Kaman

AR 13

Financials

Part II

Financials/Financial Statements and Supplementary Data/Notes to Consolidated Financial Statements – Note 15

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

15. PENSION PLANS

The Company has a non-contributory qualified defined benefit pension plan (the "Qualified Pension Plan"). On February 23, 2010, the Company's Board of Directors approved an amendment to the Qualified Pension Plan that, among other things, closed the Qualified Pension Plan to all new hires on or after March 1, 2010, and changed the benefit calculation for existing employees related to pay and years of service. Specifically, changes in pay were taken into account for benefit calculation purposes until the end of calendar year 2010, the benefit formula was improved to use the highest five years out of the last ten years of service up to December 31, 2010, whether consecutive or not, and years of service will continue to be added for purposes of the benefit calculations through December 31, 2015, with no further accrual of benefits for service thereafter except for vesting purposes. The changes to the Qualified Pension Plan resulted in a net curtailment loss of $0.2 million, a $25.2 million reduction of accumulated other comprehensive loss, a $15.5 million decrease of deferred tax assets and a $40.7 million reduction of the pension liability on the Company's Consolidated Balance Sheet.

The Company also has a Supplemental Employees' Retirement Plan ("SERP"), which is considered a non-qualified pension plan. The SERP provides certain key executives, whose compensation is in excess of the limitations imposed by federal law on the qualified defined benefit pension plan, with supplemental benefits based upon eligible earnings, years of service and age at retirement. During 2010, the Company's Board of Directors also approved an amendment to the SERP. The SERP amendment contains the changes necessary for the SERP to be consistent with the pension plan amendment except that the SERP already provided for the use of non-consecutive years of service for benefit calculation purposes and there was no provision needed regarding limitations on future participation because executives must be approved for SERP participation by the Board's Personnel & Compensation Committee (the "Committee") and the Board of Directors. The Committee and the Board have not approved any new participants to the SERP since February 28, 2010, and do not intend to do so at any time in the future. The measurement date for both these plans is December 31.

Obligations and Funded Status

The changes in the actuarial present value of the projected benefit obligation and fair value of plan assets are as follows:

For the year ended December 31,
Qualified Pension Plan SERP
2013 2012 2013 2012
In thousands
Projected benefit obligation at beginning of year $ 706,356 $ 647,372 $ 12,326 $ 12,075
Service cost 14,347 14,075 340 380
Interest cost 25,596 26,312 311 408
Actuarial liability (gain) loss (a) (78,609) 43,409 (458) (33)
Benefit payments (26,455) (24,812) (2,291) (1,550)
(Curtailment) / Settlement (318) 1,046
Projected benefit obligation at end of year $ 641,235 $ 706,356 $ 9,910 $ 12,326
Fair value of plan assets at beginning of year $ 557,653 $ 511,543 $ — $ —
Actual return on plan assets 14,202 60,922
Employer contributions 10,000 10,000 2,291 1,550
Benefit payments (26,455) (24,812) (2,291) (1,550)
Fair value of plan assets at end of year $ 555,400 $ 557,653 $ — $ —
Funded status at end of year $ (85,835) $ (148,703) $ (9,910) $ (12,326)
Accumulated benefit obligation $ 641,235 $ 706,356 $ 9,910 $ 12,326
  1. The actuarial liability (gain)/loss amount for the qualified pension plan for 2013 and 2012 is principally due to the effect of changes in the discount rate.

The Company has recorded liabilities related to our qualified pension plan and SERP as follows:

At December 31,
Qualified Pension Plan SERP
2013 2012 2013 2012
In thousands
Current liabilities (a) $ — $ — $ (819) $ (2,291)
Noncurrent liabilities (85,835) (148,703) (9,091) (10,035)
Total $ (85,835) $ (148,703) $ (9,910) $ (12,326)
  1. The current liabilities are included in other accruals and payables on the Consolidated Balance Sheets.

Certain amounts included in accumulated other comprehensive income on the Consolidated Balance Sheets represent costs that will be recognized as components of pension cost in future periods. These consist of:

At December 31,
Qualified Pension Plan SERP
2013 2012 2013 2012
In thousands
Unrecognized (gain) or loss $ 105,269 $ 166,025 $ 1,040 $ 2,353
Unrecognized prior service
cost (credit)
156 254
Amount included in accumulated
other comprehensive income (loss)
$ 105,425 $ 166,279 $ 1,040 $ 2,353

The estimated net loss and prior service cost (credit) for the qualified pension plan and the SERP that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year will be $4.2 million and $0.1 million, respectively.

