Kaman

AR 13

Financials

Part II

Financials/Financial Statements and Supplementary Data/Notes to Consolidated Financial Statements – Note 7

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

7. DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives Overview

The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to fluctuations in foreign currency exchange rates and interest rates. Derivative financial instruments are reported on the consolidated balance sheets at fair value. Changes in the fair values of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is effective as part of a hedged transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive income are subsequently included in earnings in the periods in which earnings are affected by the hedged item. The Company does not use derivative instruments for speculative purposes.

The Company held 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 those contracts were designated as cash flow hedges. The Company will include in earnings amounts currently included in accumulated other comprehensive income upon recognition of cost of sales related to the underlying transaction.

Derivatives Designated as Cash Flow Hedges

The Company's Term Loan Facility ("Term Loan") contains floating rate obligations and is subject to interest rate fluctuations. During 2013, the Company entered into interest rate swap agreements for the purposes of hedging the eight quarterly variable-rate interest payments on its Term Loan due in 2014 and 2015. 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 the Company's earnings and cash flows of interest rate fluctuations attributable to changes in LIBOR rates.

The following table shows the fair value of derivative instruments designated as cash flow hedging instruments:

Fair Value
In thousands Balance Sheet
Location
December 31, 2013 December 31, 2012 Notional
Amount
Derivative Assets
Interest rate swap contracts Other liabilities / Other long-term liabilities $ 276 $ — $70,000 - $90,000
Total $ 276 $ —

The following table shows the gain or (loss) recognized in other comprehensive income for derivatives designated as cash flow hedges:

For the year ended December 31,
2013 2012 2011
In thousands
Interest rate swap contracts $ (276) $ — $ (52)
Total $ (276) $ — $ (52)

During 2013, there was $0.2 million of expense reclassified from other comprehensive income for derivative instruments previously designated as cash flow hedges. During 2012, the income reclassified from other comprehensive income for derivative instruments designated as cash flow hedges was $0.1 million. During 2011, the loss reclassified from other comprehensive income for derivative instruments designated as cash flow hedges was $0.9 million. Over the next twelve months, the expense related to cash flow hedges expected to be reclassified from other comprehensive income is $0.4 million.

During 2013, 2012, and 2011 there was no amount recorded in other income for the ineffective portion of derivative instruments designated as cash flow hedges.

Derivatives Not Designated as Hedging Instruments

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

Fair Value
In thousands Balance Sheet
Location
December 31, 2013 December 31, 2012 Notional
Amount
Derivative Assets
Foreign exchange contracts Other current assets /Other assets $ — $ 1,345 0 / 3,408 Australian Dollars
Foreign exchange contracts Other current assets 127 161 $2,349 / $4,110
Total $ 127 $ 1,506

On February 12, 2009, the Company dedesignated the forward contract it had entered into to hedge $36.5 million (AUD) of its $39.5 million (AUD) future minimum required payments to the Commonwealth of Australia. The Company made its final minimum required payment to the Commonwealth of Australia on April 2, 2013.

The following table shows the location and amount of the gain or (loss) recognized on the Consolidated Statements of Operations for derivatives not designated as hedge instruments:

Income Statement For the year ended December 31,
Location 2013 2012 2011
In thousands
Foreign exchange contracts (a) Other expense, net $ 20 $ 407 $ 507
Foreign exchange contracts Other expense, net (10) 186 (142)
Total $ 10 $ 593 $ 365
Derivative Liabilities
Foreign exchange contracts Other expense, net $ — $ — $ (2)
Total $ — $ — $ (2)

For the year ended December 31, 2013, no material amounts were recorded in other expense related to the change in value of the previously hedged AUD payable. For the years ended 2012 and 2011, the Company recorded expense of $0.2 million, and income of $0.3 million in Other expense, net, respectively, related to the change in the value of the previously hedged AUD payable.