Kaman

AR 13

Financials

Part II

Financials/Financial Statements and Supplementary Data/Notes to Consolidated Financial Statements – Note 12

For the Years Ended December 31, 2013, 2012 and 2011

12. DEBT

Long-Term Debt

The Company has long-term debt as follows:

At December 31,
2013 2012
In thousands
Revolving credit agreement $ 77,562 $ 54,325
Term loan 90,000 100,000
Convertible notes 107,093 105,260
Total 274,655 259,585
Less current portion 10,000 10,000
Total excluding current portion $ 264,655 $ 249,585

The weighted average interest rate on long-term borrowings outstanding as of December 31, 2013 and 2012, was 2.31% and 2.39%, respectively.

The aggregate annual maturities of long-term debt for each of the next five years are approximately as follows:

In thousands
2014 $ 10,000
2015 10,000
2016 10,000
2017 252,562
2018

In the above table, the total principal of the Convertible Note of $115.0 million is included in the amount due in 2017. The carrying value of the Convertible Notes at December 31, 2013, is $107.1 million.

Revolving Credit and Term Loan Agreements

On November 20, 2012, the Company entered into a new Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and RBS Citizens, N.A. as Co-Syndication Agents, J.P. Morgan Securities LLC ("J.P. Morgan Securities"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") and RBS Citizens, N.A. as Joint Bookrunners and Joint Lead Arrangers, and the other lenders named therein (collectively, the "Lenders"). The Credit Agreement, which expires on July 31, 2017, replaced the Company's then existing $275.0 million Amended and Restated Revolving Credit Agreement (the "Revolving Credit Agreement") and $42.5 million Second Amended and Restated Term Loan Credit Agreement (the Term Loan Agreement).

The Credit Agreement, provides a $400.0 million revolving credit facility under which we may issue letters of credit for our benefit and a $100.0 million term loan facility. The term loan commitment requires quarterly payments of principal (which commenced on March 31, 2013) at the rate of $2.5 million per quarter with $55.0 million payable in the final quarter of the facility's term. We may increase the aggregate amount of each of the revolving credit facility and the term loan facility by up to $100.0 million in accordance with the terms of the Credit Agreement.

The revolving credit facility permits the Company to pay cash dividends. The Lenders have been granted a security interest in substantially all of the Company's and its domestic subsidiaries' personal property and other assets (including intellectual property but excluding real estate), including a pledge of 66% of the Company's equity interest in certain foreign subsidiaries and 100% of the Company's equity interest in its domestic subsidiaries, as collateral for the Company's obligations under the Credit Agreement. At December 31, 2013, there was $77.6 million outstanding under the Credit Agreement, excluding letters of credit, with $285.6 million available for borrowing. However, based on EBITDA levels for 2013, amounts available for borrowing were limited to $217.6 million. Letters of credit are considered borrowings for purposes of the Credit Agreement. A total of $36.8 million in letters of credit was outstanding under the Credit Agreement at December 31, 2013, $30.3 million of which related to the SH-2G(I) New Zealand sales contract. At December 31, 2012, there was $54.3 million outstanding under the Revolving Credit Agreement, excluding letters of credit, with $331.1 million available for borrowing. A total of $14.6 million in letters of credit was outstanding under the Revolving Credit Agreement at December 31, 2012, 6.7 million of which related to the guaranteed minimum payments to the Commonwealth of Australia associated with the ownership transfer of the eleven SH-2G(A) helicopters (along with the spare parts and associated equipment). This was eliminated in the second quarter of 2013, following the delivery of the final guaranteed payment of $6.4 million (AUD) on April 2, 2013. The Company has not issued any letters of credit other than those issued under the Revolving Credit Agreement.

