form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
xQUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended September
26, 2008
Or
oTRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _____ to ______
Commission
File Number: 0-1093
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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
At
October 30, 2008, there were 25,461,750 shares of Common Stock
outstanding
Part
I – Financial Information
Item
1. Financial Statements:
Condensed Consolidated
Balance Sheets
(In
thousands) (Unaudited)
|
|
September
26, 2008
|
|
|
December
31, 2007
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$ |
14,834 |
|
|
|
|
|
$ |
73,898 |
|
Accounts
receivable, net
|
|
|
|
|
|
210,743 |
|
|
|
|
|
|
158,435 |
|
Inventories
|
|
|
|
|
|
247,097 |
|
|
|
|
|
|
210,341 |
|
Deferred
income taxes
|
|
|
|
|
|
24,189 |
|
|
|
|
|
|
28,724 |
|
Other
current assets
|
|
|
|
|
|
21,851 |
|
|
|
|
|
|
20,231 |
|
Total
current assets
|
|
|
|
|
|
518,714 |
|
|
|
|
|
|
491,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant & equipment, at cost
|
|
$ |
192,445 |
|
|
|
|
|
|
$ |
163,645 |
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
amortization
|
|
|
113,189 |
|
|
|
|
|
|
|
110,000 |
|
|
|
|
|
Net
property, plant & equipment
|
|
|
|
|
|
|
79,256 |
|
|
|
|
|
|
|
53,645 |
|
Goodwill
|
|
|
|
|
|
|
88,444 |
|
|
|
|
|
|
|
45,993 |
|
Other
intangible assets, net
|
|
|
|
|
|
|
33,214 |
|
|
|
|
|
|
|
195 |
|
Deferred
income taxes
|
|
|
|
|
|
|
3,099 |
|
|
|
|
|
|
|
3,594 |
|
Overfunded
pension
|
|
|
|
|
|
|
31,292 |
|
|
|
|
|
|
|
30,486 |
|
Other
assets
|
|
|
|
|
|
|
11,398 |
|
|
|
|
|
|
|
9,321 |
|
Total
assets
|
|
|
|
|
|
$ |
765,417 |
|
|
|
|
|
|
$ |
634,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
|
|
|
$ |
1,652 |
|
|
|
|
|
|
$ |
1,680 |
|
Accounts
payable - trade
|
|
|
|
|
|
|
99,751 |
|
|
|
|
|
|
|
74,236 |
|
Accrued
salaries and wages
|
|
|
|
|
|
|
21,389 |
|
|
|
|
|
|
|
25,328 |
|
Accrued
pension costs
|
|
|
|
|
|
|
5,927 |
|
|
|
|
|
|
|
14,202 |
|
Accrued
contract losses
|
|
|
|
|
|
|
10,430 |
|
|
|
|
|
|
|
9,513 |
|
Other
accruals and payables
|
|
|
|
|
|
|
49,740 |
|
|
|
|
|
|
|
45,670 |
|
Income
taxes payable
|
|
|
|
|
|
|
2,474 |
|
|
|
|
|
|
|
12,002 |
|
Total
current liabilities
|
|
|
|
|
|
|
191,363 |
|
|
|
|
|
|
|
182,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current portion
|
|
|
|
|
|
|
99,406 |
|
|
|
|
|
|
|
11,194 |
|
Deferred
income taxes, long-term
|
|
|
|
|
|
|
8,181 |
|
|
|
|
|
|
|
199 |
|
Other
long-term liabilities
|
|
|
|
|
|
|
50,812 |
|
|
|
|
|
|
|
46,313 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
415,655 |
|
|
|
|
|
|
|
394,526 |
|
Total
liabilities and shareholders’ equity
|
$ |
765,417 |
|
|
|
|
|
|
$ |
634,863 |
|
See
accompanying notes to condensed consolidated financial
statements.
Condensed Consolidated
Statements of Operations
(In
thousands except per share amounts)
(Unaudited)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
26,
2008
|
|
|
September
28,
2007
|
|
|
September
26,
2008
|
|
|
September
28,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
335,133 |
|
|
$ |
274,856 |
|
|
$ |
937,199 |
|
|
$ |
813,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
246,260 |
|
|
|
198,399 |
|
|
|
685,463 |
|
|
|
587,566 |
|
Selling,
general and administrative expense
|
|
|
64,726 |
|
|
|
59,450 |
|
|
|
191,198 |
|
|
|
177,426 |
|
Goodwill
impairment
|
|
|
- |
|
|
|
- |
|
|
|
7,810 |
|
|
|
- |
|
Net
(gain)/loss on sale of assets
|
|
|
(301 |
) |
|
|
(1 |
) |
|
|
(94 |
) |
|
|
(15 |
) |
|
|
|
310,685 |
|
|
|
257,848 |
|
|
|
884,377 |
|
|
|
764,977 |
|
Operating
income from continuing operations
|
|
|
24,448 |
|
|
|
17,008 |
|
|
|
52,822 |
|
|
|
48,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (income), net
|
|
|
1,073 |
|
|
|
1,672 |
|
|
|
1,535 |
|
|
|
4,872 |
|
Loss
on ineffective derivative contract
|
|
|
1,587 |
|
|
|
- |
|
|
|
1,587 |
|
|
|
- |
|
Other
expense (income), net
|
|
|
658 |
|
|
|
75 |
|
|
|
1,120 |
|
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before income taxes
|
|
|
21,130 |
|
|
|
15,261 |
|
|
|
48,580 |
|
|
|
43,628 |
|
Income
tax expense
|
|
|
(7,600 |
) |
|
|
(5,824 |
) |
|
|
(20,092 |
) |
|
|
(16,111 |
) |
Net
earnings from continuing operations
|
|
|
13,530 |
|
|
|
9,437 |
|
|
|
28,488 |
|
|
|
27,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from discontinued operations before income taxes
|
|
|
- |
|
|
|
3,721 |
|
|
|
- |
|
|
|
7,000 |
|
Gain
on disposal of discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
506 |
|
|
|
- |
|
Income
tax expense
|
|
|
- |
|
|
|
(1,421 |
) |
|
|
(183 |
) |
|
|
(2,646 |
) |
Net
earnings from discontinued operations
|
|
|
- |
|
|
|
2,300 |
|
|
|
323 |
|
|
|
4,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
13,530 |
|
|
$ |
11,737 |
|
|
$ |
28,811 |
|
|
$ |
31,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share from continuing operations
|
|
|
0.54 |
|
|
|
0.39 |
|
|
|
1.13 |
|
|
|
1.13 |
|
Basic
net earnings per share from discontinued operations
|
|
|
- |
|
|
|
0.09 |
|
|
|
- |
|
|
|
0.18 |
|
Basic
net earnings per share from disposal discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
Basic
net earnings per share
|
|
$ |
0.54 |
|
|
$ |
0.48 |
|
|
$ |
1.14 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings per share from continuing operations
|
|
|
0.53 |
|
|
|
0.38 |
|
|
|
1.12 |
|
|
|
1.11 |
|
Diluted
net earnings per share from discontinued operations
|
|
|
- |
|
|
|
0.09 |
|
|
|
- |
|
|
|
0.17 |
|
Diluted
net earnings per share from disposal discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
Diluted
net earnings per share
|
|
$ |
0.53 |
|
|
$ |
0.47 |
|
|
$ |
1.13 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,265 |
|
|
|
24,438 |
|
|
|
25,199 |
|
|
|
24,288 |
|
Diluted
|
|
|
25,548 |
|
|
|
25,336 |
|
|
|
25,479 |
|
|
|
25,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.42 |
|
|
$ |
0.39 |
|
See
accompanying notes to condensed consolidated financial statements.
Condensed Consolidated
Statements of Cash Flows
(In
thousands except share and per share amounts) (Unaudited)
|
|
For
the Nine Months Ended
|
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
28,488 |
|
|
$ |
27,517 |
|
Adjustments
to reconcile net earnings from continuing operations to
|
|
|
|
|
|
|
|
|
net
cash provided by (used in) operating activities of continuing
|
|
|
|
|
|
|
|
|
operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,056 |
|
|
|
7,204 |
|
Change
in allowance for doubtful accounts
|
|
|
(23 |
) |
|
|
77 |
|
Net
(gain) loss on sale of assets
|
|
|
(94 |
) |
|
|
(15 |
) |
Goodwill
impairment
|
|
|
7,810 |
|
|
|
- |
|
Stock
compensation expense
|
|
|
1,971 |
|
|
|
3,297 |
|
Excess
tax benefits from share-based compensation arrangements
|
|
|
(348 |
) |
|
|
(977 |
) |
Deferred
income taxes
|
|
|
1,783 |
|
|
|
(3,438 |
) |
Changes
in assets and liabilities, excluding effects of
acquisition/divestitures:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(37,908 |
) |
|
|
(17,610 |
) |
Inventories
|
|
|
(24,906 |
) |
|
|
(13,667 |
) |
Income
taxes receivable
|
|
|
- |
|
|
|
(1,097 |
) |
Other
current assets
|
|
|
2,820 |
|
|
|
(1,131 |
) |
Accounts
payable
|
|
|
4,956 |
|
|
|
4,204 |
|
Accrued
contract losses
|
|
|
926 |
|
|
|
(1,616 |
) |
Accrued
expenses and payables
|
|
|
(11,115 |
) |
|
|
(7,911 |
) |
Income
taxes payable
|
|
|
(10,894 |
) |
|
|
(9,033 |
) |
Pension
liabilities
|
|
|
(8,722 |
) |
|
|
2,120 |
|
Other
long-term liabilities
|
|
|
(2,279 |
) |
|
|
6,037 |
|
Net
cash provided by (used in) operating activities of continuing
operations
|
|
|
(38,479 |
) |
|
|
(6,039 |
) |
Net
cash provided by (used in) operating activities of discontinued
operations
|
|
|
(183 |
) |
|
|
1,791 |
|
Net
cash provided by (used in) operating activities
|
|
|
(38,662 |
) |
|
|
(4,248 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of assets
|
|
|
122 |
|
|
|
193 |
|
Net
proceeds from sale of discontinued operations
|
|
|
447 |
|
|
|
- |
|
Expenditures
for property, plant & equipment
|
|
|
(9,995 |
) |
|
|
(9,301 |
) |
Acquisition
of businesses and earn out adjustments, net of cash
acquired
|
|
|
(100,168 |
) |
|
|
(1,900 |
) |
Other,
net
|
|
|
(2,277 |
) |
|
|
(3,000 |
) |
Cash
provided by (used in) investing activities of continuing
operations
|
|
|
(111,871 |
) |
|
|
(14,008 |
) |
Cash
provided by (used in) investing activities of discontinued
operations
|
|
|
- |
|
|
|
(520 |
) |
Cash
provided by (used in) investing activities
|
|
|
(111,871 |
) |
|
|
(14,528 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
borrowings (repayments) under revolving credit agreements
|
|
|
88,263 |
|
|
|
29,276 |
|
Net
change in book overdraft
|
|
|
8,723 |
|
|
|
(2,263 |
) |
Proceeds
from exercise of employee stock plans
|
|
|
3,359 |
|
|
|
4,483 |
|
Dividends
paid
|
|
|
(10,615 |
) |
|
|
(9,109 |
) |
Windfall
tax benefit
|
|
|
348 |
|
|
|
977 |
|
Other
|
|
|
1,641 |
|
|
|
(6,666 |
) |
Cash
provided by (used in) financing activities of continuing
operations
|
|
|
91,719 |
|
|
|
16,698 |
|
Cash
provided by (used in) financing activities of discontinued
operations
|
|
|
- |
|
|
|
3,347 |
|
Cash
provided by (used in) financing activities
|
|
|
91,719 |
|
|
|
20,045 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(58,814 |
) |
|
|
1,269 |
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(250 |
) |
|
|
495 |
|
Cash
and cash equivalents at beginning of period
|
|
|
73,898 |
|
|
|
12,720 |
|
Cash
and cash equivalents at end of period
|
|
$ |
14,834 |
|
|
$ |
14,484 |
|
See
accompanying notes to condensed consolidated financial
statements.
Notes
to Condensed Consolidated Financial Statements
(In
thousands except share and per share amounts) (Unaudited)
1. Basis of
Presentation
The
December 31, 2007 condensed consolidated balance sheet amounts have been derived
from the previously audited consolidated balance sheet of Kaman Corporation and
subsidiaries. In the opinion of management, the balance of the condensed
financial information reflects all adjustments which are necessary for a fair
presentation 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. Certain amounts in
prior period condensed consolidated financial statements have been reclassified
to conform to current year presentation. The statements should be read in
conjunction with the consolidated financial statements and notes included in the
company’s Form 10-K for the year ended December 31, 2007. 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 third quarter
for 2008 and 2007 ended on September 26, 2008 and September 28, 2007,
respectively.
In July
2008, the Fuzing segment changed its name to the Precision Products
segment.
Recently
Issued Accounting Pronouncements
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements. SFAS 162 is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles”. The company is
currently evaluating the potential impact of SFAS 162 but does not anticipate
that the impact will be material.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities—an amendment of
FASB Statement No. 133” (SFAS 161). Under this standard, companies with
derivative instruments are required to disclose information that enables
financial statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under Statement 133, and how derivative instruments and related hedged items
affect a company’s financial position, financial performance, and cash flows.
The new standard must be applied prospectively for interim periods and fiscal
years beginning after November 15, 2008. The company is currently evaluating the
potential impact of SFAS 161 but does not anticipate that the impact will be
material.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (SFAS 141(R)). The objective of this Statement
is to improve the relevance and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. To accomplish that, SFAS 141(R) establishes principles and
requirements for how the acquirer (a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; (b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and (c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The potential impact
of SFAS 141(R) on our consolidated financial position, results of operations and
cash flows will be dependent upon the terms, conditions and details of such
acquisitions.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (SFAS 160). The objective of SFAS 160 is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. This
Statement amends ARB No. 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. Since we currently do not
have any minority interest investments, we do not expect SFAS 160 will have an
impact on our consolidated financial position, results of operations or cash
flows.
Cash
Flow Items
Cash
payments for interest were $1,714 and $5,140 for the nine months ended September
26, 2008 and September 28, 2007, respectively. Cash payments for income taxes,
net of refunds, for the comparable periods were $28,117 and $25,422,
respectively. Non-cash investing activity for the first nine months of 2008
includes the purchase of the Navy property in exchange for the assumption of an
estimated environmental remediation liability of $10,258. Non-cash financing
activity for the first nine months 2007 includes the conversion of 2,341
debentures with a total value of $2,341 into 100,202 shares of common stock.
There were no such conversions during 2008 as the outstanding debentures were
fully redeemed in December 2007.
2. Goodwill
Impairment
During
the second quarter of 2008, our Aerostructures Wichita, KS facility continued to
experience production and quality issues, which, along with circumstances unique
to each contract, resulted in the separate termination of two long-term
contracts with Spirit AeroSystems and Shenyang Aircraft
Corporation. These contracts, which were significant to the facility,
were both loss contracts. In accordance with Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we test
goodwill for potential impairment annually as of December 31 and between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. Due to the
loss of the two major contracts as well as the continuing production and quality
issues, management performed a goodwill impairment analysis for this reporting
unit as of June 27, 2008.
We
evaluated goodwill for impairment using the two-step process prescribed in SFAS
142. The first step is to identify potential impairment by comparing the fair
value of a reporting unit to its book value, including goodwill. If the fair
value of a reporting unit exceeds its book value, goodwill is not considered
impaired. If its book value exceeds its fair value, the second step of the
process is performed to measure the amount of impairment. The process of
evaluating goodwill for impairment involves the determination of the fair value
of the reporting unit and is based on several valuation methods including the
market approach and income approach. Inherent in such fair value determinations
are certain judgments and estimates relating to future cash flows, including our
interpretation of current economic indicators and market valuations, and
assumptions about our strategic plans with regard to the operations of our
reporting units.
