Kaman

AR 13

Financials

Part II

Financials/Management's Discussion and Analysis of Financial Condition and Results of Operations/Liquidity and Capital Resources – Part 2

Financing Arrangements

Credit Agreement

On November 20, 2012, we 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"), which expires on July 31, 2017. The Credit Agreement replaced our then existing $275.0 million Amended and Restated Revolving Credit Agreement and $42.5 million Second Amended and Restated Term Loan Credit 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.

Interest rates on amounts outstanding under the Credit Agreement are variable. At December 31, 2013 and 2012, the interest rates for the outstanding amounts on the Credit Agreement were 1.72% and 1.75%, respectively. In addition, we are 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 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.

Total average bank borrowings under our revolving credit facility and term loan facility during the year ended December 31, 2013, were $188.8 million compared to $143.1 million for the year ended December 31, 2012. As of December 31, 2013 and 2012, there was $285.6 million and $331.1 million available for borrowing, respectively, net of letters of credit. However, based on EBITDA levels for 2013 amounts available for borrowing were limited to $217.6 million. Letters of credit are generally considered borrowings for purposes of calculating available borrowings. A total of $36.8 million and $14.6 million in letters of credit was outstanding as of December 31, 2013 and 2012, respectively. The letter of credit related to the guaranteed minimum payments to the Commonwealth of Australia in connection with the ownership transfer of the 11 SH-2G(A) helicopters (along with spare parts and associated equipment) was eliminated in the second quarter of 2013, having been $6.7 million at December 31, 2012, following the delivery of the final guaranteed minimum payment of $6.4 million (AUD) on April 2, 2013. The letter of credit balance related to the SH-2G(I) New Zealand sales contract was $30.3 million at December 31, 2013. The letter of credit balance related to this contract could reach a potential $60.1 million over its three-year term.

Convertible Notes

In November 2010, we 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. 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

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 a period of 7 years. 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. We recorded $0.5 million of debt issuance costs as an offset to additional paid-in capital. The balance, $3.1 million, is being amortized over the term of the notes.

The following table illustrates the dilutive effect of securities issued under the convertible debt and warrants at various theoretical average share prices for our stock as of December 31, 2013:

Theoretical Average Share Price of Kaman Stock
$33.75 $40.00 $44.14 $45.00 $50.00
Dilutive Shares associated with:
Convertible Debt 532,357 802,010 851,801 1,107,357
Warrants 65,118 399,342
Total dilutive shares 532,357 802,010 916,919 1,506,699

Debt Issuance Costs

Total expense associated with the amortization of debt issuance costs for the years ended December 31, 2013, 2012 and 2011, was $1.1 million, $1.3 million and $1.3 million, respectively.

Interest Rate Swaps

During 2013, we entered into interest rate swap agreements for the purposes of hedging the eight quarterly variable-rate Term Loan interest payments 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 our variable-rate borrowings and minimize the impact on our earnings and cash flows of interest rate fluctuations attributable to changes in LIBOR rates. For the years ended December 31, 2013 and 2012, there was no additional interest expense associated with interest rate swap agreements. For future periods, as a result of the interest rate swap agreements, the fixed rate per the agreements may be higher than the variable rate on our Term Loan.

Other Sources/Uses of Capital

Pension

We contributed $10.0 million to the qualified pension plan and $2.3 million to the SERP during 2013. In 2012, we contributed $10.0 million to the qualified pension plan and $1.6 million to the SERP. In 2014, we have contributed $10.0 million to the qualified pension plan (as of the date of this filing) and expect to contribute $0.8 million to the SERP.

Acquisitions

The following table illustrates the cash paid for acquisitions:

For the year ended December 31,
2013 2012 2011
In thousands
Cash paid for acquisitions completed during the year $ 17,284 $ 74,465 $ 75,500
Cash paid for holdback payments during the year 828 12,307 1,460
Earnout and other payments during the year 50 1,205 712
Total investment $ 18,162 $ 87,977 $ 77,672

Total consideration for the three acquisitions completed in 2013 was $17.8 million, with $0.4 million remaining to be paid to sellers representing holdback provisions. Total consideration for acquisitions completed in 2012 and 2011 was $76.8 million and $79.7 million, respectively. As of December 31, 2013, we have $1.0 million and $0.4 million remaining to be paid to sellers representing holdback provisions related to 2012 and 2011 acquisitions, respectively. We anticipate that we will continue to identify and evaluate potential acquisition candidates, the purchase of which may require the use of additional capital.

Stock Repurchase Plan

In November 2000, our Board of Directors approved a replenishment of our stock repurchase program, providing for repurchase of an aggregate of 1.4 million common shares for use in administration of our stock plans and for general corporate purposes. During 2013 and 2012, there were no shares repurchased under this program. There were 165,632 shares repurchased at an average price of $28.48 during 2011 under this program. At December 31, 2013, approximately 1.0 million shares remained authorized for repurchase under this program.