Interest rates on amounts outstanding under the Credit Agreement are variable, and are determined based on the Consolidated Senior Secured Leverage Ratio, as defined in the Credit Agreement. At December 31, 2013, the interest rate for the outstanding amounts on both the revolving credit facility and term loan commitment was 1.72%. At December 31, 2012, the interest rate for the outstanding amounts on both the former Revolving Credit Agreement and former Term Loan Agreement was 1.75%. In addition, the Company is required to pay a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.200% to 0.325% per annum, based on the Consolidated Senior Secured Leverage Ratio. Fees for outstanding letters of credit range from 1.250% to 2.125%, based on the Consolidated Senior Secured Leverage Ratio.

The financial covenants associated with the Credit Agreement include a requirement that (i) the ratio of Consolidated Senior Secured Indebtedness to Consolidated EBITDA, as defined in the Credit Agreement, cannot be greater than 3.50 to 1.00, (ii) the ratio of Consolidated Total Indebtedness to Consolidated EBITDA, as defined in the Credit Agreement, cannot be greater than 4.00 to 1.00, and iii) the ratio of Consolidated EBITDA to the sum of (a) all interest, premium payments, debt discounts, fees, charges and related expenses and (b) the portion of rent expense under capital leases that is treated as interest expense, as defined in the Credit Agreement, cannot be less than 4.00 to 1.00. The Company was in compliance with those financial covenants as of and for the quarter ended December 31, 2013, and management does not anticipate noncompliance in the foreseeable future.

Convertible Notes

In November 2010, the Company issued convertible unsecured notes due on November 15, 2017, in the aggregate principal amount of $115.0 million in a private placement offering (the "Convertible Notes"). 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 on May 15, 2011. Proceeds from the offering were $111.0 million, net of fees and expenses which were capitalized. The proceeds were used to repay $62.2 million of borrowings outstanding on the Company's Revolving Credit Agreement, make a $25.0 million voluntary contribution to the Qualified Pension Plan and pay $13.2 million for the purchase of call options related to the convertible note offering. See below for further discussion of the call options.

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

The following table illustrates the conversion rate at each date:

December 31, 2013 December 31, 2012
Convertible Notes
Conversion Rate per $1,000 principal amount (1) 29.6292 29.5635
Conversion Price (2) $ 33.75 $ 33.83
Contingent Conversion Price (3) $ 43.88 $ 43.97
Aggregate shares to be issued upon conversion (4) 3,407,357 3,399,802
  1. Represents the number of shares of Common Stock hypothetically issuable per $1,000 principal amount of Notes, subject to adjustments per the Convertible Note Indenture dated November 19, 2010. At the date the Company issued the Convertible Notes, the conversion rate initially equaled 29.4499 shares of common stock per $1,000 principal amount of notes (which is equivalent to an initial conversion price of approximately $33.96 per share of common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events, such as an increase in the dividend paid to shareholders.
  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 Convertible Note. Were the Company's share price to exceed the conversion price at conversion the noteholders would be entitled to receive additional consideration either in cash, shares or a combination, the form of which is at the sole discretion of the Company.
  3. Prior to May 15, 2017, the notes are convertible only in the following circumstances: (1) during any fiscal quarter commencing after April 1, 2011, and only during any such fiscal quarter, if the last reported sale price of our 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 the last trading day of the previous fiscal quarter, (2) upon the occurrence of specified corporate transactions, or (3) during the five consecutive business-day period following any five consecutive trading-day period in which, for each day of that period, the trading price for the notes was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day. On and after May 15, 2017 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. Upon a change in control or termination of trading, holders of the notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount, plus any accrued and unpaid interest.
  4. This represents the number of shares hypothetically issuable upon conversion of the principal balance of the Convertible Notes at each date; however, as the terms of the Convertible Notes require net share settlement, the aggregate principal amount of the notes will be paid in cash. Amounts due in excess of the principal, if any, 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.

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 FASB Accounting Standards Codification Topic 815 - Derivatives and Hedging ("ASC 815") that would require separate accounting as a derivative instrument.