The pension plan net periodic benefit costs on the Consolidated Statements of Operations and other amounts recognized in other comprehensive income (loss) on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Shareholders' Equity were computed using the projected unit credit actuarial cost method and included the following components:

For the year ended December 31,
Qualified Pension Plan SERP
2013 2012 2011 2013 2012 2011
In thousands
Service cost for benefits earned during the year $ 14,347 $ 14,075 $ 12,082 $ 340 $ 380 $ 361
Interest cost on projected benefit obligation 25,596 26,312 28,326 311 408 515
Expected return on plan assets (41,347) (37,878) (36,423)
Amortization of prior service credit (cost) 98 98 98
Recognized net loss 9,291 7,844 4,183 261 169 153
Additional amount recognized due to curtailment/settlement 276 198 560
Net pension benefit cost $ 7,985 $ 10,451 $ 8,266 $ 1,188 $ 1,155 $ 1,589
Change in prior service cost $ — $ — $ — $ — $ — $ —
Change in net gain or loss (51,465) 20,365 52,820 (1,052) 815 (608)
Amortization of prior service cost (credit) (98) (98) (98)
Amortization of net gain (loss) (9,291) (7,844) (4,183) (261) (169) (153)
Total recognized in other comprehensive income (loss) $ (60,854) $ 12,423 $ 48,539 $ (1,313) $ 646 $ (761)
Total recognized in net periodic benefit cost and other comprehensive income (loss) $ (52,869) $ 22,874 $ 56,805 $ (125) $ 1,801 $ 828

The following tables show the amount of the contributions made to the Qualified Pension Plan and SERP during each period and the amount of contributions the Company expects to make during 2014:

Year-to-date contributions:

At December 31,
Qualified Pension Plan SERP
2013 2012 2013 2012
In thousands
Year-to-date contributions $ 10,000 $ 10,000 $ 2,291 $ 1,550

Expected contributions in 2014:

Qualified Pension Plan (a) SERP
In thousands
Year-to-date contributions $ 10,000 $ 819
  1. As of the date of this report, the Company has contributed the full $10.0 million to the qualified pension plan; no further contributions are expected to be made in 2014.

Expected future benefit payments, which reflect expected future service, are as follows:

Qualified Pension Plan SERP
In thousands
2014 $ 29,097 $ 819
2015 30,822 527
2016 32,523 2,885
2017 34,038 510
2018 35,468 499
2019-2023 200,207 4,374

Effective January 1, 2011, changes in pay are no longer taken into account for benefit calculation purposes. The discount rates take into consideration the populations of our pension plans and the anticipated payment streams as compared to the Citigroup Discount Yield Curve index and rounds the results to the nearest fifth basis point. The actuarial assumptions used in determining benefit obligations of the pension plans are as follows:

At December 31,
Qualified Pension Plan SERP
2013 2012 2013 2012
Discount rate 4.60 % 3.70 % 4.20 % 2.85 %

The actuarial assumptions used in determining the net periodic benefit cost of the pension plans are as follows:

For the year ended December 31,
Qualified Pension Plan SERP
2013 2012 2013 2012
Discount rate 3.70 % 4.20 % 2.85 % 3.55 %
Expected return
on plan assets
7.50 % 7.50 % N/A N/A
Average rate of increase
in compensation levels
N/A N/A N/A N/A
Plan Assets for Qualified Pension Plan

The expected return on plan assets rate was determined based upon historical returns adjusted for estimated future market fluctuations. For 2013 and 2012, the expected rate of return on plan assets was 7.5%. During 2013, the actual return on pension plan assets was lower than our expected rate of return on pension plan assets. The 2013 actual rate of return on pension plan assets, net of expenses was 3.2%.

Plan assets are invested in a diversified portfolio consisting of equity and fixed income securities. The investment goals for pension plan assets are to improve and/or maintain the Plan's funded status by generating long-term asset returns that exceed the rate of growth of the Plan's liabilities. The Plan invests assets in a manner that seeks to (a) maximize return within reasonable and prudent levels of risk of loss of funded status; and (b) maintain sufficient liquidity to meet benefit payment obligations and other periodic cash flow requirements on a timely basis. The return generation/liability matching asset allocation ratio is currently 53%/47%. As the plan's funded status changes, the pension plan's Administrative Committee (the management committee that is responsible for plan administration) will act through an immediate or gradual process, as appropriate, to reallocate assets.