Although
we believe that we are working through the production issues at our
Aerostructures Wichita facility, its carrying value had increased significantly
during the second quarter of 2008. This, combined with our loss of two long-term
contracts and the quality and production issues at the facility, created a
situation in which the estimated fair value of this reporting unit (the legal
entity Plastic Fabricating Company, Inc.) was less than its carrying value. The
resulting total non-cash goodwill impairment charge was $7,810, which
represented the entire goodwill balance for this reporting unit prior to the
charge. This charge is not deductible for tax purposes and represents a discrete
item in our second quarter 2008 effective tax rate.
3.
Acquisitions
On June
12, 2008, our Aerostructures segment acquired the stock of Brookhouse Holdings,
Limited, a leader in the design and manufacture of composite aerostructures,
aerospace tooling, and repair and overhaul services based in Darwen, Lancashire,
England. The purchase price was 43,000 pounds sterling ($85,086 based on an
exchange rate of 1.98) in cash. The acquisition further diversifies our platform
positions in both the military and commercial markets, and significantly
enhances our position in the higher-growth markets for composite
structures.
On March
31, 2008, our Industrial Distribution segment acquired the stock of Industrial
Supply Corp (ISC), a distributor of power transmission, fluid power, material
handling and industrial MRO supply products to such diverse markets as ship
building, printing, machinery, transportation, electronics, pharmaceutical,
rubber, chemicals and food processing. In addition to its Richmond facility, ISC
has five other branches located in Norfolk, Roanoke and Waynesboro, Virginia,
and in Wilson and High Point, North Carolina.
Both
acquisitions were accounted for as purchase transactions. Accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on estimates of fair value. The excess of the purchase price over the fair
value of the net assets acquired, including intangible assets, has been
allocated to goodwill. The purchase accounting for these acquisitions is
preliminary. The operating results for Brookhouse and ISC have been included in
our consolidated financial statements from the date of acquisition.
4. Loss on
Ineffective Derivative Instrument
In
connection with the acquisition of Brookhouse, the company assumed two foreign
currency hedge contracts originally intended to hedge forecasted cash flows on a
significant US dollar denominated contract. During the third quarter of 2008,
the company determined that these hedges were ineffective, and that they no
longer met the criteria for accounting under SFAS No. 133 “Accounting for
Derivative Instruments and Hedging Activities”, due to a significant shift in
the timing of the forecasted cash flows. Therefore, the company cancelled the
contracts near the end of September, which resulted in a loss of $1,587 that has
been included in non-operating income in our consolidated statements of
operations. The company’s policy is to include the gain or loss on
effective hedges in the same account as the items being hedged and to include
gains and losses on ineffective or unhedged items in non-operating
income.
5. Accounts Receivable,
net
Accounts
receivable consist of the following:
|
|
September
26, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$ |
92,691 |
|
|
$ |
74,057 |
|
|
|
|
|
|
|
|
|
|
U.S. Government
contracts:
|
|
|
|
|
|
|
|
|
Billed
|
|
|
34,919 |
|
|
|
20,852 |
|
Costs
and accrued profit – not billed
|
|
|
6,782 |
|
|
|
6,190 |
|
|
|
|
|
|
|
|
|
|
Commercial
and other government contracts:
|
|
|
|
|
|
|
|
|
Billed
|
|
|
37,461 |
|
|
|
17,740 |
|
Costs
and accrued profit – not billed
|
|
|
40,889 |
|
|
|
41,407 |
|
|
|
|
|
|
|
|
|
|
Less
allowance for doubtful accounts
|
|
|
(1,999 |
) |
|
|
(1,811 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
210,743 |
|
|
$ |
158,435 |
|
On March
19, 2008, the company and the Commonwealth of Australia reached an agreement
relative to the termination of the SH-2G(A) Super Seasprite Program. The
unbilled receivables associated with the SH-2G(A) program were $40,750 and
$40,789 as of September 26, 2008 and December 31, 2007, respectively, and the
balance of amounts received as advances on this contract were $7,998 and $7,511
as of September 26, 2008, and December 31, 2007, respectively. These balances,
totaling a net $32,752, as of September 26, 2008, will be eliminated in
connection with the transfer of the Australian program inventory and equipment
to the company, which transfer is subject to approval by the U.S. Government.
Additional detail relative to this agreement is provided in Note 15, Commitments
and Contingencies.
6.
Inventories
Inventories
consist of the following:
|
|
September
26, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Merchandise
for resale
|
|
$ |
98,449 |
|
|
$ |
93,949 |
|
Contracts
and other work in process
|
|
|
130,260 |
|
|
|
103,004 |
|
Finished
goods (including certain general stock materials)
|
|
|
18,388 |
|
|
|
13,388 |
|
Total
|
|
$ |
247,097 |
|
|
$ |
210,341 |
|
|
|
|
|
|
|
|
|
|
We
continue to support K-MAX helicopters that are operating with customers. As of
September 26, 2008, we maintained $24,361 of K-MAX inventory, which includes a
K-MAX aircraft repurchased in the first quarter of 2008, as well as spare parts.
Total K-MAX inventory as of December 31, 2007 was $19,568.
7. Shareholders’
Equity
Changes
in shareholders’ equity for the nine months ended September 26, 2008 were as
follows:
Balance,
January 1, 2008
|
|
$ |
394,526 |
|
|
|
|
|
|
Net
earnings
|
|
|
28,811 |
|
Change
in pension & post-retirement benefit plans, net
|
|
|
1,790 |
|
Foreign
currency translation adjustment
|
|
|
(4,569 |
) |
Comprehensive
income
|
|
|
26,032 |
|
|
|
|
|
|
Dividends
declared
|
|
|
(10,659 |
) |
Employee
stock plans and related tax benefit
|
|
|
5,756 |
|
|
|
|
|
|
Balance,
September 26, 2008
|
|
$ |
415,655 |
|
Comprehensive
income was $26,032 and $35,731 for the nine months ended September 26, 2008 and
September 28, 2007, respectively. The changes to net earnings used to determine
comprehensive income are comprised of foreign currency translation adjustments
and net changes in pension and post-retirement benefit plans.
Shareholders’
equity consists of the following:
|
|
September
26, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$ |
25,499 |
|
|
$ |
25,182 |
|
Additional
paid-in capital
|
|
|
84,245 |
|
|
|
78,783 |
|
Retained
earnings
|
|
|
280,570 |
|
|
|
262,417 |
|
Treasury
stock
|
|
|
(435 |
) |
|
|
(411 |
) |
Other
shareholders' equity
|
|
|
25,776 |
|
|
|
28,555 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
415,655 |
|
|
$ |
394,526 |
|
8. Earnings Per
Share
The
following table presents a reconciliation of the numerators and denominators of
basic and diluted earnings per share:
(In
thousands except per share amounts)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
13,530 |
|
|
$ |
9,437 |
|
|
$ |
28,488 |
|
|
$ |
27,517 |
|
Net
earnings from discontinued operations, net of tax
|
|
|
- |
|
|
|
2,300 |
|
|
|
323 |
|
|
|
4,354 |
|
Net
earnings
|
|
$ |
13,530 |
|
|
$ |
11,737 |
|
|
$ |
28,811 |
|
|
$ |
31,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
25,265 |
|
|
|
24,438 |
|
|
|
25,199 |
|
|
|
24,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share from continuing operations
|
|
$ |
0.54 |
|
|
$ |
0.39 |
|
|
$ |
1.13 |
|
|
$ |
1.13 |
|
Net
earnings per share from discontinued operations
|
|
|
- |
|
|
|
0.09 |
|
|
|
- |
|
|
|
0.18 |
|
Net
earnings per share from disposal of discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
Net
earnings per share
|
|
$ |
0.54 |
|
|
$ |
0.48 |
|
|
$ |
1.14 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
13,530 |
|
|
$ |
9,437 |
|
|
$ |
28,488 |
|
|
$ |
27,517 |
|
Elimination
of interest expense on 6% subordinated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debentures (net after taxes)
|
|
|
- |
|
|
|
125 |
|
|
|
- |
|
|
|
416 |
|
Net
earnings from continuing operations (as adjusted)
|
|
|
13,530 |
|
|
|
9,562 |
|
|
|
28,488 |
|
|
|
27,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from discontinued operations, net of tax
|
|
|
- |
|
|
|
2,300 |
|
|
|
323 |
|
|
|
4,354 |
|
Net
earnings (as adjusted)
|
|
$ |
13,530 |
|
|
$ |
11,862 |
|
|
$ |
28,811 |
|
|
$ |
32,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
25,265 |
|
|
|
24,438 |
|
|
|
25,199 |
|
|
|
24,288 |
|
Weighted
averages shares issuable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
conversion of 6% subordinated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debentures
|
|
|
- |
|
|
|
567 |
|
|
|
- |
|
|
|
627 |
|
Weighted
average shares issuable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
exercise of dilutive stock options
|
|
|
283 |
|
|
|
331 |
|
|
|
280 |
|
|
|
302 |
|
Total
|
|
|
25,548 |
|
|
|
25,336 |
|
|
|
25,479 |
|
|
|
25,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share from continuing operations - diluted
|
|
$ |
0.53 |
|
|
$ |
0.38 |
|
|
$ |
1.12 |
|
|
$ |
1.11 |
|
Net
earnings per share from discontinued operations - diluted
|
|
|
- |
|
|
|
0.09 |
|
|
|
- |
|
|
|
0.17 |
|
Net
earnings per share from disposal of discontinued operations -
diluted
|
|
|
- |
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
Net
earnings per share -diluted
|
|
$ |
0.53 |
|
|
$ |
0.47 |
|
|
$ |
1.13 |
|
|
$ |
1.28 |
|
Excluded
from the net earnings per share – diluted calculation for the three months and
nine months ended September 26, 2008 are 278,517 and 242,260 anti-dilutive
shares, respectively, granted to employees, based on average stock
price.
There
were no anti-dilutive shares for the three months and nine months ended
September 28, 2007.
9. Environmental
Costs
The
following table displays the activity and the accrued balances of various
environmental liabilities as of and for the nine months ended September 26,
2008:
Balance
at January 1, 2008
|
|
$ |
4,705 |
|
Additions
to accrual
|
|
|
10,404 |
|
Cash
payments
|
|
|
(191 |
) |
Release
to income
|
|
|
- |
|
|
|
|
|
|
Balance
at September 26, 2008
|
|
$ |
14,918 |
|
In August
2008, the company completed its purchase of the portion of the Bloomfield campus
that Kaman Aerospace Corporation (of which the Helicopters segment forms a part)
had leased from NAVAIR for many years. In connection with the purchase, we have
assumed responsibility for environmental remediation at the facility as may be
required under the Connecticut Transfer Act (the “Transfer Act”) and we continue
the effort to define the scope of the remediation that will be required by the
Connecticut Department of Environmental Protection (CTDEP). The entire
transaction was recorded based on the discounted present value of the liability
to be assumed. The fair value of the Navy Property asset, which
approximates the discounted present value of the assumed environmental liability
of $10,258, has been included in Property, Plant and Equipment as of September
26, 2008. This remediation process will take many years to
complete.
The
accrual also includes estimated ongoing environmental remediation costs for our
idle Moosup, CT facility and environmental remediation costs that we expect to
incur at the former Music segment New Hartford, Connecticut facility, which
arose in connection with the 2007 sale of our Music segment. Additionally, the
company accrued $146 for environmental investigation at our recently acquired
Brookhouse facilities. This accrual may increase as the results from
our environmental audits are completed.
The
accrual is included in other accruals and payables and other long-term
liabilities on the condensed consolidated balance sheets for the periods
presented. Ongoing maintenance costs, primarily for the Moosup facility, of $345
for both the nine months ended September 26, 2008 and September 28, 2007, are
included in selling, general and administrative expenses.
10. Product Warranty
Costs
The
following table presents the activity and balances of accrued product warranty
costs included in other accruals and payables on the condensed consolidated
balance sheets as of September 26, 2008:
Balance
at January 1, 2008
|
|
$ |
1,087 |
|
Product
warranty accrual
|
|
|
104 |
|
Warranty
costs incurred
|
|
|
(82 |
) |
Release
to income
|
|
|
(10 |
) |
|
|
|
|
|
Balance
at September 26, 2008
|
|
$ |
1,099 |
|
The
company has been working to resolve two warranty-related matters at the
Precision Products (formerly Dayron) Orlando facility. The first issue involves
a supplier's recall of a switch embedded in certain bomb fuzes. The second
warranty issue involves bomb fuzes manufactured for the U. S. Army utilizing
systems which originated before this entity was acquired by the company that
have since been found to contain an incorrect part. The net reserve as of
September 26, 2008 related to these two matters is $1,032. This matter is more
fully discussed in Note 15, Commitments and Contingencies.
The
remainder of the accrual as of September 26, 2008 relates to routine warranty
rework at our various segments.
11. Accrued Contract
Losses
The
following is a summary of activity and balances associated with accrued contract
losses as of and for the nine months ended September 26, 2008:
Balance
at January 1, 2008
|
|
$ |
9,513 |
|
Additions
to loss accrual
|
|
|
5,525 |
|
Costs
incurred
|
|
|
(4,190 |
) |
Release
to income
|
|
|
(418 |
) |
Balance
at September 26, 2008
|
|
$ |
10,430 |
|
Additions
to our contract loss accrual relate primarily to cost growth in connection with
certain programs in the Aerostructures segment for the Sikorsky Canadian MH-92
program as well as the Precision Products segment for certain options of the JPF
fuze program. The remaining balance of the contract loss accrual relates
primarily to the SH-2G(A) program for Australia. We are in the process of
assessing what portion of those expenses will still be incurred if the program
is concluded as contemplated by the settlement agreement with the Commonwealth
of Australia. When title to the inventory is transferred to the company,
effectively concluding the program, we will adjust the accrued contract loss as
necessary.
12. Pension
Cost
Components
of net pension cost for the qualified pension plan and Supplemental Employees’
Retirement Plan (SERP) are as follows:
|
|
Qualified
Pension Plan
|
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost for benefits earned
|
|
$ |
3,069 |
|
|
$ |
3,329 |
|
|
$ |
9,207 |
|
|
$ |
9,988 |
|
Interest
cost on projected benefit obligation
|
|
|
7,338 |
|
|
|
6,931 |
|
|
|
22,014 |
|
|
|
20,792 |
|
Expected
return on plan assets
|
|
|
(8,681 |
) |
|
|
(8,074 |
) |
|
|
(26,043 |
) |
|
|
(24,222 |
) |
Effect
of settlement/curtailment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
amortization and deferral
|
|
|
15 |
|
|
|
225 |
|
|
|
46 |
|
|
|
676 |
|
Net
pension cost
|
|
$ |
1,741 |
|
|
$ |
2,411 |
|
|
$ |
5,224 |
|
|
$ |
7,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP
|
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost for benefits earned
|
|
$ |
184 |
|
|
$ |
116 |
|
|
$ |
553 |
|
|
$ |
348 |
|
Interest
cost on projected benefit obligation
|
|
|
443 |
|
|
|
505 |
|
|
|
1,232 |
|
|
|
1,515 |
|
Expected
return on plan assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Effect
of settlement/curtailment
|
|
|
1,381 |
|
|
|
- |
|
|
|
2,387 |
|
|
|
- |
|
Net
amortization and deferral
|
|
|
209 |
|
|
|
883 |
|
|
|
915 |
|
|
|
2,648 |
|
Net
pension cost
|
|
$ |
2,217 |
|
|
$ |
1,504 |
|
|
$ |
5,087 |
|
|
$ |
4,511 |
|
For the
2008 plan year, the company expects to contribute $6,966 to the qualified
pension plan of which $3,483 was made through September 26, 2008. We expect to
make payments of $13,971 for the SERP during 2008, $13,051 of which was made in
the first nine months of this year, most of which was for two lump sum payments
to the former CEO. Each of these payouts represented a portion of the SERP’s
projected benefit obligation sufficient to constitute a plan settlement per SFAS
88, “Employer’s Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans.” Because the retirement occurred after the company’s pension
measurement date of December 31, and in accordance with SFAS 88 settlement
accounting, liabilities related to the supplemental plan were remeasured as of
February and August 2008 with the related deferred actuarial losses being
recognized in the first nine months of 2008. For 2007, payments for
the pension plan were $10,000 and $2,396 for the SERP.