In connection with the offering, we entered into convertible note hedge transactions with affiliates of the initial purchasers. These transactions are intended to reduce the potential dilution to our Company's shareholders upon any future conversion of the notes. The call options, which cost an aggregate $13.2 million, were recorded as a reduction of additional paid-in capital. The Company also entered into warrant transactions concurrently with the offering, pursuant to which we sold warrants to acquire up to approximately 3.4 million shares of our common stock to the same counterparties that entered into the convertible note hedge transactions. Proceeds received from the issuance of the warrants totaled approximately $1.9 million and were recorded as additional paid-in capital. The convertible note hedge and warrant transactions effectively increased the conversion price of the convertible notes.

The following table illustrates the warrant price at each date:

December 31, 2013 December 31, 2012
Warrants
Warrant Price $ 44.14 $ 44.23

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 purchased call options and sold warrant contracts require net-share settlement. Based on the guidance in ASC 815, the purchased call option contracts were recorded as a reduction of equity and the warrants were recorded as an addition to 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 Consolidated Balance Sheet. The Company concluded the purchased call option contracts and the warrant contracts should be accounted for in shareholders' equity and are therefore not to be considered derivative instruments.

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 at the date of issuance of $115.0 million was bifurcated into the debt component of $101.7 million and the equity component of $13.3 million. The difference between the note payable principal balance and the value of the debt component is being accreted to interest expense over the term of the notes. The debt component was recognized at the present value of associated cash flows discounted using a 5.25% discount rate, the borrowing rate at the date of issuance for a similar debt instrument without a conversion feature. The Company incurred $3.6 million of debt issuance costs in connection with the sale of the Convertible Notes, of which $0.5 million was recorded as an offset to additional paid-in capital. The balance, $3.1 million, is being amortized over the term of the notes.

The carrying amount of the equity component and the principal amount of the liability component, the unamortized discount, and the net carrying amount of the liability are as follows:

December 31, 2013 December 31, 2012
In thousands
Principal amount of liability $ 115,000 $ 115,000
Unamortized discount 7,907 9,740
Carrying value of liability $ 107,093 $ 105,260
Equity component $ 13,329 $ 13,329

As of December 31, 2013, the "if converted value" exceeds the principal amount of the Convertible Notes by $20.4 million since the closing price of the Company's Common Stock was $39.73 compared to the conversion price of $33.75 for the Convertible Notes.

Interest expense associated with the Convertible Notes consisted of the following:

For the year ended December 31,
2013 2012 2011
In thousands
Contractual coupon rate of interest $ 3,738 $ 3,738 $ 3,737
Accretion of convertible notes discount 1,833 1,738 1,679
Interest expense - convertible notes $ 5,571 $ 5,476 $ 5,416

The effective interest yield of the convertible debt due in 2017 is 5.25% at December 31, 2013, and the cash coupon interest rate is 3.25%.

Short-Term Borrowings

The Company also has certain other credit arrangements to borrow funds on a short-term basis with interest at current market rates. There were $0.6 million of short-term borrowings outstanding under such other credit arrangements as of December 31, 2013. As of December 31, 2012, there were no material short-term borrowings outstanding under such other credit arrangements. The weighted average interest rate on short-term borrowings for 2013 and 2012 was 2.5% and 3.0%, respectively.

Debt Issuance Costs

In 2012, the Company incurred $2.4 million in debt issuance costs in connection with the new Credit Agreement. These costs have been capitalized and will be amortized over the term of the agreement. Total amortization expense for the year ended December 31, 2013, was $1.1 million. Total amortization expense for the year ended December 31, 2012, was $1.3 million, including the $0.2 million write-off of capitalized fees related to the former Revolving Credit Agreement and former Term Loan Agreement. Total amortization expense for the year ended December 31, 2011, was $1.3 million.

Interest Payments

Cash payments for interest were $11.0 million, $10.2 million and $10.2 million for 2013, 2012 and 2011, respectively.