | 11,167 |
| | $ | 40,682 |
| | $ | 29,605 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)
|
| | | | | | | | |
|
| For the Six Months Ended |
|
| June 30, 2017 |
| July 1, 2016 |
Cash flows from operating activities: |
| |
|
| |
|
Net earnings |
| $ | 19,749 |
|
| $ | 26,272 |
|
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |
| |
|
| |
|
Depreciation and amortization |
| 21,309 |
|
| 21,750 |
|
Amortization of debt issuance costs |
| 1,103 |
|
| 764 |
|
Accretion of convertible notes discount |
| 2,091 |
|
| 1,058 |
|
Provision for doubtful accounts |
| 511 |
|
| 672 |
|
Net gain on sale of assets |
| (5 | ) |
| (14 | ) |
Loss on debt extinguishment | | 137 |
| | — |
|
Net (gain) loss on derivative instruments |
| (337 | ) |
| 588 |
|
Stock compensation expense |
| 3,707 |
|
| 3,622 |
|
Excess tax benefit from share-based compensation arrangements |
| — |
|
| (197 | ) |
Deferred income taxes |
| 6,131 |
|
| (928 | ) |
Changes in assets and liabilities, excluding effects of acquisitions/divestitures: |
|
|
| |
|
Accounts receivable |
| (34,666 | ) |
| (30,735 | ) |
Inventories |
| 3,987 |
|
| (12,416 | ) |
Income tax refunds receivable |
| 1,031 |
|
| 1,967 |
|
Other current assets |
| (1,641 | ) |
| 640 |
|
Accounts payable - trade |
| 1,774 |
|
| 11,448 |
|
Accrued contract losses |
| 246 |
|
| 693 |
|
Advances on contracts |
| (8,042 | ) |
| 3,723 |
|
Other accruals and payables |
| (2,171 | ) |
| 9,479 |
|
Income taxes payable |
| (414 | ) |
| (211 | ) |
Pension liabilities |
| (10,312 | ) |
| (9,549 | ) |
Other long-term liabilities |
| (4,362 | ) |
| (3,274 | ) |
Net cash (used in) provided by operating activities |
| (174 | ) |
| 25,352 |
|
Cash flows from investing activities: |
| |
|
| |
|
Proceeds from sale of assets |
| 253 |
|
| 176 |
|
Expenditures for property, plant & equipment |
| (15,196 | ) |
| (15,348 | ) |
Acquisition of businesses (net of cash acquired) |
| (1,365 | ) |
| (5,681 | ) |
Other, net |
| (763 | ) |
| (133 | ) |
Cash used in investing activities |
| (17,071 | ) |
| (20,986 | ) |
Cash flows from financing activities: |
| |
|
| |
|
Net borrowings (repayments) under revolving credit agreements |
| (53,431 | ) |
| 14,029 |
|
Debt repayment |
| (3,125 | ) |
| (2,500 | ) |
Proceeds from the issuance of 2024 convertible notes |
| 200,000 |
|
| — |
|
Repayment of 2017 convertible notes |
| (163,654 | ) |
| — |
|
Purchase of capped call - 2024 convertible notes |
| (20,500 | ) |
| — |
|
Proceeds from bond hedge settlement - 2017 convertible notes |
| 58,564 |
|
| — |
|
Bank overdraft |
| 575 |
|
| 47 |
|
Proceeds from exercise of employee stock awards |
| 4,681 |
|
| 5,085 |
|
Purchase of treasury shares |
| (2,718 | ) |
| (7,022 | ) |
Dividends paid |
| (10,312 | ) |
| (9,744 | ) |
Debt and equity issuance costs |
| (7,348 | ) |
| — |
|
Other |
| (235 | ) |
| (163 | ) |
Windfall tax benefit |
| — |
|
| 197 |
|
Cash provided by (used in) financing activities |
| 2,497 |
|
| (71 | ) |
Net (decrease) increase in cash and cash equivalents |
| (14,748 | ) |
| 4,295 |
|
Effect of exchange rate changes on cash and cash equivalents |
| 1,309 |
|
| (547 | ) |
Cash and cash equivalents at beginning of period |
| 41,205 |
|
| 16,462 |
|
Cash and cash equivalents at end of period |
| $ | 27,766 |
|
| $ | 20,210 |
|
| | | | |
Supplemental disclosure of noncash activities: | | | | |
Common shares issued for partial unwind of warrant transactions | | $ | 30,279 |
| | $ | — |
|
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
1. BASIS OF PRESENTATION
The December 31, 2016, 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 statement 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, 2016. 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 second quarters for 2017 and 2016 ended on June 30, 2017, and July 1, 2016, respectively.
2. RECENT ACCOUNTING STANDARDS
In May 2017, the FASB issued Accounting Standards Update ("ASU") 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting". The objective of this standard update is to address the diversity in practice and reduce the cost and complexity of applying guidance for a change to the terms or conditions of a share-based payment award. This ASU provides guidance on when an entity should apply modification accounting for stock compensation. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities”. Under this ASU, the amortization period for certain callable debt securities held at a premium is shortened to more closely align the amortization period with expectations incorporated in market pricing on the underlying securities. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the potential impact this standard update might have on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715) - Improving the Net Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The objective of this standard update is to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This standard update requires employers to disaggregate the service cost component from the other components of net benefit cost. This ASU also provides guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently assessing the potential impact this standard update will have on its consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)". The objective of this standard update is to clarify the scope of asset derecognition guidance and to provide new guidance for partial sales of nonfinancial assets. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, however, an entity is required to apply the amendments in this ASU in the same period that it applies the amendments for ASU 2014-09. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The objective of this standard update is to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, assuming the loss recognized does not exceed the total amount of goodwill for the reporting unit. The standard update is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The impact of the adoption of this standard update is dependent on the Company's goodwill impairment assessment.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash". The objective of this standard update is to address the diversity in classification and presentation of changes in restricted cash on the statement of cash flows. Under this ASU, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory". Under this ASU, income tax consequences of an intra-entity transfer of an asset other than inventory will be recognized when the transfer occurs. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments". This standard update was issued to address diversity in practice in how certain cash receipts and cash payments are presented and classified. The provisions of ASU 2016-15 will be effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting”. This standard update eliminates the requirement to retroactively adopt the equity method of accounting when an investment qualifies for use of the equity method. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The adoption of this standard update did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in Debt Instruments”. The objective of this standard update is to eliminate inconsistent practices with regards to assessing embedded contingent put and call options in debt instruments. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The adoption of this standard update did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815) - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”. The objective of this standard update is to clarify whether a change in the counterparty to a derivative instrument results in a requirement to dedesignate that hedging relationship and discontinue the application of hedge accounting. The standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The adoption of this standard update did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Under this ASU as amended, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged under this ASU as amended. This standard update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is developing a project plan to implement this standard update and is currently assessing the potential impact this standard update might have on its consolidated financial statements. The Company anticipates the ASU will have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to the balance sheet, however it does not expect the ASU to have a material impact on the Company's cash flows or results of operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
2. RECENT ACCOUNTING STANDARDS (CONTINUED)
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities”. The objective of this standard update is to remove inconsistent practices with regards to the accounting for financial instruments between US GAAP and International Financial Reporting Standards (“IFRS”). The standard update intends to improve the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The provisions of this standard update are effective for interim and annual periods beginning after December 15, 2017. The Company does not expect these changes to have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 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 standard update is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. The adoption of this standard update did not have a material impact on the Company’s consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". The objective of this standard update is to remove inconsistent practices with regard to revenue recognition between US GAAP and IFRS. The standard intends to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. 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 has developed a project plan that includes a three-phase approach to implementing this standard update. Phase one, the assessment phase, was completed in early 2016. The Company concluded the second phase of the project, which included conversion activities such as establishing policies, identifying system impacts and developing a basic understanding of the impact this standard update will have on the Company's consolidated financial statements, during the fourth quarter of 2016. Phase three, which began during the first quarter of 2017, includes the integration of the standard update into financial reporting processes and systems, and developing a more robust understanding of the financial impact of this standard update on the Company's consolidated financial statements. The Company anticipates the transition to the new standard could have a material impact on the Company's consolidated financial statements but will be unable to quantify that impact until the third phase of the project has been completed. The Company expects the cost of the activities it is undertaking to transition to the new standard will result in an increase in selling, general and administrative expenses in 2017 and beyond.
