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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
- --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED June 30, 2003.
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
- --- SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
--------------- --------------
Commission File No. 0-1093
KAMAN CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 06-0613548
- -------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1332 Blue Hills Avenue
Bloomfield, Connecticut 06002
----------------------------------------
(Address of principal executive offices)
(860) 243-7100
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2)
Yes x No
--- ---
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
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of July 31, 2003:
Class A Common 21,912,343
Class B Common 667,814
Page 1 of 28 Pages
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets(In thousands)
Assets June 30, 2003 December 31, 2002
------ ------------------ -------------------
Current assets:
Cash and cash equivalents $ 8,197 $ 5,571
Accounts receivable 209,251 195,857
Inventories:
Contracts and other
work in process $ 63,905 61,917
Finished goods 21,788 7,742
Merchandise for resale 94,627 180,320 95,056 164,715
------- -------
Income taxes receivable - 5,192
Deferred income taxes 28,459 28,450
Other current assets 13,185 14,460
------- -------
Total current assets 439,412 414,245
Property, plant & equip., at cost 153,505 161,918
Less accumulated depreciation
and amortization 99,680 100,283
------- -------
Net property, plant & equipment 53,825 61,635
Goodwill and other intangible assets 50,662 50,994
Other assets, net 8,562 8,666
------- -------
Total assets $552,461 $535,540
======= =======
- 2 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets(In thousands) (continued)
Liabilities and Shareholders' Equity
------------------------------------
June 30, 2003 December 31, 2002
------------------ -------------------
Current liabilities:
Notes payable inc. current
portion of long-term debt $ 9,488 $ 10,307
Accounts payable 50,850 46,664
Accrued contract loss 28,889 26,674
Accrued restructuring costs 7,223 7,594
Other accrued liabilities 24,665 23,583
Advances on contracts 22,279 22,318
Other current liabilities 19,613 19,954
Income taxes payable 997 -
------- -------
Total current liabilities 164,004 157,094
Long-term debt, excl. current portion 55,737 60,132
Other long-term liabilities 26,866 26,367
Shareholders' equity 305,854 291,947
------- -------
Total liabilities and
shareholders' equity $552,461 $535,540
======= =======
See accompanying notes to condensed consolidated financial statements.
- 3 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $216,311 $209,141 $432,321 $432,234
Costs and expenses:
Cost of sales(1) 160,414 228,800 320,370 391,483
Selling, general and
administrative expense 49,908 50,083 99,045 101,490
Restructuring costs (2) - 8,290 - 8,290
Other operating
(income)/expense, net (341) (237) (614) (507)
Interest expense, net 751 421 1,519 867
Net (gain) loss on sale
of product lines
and other assets 23 (1,904) (16,826) (1,904)
Other(income)/expense, net 187 624 592 840
-------- -------- -------- --------
210,942 286,077 404,086 500,559
-------- -------- -------- --------
Earnings (loss)before
income taxes 5,369 (76,936) 28,235 (68,325)
Income taxes (benefit) 2,085 (26,570) 10,985 (23,300)
-------- -------- -------- --------
Net earnings (loss) $ 3,284 $(50,366) $ 17,250 $(45,025)
======== ======== ======== ========
Net earnings (loss)per share:
Basic $ .15 $ (2.25) $ .77 $ (2.01)
Diluted (3) $ .15 $ (2.25) $ .75 $ (2.01)
======== ======== ======== ========
Dividends declared per share $ .11 $ .11 $ .22 $ .22
======== ======== ======== ========
(1)Cost of sales for 2002 includes the write-off of K-MAX assets of $50,000
and Moosup facility assets of $2,679 associated with the charge taken in
the Aerospace segment.
(2)Restructuring costs relate to the closure of the Moosup facility in 2003
and are associated with the charge taken in the Aerospace segment in 2002.
(3)The calculated diluted per share amounts for 2002 are anti-dilutive,
therefore, amounts shown are equal to the basic per share calculation.
See accompanying notes to condensed consolidated financial statements.