13. Business
Segments
Summarized
financial information by business segment is as follows:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
44,047 |
|
|
$ |
25,713 |
|
|
$ |
103,784 |
|
|
$ |
74,214 |
|
Precision
Products
|
|
|
32,599 |
|
|
|
22,104 |
|
|
|
83,965 |
|
|
|
64,566 |
|
Helicopters
|
|
|
17,373 |
|
|
|
18,220 |
|
|
|
50,092 |
|
|
|
54,703 |
|
Specialty
Bearings
|
|
|
36,839 |
|
|
|
30,729 |
|
|
|
109,585 |
|
|
|
94,179 |
|
Subtotal
Aerospace Segments
|
|
|
130,858 |
|
|
|
96,766 |
|
|
|
347,426 |
|
|
|
287,662 |
|
Industrial
Distribution
|
|
|
204,275 |
|
|
|
178,090 |
|
|
|
589,773 |
|
|
|
526,106 |
|
Net
sales from continuing operations
|
|
$ |
335,133 |
|
|
$ |
274,856 |
|
|
$ |
937,199 |
|
|
$ |
813,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerostructures*
|
|
$ |
173 |
|
|
$ |
1,631 |
|
|
$ |
(7,090 |
) |
|
$ |
9,862 |
|
Precision
Products
|
|
|
3,598 |
|
|
|
2,687 |
|
|
|
6,283 |
|
|
|
9,232 |
|
Helicopters
|
|
|
3,453 |
|
|
|
2,283 |
|
|
|
7,177 |
|
|
|
1,014 |
|
Specialty
Bearings
|
|
|
13,641 |
|
|
|
10,859 |
|
|
|
40,550 |
|
|
|
31,622 |
|
Subtotal
Aerospace Segments
|
|
|
20,865 |
|
|
|
17,460 |
|
|
|
46,920 |
|
|
|
51,730 |
|
Industrial
Distribution
|
|
|
10,704 |
|
|
|
9,045 |
|
|
|
29,512 |
|
|
|
26,043 |
|
Net
gain (loss) on sale of assets
|
|
|
301 |
|
|
|
1 |
|
|
|
94 |
|
|
|
15 |
|
Corporate
expense
|
|
|
(7,422 |
) |
|
|
(9,498 |
) |
|
|
(23,704 |
) |
|
|
(28,997 |
) |
Operating
income from continuing operations
|
|
|
24,448 |
|
|
|
17,008 |
|
|
|
52,822 |
|
|
|
48,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (income), net
|
|
|
1,073 |
|
|
|
1,672 |
|
|
|
1,535 |
|
|
|
4,872 |
|
Loss
on derivative contract
|
|
|
1,587 |
|
|
|
- |
|
|
|
1,587 |
|
|
|
- |
|
Other
expense (income), net
|
|
|
658 |
|
|
|
75 |
|
|
|
1,120 |
|
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before income taxes
|
|
|
21,130 |
|
|
|
15,261 |
|
|
|
48,580 |
|
|
|
43,628 |
|
Income
tax expense
|
|
|
(7,600 |
) |
|
|
(5,824 |
) |
|
|
(20,092 |
) |
|
|
(16,111 |
) |
Net
earnings from continuing operations
|
|
|
13,530 |
|
|
|
9,437 |
|
|
|
28,488 |
|
|
|
27,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from discontinued operations, net of taxes
|
|
|
- |
|
|
|
2,300 |
|
|
|
- |
|
|
|
4,354 |
|
Gain
on disposal of discontinued operations, net of taxes
|
|
|
- |
|
|
|
- |
|
|
|
323 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
13,530 |
|
|
$ |
11,737 |
|
|
$ |
28,811 |
|
|
$ |
31,871 |
|
|
|
|
|
|
|
*
Includes a non-cash impairment charge of $7,810 during the nine months
ended September 26, 2008
|
|
|
|
|
|
14. Share-Based
Arrangements
The
following table summarizes share-based compensation expense recorded during each
period presented:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Stock
options
|
|
$ |
163 |
|
|
$ |
701 |
|
|
$ |
973 |
|
|
$ |
1,136 |
|
Restricted
stock awards
|
|
|
234 |
|
|
|
132 |
|
|
|
1,269 |
|
|
|
762 |
|
Stock
appreciation rights
|
|
|
410 |
|
|
|
253 |
|
|
|
(426 |
) |
|
|
1,237 |
|
Employee
stock purchase plan
|
|
|
52 |
|
|
|
54 |
|
|
|
155 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
share-based compensation expense
|
|
$ |
859 |
|
|
$ |
1,140 |
|
|
$ |
1,971 |
|
|
$ |
3,297 |
|
Stock
option activity was as follows:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
Stock
options outstanding:
|
|
|
|
|
Exercise
Price
|
|
Balance
at January 1, 2008
|
|
|
724,790 |
|
|
$ |
16.01 |
|
Options
granted
|
|
|
205,245 |
|
|
|
25.60 |
|
Options
exercised
|
|
|
(178,468 |
) |
|
|
15.31 |
|
Options
forfeited or expired
|
|
|
(7,330 |
) |
|
|
17.29 |
|
Balance
at September 26, 2008
|
|
|
744,237 |
|
|
$ |
18.82 |
|
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 three months and nine
months ended September 26, 2008 and September 28, 2007.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Expected
option term
|
|
6.5
years
|
|
|
|
- |
|
|
6.5
years
|
|
|
6.5
years
|
|
Expected
volatility
|
|
|
44.4 |
% |
|
|
- |
|
|
|
41.0 |
% |
|
|
36.2 |
% |
Risk-free
interest rate
|
|
|
3.4 |
% |
|
|
- |
|
|
|
3.2 |
% |
|
|
4.6 |
% |
Expected
dividend yield
|
|
|
1.9 |
% |
|
|
- |
|
|
|
1.8 |
% |
|
|
2.5 |
% |
Per
share fair value of options granted
|
|
$ |
8.76 |
|
|
|
- |
|
|
$ |
9.70 |
|
|
$ |
8.04 |
|
Restricted
Stock Awards (RSA) activity was as follows:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
Date
|
|
Restricted
Stock outstanding:
|
|
|
|
|
Fair
Value
|
|
Nonvested
at January 1, 2008
|
|
|
89,009 |
|
|
$ |
24.04 |
|
RSA
granted
|
|
|
120,545 |
|
|
|
26.88 |
|
Vested
|
|
|
(56,228 |
) |
|
|
28.32 |
|
Forfeited
or expired
|
|
|
(3,203 |
) |
|
|
24.14 |
|
Nonvested
at September 26, 2008
|
|
|
150,123 |
|
|
$ |
24.72 |
|
Stock
Appreciation Rights (SARs) activity was as follows:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
SARs
outstanding:
|
|
|
|
|
Exercise
Price
|
|
Balance
at January 1, 2008
|
|
|
66,120 |
|
|
$ |
10.15 |
|
SARs
granted
|
|
|
- |
|
|
|
- |
|
SARs
exercised
|
|
|
(26,420 |
) |
|
|
9.90 |
|
SARs
forfeited or expired
|
|
|
- |
|
|
|
- |
|
Balance
at September 26, 2008
|
|
|
39,700 |
|
|
$ |
10.32 |
|
Total
cash paid to settle SARs (at intrinsic value) exercised during the third quarter
of 2008 and 2007 was $344 and $170, respectively. Total cash paid to settle SARs
(at intrinsic value) for the first nine months of 2008 and 2007 was $533 and
$1,212, respectively.
15. Commitments and
Contingencies
Australian SH-2G(A)
Program - As previously reported, in March 2008, the company and the
Commonwealth of Australia signed a settlement agreement which terminates the
SH-2G(A) Super Seasprite program on mutually agreed terms. The agreement
provides that ownership of the 11 SH-2G(A) Super Seasprite helicopters (along
with spare parts and associated equipment) will be transferred to the company
and, thereafter, proceeds from each helicopter sale will be shared on a
predetermined basis. U.S. Government (USG) approval is required for both
physical transfer and ownership transfer of the aircraft and equipment. The
USG's approval for physical transfer was obtained during the second quarter and
the parties are now coordinating efforts to achieve shipment of the aircraft and
equipment to the U.S., after which USG approval of the Commonwealth's transfer
of ownership will be requested. Management is hopeful that such approval and the
actual transfer of ownership will occur on or before December 31,
2008.
In
connection with sharing sale proceeds, we have agreed that total payments of at
least $39.5 million (AUS) will be made to the Commonwealth regardless of sales,
with at least $26.7 million (AUS) to be paid by March 2011, and, to the extent
cumulative payments have not yet reached $39.5 million (AUS), additional
payments of $6.4 million (AUS) each in March of 2012 and 2013. To secure these
payments, at the date of ownership transfer as described above, the company will
provide the Commonwealth with a $39.5 million (AUS) unconditional letter of
credit which will be reduced as such payments are made. Additionally, under the
agreement, we will forego payment of approximately $33 million in net unbilled
receivables in exchange for the helicopters, spare parts and equipment, which
will be recorded as inventory. We currently expect that the value of
this transferred inventory will exceed the amount of the net unbilled
receivables and the guaranteed payments described above. The transaction will be
recorded as of the date of ownership transfer and we do not currently expect
that it will have a material impact on the statement of operations. The
termination of the contract, combined with the return of inventory, will result
in our inability to claim look-back interest from the IRS, previously expected
to exceed $6 million pretax. Additionally, sales relative to the service center,
which have been a meaningful portion of Helicopters segment net sales in recent
years, effectively will end at the conclusion of the support center ramp down
period, which will occur during the fourth quarter of 2008.
Moosup - The CTDEP
has given the company conditional approval for reclassification of groundwater
in the vicinity of the Moosup, CT facility consistent with the character of the
area. This facility is currently being held for disposal. The company has
substantially completed the process of connecting neighboring properties to
public drinking water in accordance with such approval and in coordination with
the CTDEP and local authorities. The company anticipates that the water
connection project will be completed in the late 2008/early 2009 timeframe. A
site assessment to characterize the environmental condition of the property has
also commenced.
Ovation - In
connection with our sale of the Music segment, we assumed responsibility for
meeting certain requirements of the Transfer Act that apply to the leased guitar
manufacturing facility ("Ovation") located in New Hartford, Connecticut, which
was transferred as part of the sale. Under the Transfer Act, we are required to
assess the environmental conditions of the site and remediate environmental
impairments, if any, caused by Ovation's operations. The site consists of a
multi-tenant industrial park, in which Ovation and other unrelated entities
lease space. We continue the process of assessing the environmental conditions
at the site and determining our share of the cost of environmental remediation
that may be required. Our current estimate of our portion of the cost to assess
the environmental conditions and remediate this property is $2.2 million,
unchanged from previously reported estimates.
Legal Matters - There
continue to be two warranty-related matters that impact the FMU-143 program at
our Precision Products Orlando operation. The items involved are an impact
switch embedded in certain bomb fuzes that was recalled by a supplier and an
incorrect part, called a bellows motor, found to be contained in bomb fuzes
manufactured for the U.S. Army utilizing systems which originated before the
Orlando operation was acquired by Kaman. The U.S. Army Sustainment Command
(USASC), the procurement agency that administers the FMU-143 contract, had
authorized warranty rework for the bellows motor matter in late 2004/early 2005;
however, we were not permitted to finish the rework due to issues raised by the
USASC primarily related to administrative matters and requests for verification
of the accuracy of test equipment (which accuracy was subsequently
verified).
In late
2006, the USASC informed us that it was changing its remedy under the contract
from performance of warranty rework to an "equitable adjustment" of $6.9 million
to the contract price. We responded, explaining our view that we had complied
with contract requirements. In June 2007 the USASC affirmed its position but
rescinded its $6.9 million demand (stating that its full costs had not yet been
determined) and gave instructions for disposition of the subject fuzes,
including both the impact switch and bellows motor related items, to a Navy
facility and we complied with that direction. To date, USASC has not made a
demand for any specific amount.
As
reported previously, a separate contract dispute between our Precision Products
Orlando operation and the USASC relative to the FMU-143 fuze program is now in
litigation. The USASC has basically alleged the existence of latent defects in
certain fuzes due to unauthorized rework during production and has sought to
revoke their acceptance. Management believes that the Precision Products segment
has performed in accordance with the contract and it is the government that has
materially breached its terms; as a result, during the fourth quarter of 2007,
we cancelled the contract and in January 2008, we commenced litigation before
the Armed Services Board of Contract Appeals (the "Board") requesting a
declaratory judgment that our cancellation was proper. At about the same time,
the USASC notified us that it was terminating the contract for default, making
the allegations noted above. We have filed a second complaint with the Board
appealing the USASC’s termination decision. The litigation process is
ongoing.
16. Subsequent
Events
On
October 7, 2008, the company announced that its subsidiary, Kaman Industrial
Technologies Corporation, has acquired the stock of Industrial Rubber &
Mechanics, Inc. (“INRUMEC”) of Puerto Rico. INRUMEC, founded in 1963,
is a distributor of fluid power products; industrial and hydraulic hoses;
belting and conveyer systems; pipe, tube, fittings and valves; and packaging
machinery to such diverse markets as food, beverage, pharmaceutical, cement and
aggregate. The company is also a manufacturer of hydraulic hose
assemblies for the same end markets. The company has a branch
and regional distribution facility in Gurabo as well as branches located in
Bayamón, Ponce and Mayaguez. The company has annual sales of
approximately $13 million.
On
October 29, 2008, the Company and The Bank of Nova Scotia, Bank of America,
N.A., Fifth Third Bank, and RBS Citizens, N.A. (collectively the “Banks”)
executed a Term Loan Credit Agreement. The Term Loan Agreement, which
is in addition to our current Revolving Credit Agreement, is a $50 million
facility with a four-year term, including quarterly payments of principal at the
rate of 2.5% with 62.5% of the initial aggregate principal payable in the final
quarter. The company may increase the term loan, up to an aggregate
of $50 million, with additional commitments from Banks or new commitments from
acceptable financial institutions. Additionally, the covenants
required of the Company are the same as those in place under the Revolving
Credit Agreement. In conjunction with this agreement,
the current Revolving Credit Agreement was amended to acknowledge the
existence of the Term Loan Credit Agreement and adopts certain provisions of the
Term Loan Credit Agreement.
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 consolidated financial
statements with the perspectives of management in the form of a narrative
regarding our financial condition, results of operations, liquidity and certain
other factors that may affect our future results. The MD&A is presented in
seven sections:
|
II.
|
Recent
Business and Financial Highlights
|
|
III.
|
Results
of Operations
|
|
IV.
|
Critical
Accounting Estimates
|
|
V.
|
Liquidity
and Capital Resources
|
|
VI.
|
Contractual
Obligations and Off-Balance Sheet
Arrangements
|
|
VII.
|
Recent
Accounting Standards
|
Our
MD&A should be read in conjunction with our Form 10-K for the year ended
December 31, 2007.
I.
OVERVIEW OF BUSINESS
Kaman
Corporation is composed of five business segments:
·
|
Aerostructures,
a provider of subassemblies for commercial and military
aircraft;
|
·
|
Precision
Products (formerly called “Fuzing”), a producer of fuzing devices and
memory and measuring systems for a variety of
applications;
|
·
|
Helicopters,
a provider of upgrades and support for its existing fleet as well as a
subcontractor for other aerospace
manufacturers;
|
·
|
Specialty
Bearings, a manufacturer of high-performance mechanical products used
primarily in aviation applications as well as marine, hydropower, and
other industrial applications; and
|
·
|
Industrial
Distribution, the third largest power transmission/motion control
industrial distributor in North
America.
|
There are
specific long-term strategies for each segment. For our aerospace businesses, we
seek to maintain leadership in product technical performance, take advantage of
opportunities arising from the prime and Tier 1 producers as they outsource
aircraft production tasks, and build on our strengths in areas targeted for
growth through internal product development and acquisitions. For our industrial
distribution business, our long-term strategy involves acquisitions and internal
means to expand our geographical footprint in major industrial markets and
broaden our product lines to enhance our competitive position for national
accounts.
II.