The Company intends to transition using the modified retrospective method upon adoption of this standard update. The Distribution segment currently recognizes the majority of its revenue at a point in time, whereas the new standard will result in certain revenue streams moving to an over time revenue recognition model. The majority of our long-term contracts in the Aerospace segment are currently accounted for under the percentage-of-completion method using units-of-delivery as a measurement basis. For these programs, early-contract unit costs in excess of the average expected cost over the life of the contract are capitalized and amortized over the number of units in the contract. With the adoption of this standard update, some deferred unit costs in excess of the contract average will be eliminated through retained earnings and will not be amortized into future earnings. The Company anticipates that many of these contracts will move to an over time revenue model under the percentage-of-completion method. For example, revenue for the Company's Joint Programmable Fuze ("JPF") program with the U.S. Government ("USG") will move from percentage-of-completion using units-of-delivery as the measurement basis to the over time revenue recognition model using input costs as the basis for recognizing progress to completion. Conversely, revenue for the K-MAX® program will move from cost-to-cost revenue recognition to point in time, with revenue on these aircraft being recognized upon delivery to the end customer. The Company is currently working to quantify the impact these changes will have on the financial statements; however, the ultimate impact cannot currently be determined as it will be dependent upon the terms of contracts with customers at such time and the Company's progress to completion.
Subsequent to the issuance of ASU 2014-09, the FASB has issued the following updates: ASU 2015-14, "Revenue from Contracts with Customers (Topic 606) - "Deferral of the Effective Date"; ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; ASU 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing"; ASU 2016-12, "Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients"; and ASU 2016-20, "Technical Corrections and Improvements to Topic 606". The amendments in these updates affect the guidance contained within ASU 2014-09 and will be assessed as part of the Company's revenue recognition project plan.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
|
| | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
In thousands | | | | |
Trade receivables | | $ | 155,614 |
| | $ | 143,471 |
|
U.S. Government contracts: | | |
| | |
|
Billed | | 20,745 |
| | 17,244 |
|
Costs and accrued profit – not billed | | 1,071 |
| | 1,478 |
|
Commercial and other government contracts: | | |
| | |
|
Billed | | 56,899 |
| | 50,560 |
|
Costs and accrued profit – not billed | | 39,919 |
| | 22,234 |
|
Less allowance for doubtful accounts | | (4,154 | ) | | (4,123 | ) |
Accounts receivable, net | | $ | 270,094 |
| | $ | 230,864 |
|
The increase in commercial and other government contracts unbilled costs and accrued profits is primarily related to receivables under the K-MAX® program. The increase in trade receivables is primarily due to an increase in receivables at the Distribution segment.
Additionally, $3.7 million of unbilled receivables and accrued profit for the K-MAX® program were included in other assets on the Company's Condensed Consolidated Balance Sheet as of December 31, 2016, as the amounts due were expected to be collected more than one year after the balance sheet date. At June 30, 2017, all receivables for the K-MAX® program were included in accounts receivable, net, as the amounts due were expected to be collected within one year of the balance sheet date.
Accounts receivable, net includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:
|
| | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
In thousands | | | | |
Contract changes, negotiated settlements and claims for unanticipated contract costs | | $ | 1,283 |
| | $ | 900 |
|
4. 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. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
The following table presents the carrying value and fair value of financial instruments that are not carried at fair value:
|
| | | | | | | | | | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
In thousands | | | | | | | | |
Debt: | | | | | | | | |
Level 1 | | $ | — |
| | $ | — |
| | $ | 113,203 |
| | $ | 170,935 |
|
Level 2 | | 440,502 |
| | 451,509 |
| | 303,855 |
| | 279,582 |
|
Total | | $ | 440,502 |
| | $ | 451,509 |
| | $ | 417,058 |
| | $ | 450,517 |
|
The above fair values were computed based on quoted market prices (Level 1 and 2) 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 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. At June 30, 2017, the derivative instruments have been included in other current assets and current assets on the Condensed Consolidated Balance Sheets. At December 31, 2016, the derivative instruments were included in other current liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets. 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.
The Company evaluated the credit risk associated with the counterparties to these derivative instruments and determined that as of June 30, 2017, such credit risks have not had an adverse impact on the fair value of these instruments.
5. 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.
Forward Exchange Contracts
The Company holds forward exchange contracts designed to hedge forecasted transactions denominated in foreign currencies and to minimize the impact of foreign currency fluctuations on the Company’s earnings and cash flows. Some of these contracts are designated as cash flow hedges. The Company will include in earnings amounts currently included in accumulated other comprehensive income upon recognition of cost of sales related to the underlying transaction. These contracts were not material to the Company's Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016. The activity related to these contracts was not material Company's Condensed Consolidated Financial Statements for the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
5. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Interest Rate Swaps
The Term Loan Facility of the Company's Credit Agreement (“Term Loan”) contains floating rate obligations and is subject to interest rate fluctuations. During 2015, the Company entered into interest rate swap agreements for the purposes of hedging the eight quarterly variable-rate Term Loan interest payments due in 2016 and 2017. Additionally, the Company entered into interest rate swap agreements to effectively convert $83.8 million of its variable rate revolving credit facility debt to a fixed interest rate. These interest rate swap agreements were designated as cash flow hedges and intended to manage interest rate risk associated with the Company's variable-rate borrowings and minimize the impact on its earnings and cash flows of interest rate fluctuations attributable to changes in LIBOR rates. These agreements were not material to the Company's Condensed Consolidated Balance Sheets for the three-month and six-month fiscal periods ended June 30, 2017 and December 31, 2016.
The activity related to these contracts was not material to the Company's Condensed Consolidated Financial Statements for the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016. Over the next twelve months, the income related to cash flow hedges expected to be reclassified from other comprehensive income is $0.2 million.
6. INVENTORIES
Inventories consist of the following:
|
| | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
In thousands | | | | |
Merchandise for resale | | $ | 154,053 |
| | $ | 158,618 |
|
Raw materials | | 19,858 |
| | 20,592 |
|
Contracts and other work in process (including certain general stock materials) | | 187,987 |
| | 189,295 |
|
Finished goods | | 30,702 |
| | 25,309 |
|
Total | | $ | 392,600 |
| | $ | 393,814 |
|
Inventories include amounts associated with matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:
|
| | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
In thousands | | | | |
Contract changes, negotiated settlements and claims for unanticipated contract costs | | $ | 2,947 |
| | $ | 3,629 |
|
K-MAX® inventory of $16.6 million and $15.9 million as of June 30, 2017, and December 31, 2016, respectively, was included in contracts and other work in process inventory and finished goods on the Company's Condensed Consolidated Balance Sheets. These amounts exclude the inventory associated with our new build aircraft. Management believes that a significant portion of this K-MAX® inventory will be sold after June 30, 2018, based upon the anticipation of additional aircraft manufacturing and supporting the fleet for the foreseeable future.
At June 30, 2017, and December 31, 2016, $6.7 million and $7.2 million, respectively, of SH-2G(I) inventory was included in contracts and other work in process inventory on the Company's Condensed Consolidated Balance Sheets. Management believes that approximately $3.4 million of the SH-2G(I) inventory will be sold after June 30, 2018. This balance represents spares requirements and inventory to be used on SH-2G programs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
6. INVENTORIES (CONTINUED)
At June 30, 2017, backlog for the A-10 program with Boeing was $2.4 million, representing 5 shipsets, and total program inventory was $9.6 million, of which $7.6 million is associated with nonrecurring costs. Through June 30, 2017, the Company has delivered 168 shipsets over the life of the program. During 2016, the U.S. Air Force ("USAF") indicated that they would delay the retirement of the A-10 fleet due to its vital close air support, search and rescue capabilities and the lack of a suitable replacement. The Company continues to monitor the defense budget and understands that despite this positive indication, the future of this program could be at risk without the continued support of Congress. The Company has not received any orders for additional shipsets in 2017, and as such, expects a break in production as it completes the units currently on order and waits for follow-on orders from the customer. The customer has not given any indication that this program will be terminated. Final production and deliveries of existing orders under this contract are anticipated to be completed during the second half of 2017. Tooling and nonrecurring costs on this program are being amortized over 242 shipsets, the number of shipsets under the program of record. These nonrecurring costs may not be recoverable in the event of an extended break in production or program termination.