- 4 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Condensed Consolidated Statements of Cash Flows(In thousands)
For the Six Months
Ended June 30,
--------------------
2003 2002
------- -------
Cash flows from operating activities:
Net earnings (loss) $ 17,250 $(45,025)
Depreciation and amortization 5,131 5,698
Net gain on sale of product line and other assets (16,826) (1,904)
Restructuring costs - 8,290
Non-cash write-down of assets - 52,679
Deferred income taxes - (19,596)
Other, net 905 1,753
Changes in current assets and liabilities,
excluding effects of acquisition/divestiture:
Accounts receivable (15,664) (13,300)
Inventory (16,651) (55)
Income taxes receivable 5,192 (6,776)
Accounts payable 3,757 (7,034)
Accrued contract loss 2,214 18,495
Accrued restructuring costs (371) -
Advances on contracts 740 (612)
Income taxes payable 1,015 -
Changes in other current assets and liabilities 2,375 (7,751)
------- -------
Cash provided by (used in) operating activities (10,933) (15,138)
------- -------
Cash flows from investing activities:
Proceeds from sale of product line and other assets 28,025 7,500
Expenditures for property, plant & equipment (4,175) (2,752)
Acquisition of business, less cash acquired - (1,724)
Other, net (574) 62
------- -------
Cash provided by (used in) investing activities 23,276 3,086
------- -------
Cash flows from financing activities:
Changes to notes payable (819) 184
Reductions to long-term debt (4,395) (1,660)
Dividends paid (4,948) (4,913)
Purchases of treasury stock (205) -
Proceeds from sale of stock 650 820
------- -------
Cash provided by (used in) financing activities (9,717) (5,569)
------- -------
Net increase (decrease) in cash and cash equivalents 2,626 (17,621)
Cash and cash equivalents at beginning of period 5,571 30,834
------- -------
Cash and cash equivalents at end of period $ 8,197 $ 13,213
======= =======
See accompanying notes to condensed consolidated financial statements.
- 5 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Basis of Presentation
- ----------------------
The December 31, 2002 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 financial position,
results of operations and cash flows for the interim periods
presented and are of a normal recurring nature, unless otherwise
disclosed in this report.
The statements should be read in conjunction with the notes to
the consolidated financial statements included in Kaman
Corporation's 2002 Annual Report to Shareholders.
Net Gain on Sale of Product Line and Other Assets
- -------------------------------------------------
On January 15, 2003, the corporation sold its electric motor and
drive business to DRS Technologies, Inc. The 2003 six months
results include a pre-tax gain of $16,500 as a result of this
transaction. The 2002 second quarter and six month results
include a pre-tax $1,928 gain from the sale of the Company's
microwave products line.
Cash Flow Items
- ---------------
Cash payments for interest were $1,643 and $1,086 for the six
months ended June 30, 2003 and 2002, respectively. Cash
payments for income taxes for the comparable periods
were $4,629 and $2,428, respectively.
- 6 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Comprehensive Income/(Loss)
- ---------------------------
Comprehensive income (loss) was $17,948 and $(44,955) for the
six months ended June 30, 2003 and 2002, respectively.
Comprehensive income (loss) was $3,925 and $(50,302) for the
three months ended June 30, 2003 and 2002, respectively. The
changes to net earnings (loss) used to determine comprehensive
income (loss) are foreign currency translation adjustments.
Restructuring Costs
- -------------------
The following table displays the activity and balances of these
pre-tax charges as of June 30, 2003:
Deductions
----------
Balance at
December 31, Cash Non-Cash Balance at
2002 Payments Charges June 30, 2003
----------- -------- -------- -------------
Restructuring costs
- -------------------
Employee termination
benefits $ 2,594 $ 371 $ - $ 2,223
Facility closings 5,000 - - 5,000
------ ------ ------ ------
Total restructuring costs $ 7,594 $ 371 $ - $ 7,223
====== ====== ====== ======
- 7 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Accounts Receivable
- -------------------
Accounts receivable consist of the following:
June 30, December 31,
2003 2002
-------- -----------
Trade receivables, net of allowance
for doubtful accounts of
$2,852 in 2003, $2,853 in 2002 $ 73,555 $ 72,471
U.S. Government contracts:
Billed 14,838 11,607
Recoverable costs and accrued profit
- not billed 16,331 21,225
Commercial and other government contracts:
Billed 26,603 21,628
Recoverable costs and accrued profit
- not billed 77,924 68,926
-------- --------
Total $209,251 $195,857
======== ========
Shareholders' Equity
- --------------------
Changes in shareholders' equity were as follows:
Balance, January 1, 2003 $291,947
Net earnings 17,250
Foreign currency translation adjustment 698
--------
Comprehensive income 17,948
Dividends declared (4,960)
Purchase of treasury stock (205)
Employee stock plans 1,124
--------
Balance, June 30, 2003 $305,854
========
- 8 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Business Segments
- -----------------
Summarized financial information by business segment is as
follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30
-------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales:
Aerospace $ 62,912 $ 60,426 $124,636 $136,027
Industrial Distribution 121,862 121,034 242,128 238,475
Music Distribution 31,537 27,681 65,557 57,732
------- ------- ------- -------