RECENT BUSINESS AND FINANCIAL HIGHLIGHTS
The
following is a summary of key events that recently occurred:
▪
|
Our
net sales from continuing operations increased 21.9 percent in the third
quarter of 2008 compared to the third quarter of
2007.
|
▪
|
Our
net earnings from continuing operations increased 43.4 percent in the
third quarter of 2008 compared to the third quarter of
2007.
|
▪
|
Earnings
per share diluted from continuing operations rose to $0.53 per share
diluted in the third quarter of 2008, an increase of 39.5 percent compared
to the third quarter of 2007.
|
▪
|
The
Industrial Distribution and Specialty Bearings segments experienced strong
growth in sales and operating
profit.
|
▪
|
Our
Precision Products segment continued to ramp up on the JPF program and
produced and shipped above its planned level for the
quarter.
|
▪
|
In
August 2008, the company completed its purchase of the portion of the
Bloomfield campus that Kaman Aerospace Corporation (of which the
Helicopters segment forms a part) had leased from NAVAIR for many
years. |
▪
|
On
October 29, 2008, the company entered into a 4-year Term Loan Credit
Agreement with various banks for $50
million.
|
▪
|
In
early October, our Industrial Distribution segment acquired Industrial
Rubber and Mechanics, Incorporated (INRUMEC) of Puerto
Rico.
|
III.
RESULTS OF OPERATIONS
RESULTS
OF OPERATIONS - CONSOLIDATED
The
following tables present selected financial data from continuing operations of
the company:
Net
Sales
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Net
sales
|
|
$ |
335,133 |
|
|
$ |
274,856 |
|
|
$ |
937,199 |
|
|
$ |
813,768 |
|
$
change
|
|
|
60,277 |
|
|
|
22,767 |
|
|
|
123,431 |
|
|
|
72,592 |
|
%
change
|
|
|
21.9 |
% |
|
|
9.0 |
% |
|
|
15.2 |
% |
|
|
9.8 |
% |
The
increase in consolidated net sales for the third quarter of 2008 was driven by
both organic sales growth and additional sales attributable to the two companies
(ISC and Brookhouse) acquired in the second quarter of 2008. The
increase in net sales for the first nine months of 2008 was primarily
attributable to organic growth in all reporting segments except for the
Helicopters segment as well as the acquisitions in the Aerostructures and
Industrial Distribution segments. In the aerospace businesses, organic sales
growth resulted from increased shipments for major programs and customers,
specifically the Sikorsky cockpit program and the JPF fuze program. In the
Industrial Distribution segment, sales to several new large national accounts,
as well as the acquisition of ISC, contributed to the increase for 2008 compared
to 2007.
Gross
Profit
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Gross
profit
|
|
$ |
88,873 |
|
|
$ |
76,457 |
|
|
$ |
251,736 |
|
|
$ |
226,202 |
|
$
change
|
|
|
12,416 |
|
|
|
7,936 |
|
|
|
25,534 |
|
|
|
23,522 |
|
%
change
|
|
|
16.2 |
% |
|
|
11.6 |
% |
|
|
11.3 |
% |
|
|
11.6 |
% |
%
of net sales
|
|
|
26.5 |
% |
|
|
27.8 |
% |
|
|
26.9 |
% |
|
|
27.8 |
% |
The
change in consolidated gross profit for the third quarter of 2008 was
attributable to several factors. Gross profit increased in the Industrial
Distribution and Specialty Bearings segments primarily from higher sales volume.
Gross profit also increased for the Helicopters segment primarily due to the
absence of Australian SH-2G(A) program charges in 2008, in contrast with the
$0.8 million charge in the prior year third quarter. Gross profit remained
essentially unchanged at both the Aerostructures and Precision Products segments
due to the continued charges at the Aerostructures Wichita facility and a higher
level of sales volume to the US Government for JPF fuzes, which generate
essentially break-even gross profit.
Gross
profit for the first nine months of 2008 increased primarily due to the
increased sales volume at the Industrial Distribution and Specialty Bearings
segments and the absence of Australia SH-2G(A) program charges compared to the
$5.6 million in charges recorded in the first nine months of 2007. These
positive results were partially offset by the less favorable product mix for the
Precision Products segment and the charges, excluding goodwill, that were
recorded at the Aerostructures Wichita facility as discussed more fully in the
reporting segment discussion that follows.
Selling,
General & Administrative Expenses (S,G&A)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses (S,G&A)
|
|
$ |
64,726 |
|
|
$ |
59,450 |
|
|
$ |
191,198 |
|
|
$ |
177,426 |
|
$
change
|
|
|
5,276 |
|
|
|
3,460 |
|
|
|
13,772 |
|
|
|
9,965 |
|
%
change
|
|
|
8.9 |
% |
|
|
6.2 |
% |
|
|
7.8 |
% |
|
|
6.0 |
% |
%
of net sales
|
|
|
19.3 |
% |
|
|
21.6 |
% |
|
|
20.4 |
% |
|
|
21.8 |
% |
Overall
S,G&A expenses as a percent of net sales decreased during the third quarter
and the first nine months of 2008. Expense at both the Industrial
Distribution and Aerostructures segments increased, largely as a result of the
two acquisitions in the second quarter of 2008. Other increases in
S,G&A related to higher personnel costs and vehicle expenses driven by
higher fuel costs. These increases were partially offset by a
decrease in Corporate expense, which was attributable to lower group insurance
expenses and other incentive compensation including the long-term incentive
program and stock compensation expense.
S,G&A
for the first nine months of 2008 increased also due to the two acquisitions
made during the second quarter of 2008. Other increases related to
higher personnel costs across most of the reporting segments as well as
increased bid and proposal activity in the aerospace segments. Overall,
Corporate expenses decreased significantly primarily due to lower fringe
benefits, incentive compensation and stock appreciation rights expense as well
as lower group insurance expenses for the first nine months of
2008.
Goodwill
Impairment
During
the second quarter of 2008, our Aerostructures Wichita, KS facility continued to
experience production and quality issues, which, along with circumstances unique
to each contract, resulted in the separate termination of two long-term
contracts with Spirit AeroSystems and Shenyang Aircraft
Corporation. These contracts, which were significant to the facility,
were both loss contracts. In accordance with Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we test
goodwill for potential impairment annually as of December 31 and between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. Due to the
loss of the two major contracts as well as the continuing production and quality
issues, management performed a goodwill impairment analysis for this reporting
unit as of June 27, 2008.
We
evaluated goodwill for impairment using the two-step process prescribed in SFAS
142. The first step is to identify potential impairment by comparing the fair
value of a reporting unit to its book value, including goodwill. If the fair
value of a reporting unit exceeds its book value, goodwill is not considered
impaired. If its book value exceeds its fair value, the second step of the
process is performed to measure the amount of impairment. The process of
evaluating goodwill for impairment involves the determination of the fair value
of the reporting unit and is based on several valuation methods including the
market approach and income approach. Inherent in such fair value determinations
are certain judgments and estimates relating to future cash flows, including our
interpretation of current economic indicators and market valuations, and
assumptions about our strategic plans with regard to the operations of our
reporting units.
Although
we believe that we are working through the production issues at our
Aerostructures Wichita facility, its carrying value had increased significantly
during the second quarter of 2008. This, combined with our loss of two long-term
contracts and the quality and production issues at the facility, created a
situation in which the estimated fair value of this reporting unit (the legal
entity Plastic Fabricating Company, Inc.) was less than its carrying value. The
resulting total non-cash goodwill impairment charge was $7,810, which
represented the entire goodwill balance for this reporting unit prior to the
charge. This charge is not deductible for tax purposes and represents a discrete
item in our second quarter 2008 effective tax rate.
Operating
Income
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Operating
income
|
|
$ |
24,448 |
|
|
$ |
17,008 |
|
|
$ |
52,822 |
|
|
$ |
48,791 |
|
$
change
|
|
|
7,440 |
|
|
|
4,569 |
|
|
|
4,031 |
|
|
|
13,612 |
|
%
change
|
|
|
43.7 |
% |
|
|
36.7 |
% |
|
|
8.3 |
% |
|
|
38.7 |
% |
%
of net sales
|
|
|
7.3 |
% |
|
|
6.2 |
% |
|
|
5.6 |
% |
|
|
6.0 |
% |
Our
reporting segments produced mixed operating income results for the third quarter
and first nine months of 2008 compared to the same periods in 2007. The
Specialty Bearings, Helicopters and Industrial Distribution segments experienced
an increase in operating income in 2008 compared to 2007 primarily as a result
of the program developments and national accounts discussed in the segment
sections that follow. Corporate expenses were also significantly lower in both
the third quarter and first nine months of 2008 compared to the third quarter
and first nine months of 2007. These positive impacts were offset by decreases
in our Aerostructures and Precision Products segments. Please refer to the
individual segment discussions for details.
Loss
on Ineffective Derivative Instrument
In
connection with the acquisition of Brookhouse, the company assumed two foreign
currency hedge contracts originally intended to hedge forecasted cash flows on a
significant US dollar denominated contract. During the third quarter of 2008,
the company determined that these hedges were ineffective, and that they no
longer met the criteria for accounting under SFAS No. 133 “Accounting for
Derivative Instruments and Hedging Activities”, due to a significant shift in
the timing of the forecasted cash flows. Therefore, the company cancelled the
contracts near the end of September, which resulted in a loss of $1.6 million
that has been included in non-operating income in our consolidated statements of
operations.
Additional
Consolidated Results
Net
interest expense generally consists of interest charged on the revolving credit
facility offset by interest income. Total net interest expense for the third
quarter of 2008 was $1.1 million compared to $1.7 million for the third quarter
of 2007. Total net interest expense for the first nine months of 2008 was $1.5
million as compared to $4.9 million expense in the first nine months of 2007.
The difference for both periods was a result of our pay down of a significant
portion of our revolving credit line as of December 31, 2007, using the proceeds
from the sale of the Music segment, as well as the redemption of the remaining
convertible debentures in late 2007. In the second quarter of 2008, the company
began to borrow against its revolving credit line again to fund working capital
requirements, and a significant amount of debt was incurred in June to fund the
Brookhouse acquisition.
The
effective income tax rate was 36.0% for the third quarter of 2008 as compared to
38.2% for the third quarter of 2007. The effective rate for the entire year is
estimated to be 40% for 2008, which includes certain discrete quarterly items
including the second quarter non-deductible goodwill impairment charge, compared
to 36.6% for 2007. The effective tax rate represents the combined estimated
federal, state and international tax effects attributable to pretax earnings for
the year.
Other
Matters
In
connection with our sale of the Music segment, we assumed responsibility for
meeting certain requirements of the Connecticut Transfer Act (the “Transfer
Act”) that apply to the leased guitar manufacturing facility ("Ovation") located
in New Hartford, Connecticut, which was transferred as part of the sale. Under
the Transfer Act, we are required to assess the environmental conditions of the
site and remediate environmental impairments, if any, caused by Ovation's
operations. The site consists of a multi-tenant industrial park, in which
Ovation and other unrelated entities lease space. We continue the process of
assessing the environmental conditions at the site and determining our share of
the cost of environmental remediation that may be required. Our current estimate
of our portion of the cost to assess the environmental conditions and remediate
this property is $2.2 million, unchanged from previously reported
estimates.
The CTDEP
has given the company conditional approval for reclassification of groundwater
in the vicinity of the Moosup, CT facility consistent with the character of the
area. This facility is currently being held for disposal. The company has
substantially completed the process of connecting neighboring properties to
public drinking water in accordance with such approval and in coordination with
the CTDEP and local authorities. The company anticipates that the water
connection project will be completed in the late 2008/early 2009 timeframe. A
site assessment to characterize the environmental condition of the property has
also commenced.
COMBINED
AEROSPACE SEGMENT RESULTS
The
following table presents selected financial data for our combined Aerospace
Segments:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
44,047 |
|
|
$ |
25,713 |
|
|
$ |
103,784 |
|
|
$ |
74,214 |
|
Precision
Products
|
|
|
32,599 |
|
|
|
22,104 |
|
|
|
83,965 |
|
|
|
64,566 |
|
Helicopters
|
|
|
17,373 |
|
|
|
18,220 |
|
|
|
50,092 |
|
|
|
54,703 |
|
Specialty
Bearings
|
|
|
36,839 |
|
|
|
30,729 |
|
|
|
109,585 |
|
|
|
94,179 |
|
Total
Aerospace Segments
|
|
$ |
130,858 |
|
|
$ |
96,766 |
|
|
$ |
347,426 |
|
|
$ |
287,662 |
|
$
change
|
|
|
34,092 |
|
|
|
11,423 |
|
|
|
59,764 |
|
|
|
54,285 |
|
%
change
|
|
|
35.2 |
% |
|
|
13.4 |
% |
|
|
20.8 |
% |
|
|
23.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
173 |
|
|
$ |
1,631 |
|
|
$ |
(7,090 |
) |
|
$ |
9,862 |
|
Precision
Products
|
|
|
3,598 |
|
|
|
2,687 |
|
|
|
6,283 |
|
|
|
9,232 |
|
Helicopters
|
|
|
3,453 |
|
|
|
2,283 |
|
|
|
7,177 |
|
|
|
1,014 |
|
Specialty
Bearings
|
|
|
13,641 |
|
|
|
10,859 |
|
|
|
40,550 |
|
|
|
31,622 |
|
Total
Aerospace Segments
|
|
$ |
20,865 |
|
|
$ |
17,460 |
|
|
$ |
46,920 |
|
|
$ |
51,730 |
|
$
change
|
|
|
3,405 |
|
|
|
5,651 |
|
|
|
(4,810 |
) |
|
|
19,257 |
|
%
change
|
|
|
19.5 |
% |
|
|
47.9 |
% |
|
|
(9.3 |
)% |
|
|
59.3 |
% |
Kaman’s
strategies for the Aerospace segments are:
·
|
Aerostructures:
Take advantage of the trend toward increased outsourcing by both the
aircraft prime manufacturers and Tier 1
suppliers.
|
·
|
Precision
Products: Become the leading producer of fuzing systems for the U.S.
military and allied militaries.
|
·
|
Helicopters:
Take advantage of increasing subcontracting opportunities as helicopter
prime manufacturers shift focus from manufacturing to final assembly and
systems integration.
|
·
|
Specialty
Bearings: Maintain leadership in product technical performance and
application engineering support while staying ahead of the curve in
product technology enhancement, lean manufacturing techniques and lead
time reduction.
|
AEROSTRUCTURES
SEGMENT
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Net
sales
|
|
$ |
44,047 |
|
|
$ |
25,713 |
|
|
$ |
103,784 |
|
|
$ |
74,214 |
|
$
change
|
|
|
18,334 |
|
|
|
4,263 |
|
|
|
29,570 |
|
|
|
18,792 |
|
%
change
|
|
|
71.3 |
% |
|
|
19.9 |
% |
|
|
39.8 |
% |
|
|
33.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
173 |
|
|
$ |
1,631 |
|
|
$ |
(7,090 |
) |
|
$ |
9,862 |
|
$
change
|
|
|
(1,458 |
) |
|
|
(1,826 |
) |
|
|
(16,952 |
) |
|
|
2,041 |
|
%
change
|
|
|
(89.4 |
)% |
|
|
(52.8 |
)% |
|
|
(171.9 |
)% |
|
|
26.1 |
% |
%
of net sales
|
|
|
0.4 |
% |
|
|
6.3 |
% |
|
|
(6.8 |
)% |
|
|
13.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$ |
283,668 |
|
|
$ |
138,381 |
|
|
|
|
|
|
|
|
|
The
growth in net sales for both the third quarter and first nine months of 2008 was
partially attributable to $15.2 million and $18.8 million of sales by
Brookhouse, respectively, which was acquired in mid-June 2008. The remainder of
the sales growth was due to higher production levels and increased shipments to
Sikorsky for the BLACK HAWK helicopter program at our Jacksonville facility,
offset partially by a decrease in Wichita facility sales due to the production
and operational issues discussed below. During the third quarter of 2008, the
segment delivered 31 BLACK HAWK cockpits as compared to the 23 delivered in the
third quarter of 2007. For the third quarter and first nine months of 2008, the
segment’s gross profit was significantly impacted by charges recorded at the
Wichita facility. For the third quarter of 2008, these charges were $3.9 million
and were $17.9 million for the first nine months of 2008, which included a
goodwill impairment charge of $7.8 million.