Long-term Contracts
For long-term aerospace contracts, the Company generally recognizes revenue and cost of sales using 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 of sales based on either (1) the cost-to-cost method, in which case 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 case 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 six-month fiscal periods ended June 30, 2017, there were net increases in the Company's operating income attributable to changes in contract estimates of $1.1 million and $2.1 million, respectively. These increases were primarily a result of improved performance on the JPF USG program, the AH-1Z program and the SH-2G program with Peru. These improvements were partially offset by cost growth on the K-MAX® and A-10 programs. There were net decreases in the Company's operating income from changes in contract estimates of $1.6 million and $2.6 million, respectively, for the three-month and six-month fiscal periods ended July 1, 2016. These decreases were primarily a result of cost growth on various programs, including the Boeing 767/777 program, the A-10 program and a composites assembly program, offset by improved performance on the JPF program.
7. 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, 2016 | | $ | 149,204 |
| | $ | 204,942 |
| | $ | 354,146 |
|
Accumulated impairment | | — |
| | (16,252 | ) | | (16,252 | ) |
Net balance at December 31, 2016 | | 149,204 |
| | 188,690 |
| | 337,894 |
|
Additions | | — |
| | — |
| | — |
|
Impairments | | — |
| | — |
| | — |
|
Foreign currency translation | | — |
| | 8,085 |
| | 8,085 |
|
Ending balance at June 30, 2017 | | $ | 149,204 |
| | $ | 196,775 |
| | $ | 345,979 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)
Other intangible assets consisted of:
|
| | | | | | | | | | | | | | | | | | |
| | | | At June 30, | | At December 31, |
| | | | 2017 | | 2016 |
| | Amortization Period | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
In thousands | | | | | | | | | | |
Customer lists / relationships | | 6-26 years | | $ | 157,556 |
| | $ | (58,431 | ) | | $ | 154,745 |
| | $ | (51,800 | ) |
Developed technologies | | 10-20 years | | 19,696 |
| | (2,083 | ) | | 19,049 |
| | (1,394 | ) |
Trademarks / trade names | | 3-15 years | | 8,727 |
| | (3,600 | ) | | 8,344 |
| | (3,250 | ) |
Non-compete agreements and other | | 1-9 years | | 8,240 |
| | (7,988 | ) | | 8,096 |
| | (7,444 | ) |
Patents | | 17 years | | 523 |
| | (430 | ) | | 523 |
| | (425 | ) |
Total | | | | $ | 194,742 |
| | $ | (72,532 | ) | | $ | 190,757 |
| | $ | (64,313 | ) |
The changes in other intangible assets are due to changes in foreign currency exchange rates.
In accordance with ASC 360 - Property, Plant, and Equipment ("ASC 360"), the Company is required to evaluate long-lived intangible assets for possible impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We are continuing to monitor the ongoing operating performance of our UK Composites facility, including an ongoing assessment for potential triggering events that would require further evaluation. The total amount of intangible assets at our U.K. Composites business at June 30, 2017 was $11.4 million.
8. DEBT
Convertible Notes
Overview
During the fiscal quarter ending June 30, 2017, the Company issued $200.0 million aggregate principal amount of convertible senior unsecured notes due May 2024 (the "2024 Notes") pursuant to an indenture (the "Indenture"), dated May 12, 2017, between the Company and U.S. Bank National Association, as trustee. In connection therewith, the Company entered into certain capped call transactions that cover, collectively, the number of shares of the Company's common stock underlying the 2024 Notes. In a separate transaction, the Company repurchased $103.5 million aggregate principal amount of its existing convertible senior unsecured notes due November 15, 2017 (the "2017 Notes"). In connection with the repurchase of the 2017 Notes, the Company settled a portion of the associated outstanding bond hedge transactions and warrant transactions it entered into in 2010 in connection with their issuance. See below for further discussion on the issuance of the 2024 Notes, the repurchase of the 2017 Notes and the related transactions.
2024 Notes
On May 12, 2017, the Company issued $175.0 million in principal amount of 2024 Notes, in a private placement offering. On May 24, 2017, the Company issued an additional $25.0 million in principal amount of 2024 Notes pursuant to the initial purchasers' exercise of their overallotment option, resulting in the issuance of an aggregate $200.0 million principal amount of 2024 Notes. The 2024 Notes bear 3.25% interest per annum on the principal amount, payable semiannually in arrears on May 1 and November 1 of each year, beginning on November 1, 2017. The 2024 Notes will mature on May 1, 2024, unless earlier repurchased by the Company or converted. The Company will settle any conversions of the 2024 Notes in cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
8. DEBT (CONTINUED)
Convertible Notes - continued
2024 Notes - continued
Use of proceeds from the issuance of the 2024 Notes was as follows: |
| | | | |
in thousands | | |
Proceeds: | | |
Gross proceeds | | $ | 200,000 |
|
Commission fees and other expenses(1) | | (7,348 | ) |
Net proceeds | | $ | 192,652 |
|
Use of Proceeds: | | |
Cost to repurchase $103.5 million aggregate principal amount of 2017 Notes(2) | | $ | (165,308 | ) |
Cost for capped call transaction related to 2024 Notes | | (20,500 | ) |
Payment made to reduce revolving credit facility(3) | | (6,844 | ) |
Total use of proceeds | | $ | (192,652 | ) |
(1) Debt issuance fees paid to the counterparties and other expenses (i.e. legal and accounting) related to the issuance of the 2024 Notes were capitalized.
(2)Included in this balance is $1.7 million of related accrued interest payments.
(3)Additional payments to the revolving credit facility were made from proceeds received as part of the bond hedge settlement related to the repurchase of the 2017 Notes. See the 2017 Notes section below for further discussion.
The following table illustrates the conversion rate at the date of transaction:
|
| | | | |
2024 Notes | | |
Conversion Rate per $1,000 principal amount (1) | | 15.3227 |
Conversion Price (2) | | $ | 65.2626 |
|
Contingent Conversion Price (3) | | $ | 84.84 |
|
Aggregate shares to be issued upon conversion (4) | | 3,064,540 |
|
(1) Represents the number of shares of Common Stock hypothetically issuable per each $1,000 principal amount of 2024 Notes, subject to adjustments upon the occurrence of certain specified events in accordance with the terms of the Indenture.
(2) Represents $1,000 divided by the conversion rate as of such date. The conversion price reflects the strike price of the embedded option within the 2024 Notes. If the Company's share price exceeds the conversion price at conversion, the noteholders would be entitled to receive additional consideration either in cash, shares or a combination thereof, the form of which is at the sole discretion of the Company.
(3) Prior to November 1, 2023, the notes are convertible only in the following circumstances: (1) during any fiscal quarter commencing after July 1, 2017, and only during any such fiscal quarter, if the last reported sale price of the Company's common stock was greater than or equal to 130% of the applicable conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter, (2) during the five consecutive business day period following any ten consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day or (3) upon the occurrence of specified corporate events. On or after November 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. If the Company undergoes a fundamental change (as defined in the Indenture), holders of the notes may require the Company to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount to be repurchased, plus any accrued and unpaid interest. As of June 30, 2017, none of the conditions permitting the holders of the 2024 Notes to convert had been met. Therefore, the 2024 Notes are classified as long-term debt.