Under the current investment policy no Investment Manager may invest in investments deemed illiquid by the Investment Manager at the time of purchase, development programs, real estate, mortgages or private equities or securities of Kaman Corporation without prior written authorization from the Finance Committee of the Board of Directors. In addition, with the exception of U.S. Government securities, managers' holdings in the securities of any one issuer, at the time of purchase, may not exceed 7.5% of the total market value of that manager's account.

The pension plan assets are valued at fair value. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

Short-term Investments – This investment category consists of cash and cash equivalents and futures and options contracts. Cash and cash equivalents are comprised of investments with maturities of three months or less when purchased, including certain short-term fixed-income securities, and are classified as Level 1 investments. Futures contracts and options contracts requiring the investment managers to receive from or pay to the broker an amount of cash equal to daily fluctuations are included in short-term investments and are classified as Level 2 investments.

Corporate Stock – This investment category consists of primarily domestic common stock issued by U.S. corporations. Common shares are traded actively on exchanges and price quotes for these shares are readily available. Holdings of corporate stock are classified as Level 1 investments.

Mutual Funds –Mutual funds are traded actively on public exchanges. The share prices for these mutual funds are published at the close of each business day. Holdings of mutual funds are classified as Level 1 investments.

Common Trust Funds – Common trust funds are comprised of shares or units in commingled funds that are not publicly traded. The values of the commingled funds are not publicly quoted and must trade through a broker. For equity and fixed-income commingled funds traded through a broker, the fund administrator values the fund using the net asset value ("NAV") per fund share, derived from the value of the underlying assets. The underlying assets in these funds (equity securities, fixed income securities, and commodity-related securities) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. Holdings of common trust funds are classified as Level 2 investments.

Fixed Income Securities - For fixed income securities, multiple prices and price types are obtained from pricing vendors whenever possible, which enables cross-provider validations. A primary price source is identified based on asset type, class or issue for each security. The fair values of fixed income securities are based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences, and are categorized as Level 2. These securities are primarily investment grade securities.

The fair values of the Company's qualified pension plan assets at December 31, 2013 and 2012, are as follows:

In Thousands Total Carrying
Value at
December 31, 2013
Quoted prices in
active markets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Short-term investments:
Cash and cash equivalents $ 23,668 $ 23,668 $ — $ —
Futures contracts (2,196) (2,196)
Fixed income securities:
U.S. Government and agency
securities (a)
61,592 61,592
Bonds:
Corporate fixed income 81,601 81,601
Foreign fixed income 10,291 10,291
Other fixed income (b) 3,467 3,467
Mutual funds 71,244 71,244
Common trust funds 256,949 256,949
Corporate stock 47,035 47,035
Subtotal $ 553,651 $ 141,947 $ 411,704 $ —
Accrued income/expense 1,749 39 1,710
Total $ 555,400 $ 141,986 $ 413,414 $ —


In Thousands Total Carrying
Value at
December 31, 2012
Quoted prices in
active markets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Short-term investments:
Cash and cash equivalents $ 40,300 $ 40,300 $ — $ —
Futures contracts (2,312) (2,312)
Fixed income securities:
U.S. Government and agency
securities (a)
56,116 56,116
Bonds:
Corporate fixed income 83,530 83,530
Foreign fixed income 9,388 9,388
Other fixed income (b) 5,405 5,405
Mutual funds 77,921 77,921
Common trust funds 221,195 221,195
Corporate stock 64,432 64,432
Subtotal $ 555,975 $ 182,653 $ 373,322 $ —
Accrued income 1,678 223 1,455
Total $ 557,653 $ 182,876 $ 374,777 $ —
  1. This category represents investments in debt securities issued by the U.S. Treasury, other U.S. government corporations and agencies, states and municipalities.
  2. This category primarily represents investments in commercial and residential mortgage-backed securities.

Derivatives are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. Derivative instruments mainly consist of equity futures and interest rate futures.

Other Plans

The Company also maintains a Defined Contribution Plan that has been adopted by most of its U.S. subsidiaries. Employees of the adopting employers who meet the eligibility requirements of the plan may participate. Employer matching contributions are made to the plan based on a percentage of each participant's pre-tax contribution. For each dollar that a participant contributes, up to 5% of compensation, participating subsidiaries make employer contributions of one dollar. Employer contributions to the plan totaled $10.4 million, $9.3 million and $8.5 million in 2013, 2012 and 2011, respectively.

One of the Company's acquired U.S. subsidiaries maintains a separate defined contribution plan for its eligible employees. Employer matching contributions are made on a discretionary basis. Additionally, two of our foreign subsidiaries each maintain a defined benefit plan of their own for their local employees. The net pension liabilities of $0.5 million associated with these plans are included in other accruals and payables on the Consolidated Balance Sheets.