Aerostructures – Major
Programs
In the
third quarter of 2008, our Jacksonville facility continued to deliver cockpits
under the Sikorsky BLACK HAWK helicopter program. In June 2008, Sikorsky placed
an order for an additional 238 cockpits. To date, Sikorsky has placed orders for
549 cockpits for various models of the helicopter. This program includes the
installation of all wiring harnesses, hydraulic assemblies, control pedals and
sticks, seat tracks, pneumatic lines, and the composite structure that holds the
windscreen for cockpits on most models of the BLACK HAWK helicopter. This
program has a total potential value of at least $250 million. We expect that
deliveries on the current orders will continue through 2010. A total of 248
cockpits have been delivered under this contract from inception through the
third quarter of 2008.
In mid
July 2008, the company signed a long-term requirements contract with Boeing for
the production of wing control surfaces for the U.S. Air Force’s A-10
fleet. The agreement calls for the segment to supply inboard and
outboard flaps, slats and deceleron assemblies, which will be performed at the
Aerostructures Jacksonville facility. The contract commenced in 2008 with
initial deliveries scheduled to begin in early 2010. Full rate
production is expected to begin in 2011 with an average of approximately 47
shipsets per year through 2015. This multiyear contract has a
potential value in excess of $100 million. The annual quantities may
vary and will be dependent upon the orders Boeing receives from the Air
Force.
The
production of structural wing subassemblies for the Boeing C-17 continues to be
an important element in maintaining a sufficient business base at the
Jacksonville facility and will remain so until work under the A-10 program ramps
up in 2010. During the third quarter of 2008, we received an order for an
additional 10 shipsets, which will extend production under this program through
2010. Additionally, in late 2007 we signed a seven-year follow-on
contract with Boeing for the production of fixed wing trailing edge assemblies
for the Boeing 777 and 767 aircraft. Shipments under this program had been
delayed during the third quarter, due to the International Association of
Machinists (IAM) strike at the Boeing Company. Now that
Boeing appears to have reached a tentative deal with the striking
machinists, we are hopeful that we will be able to resume shipments to Boeing
shortly, although shipments may still be behind schedule for the fourth quarter
of 2008.
At the
Aerostructures Wichita facility, we continue our efforts to implement corrective
actions to resolve personnel, quality and production process issues. As
previously reported, these issues arose in connection with the facility's rapid
expansion to accommodate the ramp up of three contracts, all of which were
awarded in 2006; specifically, Spirit AeroSystems and Shenyang Aircraft
Corporation for the Boeing 787 Dreamliner program and Sikorsky Aircraft
Corporation for the Canadian MH-92 helicopter program. In the first quarter,
management responsibility for the facility was consolidated with the
Jacksonville management team in order to share operational
knowledge. During the second quarter we successfully hired key
personnel, including the appointment of Greg Steiner as President of our
Aerospace Group. We also made efforts toward resolving production and
equipment issues. In July 2008, the "probation" status that was imposed by a
major customer in the first quarter was removed, and production has resumed on
all programs. During the third quarter, we were also able to successfully
complete the required audits and re-established our AS9100 certification in late
September 2008.
As
previously reported, the facility's lack of certification status for a large
portion of the year has adversely affected our ability to fully perform our
obligations under certain contracts. These circumstances, combined with the
personnel and operational issues described above and other factors affecting
specific programs, resulted in two of the contracts awarded in 2006 being
terminated. Specifically, we received a notice from Spirit AeroSystems in June
2008 seeking a default termination of its contract. Management has cooperated
with Spirit to achieve the customer’s production objectives while reserving our
legal rights with respect to the appropriateness of the contract
termination. In addition, in July 2008 the Shenyang contract was
terminated under a mutually satisfactory arrangement that essentially waives all
potential claims other than warranty items. This arrangement also
provides compensation to the Wichita facility for its tooling, which was
transferred directly to Boeing. Although both of these terminated
programs were loss contracts for the company, they were considered significant
to the overall operating results of the Wichita facility. Finally, inventories
at the facility have increased significantly due to delays in shipments as a
result of these circumstances. These issues, which existed during
most of the quarter, have led to continued inefficiencies, excess costs to
perform additional quality procedures, an insufficient business base to maintain
our overhead structures and higher obsolete inventory. These issues
led to the segment recording an additional $3.9 million charge during the third
quarter of 2008.
Even with
these issues, the Wichita facility is making progress on other programs,
including the tail rotor pylon work for Sikorsky's Canadian MH-92 helicopter
program with support from the Jacksonville facility. Due to numerous
design changes directed by the customer, costs on this program have grown
substantially, and have reached the point where they exceed the proposed price
for the not yet finalized contract. Management believes these incremental costs
are recoverable from the customer, and that the upcoming contract negotiation
discussions will yield an acceptable overall price. We believe that the Wichita
facility is an important component of our overall strategy. The facility, which
is in a key location, provides skilled capability in composites, an industry
that is becoming increasingly prevalent. In addition, this facility
has a structure that should allow us to become increasingly competitive as we
work through our operational issues. We have invested significant
time, resources and capital into this facility and, although there is still
significant work to be done, we believe the right management team is in place to
meet the challenges currently confronted by the Wichita
facility. However, it is expected that it will take the remainder of
2008 to resolve these operational issues satisfactorily.
Our
recently acquired UK-based facility, which designs and manufactures composite
aerostructures, aerospace tooling, and performs repair and overhaul services,
performed well during the third quarter of 2008. This facility has
components placed on a number of platforms on which we previously did not have
work, including the Airbus A320 family, Airbus A330/340, F-35 (Joint Strike
Fighter) and Eurofighter. As previously disclosed, this acquisition supports our
overall aerospace strategy and it expands our presence on a number of additional
platforms with solid growth prospects. The tooling business also adds
significant capability to our portfolio and further diversifies our customer
base, while the after-market services business will increase our capabilities in
the repair and overhaul business.
PRECISION
PRODUCTS SEGMENT
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Net
sales
|
|
$ |
32,599 |
|
|
$ |
22,104 |
|
|
$ |
83,965 |
|
|
$ |
64,566 |
|
$
change
|
|
|
10,495 |
|
|
|
(206 |
) |
|
|
19,399 |
|
|
|
8,580 |
|
%
change
|
|
|
47.5 |
% |
|
|
(0.9 |
)% |
|
|
30.0 |
% |
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
3,598 |
|
|
$ |
2,687 |
|
|
$ |
6,283 |
|
|
$ |
9,232 |
|
$
change
|
|
|
911 |
|
|
|
237 |
|
|
|
(2,949 |
) |
|
|
2,355 |
|
%
change
|
|
|
33.9 |
% |
|
|
9.7 |
% |
|
|
(31.9 |
)% |
|
|
34.2 |
% |
%
of net sales
|
|
|
11.0 |
% |
|
|
12.2 |
% |
|
|
7.5 |
% |
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$ |
168,535 |
|
|
$ |
147,292 |
|
|
|
|
|
|
|
|
|
Net sales
for the third quarter of 2008 increased compared to the third quarter of 2007
primarily as a result of greater JPF Fuze program shipments to the U.S.
Government (USG). Net sales for the first nine months of 2008
compared to the same period a year ago increased primarily due to increased
production and shipments of the JPF to the USG as well as higher shipments on
several legacy fuze programs. The increase in operating income for
the third quarter of 2008 compared to the third quarter of 2007 was driven by
increased profitability on our legacy fuze programs. Sales to the USG
on the JPF program under the current option are at an essentially break even
gross margin, which resulted in a decrease in operating income for the first
nine months of 2008 compared to the same period in 2007. The 2007
results also benefited from higher gross margins on the JPF facilitization
program, which was essentially complete in early 2008; sales of 40mm products, a
product line that was sold on December 31, 2007; and several higher margin
foreign military sales of the JPF product.
Precision Products – Major
Programs
The JPF
program continues to be one of the segment’s most important programs with
significant potential for growth. The segment has been able to steadily ramp up
production over the first nine months of 2008. The total value of JPF contracts
awarded by the USG from inception of the program through September 26, 2008 is
$190.3 million. This value primarily consists of Options 1 through 5 under the
original contract and various contract modifications, including a two-phase
facilitization contract modification and additional foreign military sales
facilitated by the USG, as well as a variety of development and engineering
contracts, along with special tooling and test equipment. We expect that we will
continue production under the currently awarded options through 2009 and are
currently working with the USG for follow-on orders.
In the
second and third quarters, we achieved our desired production levels of more
than 6,000 fuzes per quarter and were able to ship fuzes to the USG in the lot
sizes required. This production capability, achieved on a consistent basis, will
allow us in the future to meet our delivery requirements to the USG as well as
sell fuzes to foreign customers. Therefore, our efforts to produce and sell the
JPF to foreign allied militaries, which would generate further market
penetration, increase sales and improve profitability, are important factors to
the ultimate success of this program. These shipments to foreign allied
militaries are under both the USG contract as well as direct commercial
sales. Typically we cannot sell any fuzes to our foreign customers
until after we have met our USG requirements. To date, we have sold smaller lots
of fuzes to several foreign allied militaries. The segment also has a
significant amount of JPF fuze inventory, the specifications of which are
outside the U.S. government’s temperature requirement. Since these fuzes meet
the operational requirements of non-U.S. militaries, we are actively marketing
these fuzes to them and have received an order for some of these fuzes, which
are expected to be shipped in late 2008. We also continue to work
with the USG to negotiate further price increases, which will lead to improved
profitability on this program. We believe that this program has made meaningful
progress and we continue to work to ensure the overall success of the
program.
Due to
the design complexity of the fuze, we have in the past experienced difficulty
with production of the fuze. During 2008, we have continued to make progress on
production improvements and enhancements of the JPF fuze system. The
facilitization program has also contributed to our increased production and has
been another important element of our strategy to improve our quality and
efficiency on the JPF program. This facilitization program provides us an
opportunity to review production workflow to create greater efficiencies,
qualify a second Kaman site (Middletown) for full production of JPF fuzes, and
create an enhanced fuze design. The enhanced design is expected to reduce the
number of technical issues so that a more steady state of production can be
achieved more efficiently. We believe that the value of these initiatives will
be more fully realized in 2009 and beyond. Although we believe that we are
making progress on this program, at this time the line remains subject to
periodic production interruptions, which may result in irregular shipments and
increased costs.
Warranty and
Contract-Related Matters
There
continue to be two warranty-related matters that impact the FMU-143 program at
our Precision Products Orlando operation. The items involved are an impact
switch embedded in certain bomb fuzes that was recalled by a supplier and an
incorrect part, called a bellows motor, found to be contained in bomb fuzes
manufactured for the U.S. Army utilizing systems which originated before the
Orlando operation was acquired by Kaman. The U.S. Army Sustainment Command
(USASC), the procurement agency that administers the FMU-143 contract, had
authorized warranty rework for the bellows motor matter in late 2004/early 2005;
however, we were not permitted to finish the rework due to issues raised by the
USASC primarily related to administrative matters and requests for verification
of the accuracy of test equipment (which accuracy was subsequently
verified).
In late
2006, the USASC informed us that it was changing its remedy under the contract
from performance of warranty rework to an "equitable adjustment" of $6.9 million
to the contract price. We responded, explaining our view that we had complied
with contract requirements. In June 2007 the USASC affirmed its position but
rescinded its $6.9 million demand (stating that its full costs had not yet been
determined) and gave instructions for disposition of the subject fuzes,
including both the impact switch and bellows motor related items, to a Navy
facility and we complied with that direction. To date, USASC has not made a
demand for any specific amount.
As
reported previously, a separate contract dispute between our Precision Products
Orlando operation and the USASC relative to the FMU-143 fuze program is now in
litigation. USASC has basically alleged the existence of latent defects in
certain fuzes due to unauthorized rework during production and has sought to
revoke their acceptance. Management believes that the Precision Products segment
has performed in accordance with the contract and it is the government that has
materially breached its terms; as a result, during the fourth quarter of 2007,
we cancelled the contract and in January 2008, we commenced litigation before
the Armed Services Board of Contract Appeals (the "Board") requesting a
declaratory judgment that our cancellation was proper. At about the same time,
the USASC notified us that it was terminating the contract for default, making
the allegations noted above. We have filed a second complaint with the Board
appealing the USASC’s termination decision. The litigation process is
ongoing.
HELICOPTERS
SEGMENT
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Net
sales
|
|
$ |
17,373 |
|
|
$ |
18,220 |
|
|
$ |
50,092 |
|
|
$ |
54,703 |
|
$
change
|
|
|
(847 |
) |
|
|
2,795 |
|
|
|
(4,611 |
) |
|
|
12,563 |
|
%
change
|
|
|
(4.6 |
)% |
|
|
18.1 |
% |
|
|
(8.4 |
)% |
|
|
29.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
3,453 |
|
|
$ |
2,283 |
|
|
$ |
7,177 |
|
|
$ |
1,014 |
|
$
change
|
|
|
1,170 |
|
|
|
3,356 |
|
|
|
6,163 |
|
|
|
5,313 |
|
%
change
|
|
|
51.2 |
% |
|
|
312.8 |
% |
|
|
607.8 |
% |
|
|
123.6 |
% |
%
of net sales
|
|
|
19.9 |
% |
|
|
12.5 |
% |
|
|
14.3 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$ |
38,359 |
|
|
$ |
115,019 |
|
|
|
|
|
|
|
|
|
Sales for
the Helicopters segment were comprised primarily of the upgrade and maintenance
program for Egypt, Sikorsky subcontract work, MDHI subcontract work and SH-2
program spare parts. The decrease in sales for the third quarter and first nine
months of 2008 compared to the same periods in 2007 was a result of certain
nonrecurring work performed for Egypt in 2007 that was not repeated during 2008
as well as lower SH-2 program spare parts sales and lower revenue on the
Australian production and service contracts. These decreases were partially
offset by increased sales for Sikorsky and MDHI. Operating income increased
primarily due to the absence of an accrued contract loss charge for the
Australia program in the first nine months of 2008 as well as higher gross
margins on subcontract sales. Third quarter and first nine months of 2007
Australian program charges were $0.8 million and $5.6 million,
respectively.
Helicopters – Major
Programs
As
previously reported, in March 2008, the company and the Commonwealth of
Australia signed a settlement agreement which terminates the SH-2G(A) Super
Seasprite program on mutually agreed terms. The agreement provides that
ownership of the 11 SH-2G(A) Super Seasprite helicopters (along with spare parts
and associated equipment) will be transferred to the company and, thereafter,
proceeds from each helicopter sale will be shared on a predetermined basis. U.S.
Government (USG) approval is required for both physical transfer and ownership
transfer of the aircraft and equipment. The USG's approval for physical transfer
was obtained during the second quarter and the parties are now coordinating
efforts to achieve shipment of the aircraft and equipment to the U.S., after
which USG approval of the Commonwealth's transfer of ownership will be
requested. Management is hopeful that such approval and the actual transfer of
ownership will occur on or before December 31, 2008. During the third quarter,
Helicopters segment management obtained additional USG-required marketing
licenses and is beginning discussions with many potential foreign government
customers. Segment management has also attended trade events such as the Black
Sea Air Show recently held in Romania.
In
connection with sharing sale proceeds, we have agreed that total payments of at
least $39.5 million (AUS) will be made to the Commonwealth regardless of sales,
with at least $26.7 million (AUS) to be paid by March 2011, and, to the extent
cumulative payments have not yet reached $39.5 million (AUS), additional
payments of $6.4 million (AUS) each in March of 2012 and 2013. To secure these
payments, at the date of ownership transfer as described above, the company will
provide the Commonwealth with a $39.5 million (AUS) unconditional letter of
credit which will be reduced as such payments are made. Additionally, under the
agreement, we will forego payment of approximately $33 million in net unbilled
receivables in exchange for the helicopters, spare parts and equipment, which
will be recorded as inventory. We currently expect that the value of
this transferred inventory will exceed the amount of the net unbilled
receivables and the guaranteed payments described above. The transaction will be
recorded as of the date of ownership transfer and we do not currently expect
that it will have a material impact on the statement of operations. The
termination of the contract, combined with the return of inventory, will result
in our inability to claim look-back interest from the IRS, previously expected
to exceed $6 million pretax. Additionally, sales relative to the service center,
which have been a meaningful portion of Helicopters segment net sales in recent
years, effectively will end at the conclusion of the support center ramp down
period, which will occur during the fourth quarter of 2008.