(4) This represents the number of shares hypothetically issuable upon conversion of 100% of the outstanding aggregate principal amount of the 2024 Notes at each date; however, the terms of the 2024 Notes state that the Company may pay or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election. The Company currently intends to settle the aggregate principal amount in cash. Amounts due in excess of the principal, if any, also may be settled in cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
8. DEBT (CONTINUED)
Convertible Notes - continued
2024 Notes - continued
In connection with the 2024 Notes offering, the Company entered into capped call transactions with certain of the initial purchasers or their respective affiliates. These transactions are intended to reduce the potential dilution to the Company's shareholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon any future conversion of the notes in the event that the market price per share of the Company's common stock is greater than the strike price of the capped call transactions, with such reduction and/or offset subject to a cap based on the cap price of the capped call transactions. Under the terms of the capped call transactions, the strike price ($65.2626) and the cap price ($88.7570) are each subject to adjustment in certain circumstances. In connection with establishing their initial hedges of the capped call transactions, the option counterparties or their respective affiliates entered into various derivative transactions with respect to the Company’s common stock concurrently with or shortly after the pricing of the notes. The capped call transactions, which cost an aggregate $20.5 million, were recorded as a reduction of additional paid-in capital.
Accounting Standards Codification ("ASC") Topic 815 - Derivatives and Hedging ("ASC 815") provides that contracts are initially classified as equity if (1) the contract requires physical settlement or net-share settlement, or (2) the contract gives the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The settlement terms of our capped call transactions require net-share settlement. Based on the guidance in ASC 815, the capped call transactions were recorded as a reduction of equity as of the trade date. ASC 815 states that a reporting entity shall not consider contracts to be derivative instruments if the contract issued or held by the reporting entity is both indexed to its own stock and classified in shareholders' equity in its balance sheet. The Company concluded the capped call transactions should be accounted for in shareholders' equity and are, therefore, not to be considered a derivative instrument.
ASC 470-20 "Debt with Conversion and Other Options" (“ASC 470-20”), clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. ASC 470-20 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflects the issuer's non-convertible debt borrowing rate which interest costs are to be recognized in subsequent periods. The note payable principal balance for the 2024 Notes at the date of issuance of $200.0 million was bifurcated into the debt component of $179.5 million and the equity component of $20.5 million. The difference between the note payable principal balance and the fair value of the debt component representing the debt discount is being accreted to interest expense over the term of the 2024 Notes. The fair value of the debt component was recognized using a 5.0% discount rate, representing the Company's borrowing rate at the date of issuance for a similar debt instrument without a conversion feature with an expected life of seven years.
The Company incurred $7.3 million of debt issuance costs in connection with the sale of the 2024 Notes, which was allocated between the debt and equity components of the instrument. Of the total amount, $0.7 million was recorded as an offset to additional paid-in capital. The balance, $6.6 million, was recorded as a contra-debt balance and is being amortized over the term of the 2024 Notes. Total amortization expense for the three-month fiscal period ended June 30, 2017 was $0.1 million.
The carrying amount of the equity component and the principal amount of the liability component, the unamortized discount and the net carrying value of the liability are as follows:
|
| | | | | | | | |
| | 2024 Notes |
| | June 30, 2017 | | December 31, 2016 |
In thousands | | | | |
Principal amount of liability | | $ | 200,000 |
| | $ | — |
|
Unamortized discount | | 20,097 |
| | — |
|
Carrying value of liability | | $ | 179,903 |
| | $ | — |
|
| | | | |
Equity component | | $ | 20,459 |
| | $ | — |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
8. DEBT (CONTINUED)
Convertible Notes - continued
2024 Notes - continued
Because the embedded conversion option is indexed to the Company’s own stock and would be classified in shareholders’ equity, it does not meet the criterion under ASC 815 that would require separate accounting as a derivative instrument.
As of June 30, 2017, the "if converted value" did not exceed the principal amount of the 2024 Notes since the closing sales price of the Company's common stock was less than the conversion price of the 2024 Notes.
2017 Notes
|
| | | | | | | | |
| | 2017 Notes |
| | June 30, 2017 | | December 31, 2016 |
In thousands | | | | |
Principal amount of liability | | $ | 11,500 |
| | $ | 115,000 |
|
Unamortized discount | | 68 |
| | 1,797 |
|
Carrying value of liability | | $ | 11,432 |
| | $ | 113,203 |
|
In November 2010, the Company issued convertible senior unsecured notes due on November 15, 2017, in the aggregate principal amount of $115.0 million in a private placement offering. These notes bear 3.25% interest per annum on the principal amount, payable semiannually in arrears on May 15 and November 15 of each year, beginning in 2011. In May 2017, the Company used a portion of the net proceeds from the issuance of the 2024 Notes, along with cash received from the counterparties in connection with the termination of the existing convertible note hedge transactions referred to below, to repurchase $103.5 million principal amount of the 2017 Notes from a limited number of holders in an arm's length transaction. This repurchase represented approximately 90% of the aggregate principal amount of 2017 Notes. The repurchases were accounted for as an extinguishment of the outstanding instrument. Of the total aggregate cost of $165.3 million, $60.0 million was allocated to the equity component of the 2017 Notes and was recorded as a reduction to additional paid-in capital. The remainder of the cost was attributed to the outstanding principal repurchased and accrued interest. As of June 30, 2017, $11.5 million principal amount remains outstanding under the 2017 Notes.
The repayment of a portion of the 2017 Notes was not contingent upon the issuance of the 2024 Notes. As such, the repurchase of the 2017 Notes was accounted for as a debt extinguishment.
See below for further details on the loss on extinguishment:
|
| | | | |
in thousands | | |
Carrying value of 2017 Notes | | $ | 113,943 |
|
| | |
Carrying value of Redeemed Debt | | $ | 102,548 |
|
Fair value of consideration transferred allocated to debt component(1) | | 103,637 |
|
Loss on extinguishment of 2017 Notes(2) | | $ | (1,089 | ) |
Acceleration of the related portion of debt issuance cost(3) | | (297 | ) |
Total loss on extinguishment of 2017 Notes(4) | | $ | (1,386 | ) |
(1)The fair value of consideration transferred was calculated using a discount rate of 3%, representing the Company's borrowing rate at the date of issuance for a similar debt instrument with a remaining expected life of six months (for the 2017 Notes).
(2)The majority of this balance relates to the write-off of approximately $1.0 million, 90% of the unamortized debt discount.
(3)The Company determined that in connection with the repurchase of the 2017 Notes, 90% of the unamortized debt issuance costs should be written off, representing the approximate outstanding portion of these costs related to the notes repurchased.
(4)This loss is included in interest expense, net on the Company's Consolidated Statement of Operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
8. DEBT (CONTINUED)
Convertible Notes - continued
2017 Notes - continued
In connection with the 2017 Notes, the Company had entered into convertible note hedge transactions and warrant transactions ("existing call spread transactions") with certain financial institutions. These transactions were accounted for as equity instruments at the time of issuance in 2010. With the intention of repurchasing the 2017 Notes, the Company entered into agreements with these financial institutions to terminate a portion of the existing call spread transactions concurrently with the offering. In connection with these transactions, the Company received $58.6 million in payments related to the unwind of 90% of the convertible note hedge transactions and made deliveries of 624,044 shares of the Company's common stock in connection with the partial unwind of the warrant transactions. The Company used a portion of the proceeds from the bond hedge settlement to repurchase the 2017 Notes as described above and to make a payment to the revolving credit facility. The cash proceeds received were recorded as an increase of additional paid-in-capital which was partially offset by the delivery of shares.
The remaining portion of the 2017 Notes are convertible at the option of the noteholders until the close of business on the second Scheduled Trading Day (as defined in the 2017 Notes indenture) immediately preceding the maturity date. Accordingly, the remaining carrying amount of the 2017 Notes is recorded in current liabilities and a portion of the equity component, representing the unamortized debt discount, was reclassified from additional paid-in-capital to temporary equity on the Company's Condensed Consolidated Balance Sheet as of June 30, 2017.