We
continue our work under a program for depot level maintenance and upgrades for
nine SH-2G(E) helicopters delivered to the Egyptian government during the 1990s.
Through September 26, 2008, we are on contract for approximately $49.9 million
of work related to maintenance and upgrades. This program has a potential total
contract value of approximately $92 million. The segment also continues to
perform subcontract work for Sikorsky involving BLACKHAWK fuselage joining and
installation tasks and the production of certain mechanical subassemblies and
for MDHI in regard to Rotor Blade System deliveries. These programs have been an
important element of our business base over the recent past.
Additionally,
during 2008, we continued to work under a contract from the Army Material
Research Development and Engineering Command for follow-on work associated with
development of the BURRO Unmanned Resupply Helicopter, utilizing the K-MAX
helicopter. In January 2008, the segment and Lockheed, under our previously
disclosed agreement, jointly acquired three K-MAX helicopters from a U.S.
Government General Services Administration auction for an average cost of $4.3
million. Two of the aircraft were purchased by Lockheed and the third is owned
by the company. The aircraft are being used to further develop the BURRO
program.
In August
2008, the company completed its purchase of the portion of the Bloomfield campus
that Kaman Aerospace Corporation (of which the Helicopters segment forms a part)
had leased from NAVAIR for many years. In connection with the purchase, we have
assumed responsibility for environmental remediation at the facility as may be
required under the Transfer Act and we continue the effort to define the scope
of the remediation that will be required by the Connecticut Department of
Environmental Protection (CTDEP). Management believes that the fair value of the
property of $10.3 million approximates the discounted present value of the cost
of the environmental remediation. This remediation process will take many years
to complete.
SPECIALTY
BEARINGS SEGMENT
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Net
sales
|
|
$ |
36,839 |
|
|
$ |
30,729 |
|
|
$ |
109,585 |
|
|
$ |
94,179 |
|
$
change
|
|
|
6,110 |
|
|
|
4,571 |
|
|
|
15,406 |
|
|
|
14,350 |
|
%
change
|
|
|
19.9 |
% |
|
|
17.5 |
% |
|
|
16.4 |
% |
|
|
18.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
13,641 |
|
|
$ |
10,859 |
|
|
$ |
40,550 |
|
|
$ |
31,622 |
|
$
change
|
|
|
2,782 |
|
|
|
3,884 |
|
|
|
8,928 |
|
|
|
9,548 |
|
%
change
|
|
|
25.6 |
% |
|
|
55.7 |
% |
|
|
28.2 |
% |
|
|
43.3 |
% |
%
of net sales
|
|
|
37.0 |
% |
|
|
35.3 |
% |
|
|
37.0 |
% |
|
|
33.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$ |
93,145 |
|
|
$ |
90,146 |
|
|
|
|
|
|
|
|
|
The
Specialty Bearings segment continued its trends of strong sales and operating
income in the third quarter and first nine months of 2008. The increase in net
sales for both the quarter and the first nine months was a result of higher
shipments to our customers in the commercial jet liner market (including the
aftermarket), regional jet market and helicopter market. Sales for the first
nine months of 2008 also reflect a favorable foreign currency rate change, of
approximately 2.6 percent, due to the exchange rate of the Euro in 2008 as
compared to 2007. Operating income increased primarily due to the
increased sales volume driven by increased shipments and favorable pricing,
which allows us to leverage our fixed costs, and continued lean manufacturing
improvements on the production line.
Specialty Bearings – Major
Programs
The
aerospace market continues to be strong in 2008 although Airbus and Boeing have
reported a slowdown in new order activity and U.S. airlines have announced
capacity and fleet reductions. The segment has maintained a strong
backlog although we do perform a significant amount of work for Boeing
through direct contracts and subcontract work, including aftermarket
support. Sales for the rest of 2008 will be slightly lower than the
previous fourth quarter, although we currently do not believe that our total
operating results will be significantly impacted by the IAM strike. Our diverse
customer mix, which includes several large commercial aircraft customers and a
significant aftermarket, as well as military customers and the regional jet
liners market, provides us some degree of stability in the changing economy.
Additionally, we typically experience stronger sales in the first half of the
year as compared to the second half primarily due to the greater number of
holidays and the peak summer months being in the second half of the
year.
We also
benefit significantly from our strategy to provide a high quality product with
shorter lead times than our competitors, to customers in both the commercial and
military markets. We continue to target the most demanding applications early in
the aircraft design process as part of prime contractors’ problem solving teams.
We then apply innovative technology to develop and manufacture proprietary
products to address our customers’ needs while providing excellent performance
and service. We believe technological enhancements we make to our current
products, as well as the development of new products, will preserve our
competitive advantages, increase our customer base, and lead to further
penetration of both domestic and foreign markets. Our Bloomfield
operation received the UTC Supplier Gold award in a presentation ceremony
October 28, 2008. UTC Supplier Gold is a supplier recognition program
established to acknowledge superior performance over the preceding 12 months.
Supplier Gold criteria address quality, delivery, lean and customer
satisfaction.
INDUSTRIAL
DISTRIBUTION SEGMENT RESULTS
The
following table presents selected financial data for the Industrial Distribution
segment:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Net
sales
|
|
$ |
204,275 |
|
|
$ |
178,090 |
|
|
$ |
589,773 |
|
|
$ |
526,106 |
|
$
change
|
|
|
26,185 |
|
|
|
11,344 |
|
|
|
63,667 |
|
|
|
18,307 |
|
%
change
|
|
|
14.7 |
% |
|
|
6.8 |
% |
|
|
12.1 |
% |
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
10,704 |
|
|
$ |
9,045 |
|
|
$ |
29,512 |
|
|
$ |
26,043 |
|
$
change
|
|
|
1,659 |
|
|
|
455 |
|
|
|
3,469 |
|
|
|
(2,620 |
) |
%
change
|
|
|
18.3 |
% |
|
|
5.3 |
% |
|
|
13.3 |
% |
|
|
(9.1 |
)% |
%
of net sales
|
|
|
5.2 |
% |
|
|
5.1 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Our
Industrial Distribution segment continued its trend of strong sales growth
during the third quarter of 2008. Approximately half ($13.5 million) of this
increase was attributable to sales by ISC, which was acquired on March 31, 2008.
The remaining half was due to higher sales to new national accounts, some of
which were ramping up during the first nine months of 2007. The first nine
months of 2008 also experienced strong sales growth despite the slowing
industrial market and uncertain economy. During the year, we continued to make
investments in infrastructure in the form of new branches and opened a new
branch in Savannah, GA during the third quarter. As previously disclosed, these
investments in infrastructure and personnel have had an impact on our operating
income and it will take several years for the benefits of these investments to
be fully realized. Operating income for the third quarter and first nine months
of 2008 increased primarily due to the sales volume increase. We anticipate that
as we continue to ramp up our new branches, leveraging our size and scale, and
increase sales to recently awarded national accounts, margins will
improve. However, we remain watchful of the impact of the current
economic conditions and the credit markets.
2008
Industrial Distribution Trends
The
Market
Because
of our diverse customer base, our performance tends to track the U.S. Industrial
Production Index. We are therefore affected, to a large extent, by the overall
business climate for our customer industries, which includes plant capacity
utilization levels, and the effect of pricing spikes and/or supply interruptions
for basic commodities such as steel and oil. The strength of certain markets
varied considerably by industry type during the first nine months of 2008, and
markets and products such as mining, paper manufacturing, food and beverage
processing and fluid power, continued to perform well. Other industries have
experienced a decline, including the building materials industry (with respect
to new home construction). Our business has been adversely impacted in certain
of these areas but continues to improve in other industries, largely due to the
several new contracts and renewals we have received in 2008.
Our
Strategy
The
strategy for the Industrial Distribution segment is to:
1.
|
Expand
our geographic footprint in major industrial markets to enhance our
position in the competition for regional and national
accounts.
|
In order
to increase our geographic footprint, we continue to explore potential
acquisition candidates as well as establish branches in locations that are
consistent with our strategic objectives. By so doing, we will more clearly
establish our business as one that can provide comprehensive services to our
customers who are continually focused on streamlining their procurement
operations and consolidating supplier relationships. In early October 2008, the
segment acquired the stock of INRUMEC of Puerto Rico. INRUMEC,
founded in 1963, is a distributor of fluid power products; industrial and
hydraulic hoses; belting and conveyer systems; pipe, tube, fittings and valves;
and packaging machinery to such diverse markets as food, beverage,
pharmaceutical, cement and aggregate. INRUMEC is also a manufacturer
of hydraulic hose assemblies for the same end markets and has a branch and
regional distribution facility in Gurabo as well as branches located in Bayamón,
Ponce and Mayaguez. The company has annual sales of approximately $13
million. This acquisition will allow us to immediately provide service to our
new national account that has a presence in Puerto Rico. As noted
above, the segment also opened a small branch in Savannah, GA.
2.
|
Broaden
our product offering to gain additional business from existing customers
and new opportunities from a wider slice of the
market.
|
In recent
years, we have worked to increase market share in several growing markets
including the mining, energy and food and beverage industries. We believe that
we have been successful in this endeavor, as evidenced by our recently awarded
national account wins, and continue to focus on these industries. During the
third quarter, we received notification of renewals from several large national
accounts including US Gypsum, Del Monte Foods, Titan Cement, Chemical Lime, Solo
Cup and Campbell’s Soup Company. We also continued to build our
government business group to service our recently awarded 5-year contract with
the General Services Administration Center for Facilities Maintenance and
Hardware which allows us to supply government agencies with MRO products from
our major product categories.
We also
continue to be focused on maintaining competitive pricing as well as providing
value added services that save our customers money and time while helping them
improve operating efficiency.
3.
|
Further
enhance operating and asset utilization efficiencies throughout the
enterprise.
|
To
compete effectively in today's industrial market requires size, scale, effective
IT systems and knowledgeable people. Our size and scale allow us to realize
internal operating efficiencies and achieve supplier incentives in the form of
rebates. To further meet our customers’ requirements our new e-business search
engine provides customers with a more intuitive and flexible search capability
to satisfy their evolving needs. We expect that this tool will allow us greater
asset utilization and increase our operating efficiencies. To ensure the
continuation of our ability to help customers solve their production reliability
challenges, we rely on a disciplined human resource recruiting process supported
by proprietary and industry based education programs. This allows us to have the
appropriate number of qualified personnel to help us continue to compete in the
markets in which we participate.
IV.
CRITICAL ACCOUNTING ESTIMATES
Preparation
of the company’s financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Management believes the most complex and sensitive judgments,
because of their significance to the consolidated financial statements, result
primarily from the need to make estimates about the effects of matters that are
inherently uncertain. Management’s Discussion and Analysis and the Notes to the
Consolidated Financial Statements in the company’s Form 10-K for the year ended
December 31, 2007, describe the significant accounting estimates and policies
used in preparation of the Consolidated Financial Statements. Actual results in
these areas could differ from management’s estimates. There have been no
significant changes in the company's critical accounting policies and
significant estimates in 2008.
V.
LIQUIDITY AND CAPITAL RESOURCES
We assess
the company's liquidity in terms of our ability to generate cash to fund working
capital, investing and financing activities. Significant factors affecting
liquidity include: cash flows generated from or used by operating activities,
capital expenditures, investments in our business segments and their programs,
acquisitions, divestitures, dividends and adequacy of available bank lines of
credit.
We
continue to rely upon bank financing as an important source of support for our
business activities including several recent acquisitions. We believe this, when
combined with cash generated from operating activities, will be sufficient to
support our anticipated liquidity requirements for the foreseeable future. We
anticipate that a variety of items will have an impact on our liquidity during
the next 12 months, aside from our normal working capital requirements. These
may include the resolution of any of the matters described in Management’s
Discussion and Analysis, including the FMU-143 contract matter, the letter of
credit to guarantee the payment to the Commonwealth, the cost of environmental
remediation associated with the purchase of the NAVAIR property, the operational
issues at the Aerostructures Wichita facility, and future SERP payments and
required pension contributions. However, we do not believe any of these matters
will lead to a shortage of capital resources or liquidity that would prevent us
from continuing with our business operations as expected.
We are
watchful of the recent developments in the credit markets and are assessing the
impact that the current economic downturn may have on the
company. This current market may prohibit us from securing the level
of financing that is necessary to continue with our growth strategy and finance
working capital requirements. The trends in the market may have an
impact on the company through lower customer spending as well as higher interest
rates on borrowings going forward. Additionally, with the
significant downturn in the current financial markets, our pension plan assets
have significantly decreased which may result in higher pension plan
contributions in 2009. These matters and others are discussed in more
detail in the Risk Factors section of this Form 10-Q.
The
following table summarizes cash flow activity from continuing
operations:
In
thousands
|
|
September
26, 2008
|
|
|
September
28, 2007
|
|
Total
cash provided by (used in)
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
(38,479 |
) |
|
$ |
(6,039 |
) |
Investing
activities
|
|
|
(111,871 |
) |
|
|
(14,008 |
) |
Financing
activities
|
|
|
91,719 |
|
|
|
16,698 |
|
Increase
(decrease) in cash
|
|
$ |
(58,631 |
) |
|
$ |
(3,349 |
) |
Net cash
used in operating activities increased $32.4 million for the first nine months
of 2008 compared to the first nine months of 2007. This increase is primarily
attributable to increased cash requirements to fund working capital needs in the
first nine months of 2008 as compared to the first nine months of 2007 as
specifically discussed below:
·
|
The
company experienced an increase in accounts receivable partially as a
result of higher sales volume at our Industrial Distribution,
Aerostructures, Precision Products and Specialty Bearings
segments.
|
·
|
Inventory
levels increased in the Helicopters segment, primarily due to the
acquisition of a K-MAX aircraft, and in the Aerostructures segment,
primarily due to higher amounts of inventory at the Wichita
facility.
|
·
|
Inventory
has also increased at our Precision Products segment, although it is
anticipated that the JPF inventory, the largest driver of this increase,
will decrease as additional progress payments are billed and as more fuzes
are shipped.
|
·
|
Total
cash payments for income taxes increased significantly, primarily due to
the taxes paid on the gain of the Music segment
sale.
|
·
|
The
company paid out a significant amount of SERP payments in the first nine
months of 2008 compared to the first nine months of 2007 primarily
attributable to the retirement of the former
CEO.
|
Net cash
used in investing activities increased $97.9 million for the first nine months
of 2008 compared to the same period of 2007. The majority of the increase was
attributable to the acquisitions of Brookhouse and ISC during the second quarter
of 2008. Capital expenditures also increased specifically at the Specialty
Bearings, Aerostructures and Industrial Distribution segments.
Net cash
provided by financing activities increased $75.0 million for the first nine
months of 2008 compared to the same period of 2007. The company had net
borrowings under the Revolving Credit Agreement of $88.3 million for the first
nine months of 2008 as compared to $29.3 million for the first nine months of
2007. The significant increase was driven by our acquisition activity in the
second quarter of 2008. Cash outflows for financing activities during 2008 also
included the payment of dividends, net of proceeds from the exercise of employee
stock options.
Financing
Arrangements
We
maintain a $200 million revolving credit facility (Revolving Credit Agreement)
expiring August 4, 2010. The facility includes the availability of funding in
foreign currencies as well as an “accordion” feature that provides the company
the opportunity to request, subject to bank approval, an expansion of up to $50
million in the overall size of the facility. A significant amount of this
facility was used to fund the acquisition of Brookhouse in the second quarter of
2008. On
October 29, 2008, the Company and The Bank of Nova Scotia, Bank of America,
N.A., Fifth Third Bank, and RBS Citizens, N.A. (collectively the “Banks”)
executed a Term Loan Credit Agreement. The Term Loan Agreement, which
is in addition to our current Revolving Credit Agreement, is a $50 million
facility with a four-year term, including quarterly payments of principal at the
rate of 2.5% with 62.5% of the initial aggregate principal payable in the final
quarter. The company may increase the term loan, up to an aggregate
of $50 million, with additional commitments from Banks or new commitments from
acceptable financial institutions. Additionally, the covenants
required of the Company are the same as those in place under the Revolving
Credit Agreement. In conjunction with this agreement,
the current Revolving Credit Agreement was amended to acknowledge the
existence of the Term Loan Credit Agreement and adopts certain provisions of the
Term Loan Credit Agreement provisions.
Total
average bank borrowings for the first nine months of 2008 were $48.3 million
compared to $81.2 million for the same period in 2007. As of September 26, 2008,
there was $72.9 million available for borrowing under the Revolving Credit
Agreement, net of letters of credit. Letters of credit are generally considered
borrowings for purposes of the Revolving Credit Agreement. A total of $27.7
million in letters of credit were outstanding under the Revolving Credit
Agreement at September 26, 2008, $20.4 million of which is related to the
Australia SH-2G(A) program. Once the U.S. Government has approved the transfer
of the inventory according to the terms of the settlement agreement, we will
cancel these letters of credit and issue a new letter of credit for the
guaranteed minimum payment previously described.
Facility
fees and interest rates under the Revolving Credit Agreement are determined on
the basis of the company's credit rating from Standard & Poor's. In June
2008, Standard & Poor's re-affirmed the company’s rating as investment grade
BBB- with an outlook of stable. We believe this is a favorable rating for a
company of our size. Under the terms of the Revolving Credit Agreement, if this
rating should decrease, the effect would be to increase facility fees as well as
the interest rates charged. The financial covenants related to the Revolving
Credit Agreement include a requirement that the company have i) EBITDA, at least
equal to 300 percent of net interest expense, on the basis of a rolling four
quarters and ii) a ratio of consolidated total indebtedness to total
capitalization of not more than 55 percent. The agreement also incorporates a
financial covenant which provides that if the company's EBITDA to net interest
expense ratio is less than 6 to 1, the ratio of i) accounts receivable and
inventory for certain Kaman subsidiaries to ii) the company's consolidated total
indebtedness cannot be less than 1.6 to 1. We remained in compliance with those
financial covenants as of and for the quarter ended September 26,
2008.
Other
Sources/Uses of Capital
We will
make a cash contribution of approximately $7.0 million to our tax-qualified
defined benefit pension plan for the 2008 plan year, of which $3.5 million was
made through the third quarter of 2008. Additionally during 2008, we will pay
approximately $14.0 million in SERP payments, a large portion of which were made
in February and August 2008 to our former CEO for his final lump sum SERP
payment. Total SERP payments through the third quarter of 2008 were $13.1
million. For the 2007 plan year, we made a contribution of $10.0
million to our tax-qualified defined benefit pension plan and $2.4 million in
payments for our SERP.
In
November 2000, the company's board of directors approved a replenishment of the
company's stock repurchase program, providing for repurchase of an aggregate of
1.4 million common shares for use in administration of the company's stock plans
and for general corporate purposes. There were no shares repurchased during the
first nine months of 2008.
VI.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual
Obligations
There has
been no material change outside the ordinary course of business in the company's
contractual obligations during the third quarter of 2008. Please see the
company's Form 10-K for the year ended December 31, 2007 for a discussion of its
contractual obligations.
Off-Balance
Sheet Arrangements
There has
been no material change in the company's off-balance sheet arrangements during
the third quarter of 2008. Please see the company's Form 10-K for the year ended
December 31, 2007 for a discussion of such arrangements.
VII.
RECENT ACCOUNTING STANDARDS
A summary
of recent accounting standards is included in Note 1, Basis of Presentation, of
the Notes to Condensed Consolidated Financial Statements, which is included in
Item 1, Financial Statements, of this Form 10-Q.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
There has
been no significant change in the company’s exposure to market risk during the
third quarter of 2008. Please see the company’s Form 10-K for the year ended
December 31, 2007 for a discussion of the company’s exposure to market
risk.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The
company has carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of September 26, 2008. There are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon our evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of
September 26, 2008, the disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in the
reports that we file and submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms.
During
2008, the company acquired Industrial Supply Corporation and Brookhouse Holdings
Limited. While the company is beginning the process of incorporating its
controls and procedures into these businesses, management has not yet performed
documentation, evaluation and testing of internal controls over financial
reporting at those subsidiaries. Industrial Supply Corporation and Brookhouse
Holdings Limited will not be included in the company’s assessment of internal
controls over financial reporting as of December 31, 2008.
Changes
in Internal Controls
There
were no other changes in internal controls over financial reporting at the
company that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
Kaman
Corporation and Subsidiaries
Part
II – Other Information
Item
1A. Risk Factors
Our
business, financial condition, operating results and cash flows can be impacted
by a number of factors, including, but not limited to, those set forth below,
any one of which could cause our actual results to vary materially from recent
results or anticipated future results. Information regarding risk factors
appears in Part I – Item 1A of our Report on Form 10-K for the fiscal year ended
December 31, 2007. We have added a discussion of the current economic downturn
and the impact it may have on us as well as the potential impact of the Boeing
Company IAM strike. Other risk factors that were added during 2008
include a discussion of our risk related to goodwill impairment as well as our
updated discussion relative to the Deed of Settlement with the Commonwealth of
Australia regarding the Australia SH-2G(A) program. Other than these changes,
there have not been any material changes to the risk factors disclosed in Item
1A of our Form 10-K for 2007.
The current economic
conditions may have an impact on our future operating
results.
With the
current economic downturn in the financial markets, the company’s operating
results and liquidity may be impacted in several ways including:
-
|
the
inability to obtain further bank financing, which may limit our ability to
fully execute our strategy in the short
term;
|
-
|
higher
interest rates on current borrowings which would limit our free cash
flow;
|
-
|
changes
in the relationship between the US dollar and the Euro and British Pound
could positively or negatively impact our financial
results;
|
-
|
a
decrease in the market value of our pension assets which could lead to
increased pension expense and contributions in future
years;
|
-
|
less
activity relative to capital projects and planned
expansions;
|
-
|
increased
bad debt reserves or slower payments from customers;
and,
|
-
|
less
order activity from our customers particularly in the Industrial
Distribution and Specialty Bearings segments, which would result in lower
operating profits as well as less absorption due to the decreased business
base.
|
We are
currently evaluating opportunities for future financing, monitoring current
borrowing rates, routinely reviewing overdue receivables and working with our
customers to ensure a minimal impact on our businesses.
The Boeing Company IAM
strike could have an impact on certain of our aerospace
segments.
Although
our aerospace segments provide a wide variety of products to many different
customers in both the commercial and military markets, certain segments may be
impacted by the IAM strike at Boeing. In particular, our
Aerostructures segment provides fixed wing trailing edge assemblies for the
Boeing 777 and 767. This is our third largest program at the Aerostructures
Jacksonville facility. Shipments under this program may be delayed
from the fourth quarter of 2008 despite the resolution of the strike since
delivery schedules may have shifted. Additionally, sales in support
of Boeing aircraft, through direct contracts and subcontract work, including
aftermarket are approximately 25%-30% of the Specialty Bearings segment’s
work. The strike could have an impact on this segment’s sales for the
rest of 2008 as current orders are pushed out and future orders are
delayed.
Overall,
the company does not believe that the strike will have a significant impact on
our overall financial performance as we believe that we have sufficient business
with customers other than Boeing.
Our results of operations
could be adversely affected as a result of goodwill
impairment.
When we
acquire a business, we record goodwill equal to the excess of the amount we pay
for the business, including liabilities assumed, over the fair value of the
tangible and intangible assets of the business we acquire. The Financial
Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other
Intangible Assets”, which provides that goodwill and other intangible assets
that have indefinite useful lives must be tested at least annually for
impairment. SFAS 142 also provides specific guidance for testing goodwill and
other non-amortized intangible assets for impairment. SFAS 142 requires
management to make certain estimates and assumptions when allocating goodwill to
reporting units and determining the fair value of reporting unit net assets and
liabilities, including, among other things, an assessment of market conditions,
projected cash flows, investment rates, cost of capital and growth rates, which
could significantly impact the reported value of goodwill and other intangible
assets. Fair value is generally determined using a combination of the discounted
cash flow, market multiple and market capitalization valuation approaches.
Absent any impairment indicators, we perform our impairment tests annually as of
December 31. Impairments, if any, are recognized as operating
expenses.
If at any
time we determine that an impairment has occurred, we are required to reflect
the reduction in value as an expense within operating income, resulting in a
reduction of earnings in the period such impairment is identified and a
corresponding reduction in our net asset value.
During
the second quarter of 2008, we performed an impairment test with respect to the
goodwill recorded by our Aerostructures segment in connection with the
acquisition of our Wichita facility. This mid-year analysis was deemed to be
necessary due to certain significant developments that resulted in decreased
expectations regarding future sales and operating income to be generated by the
Wichita facility, as well as a significant increase in the level of our
investment in that operation as of June 27, 2008. Based upon the results of our
analysis, we recorded an impairment charge of $7.8 million and eliminated the
Aerostructures goodwill from our balance sheet as of the second quarter of
2008.
Although
we have made significant progress on the JPF fuze program recently, we performed
a similar interim analysis, as of June 27, 2008, with respect to the goodwill
recorded in connection with the acquisition of our Precision Products Orlando
facility. This facility has experienced a variety of design and production
issues associated with the JPF fuze program, which is forecasted to be its
principal source of revenues and earnings in the near term, as well as increased
inventory levels. Based upon the results of our analysis we have concluded the
goodwill recorded by the Precision Products segment has not been impaired. We
will continue to monitor this facility’s performance in the future.
We have entered into a Deed
of Settlement with the Commonwealth of Australia, which terminates the Australia
SH-2G (A) program with a mutual release of claims.
This
agreement is subject to a variety of risks and uncertainties including but not
limited to:
-
|
The
company obtaining the U.S. Government approval necessary to transfer title
to the inventory;
|
-
|
Proper
valuation of the inventory once U.S. Government approval occurs and
transfer of title has taken place;
|
-
|
The
potential absence of a market for the aircraft and spare
parts;
|
-
|
Risk
of the inventory becoming obsolete over time resulting in the company
recording a lower of cost or market
adjustment;
|
-
|
The
additional costs that may be necessary to transfer, store and track the
inventory.
|
We have
already begun to actively market these aircraft to interested customers to
minimize the impact of these risks going forward.
Our financial performance is
largely dependent on the conditions of the aerospace
industry.
The
combined Aerospace Segments’ results are directly tied to the economic
conditions in the commercial aviation and defense industries. As a result,
changes in economic conditions may cause customers to request that firm orders
be rescheduled or canceled, which could put a portion of our backlog at risk.
Additionally, a significant amount of work that we perform under contract tends
to be for a few large customers.
The
aviation industry tends to be cyclical, and capital spending by airlines and
aircraft manufacturers may be influenced by a variety of factors including
current and future traffic levels, aircraft fuel pricing, labor issues,
competition, the retirement of older aircraft, regulatory changes, terrorism and
related safety concerns, general economic conditions, worldwide airline profits
and backlog levels.
The
defense industry is also affected by a changing global political environment,
continued pressure on U.S. and global defense spending, U.S. foreign policy and
the level of activity in military flight operations. Changes to the defense
industry could have a material impact on several of our current aerospace
programs, which would adversely affect our operating results. To mitigate these
risks, we have worked to expand our customer and product base to include both
commercial and military markets.
Furthermore,
because of the lengthy research and development cycle involved in bringing new
products to market, we cannot predict the economic conditions that will exist
when a new product is introduced. A reduction in capital spending in the
aviation or defense industries could have a significant effect on the demand for
our products, which could have an adverse effect on our financial performance or
results of operations.
Competition from domestic
and foreign manufacturers may result in the loss of potential contracts and
opportunities.
The
aerospace markets in which we participate are highly competitive and we often
compete for work not only with large OEMs but also sometimes with our own
customers and suppliers. Many of our large customers may choose not to outsource
production due to, among other things, their own direct labor and overhead
considerations and capacity utilization at their own facilities. This could
result in these customers supplying their own products or services and competing
directly with us for sales of these products or services, all of which could
significantly reduce our revenues.
Our
competitors may have more extensive or more specialized engineering,
manufacturing and marketing capabilities than we do in some areas and we may not
have the technology, cost structure, or available resources to effectively
compete in the market. We believe that developing and maintaining a competitive
advantage will require continued investment in product development, engineering,
supply chain management and sales and marketing, and we may not have enough
resources to make the necessary investments to do so.
We are
also facing increased international competition. Further, our significant
customers have in the past used, and may attempt in the future to use, their
position to negotiate a reduction in price of a particular product regardless of
the terms of an existing contract.
For these
reasons, we may not be able to compete successfully in this market or against
such competitors. Our strategies for our aerospace segments allow us to continue
to effectively compete for key contracts and customers. For additional
information on this topic, see Item 1 “Business — Competition” of our 2007 Form
10-K.
Estimates of future costs
for long-term contracts impact our current operating results and
profits.
For
long-term contracts we generally recognize sales and gross margin based on the
percentage-of-completion method of accounting. This method allows for revenue
recognition as our work progresses on a contract.
The
percentage-of-completion method requires that we estimate future revenues and
costs over the life of a contract. Revenues are estimated based upon the
original contract price, with consideration being given to exercised contract
options, change orders and, in some cases, projected customer requirements.
Contract costs may be incurred over a period of several years, and the
estimation of these costs requires significant judgment based upon the acquired
knowledge and experience of program managers, engineers, and financial
professionals. Estimated costs are based primarily on anticipated purchase
contract terms, historical performance trends, business base and other economic
projections. The complexity of certain programs as well as technical risks and
the availability of materials and labor resources could affect the company’s
ability to estimate future contract costs. Additional factors that could affect
recognition of revenue under the percentage-of-completion method
include:
·
|
Accounting
for start-up costs;
|
·
|
The
effect of nonrecurring work;
|
·
|
Delayed
contract start-up;
|
·
|
Transition
of work from the customer or other
vendors;
|
·
|
Claims
or unapproved change orders;
|
·
|
Product
warranty issues;
|
·
|
Delayed
completion of certain programs for which inventory has been built up;
and,
|
·
|
Accrual
of contract losses.
|
Because
of the significance of the judgments and estimation processes, it is likely that
materially different sales and profit amounts could be recorded if we used
different assumptions or if the underlying circumstances were to change. Changes
in underlying assumptions, circumstances or estimates may adversely affect
future period financial performance. We perform quarterly reviews of our
long-term contracts to address and lessen the effects of these
risks.
The cost and effort to
start-up new programs could negatively impact our current operating results and
profits.
In recent
years, the company has been ramping up several new programs. These include, but
are not limited to, a contract for production of the composite flight deck
floor, as well as metal and composite bonded panels for the vertical stabilizer,
for the Boeing 787 Dreamliner, and a contract to manufacture and assemble
composite tail rotor pylons for Sikorsky MH-92 helicopters.
The time
required and cost incurred to get a new program underway can be significant and
includes nonrecurring costs for tooling, first article testing, finalizing
drawings and engineering specifications and hiring new employees able to perform
the technical work required. New programs can typically involve greater volume
of scrap, higher overhead rates due to inefficiencies, delays in production, and
learning curves that are more extended than anticipated, all of which can impact
current period results. We have been working with our customers and leveraging
our years of experience to effectively ramp up these new programs.
Our U.S. Government programs
are subject to unique risks.
The
company has several significant long-term contracts either directly with the
U.S. government or where it is the ultimate customer, including the Sikorsky
BLACK HAWK cockpit program, the JPF program, and the Boeing C-17 program. These
contracts are subject to unique risks, some of which are beyond our control.
Examples of such risks would include:
The U.S.