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 |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
In thousands | | | | | | | | |
Service cost | | $ | 1,199 |
| | $ | 1,149 |
| | $ | — |
| | $ | — |
|
Interest cost on projected benefit obligation | | 6,090 |
| | 6,122 |
| | 62 |
| | 64 |
|
Expected return on plan assets | | (10,512 | ) | | (10,192 | ) | | — |
| | — |
|
Amortization of net loss | | 3,486 |
| | 3,174 |
| | 8 |
| | 46 |
|
Additional amount recognized due to curtailment/settlement | | — |
| | — |
| | — |
| | — |
|
Net pension cost | | $ | 263 |
| | $ | 253 |
| | $ | 70 |
| | $ | 110 |
|
|
| | | | | | | | | | | | | | | | |
| | For the Six Months Ended |
| | Qualified Pension Plan | | SERP |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
In thousands | | | | | | | | |
Service cost | | $ | 2,397 |
| | $ | 2,298 |
| | $ | — |
| | $ | — |
|
Interest cost on projected benefit obligation | | 12,179 |
| | 12,244 |
| | 123 |
| | 128 |
|
Expected return on plan assets | | (21,024 | ) | | (20,384 | ) | | — |
| | — |
|
Amortization of net loss | | 6,972 |
| | 6,347 |
| | 66 |
| | 91 |
|
Additional amount recognized due to curtailment/settlement | | — |
| | — |
| | 99 |
| | — |
|
Net pension cost | | $ | 524 |
| | $ | 505 |
| | $ | 288 |
| | $ | 219 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
9. PENSION PLANS (CONTINUED)
The Company contributed $10.0 million to the qualified pension plan and $1.1 million to the SERP through the end of the second quarter of 2017. No further contributions are expected to be made to the qualified pension plan during 2017. The Company plans to contribute an additional $2.0 million to the SERP in 2017. For the 2016 plan year, the Company contributed $10.0 million to the qualified pension plan and $0.5 million to the SERP.
10. COMMITMENTS AND CONTINGENCIES
Pension Freeze
Effective December 31, 2015, the Company's qualified pension plan was frozen with respect to future benefit accruals. Under USG Cost Accounting Standard (“CAS”) 413 the Company must determine the USG’s share of any pension curtailment adjustment calculated in accordance with CAS. Such adjustments can result in an amount due to the USG for pension plans that are in a surplus position or an amount due to the contractor for plans that are in a deficit position. During the fourth quarter of 2016, the Company accrued a $0.3 million liability representing our estimate of the amount due to the USG based on our pension curtailment adjustment calculation, which was submitted to the USG for review in December 2016. Through the date of this filing, there has been no response from the USG on this matter. There can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations, financial position and cash flows.
New Hartford Property
In connection with the sale of the Company’s Music segment in 2007, the Company assumed responsibility for meeting certain requirements of the Connecticut Transfer Act (the “Transfer Act”) that applied to the transfer of the New Hartford, Connecticut, facility leased by that segment for guitar manufacturing purposes (“Ovation”). Under the Transfer Act, those responsibilities essentially consist of assessing the site's environmental conditions and remediating environmental impairments, if any, caused by Ovation's operations prior to the sale. The site is a multi-tenant industrial park, in which Ovation and other unrelated entities lease space. The environmental assessment process, which began in 2008, has been completed and site remediation is in process.
The Company's estimate of its portion of the cost to assess the environmental conditions and remediate this site is $2.3 million, all of which has been accrued. The total amount paid to date in connection with these environmental remediation activities is $1.6 million. At June 30, 2017, the Company had $0.7 million accrued for these environmental remediation activities. A portion ($0.1 million) of the accrual related to this property is included in other current liabilities and the balance is included in other long-term liabilities. The remaining balance of the accrual reflects the total anticipated cost of completing these environmental remediation activities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.
Bloomfield Property
In connection with the Company’s 2008 purchase of the portion of the Bloomfield campus that Kaman Aerospace Corporation had leased from NAVAIR, the Company assumed responsibility for environmental remediation at the facility as may be required under the Transfer Act and is currently remediating the property under the guidance of the Connecticut Department of Environmental Protection ("CTDEP"). The assumed environmental liability of $10.3 million was determined by taking the undiscounted estimated remediation liability of $20.8 million and discounting it at a rate of 8%. This remediation process will take many years to complete. The total amount paid to date in connection with these environmental remediation activities is $12.6 million. At June 30, 2017, the Company had $2.5 million accrued for these environmental remediation activities. A portion ($1.1 million) of the accrual related to this property is included in other current liabilities, and the balance is included in other long-term liabilities. 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-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rimpar Property
In connection with the Company's purchase of GRW, the Company assumed responsibility for the environmental remediation at the Rimpar, Germany facility. As part of the purchase price allocation, the Company initially accrued approximately $4.2 million during the year ended December 31, 2015. In 2016, the Company completed a Phase II assessment in order to better understand the extent of the environmental effort necessary to remediate the facility. Based on this assessment, the Company adjusted the accrual to $0.5 million, as results of the assessment indicate a lower level of remediation effort will be required. The total amount paid to date in connection with these environmental remediation activities is $0.2 million. The balance ($0.3 million) of the accrual related to this property is included in other current 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.
Aerospace Claim Matter
On June 29, 2016, the Company received notification from a customer of their intent to file a claim for recovery of costs and expenses related to rework on certain aerostructure components previously delivered by the Company to the customer. The notification did not indicate the extent of the rework undertaken by the customer, the cost or expenses incurred by the customer or the time frame in which the customer anticipated filing its formal claim. Based on initial discussions with the customer, the Company believes the customer is seeking recovery of $12.4 million associated with the rework of these components and related costs incurred by the customer. The Company estimates the cost to rework the aerostructure components delivered to the customer over the time period in question is approximately $0.2 million. Based on this analysis, the Company has accrued $0.2 million, the estimated cost to rework the aerostructure components, as of June 30, 2017; however, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations, financial position and cash flows.
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 period. The computation of diluted earnings per share reflects the common stock equivalency of dilutive options granted to employees under the Company's stock incentive plan, shares issuable on redemption of its convertible notes and shares issuable upon redemption of outstanding warrants. |
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
In thousands, except per share amounts | | | | | | | | |
Net earnings | | $ | 13,458 |
| | $ | 16,495 |
| | $ | 19,749 |
| | $ | 26,272 |
|
| | | | | | | | |
Basic: | | | | | | | | |
Weighted average number of shares outstanding | | 27,557 |
| | 27,101 |
| | 27,351 |
| | 27,080 |
|
Basic earnings per share | | $ | 0.49 |
| | $ | 0.61 |
| | $ | 0.72 |
| | $ | 0.97 |
|
| | | | | | | | |
Diluted: | | |
| | |
| | | | |
Weighted average number of shares outstanding | | 27,557 |
| | 27,101 |
| | 27,351 |
| | 27,080 |
|
Weighted average shares issuable on exercise of dilutive stock options | | 141 |
| | 140 |
| | 154 |
| | 137 |
|
Weighted average shares issuable on redemption of 2017 Notes | | 108 |
| | 703 |
| | 628 |
| | 658 |
|
Weighted average shares issuable on redemption of warrants | | 36 |
| | — |
| | 237 |
| | — |
|
Total | | 27,842 |
| | 27,944 |
| | 28,370 |
| | 27,875 |
|
| | | | | | | | |
Diluted earnings per share | | $ | 0.48 |
| | $ | 0.59 |
| | $ | 0.70 |
| | $ | 0.94 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
11. COMPUTATION OF EARNINGS PER SHARE (CONTINUED)
Equity awards
For the three-month and six-month fiscal periods ended June 30, 2017, respectively, 350,649 and 286,343 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 six-month fiscal periods ended July 1, 2016, respectively, 537,033 and 600,168 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.
2017 Convertible Notes
For the three-month and six-month fiscal periods ended June 30, 2017, and July 1, 2016, respectively, shares issuable under the 2017 Notes that were dilutive during the period were included in the calculation of earnings per share as the conversion price for the 2017 Notes was less than the average share price of the Company's stock.
2024 Convertible Notes
For the three-month and six-month fiscal periods ended June 30, 2017, shares issuable under the 2024 Notes were excluded from the diluted earnings per share calculation because the conversion price was greater than the average market price of our stock during the periods.
Warrants
Excluded from the diluted earnings per share calculation for the three-month and six-month fiscal periods ended June 30, 2017, were 309,306 and 1,657,483, respectively, shares issuable under the warrants sold in connection with the Company's 2017 Notes as they would be anti-dilutive. Excluded from the diluted earnings per share calculation for the three-month and six-month fiscal periods ended July 1, 2016, were 3,434,193 and 3,432,593, respectively, shares issuable under the warrants sold in connection with the Company’s 2017 Notes as they would be anti-dilutive.
12. 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 six-month fiscal periods ended June 30, 2017, was $2.3 million and $3.7 million, respectively. Share-based compensation expense recorded for the three-month and six-month fiscal periods ended July 1, 2016, was $2.1 million and $3.6 million, respectively.
During the first quarter of 2016, the Company issued stock awards with market and performance based conditions, bringing the total of these shares to 8,979, 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 is recorded on a straight-line basis over the requisite service period. Throughout the course of the requisite service period, the Company monitors the level of achievement compared to the target and adjusts 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 six-month fiscal periods ended June 30, 2017, and July 1, 2016, was not material.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
12. SHARE-BASED ARRANGEMENTS (CONTINUED)
Stock option activity was as follows:
|
| | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | June 30, 2017 |
| | Options | | Weighted - average exercise price | | Options | | Weighted - average exercise price |
Options outstanding at beginning of period | | 1,087,636 |
| | $ | 39.45 |
| | 958,679 |
| | $ | 36.18 |
|
Granted | | — |
| | $ | — |
| | 226,315 |
| | $ | 51.97 |
|
Exercised | | (88,603 | ) | | $ | 34.46 |
| | (146,744 | ) | | $ | 33.19 |
|
Forfeited or expired | | (6,254 | ) | | $ | 41.19 |
| | (45,471 | ) | | $ | 43.53 |
|
Options outstanding at June 30, 2017 | | 992,779 |
| | $ | 39.89 |
| | 992,779 |
| | $ | 39.89 |
|
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 Six Months Ended |
| | June 30, 2017 | | July 1, 2016 |
Expected option term (years) | | 5.0 |
| | 5.2 |
|
Expected volatility | | 19.9 | % | | 26.0 | % |
Risk-free interest rate | | 1.9 | % | | 1.2 | % |
Expected dividend yield | | 1.6 | % | | 1.8 | % |
Per share fair value of options granted | |
| $8.61 |
| |
| $8.63 |
|
Restricted Stock Award and Restricted Stock Unit activity was as follows:
|
| | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | June 30, 2017 |
| | Restricted Stock | | Weighted- average grant date fair value | | Restricted Stock | | Weighted- average grant date fair value |
Restricted Stock outstanding at beginning of period | | 162,410 |
| | $ | 44.07 |
| | 167,674 |
| | $ | 40.27 |
|
Granted | | 25,273 |
| | $ | 46.48 |
| | 75,008 |
| | $ | 50.00 |
|
Vested | | (25,257 | ) | | $ | 46.24 |
| | (71,342 | ) | | $ | 41.48 |
|
Forfeited or expired | | (1,945 | ) | | $ | 41.67 |
| | (10,859 | ) | | $ | 42.40 |
|
Restricted Stock outstanding at June 30, 2017 | | 160,481 |
| | $ | 44.13 |
| | 160,481 |
| | $ | 44.13 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
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 Distribution segment is a leading power transmission, automation and fluid power industrial distributor with operations throughout the United States. The segment provides electro-mechanical products, bearings, power transmission, motion control and electrical and fluid power components to a broad spectrum of industrial markets serving both maintenance, repair and overhaul ("MRO") and original equipment manufacturer ("OEM") customers.
The Aerospace segment produces and markets proprietary aircraft bearings and components; super precision, miniature ball bearings; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; and safe and arming solutions for missile and bomb systems for the U.S. and allied militaries. The segment also markets the design and supply of aftermarket parts to businesses performing MRO in aerospace markets; performs helicopter subcontract work; restores, modifies and supports the Company's SH-2G Super Seasprite maritime helicopters; manufactures and supports the Company's K-MAX® manned and unmanned medium-to-heavy lift helicopters; and provides engineering design, analysis and certification services.
Summarized financial information by business segment is as follows: |
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
In thousands | | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
Net sales: | | | | | | | | |
Distribution | | $ | 278,706 |
| | $ | 286,052 |
| | $ | 550,324 |
| | $ | 574,716 |
|
Aerospace | | 170,300 |
| | 184,590 |
| | 334,623 |
| | 347,124 |
|
Net sales | | $ | 449,006 |
| | $ | 470,642 |
| | $ | 884,947 |
| | $ | 921,840 |
|
Operating income: | | |
| | |
| | | | |
Distribution | | $ | 15,934 |
| | $ | 13,807 |
| | $ | 27,628 |
| | $ | 24,276 |
|
Aerospace | | 26,270 |
| | 30,461 |
| | 42,859 |
| | 51,758 |
|
Net gain (loss) on sale of assets | | (15 | ) | | (14 | ) | | 5 |
| | 14 |
|
Corporate expense | | (14,797 | ) | | (14,407 | ) | | (28,892 | ) | | (27,851 | ) |
Operating income | | 27,392 |
| | 29,847 |
| | 41,600 |
| | 48,197 |
|
Interest expense, net | | 6,122 |
| | 3,988 |
| | 10,282 |
| | 7,795 |
|
Other expense (income), net | | (69 | ) | | 489 |
| | (228 | ) | | 575 |
|
Earnings before income taxes | | 21,339 |
| | 25,370 |
| | 31,546 |
| | 39,827 |
|
Income tax expense | | 7,881 |
| | 8,875 |
| | 11,797 |
| | 13,555 |
|
Net earnings | | $ | 13,458 |
| | $ | 16,495 |
| | $ | 19,749 |
| | $ | 26,272 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
14. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in shareholders’ equity for the six-month fiscal periods ended June 30, 2017, and July 1, 2016, were as follows:
|
| | | | | | | | |
| | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 |
In thousands | | | | |
Beginning balance | | $ | 565,787 |
| | $ | 543,077 |
|
Comprehensive income | | 40,682 |
| | 29,605 |
|
Dividends declared | | (11,011 | ) | | (9,754 | ) |
Employee stock plans and related tax benefit | | 4,681 |
| | 5,085 |
|
Purchase of treasury shares | | (2,718 | ) | | (7,022 | ) |
Share-based compensation expense | | 3,707 |
| | 3,622 |
|
Amounts reclassified to temporary equity | | 1,729 |
| | — |
|
Changes due to convertible notes transactions | | (2,511 | ) | | — |
|
Ending balance | | $ | 600,346 |
| | $ | 564,613 |
|
The components of accumulated other comprehensive income (loss) are shown below:
|
| | | | | | | | |
| | For the Three Months Ended |
| | June 30, 2017 | | July 1, 2016 |
In thousands | | | | |
Foreign currency translation: | | | | |
Beginning balance | | $ | (32,299 | ) | | $ | (15,412 | ) |
Net gain/(loss) on foreign currency translation | | 13,777 |
| | (7,178 | ) |
Reclassification to net income | | — |
| | — |
|
Other comprehensive income/(loss), net of tax | | 13,777 |
| | (7,178 | ) |
Ending balance | | $ | (18,522 | ) | | $ | (22,590 | ) |
| | | | |
Pension and other post-retirement benefits(1): | | | | |
Beginning balance | | $ | (119,239 | ) | | $ | (115,450 | ) |
Reclassifications to net income: | | | | |
Amortization of net loss, net of tax expense of $1,335 and $1,215, respectively | | 2,159 |
| | 2,005 |
|
Other comprehensive income/(loss), net of tax | | 2,159 |
| | 2,005 |
|
Ending balance | | $ | (117,080 | ) | | $ | (113,445 | ) |
| | | | |
Derivative instruments(2): | | | | |
Beginning balance | | $ | 135 |
| | $ | (615 | ) |
Net loss on derivative instruments, net of tax expense (benefit) of $5 and ($192), respectively | | 8 |
| | (317 | ) |
Reclassification to net income, net of tax expense (benefit) of ($0) and $98, respectively | | (1 | ) | | 162 |
|
Other comprehensive income/(loss), net of tax | | 7 |
| | (155 | ) |
Ending balance | | $ | 142 |
| | $ | (770 | ) |
| | | | |
Total accumulated other comprehensive income (loss) | | $ | (135,460 | ) | | $ | (136,805 | ) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
14. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED)
|
| | | | | | | | |
| | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 |
In thousands | | | | |
Foreign currency translation: | | | | |
Beginning balance | | $ | (34,896 | ) | | $ | (22,625 | ) |
Net gain/(loss) on foreign currency translation | | 16,374 |
| | 35 |
|
Reclassification to net income | | — |
| | — |
|
Other comprehensive income/(loss), net of tax | | 16,374 |
| | 35 |
|
Ending balance | | $ | (18,522 | ) | | $ | (22,590 | ) |
| | | | |
Pension and other post-retirement benefits(1): | | | | |
Beginning balance | | $ | (121,448 | ) | | $ | (117,455 | ) |
Reclassifications to net income: | |
|
| |
|
Amortization of net loss, net of tax expense of $2,670 and $2,428, respectively | | 4,368 |
| | 4,010 |
|
Other comprehensive income/(loss), net of tax | | 4,368 |
| | 4,010 |
|
Ending balance | | $ | (117,080 | ) | | $ | (113,445 | ) |
| | | | |
Derivative instruments(2): | | | | |
Beginning balance | | $ | (49 | ) | | $ | (58 | ) |
Net loss on derivative instruments, net of tax expense (benefit) of $78 and ($629), respectively | | 129 |
| | (1,039 | ) |
Reclassification to net income, net of tax expense of $37 and $198, respectively | | 62 |
| | 327 |
|
Other comprehensive income/(loss), net of tax | | 191 |
| | (712 | ) |
Ending balance | | $ | 142 |
| | $ | (770 | ) |
| | | | |
Total accumulated other comprehensive income (loss) | | $ | (135,460 | ) | | $ | (136,805 | ) |
(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost.