Government may modify, curtail or terminate its contracts and subcontracts at
its convenience without prior notice, upon payment for work done and commitments
made at the time of termination. Modification, curtailment or termination of our
major programs or contracts could have a material adverse effect on our future
results of operations and financial condition.
Our U.S.
Government business is subject to specific procurement regulations and other
requirements. These requirements, although customary in U.S. Government
contracts, increase our performance and compliance costs. These costs might
increase in the future, reducing our margins, which could have a negative effect
on our financial condition. Failure to comply with these regulations and
requirements could lead to suspension or debarment, for cause, from U.S.
Government contracting or subcontracting for a period of time and could have a
negative effect on our reputation and ability to procure other U.S. Government
contracts in the future.
Our
contract costs are subject to audits by U.S. Government agencies. The costs we
incur on our U.S. Government contracts, including allocated indirect costs, may
be audited by U.S. Government representatives. These audits may result in
adjustments to our contract costs. Any costs found to be improperly allocated to
a specific contract will not be reimbursed, and such costs already reimbursed
must be refunded. We normally negotiate with the U.S. Government representatives
before settling on final adjustments to our contract costs. We have recorded
contract revenues based upon results we expect to realize upon final audit.
However, we do not know the outcome of any future audits and adjustments and we
may be required to reduce our revenues or profits upon completion and final
negotiation of these audits. If any audit shows improper or illegal activities,
we may be subject to civil and criminal penalties and administrative sanctions,
including termination of contracts, forfeiture of profits, suspension of
payments, fines and suspension or prohibition from doing business with the U.S.
Government.
Our
business is subject to potential U.S. Government inquiries and investigations.
We are from time to time subject to certain routine U.S. Government inquiries
and investigations of our business practices due to our participation in
government contracts. Any adverse finding associated with such an inquiry or
investigation could have a material adverse effect on our results of operations
and financial condition.
The price volatility and
availability of raw materials could increase our operating costs and adversely
impact our profits.
We rely
on foreign and domestic suppliers and commodity markets to secure raw materials
used in many of the products we manufacture within the combined Aerospace
Segments or sell within our Industrial Distribution segment. This exposes us to
volatility in the price and availability of raw materials. In some instances, we
depend upon a single source of supply. A disruption in deliveries from our
suppliers, price increases, or decreased availability of raw materials or
commodities could adversely affect our ability to meet our commitments to
customers. This could also have an impact on our operating costs as well as our
operating income. We try to base our supply management process on an appropriate
balancing of the foreseeable risks and the costs of alternative practices. We
also try to pass on increases in our costs but our ability to do so depends on
contract terms and market conditions. Raising our prices could result in
decreased sales volume, which could significantly reduce our profitability. All
of these factors may have an adverse effect on our results of operations or
financial condition. To mitigate these risks, we negotiate long-term agreements
for materials, when possible.
We may make acquisitions or
investments in new businesses, products or technologies that involve additional
risks, which could disrupt our business or harm our financial condition or
results of operations.
As part
of our business strategy, we have made, and expect to continue to make,
acquisitions of businesses or investments in companies that offer complementary
products, services and technologies. Such acquisitions or investments involve a
number of risks, including:
·
|
Assimilating
operations and products may be unexpectedly
difficult;
|
·
|
Management’s
attention may be diverted from other business
concerns;
|
·
|
The
company may enter markets in which it has limited or no direct
experience;
|
·
|
The
company may lose key employees of an acquired business;
and
|
·
|
The
company may not realize the value of the acquired assets relative to the
price paid.
|
These
factors could have a material adverse effect on our business, financial
condition and operating results. Consideration paid for any future acquisitions
could include our stock or require that we incur additional debt and contingent
liabilities. As a result, future acquisitions could cause dilution of existing
equity interests and earnings per share. Before we enter into any acquisition,
we perform significant due diligence to ensure the potential acquisition fits
with our strategic objectives. In addition, we try to have adequate resources to
transition the newly acquired company efficiently.
We rely on the experience
and expertise of our skilled employees, and must continue to attract and retain
qualified technical, marketing and managerial personnel in order to
succeed.
Our
future success will depend largely upon our ability to attract and retain highly
skilled technical, managerial and marketing personnel. There is significant
competition for such personnel in the aerospace and industrial distribution
industries. We try to ensure that we offer competitive compensation and benefits
as well as opportunities for continued development. There can be no assurance
that we will continue to be successful in attracting and retaining the personnel
we require to develop new and enhanced products and to continue to grow and
operate profitably. We continue to work to recruit and train new personnel as
well as maintain our existing employee base.
We are subject to litigation
that could adversely affect our operating results.
Our
financial results may be affected by the outcome of legal proceedings and other
contingencies that cannot be predicted. In accordance with generally accepted
accounting principles, if a liability is deemed probable and reasonably
estimable in light of the facts and circumstances known to us at a particular
point in time, we will make an estimate of material loss contingencies and
establish reserves based on our assessment. Subsequent developments in legal
proceedings may affect our assessment. The estimates of a loss contingency
recorded in our financial statements could adversely affect our results of
operations in the period in which a liability would be recognized. This could
also have an adverse impact on our cash flows in the period during which damages
would be paid. As of September 26, 2008, the company does not have any loss
contingency recorded with respect to any pending litigation, as we do not
believe that we have met the criteria to establish such a liability for any
pending litigation matter.
We rely upon growth in our
Industrial Distribution segment through development of national account
relationships.
Over the
past several years, more companies have begun to consolidate their purchases of
industrial products, resulting in their doing such business with only a few
major distributors rather than a large number of vendors. Through our national
accounts strategy we have worked hard to develop the relationships necessary to
be one of those major suppliers. Competition relative to these types of
arrangements is significant. If we are not awarded additional national accounts
in the future, or if existing national account agreements are not renewed, our
sales volume could be negatively impacted which may result in lower gross
margins and weaker operating results. Additionally, national accounts typically
require an increased level of customer service as well as investments in the
form of opening of new branches to meet our customers’ needs. The cost and time
associated with these activities could be significant and if the relationship is
not maintained we could ultimately not make a return on these investments. One
of our key strategies has been to increase our national account presence. Thus
far, we have been successful with our strategy with the addition of several new
large national accounts since late 2006. We will continue to focus on this
endeavor through 2008 and beyond.
We could be negatively
impacted by the loss of key suppliers, lack of product availability, or changes
in supplier programs that could adversely affect our operating
results.
Our
Industrial Distribution business depends on maintaining sufficient supply of
various products to meet our customers’ demands. We have several long-standing
relationships with key product suppliers but these relationships are
non-exclusive and could be terminated by either party. If we lost a key
supplier, or were unable to obtain the same levels of deliveries from these
suppliers and were unable to supplement those purchases with products obtained
from other suppliers, it could have a material adverse effect on our business.
Supply interruptions could arise from shortages of raw materials, labor disputes
or weather conditions affecting suppliers’ production, transportation
disruptions, or other reasons beyond our control. Even if we continue with our
current supplier relationships, high demand for certain products may result in
us being unable to meet our customers’ demand, which could put us at a
competitive disadvantage. Additionally our key suppliers could also increase
pricing of their products, which would negatively affect our operating results
if we were not able to pass these price increases through to our customers. We
engage in strategic inventory purchases during the year, negotiate long-term
vendor supply agreements and monitor our inventory levels to ensure that we have
the appropriate inventory on hand to meet our customers’
requirements.
Our revenue and quarterly
results may fluctuate, which could adversely affect our stock
price.
We have
experienced, and may in the future experience, significant fluctuations in our
quarterly operating results that may be caused by many factors. These factors
include but are not limited to:
·
|
Changes
in demand for our products;
|
·
|
Introduction,
enhancement or announcement of products by us or our
competitors;
|
·
|
Market
acceptance of our new products;
|
·
|
The
growth rates of certain market segments in which we
compete;
|
·
|
Size
and timing of significant orders;
|
·
|
Budgeting
cycles of customers;
|
·
|
Mix
of distribution channels;
|
·
|
Mix
of products and services sold;
|
·
|
Mix
of international and North American
revenues;
|
·
|
Fluctuations
in currency exchange rates;
|
·
|
Changes
in the level of operating expenses;
|
·
|
Changes
in our sales incentive plans;
|
·
|
Inventory
obsolescence;
|
·
|
Accrual
of contract losses;
|
·
|
Fluctuations
in oil and utility costs;
|
·
|
Completion
or announcement of acquisitions by us or our competitors;
and
|
·
|
General
economic conditions in regions in which we conduct
business.
|
Most of
our expenses are relatively fixed, including costs of personnel and facilities,
and are not easily reduced. Thus, an unexpected reduction in our revenue, or
failure to achieve the anticipated rate of growth, could have a material adverse
effect on our profitability. If our operating results do not meet the
expectations of investors, our stock price may decline.
Changes in global economic
and political conditions could adversely affect our domestic and foreign
operations and results of operations.
If our
customers’ buying patterns, including decision-making processes, timing of
expected deliveries and timing of new projects, unfavorably change due to
economic or political conditions, there could be an adverse effect on our
business. Other potential risks inherent in our foreign business
include:
·
|
Greater
difficulties in accounts receivable
collection;
|
·
|
Unexpected
changes in regulatory requirements;
|
·
|
Export
restrictions, tariffs and other trade
barriers;
|
·
|
Difficulties
in staffing and managing foreign
operations;
|
·
|
Seasonal
reductions in business activity during the summer months in Europe and
certain other parts of the world;
|
·
|
Economic
instability in emerging markets;
|
·
|
Potentially
adverse tax consequences; and
|
·
|
Cultural
and legal differences in the conduct of
business.
|
Any one
or more of such factors could have a material adverse effect on our
international operations, and, consequently, on our business, financial
condition and operating results.
FORWARD-LOOKING
STATEMENTS
This
report may contain forward-looking information relating to the company's
business and prospects, including the Aerospace and Industrial Distribution
businesses, operating cash flow, and other matters that involve a number of
uncertainties that may cause actual results to differ materially from
expectations. Those uncertainties include, but are not limited to: 1) the
successful conclusion of competitions for government programs and thereafter
contract negotiations with government authorities, both foreign and domestic; 2)
political conditions in countries where the company does or intends to do
business; 3) standard government contract provisions permitting renegotiation of
terms and termination for the convenience of the government; 4) domestic and
foreign economic and competitive conditions in markets served by the company,
particularly the defense, commercial aviation and industrial production markets;
5) risks associated with successful implementation and ramp up of significant
new programs; 6) management's success in resolving operational issues at the
Aerostructures Wichita facility, including successful negotiation of the
Sikorsky Canadian MH-92 program; 7) successful implementation of the
Deed of Settlement agreed upon with the Commonwealth of Australia, which
terminates the Australia SH-2G (A) program with a mutual release of claims; 8)
receipt and successful execution of production orders for the JPF U.S.
government contract, including the exercise of all contract options, successful
negotiation of price increases with the U.S. government, and receipt of orders
from allied militaries, as all have been assumed in connection with goodwill
impairment evaluations; 9) satisfactory resolution of the company’s litigation
with the U.S. Army procurement agency relating to the FMU-143 program; 10)
continued support of the existing K-MAX helicopter fleet, including sale of
existing K-MAX spare parts inventory; 11) cost growth in connection with
environmental remediation activities at the Bloomfield, Moosup and New Hartford,
CT facilities; 12) profitable integration of acquired businesses into the
company's operations; 13) changes in supplier sales or vendor incentive
policies; 14) the effect of price increases or decreases; 15) pension plan
assumptions and future contributions; 16) future levels of indebtedness and
capital expenditures; 17) continued availability of raw materials and other
commodities in adequate supplies and the effect of increased costs therefore;
18) the effects of currency exchange rates and foreign competition on future
operations; 19) changes in laws and regulations, taxes, interest rates,
inflation rates, general business conditions and other factors; and 20) other
risks and uncertainties set forth in the company's annual, quarterly and current
reports, and proxy statements. Any forward-looking information provided in this
report should be considered with these factors in mind. The company assumes no
obligation to update any forward-looking statements contained in this
report.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
(c)
Purchases of Equity Securities
In
November 2000, the company's board of directors approved a replenishment of the
company's stock repurchase program providing for repurchase of an aggregate of
1.4 million common shares for use in administration of the company's stock plans
and for general corporate purposes.
The
following table provides information about purchases of common shares by the
company during the three months ended September 26, 2008:
Period
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of a Publically Announced
Plan
|
|
|
Maximum
Number of Shares That May Yet Be Purchased Under the Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/28/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
7/25/2008
|
|
|
- |
|
|
|
- |
|
|
|
269,611 |
|
|
|
1,130,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/26/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/22/2008
|
|
|
- |
|
|
|
- |
|
|
|
269,611 |
|
|
|
1,130,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/23/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/26/2008
|
|
|
- |
|
|
|
- |
|
|
|
269,611 |
|
|
|
1,130,389 |
|
Item
6. Exhibits
10(a)(i)
|
Kaman
Corporation 2003 Stock Incentive Plan effective November 1, 2003, as
amended effective September 23, 2008 |
|
|
10(b)(i)
|
Kaman
Corporation Employees Stock Purchase Plan as amended effective September
23, 2008
|
|
|
10.1 |
Term
Loan Credit Agreement dated as of October 29, 2008 among Kaman
Corporation, the banks listed therein, The Bank of Nova Scotia and Bank of
America, N.A., as the Co-Administrative Agents for the Banks filed as
Exhibit 10.1 to Form 8-K filed on October 30, 2008 |
|
|
10.2 |
Amendment
No. 3 to Revolving Credit Agreement dated as of October 29, 2008 among
Kaman Corporation, the banks listed theein, The Bank of Nova Scotia and
Bank of America, N.A., as the Co-Administrative Agents for the Banks filed
as Exhibit 10.2 to Form 8-K filed on October 30, 2008 |
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities
and Exchange Act of 1934
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14 under the Securities
and Exchange Act of 1934
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Kaman
Corporation and Subsidiaries
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
KAMAN
CORPORATION
|
|
Registrant
|
|
|
|
|
|
|
|
|
|
Date:
October 30, 2008
|
By: /s/ Neal J. Keating
|
|
|
Neal
J. Keating
|
|
|
Chairman,
President and
|
|
|
Chief
Executive Officer
|
|
|
(Duly
Authorized Officer)
|
Date:
October 30, 2008
|
By: /s/ Robert M.
Garneau
|
|
|
Robert
M. Garneau
|
|
|
Executive
Vice President and
|
|
|
Chief
Financial Officer
|
Kaman
Corporation and Subsidiaries
Index to
Exhibits
Exhibit
10(a)(i) |
Kaman
Corporation 2003 Stock Incentive Plan effective November 1, 2003, as
amended effective September 23, 2008 |
Attached |
|
|
|
Exhibit
10(b)(i)
|
Kaman
Corporation Employees Stock Purchase Plan as amended effective September
23, 2008
|
Attached |
|
|
|
Exhibit
10.1 |
Term
Loan Credit Agreement dated as of October 29, 2008 among Kaman
Corporation, the banks listed therein, The Bank of Nova Scotia and Bank of
America, N.A., as the Co-Administrative Agents for the Banks filed as
Exhibit 10.1 to Form 8-K filed on October 30, 2008 |
By
reference |
|
|
|
Exhibit
10.2 |
Amendment
No. 3 to Revolving Credit Agreement dated as of October 29, 2008 among
Kaman Corporation, the banks listed theein, The Bank of Nova Scotia and
Bank of America, N.A., as the Co-Administrative Agents for the Banks filed
as Exhibit 10.2 to Form 8-K filed on October 30, 2008 |
By
reference |
|
|
|
Exhibit
31.1
|
Certification
of Chief Executive Officer
Pursuant to Rule 13a-14 under
the Securities and Exchange Act of 1934
|
Attached
|
|
|
|
Exhibit
31.2
|
Certification
of Chief Financial Officer
Pursuant to Rule 13a-14 under
the Securities and Exchange Act of 1934
|
Attached
|
|
|
|
Exhibit
32.1
|
Certification
of Chief Executive Officer
Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
Attached
|
|
|
|
Exhibit
32.2
|
Certification
of Chief Financial Officer
Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
Attached
|