(See Note 9, Pension Plans for additional information.)
(2) See Note 5, Derivative Financial Instruments, for additional information regarding our derivative instruments.
15. INCOME TAXES
|
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
| | | | | | | | |
Effective Income Tax Rate | | 36.9 | % | | 35.0 | % | | 37.4 | % | | 34.0 | % |
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 and six-month fiscal periods ended June 30, 2017, compared to the rate for the corresponding periods in the prior year, is primarily due to a projected foreign loss in the current period for which no tax benefit has been provided and certain discrete items which were present for the comparable periods ended July 1, 2016, most notably favorable differences between foreign provisions for taxes and actual foreign returns filed.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three-month and six-month fiscal periods ended June 30, 2017 and July 1, 2016
(Unaudited)
15. INCOME TAXES (CONTINUED)
A valuation allowance for deferred tax assets, including those associated with net operating loss carryforwards, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, the Company uses estimates and judgment regarding future taxable income, and considers the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies, as well as the current and forecasted business economics.
The Company has assessed both positive and negative evidence to estimate whether sufficient future taxable income will be generated to utilize operating loss carryforwards associated with certain foreign operations that will permit the Company to use $2.1 million of deferred tax assets associated with these foreign operations as of June 30, 2017. Through the end of the second quarter of 2017, the Company believes it is more likely than not that only $1.1 million of these deferred tax assets will be realized and, as such, has recorded a valuation allowance of $1.0 million. Going forward, management will continue to assess the available positive and negative evidence to determine whether it is likely sufficient future taxable income will be generated to permit the use of these deferred tax assets. The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income are reduced or increased, or if additional weight is given to subjective evidence such as future expected growth because objective negative evidence in the form of cumulative losses is no longer present.
16. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the issuance date of these financial statements. No material subsequent events were identified that require disclosure.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations ("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 Annual Report on Form 10-K for the year ended December 31, 2016 ("2016 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, automation and fluid power industrial distributor with operations throughout the United States. The segment provides electro-mechanical products, bearings, power transmission, motion control and electrical and fluid power components to a broad spectrum of industrial markets serving both maintenance, repair and overhaul ("MRO") and original equipment manufacturer ("OEM") customers. |
| |
• | The Aerospace segment produces and markets proprietary aircraft bearings and components; super precision, miniature ball bearings; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; and safe and arming solutions for missile and bomb systems for the U.S. and allied militaries. The segment also markets the design and supply of aftermarket parts to businesses performing MRO in aerospace markets; performs helicopter subcontract work; restores, modifies and supports our SH-2G Super Seasprite maritime helicopters; manufactures and supports our K-MAX® manned and unmanned medium-to-heavy lift helicopters; and provides engineering design, analysis and certification services. |
Financial performance
| |
• | Net sales decreased 4.6% and 4.0% for the three-month and six-month fiscal periods ended June 30, 2017, compared to the comparable fiscal periods in the prior year. |
| |
• | Net earnings decreased 18.4% and 24.8% for the three-month and six-month fiscal periods ended June 30, 2017, compared to the comparable fiscal periods in the prior year. |
| |
• | Diluted earnings per share decreased to $0.48 for the three-month fiscal period ended June 30, 2017, compared to $0.59 in the comparable fiscal period in the prior year. For the six-month fiscal period ended June 30, 2017, diluted earnings per share decreased to $0.70, compared to $0.94 in the comparable fiscal period in the prior year. |
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• | Cash used in operating activities during the six-month fiscal period ended June 30, 2017, was $0.2 million, compared to cash provided by operating activities for the comparable fiscal period in the prior year of $25.4 million. |
Recent events
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• | On July 17, 2017, our Aerospace segment announced it had entered into a new multi-year contract with Sikorsky to manufacture H-60 cockpits under the Department of Defense MY IX H-60 procurement authorization. The term of the agreement will be for five years, beginning in 2018 and ending in 2022. |
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• | On July 14, 2017, Lectern Aviation of China accepted the first two K-MAX® helicopters from the newly reopened commercial production line. |
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• | On June 19, 2017, our Aerospace segment announced it had entered into a Long Term Agreement with Rolls-Royce to manufacture components for the production phase of the Trent 7000 engine program. |
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• | On June 14, 2017, our Aerospace segment announced that due to the continued demand and interest in the capabilities of the K-MAX®, we will continue production of the K-MAX® heavy-lift utility helicopter into 2019 at a minimum. |
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• | In May 2017, we issued convertible senior unsecured notes due on May 1, 2024 ("2024 Notes"), in the aggregate principal amount of $200.0 million, with a coupon rate of 3.25%. The Company used a portion of the proceeds from the issuance of these notes, along with cash received in connection with the termination of existing convertible note hedge transactions, to repurchase a portion of the existing convertible senior unsecured notes due on November 15, 2017 ("2017 Notes") at a cost of $165.3 million. The remaining proceeds were used to purchase a capped call related to the 2024 Notes, at a cost of $20.5 million, and pay down a portion of our revolving credit facility. |
RESULTS OF OPERATIONS
Consolidated Results
Net Sales
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
| | (in thousands) |
Net sales | | $ | 449,006 |
| | $ | 470,642 |
| | $ | 884,947 |
| | $ | 921,840 |
|
$ change | | (21,636 | ) | | 24,318 |
| | (36,893 | ) | | 32,734 |
|
% change | | (4.6 | )% | | 5.4 | % | | (4.0 | )% | | 3.7 | % |
Net sales decreased for the three-month and six-month fiscal periods ended June 30, 2017, as compared to the corresponding periods in 2016. This was a result of a decrease in net sales at both our Distribution and Aerospace segments. Foreign currency exchange rates relative to the U.S. dollar had an unfavorable impact for the three-month and six-month fiscal periods ended June 30, 2017 of $1.6 million and $3.9 million, respectively. (See segment discussion below for additional information.)
Gross Profit
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
| | (in thousands) |
Gross profit | | $ | 134,963 |
| | $ | 143,766 |
| | $ | 259,779 |
| | $ | 278,196 |
|
$ change | | (8,803 | ) | | 11,814 |
| | (18,417 | ) | | 18,333 |
|
% change | | (6.1 | )% | | 9.0 | % | | (6.6 | )% | | 7.1 | % |
% of net sales | | 30.1 | % | | 30.5 | % | | 29.4 | % | | 30.2 | % |
Gross profit decreased for the three-month and six-month fiscal periods ended June 30, 2017, as compared to the corresponding periods in 2016. This was a result of lower gross profit at both our Aerospace and Distribution segments. The decrease in gross profit at our Aerospace segment was primarily associated with our JPF program customer mix. For the three-month and six-month fiscal periods ended June 30, 2017, JPF deliveries consisted of mostly USG fuzes under Option 12, which were negotiated at a lower selling price than both direct sales to foreign militaries and Option 11 sold in the corresponding periods in 2016. Lower gross profit at our Distribution segment was primarily attributable to lower sales under our bearings and power transmission and automation, control and energy product lines.
Gross profit as a percentage of net sales decreased for the three-month and six-month fiscal periods ended June 30, 2017, as compared to the corresponding period in 2016, primarily due to the customer mix under our JPF program described in the preceding paragraph. Gross profit as a percentage of net sales remained relatively flat at our Distribution segment for the three-month and six-month fiscal periods ended June 30, 2017.
Selling, General & Administrative Expenses (S,G&A)
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
| | (in thousands) |
S,G&A | | $ | 107,556 |
| | $ | 113,905 |
| | $ | 218,184 |
| | $ | 230,013 |
|
$ change | | (6,349 | ) | | 11,952 |
| | (11,829 | ) | | 22,506 |
|
% change | | (5.6 | )% | | 11.7 | % | | (5.1 | )% | | 10.8 | % |
% of net sales | | 24.0 | % | | 24.2 | % | | 24.7 | % | | 25.0 | % |
The decrease in S,G&A for the three-month fiscal period ended June 30, 2017, compared to the corresponding period in 2016, resulted from lower expenses at both of our segments. The decrease in expenses at our Distribution segment primarily related to lower expenses of $1.5 million associated with our productivity and efficiency initiatives designed to improve operating performance. Additionally, there were lower salary and benefit expenses at both segments. Corporate expenses remained relatively flat compared to the corresponding period in 2016, primarily due to higher employee and employee-related costs, mostly offset by lower consulting costs.
The decrease in S,G&A for the six-month fiscal period ended June 30, 2017, compared to the corresponding period in 2016, resulted from lower expenses at both of our segments, partially offset by an increase in corporate expenses. The decrease in expenses at our Distribution segment primarily related to lower expenses of $4.2 million associated with our productivity and efficiency initiatives designed to improve operating performance and lower salary and benefit expenses. The Aerospace segment experienced lower costs associated with the sale of government contract program inventory (see segment discussion below for additional information). The increase in corporate expenses was primarily due to higher employee and employee-related costs, partially offset by lower consulting costs.
Operating Income
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
| | (in thousands) |
Operating income | | $ | 27,392 |
| | $ | 29,847 |
| | $ | 41,600 |
| | $ | 48,197 |
|
$ change | | (2,455 | ) | | (584 | ) | | (6,597 | ) | | (4,564 | ) |
% change | | (8.2 | )% | | (1.9 | )% | | (13.7 | )% | | (8.7 | )% |
% of net sales | | 6.1 | % | | 6.3 | % | | 4.7 | % | | 5.2 | % |
The decrease in operating income for the three-month and six-month fiscal periods ended June 30, 2017, versus the comparable periods in 2016, was primarily attributable to lower operating income at our Aerospace segment, mostly due to the decrease in sales and lower gross profit under our JPF program due to the shift in customer mix. Additionally, for the six-month fiscal period, we had higher corporate expenses as detailed above. These changes were partially offset by higher operating income at our Distribution segment. (See segment discussion below for additional information.)
Interest Expense, Net
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
| | (in thousands) |
Interest expense, net | | $ | 6,122 |
| | $ | 3,988 |
| | $ | 10,282 |
| | $ | 7,795 |
|
Interest expense, net, generally consists of interest charged on our Credit Agreement, which includes a revolving credit facility and a term loan facility, and our convertible notes and the amortization of debt issuance costs, offset by interest income. The increase in interest expense, net for both periods ended June 30, 2017, compared to the corresponding periods in 2016, was primarily attributable to the write-off of unamortized debt issuance costs and the unamortized debt discount associated with the redemption of our 2017 Notes, for $0.3 million and $1.0 million, respectively. Additionally, the interest rate is higher for
outstanding amounts under the Credit Agreement as compared to the same period in 2016. At June 30, 2017, the interest rate for outstanding amounts under the Credit Agreement was 2.69% compared to 2.09% at July 1, 2016. This increase was partially offset by lower average borrowings, as compared to the comparable periods ended July 1, 2016. (See Liquidity and Capital Resources section below for information on our borrowings.)
Effective Income Tax Rate
|
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
| | | | | | |
Effective income tax rate | | 36.9 | % | | 35.0 | % | | 37.4 | % | | 34.0 | % |
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 and six-month fiscal periods ended June 30, 2017, compared to the rate for the corresponding periods in the prior year is primarily due to a projected foreign loss in the current period for which no tax benefit has been provided and certain discrete items which were present for the comparable periods ended July 1, 2016, most notably favorable differences between foreign provisions for taxes and actual foreign returns filed.
Distribution Segment
Results of Operations
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
| | (in thousands) |
Net sales | | $ | 278,706 |
| | $ | 286,052 |
| | $ | 550,324 |
| | $ | 574,716 |
|
$ change | | (7,346 | ) | | (17,998 | ) | | (24,392 | ) | | (40,805 | ) |
% change | | (2.6 | )% | | (5.9 | )% | | (4.2 | )% | | (6.6 | )% |
| | | | | | | | |
Operating income | | $ | 15,934 |
| | $ | 13,807 |
| | $ | 27,628 |
| | $ | 24,276 |
|
$ change | | 2,127 |
| | (1,596 | ) | | 3,352 |
| | (4,091 | ) |
% change | | 15.4 | % | | (10.4 | )% | | 13.8 | % | | (14.4 | )% |
% of net sales | | 5.7 | % | | 4.8 | % | | 5.0 | % | | 4.2 | % |
Net sales
Net sales for the three-month fiscal period ended June 30, 2017 decreased when compared to the corresponding period in 2016, primarily due to a decrease in sales of $5.3 million associated with our automation, control and energy product line and a less significant decrease in our bearings and power transmission product line. Net sales under our fluid power product line remained relatively flat for the quarter when compared to the corresponding period in 2016. The decreases in sales in our product lines were mostly attributable to $11.2 million in lower sales volume to our MRO customers, partially offset by higher sales volume to our OEM customers. Looking at the markets we serve, sales were lower in the paper manufacturing, computer and electric product manufacturing and transportation equipment manufacturing markets. Partially offsetting these decreases, were higher sales in the food manufacturing and machinery manufacturing markets.
Net sales for the six-month fiscal period ended June 30, 2017 decreased when compared to the corresponding period in 2016, primarily due to a decrease in sales of $21.6 million associated with our bearings and power transmission and automation, control and energy product lines and a less significant decrease in our fluid power product line. Additionally, sales for the six-month fiscal period decreased when compared to the corresponding period in the prior year due to one fewer sales day in the first six months of 2017. The decreases in net sales in our product lines were mostly attributable to $23.7 million in lower sales volume to our MRO customers. Looking at the markets we serve, sales were lower in the food manufacturing, paper manufacturing and merchant wholesalers durable goods markets. Partially offsetting these decreases, were higher sales in the fabricated metal product and mining markets.
"Organic Sales per Sales Day" is a metric management uses to evaluate performance trends at our Distribution segment and is calculated by taking Organic Sales divided by the number of Sales Days in the period. The following table illustrates the calculation of Organic Sales per Sales Day.
|
| | | | | | | | | | | | | | | | |
|
| For the Three Months Ended | | For the Six Months Ended |
| | June 30, 2017 | | July 1, 2016 | | June 30, 2017 | | July 1, 2016 |
| | (in thousands) |
Current period | |
|
| |
| |
| |
|
Net sales | | $ | 278,706 |
| | $ | 286,052 |
| | $ | 550,324 |
| | $ | 574,716 |
|
Acquisition sales (1) | | — |
| | 894 |
| | — |
| | 3,553 |
|
Organic sales | | 278,706 |
| | 285,158 |
| | 550,324 |
| | 571,163 |
|
Sales days | | 64 |
| | 64 |
| | 128 | |