$216,311 $209,141 $432,321 $432,234
======== ======== ======== ========
Operating profit (loss):
Aerospace $ 6,515 $(78,024) $ 13,725 $(68,874)
Industrial Distribution 3,365 3,464 6,162 6,057
Music Distribution 1,391 707 3,238 2,062
------- ------- ------- -------
11,271 (73,853) 23,125 (60,755)
Interest, corporate and
other expense, net (5,879) (4,987) (11,716) (9,474)
Net gain (loss) on sale
of product lines
and other assets (23) 1,904 16,826 1,904
-------- -------- -------- --------
Earnings (loss)
before income taxes $ 5,369 $(76,936) $ 28,235 $(68,325)
======= ======= ======= =======
June 30, December 31,
2003 2002
-------- --------
Identifiable assets:
Aerospace $329,234 $308,275
Industrial Distribution 141,059 144,585
Music Distribution 68,841 68,448
Corporate 13,327 14,232
-------- --------
$552,461 $535,540
======== ========
- 9 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands except per share amounts)
Stock Option Accounting
- -----------------------
The following table reflects pro forma net earnings (loss) and
earnings (loss) per share had the corporation elected to record
employee stock option expense based on the fair value methodology:
For the Three Months For the Six Months
Ended June 30, Ended June 30
-------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net earnings (loss):
As reported $ 3,284 $(50,366) $ 17,250 $(45,025)
Less stock option expense (316) (353) (632) (700)
Tax effect 123 107 246 239
------ ------- ------- -------
Pro forma net
earnings (loss) $ 3,091 $(50,612) $ 16,864 $(45,486)
====== ====== ====== ======
Earnings (loss) per share - basic:
As reported 0.15 (2.25) 0.77 (2.01)
Pro forma after option expense 0.14 (2.26) 0.75 (2.03)
Earnings (loss) per share - diluted:
As reported 0.15 (2.25)* 0.75 (2.01)*
Pro forma after option expense 0.14 (2.26)* 0.74 (2.03)*
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is
amortized to expense over the vesting period, and additional
options may be granted in future years. The pro forma amounts
assume that the corporation had been following the fair value
approach since the beginning.
* The calculated diluted per share amounts for 2002 are
anti-dilutive, therefore, amounts shown are equal to the basic
per share calculation.
- 10 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Recent Accounting Standards
- ---------------------------
In April 2003, The Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 149,
"Amendment to Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149") which is effective for the corporation
after June 30, 2003. SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for
hedging activities under SFAS 133. The corporation adopted SFAS
149 effective July 1, 2003 and that adoption did not have a
material impact on its consolidated results of operations or
financial position.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity" ("SFAS 150")
which is effective for the corporation on July 1, 2003. SFAS 150
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. The corporation adopted SFAS 150
effective July 1, 2003 and that adoption did not have a material
impact on its consolidated financial position.
- 11 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
Consolidated net sales for the three months ended June 30, 2003
were $216.3 million compared to $209.1 million for the same period
of 2002. Consolidated net sales for the six months ended June 30,
2003 were $432.3 million compared to $432.2 million in the
previous year. Net sales in both periods of 2002 were reduced by
$6.5 million as a result of the Australia SH-2G helicopter
program adjustment taken in the second quarter of that year.
Results for the quarter and six-month periods reflect continued
economic weakness in key markets served by the corporation,
including commercial aviation and industrial production.
Aerospace segment net sales were $62.9 million for the second
quarter of 2003 (including $7.2 million from acquisitions made
during the past year) compared to $60.4 million in the comparable
2002 quarter (which included $2.9 million from two divested
businesses). Net sales for the first six months of 2003 were
$124.6 million (including $14.3 million from acquisitions made
during the past year)compared to $136.0 million in the previous
year (including $9.7 million from two divested businesses). The
second quarter 2002 adjustment mentioned above reduced net sales
by $6.5 million for both periods of 2002. The 2003 results
reflect weakness in commercial aviation markets, the wind down of
the Australia SH-2G program (which is in its later stages) and
lack of new SH-2G production orders or K-MAX helicopter sales in
the quarter.
The Aerospace segment's programs include helicopter manufacturing
along with spare parts and support; aerostructure and helicopter
subcontract work as well as manufacture of components such as
self-lubricating bearings and drive-line couplings for aircraft
applications; and advanced technology products.
The corporation's helicopter programs include the SH-2G multi-
mission maritime helicopter and the K-MAX medium-to-heavy external
lift helicopter. This business generated sales of $18.7 million
in the second quarter (about 30% of Aerospace segment sales),
reflecting a decrease in SH-2G sales offset by a small increase in
K-MAX spare parts sales. Sales for the same period of 2002 were
$13.7 million, which includes the previously mentioned $6.5
million downward adjustment (approximately 23% of the segment's
sales). SH-2G helicopter programs constitute the vast majority
of the segment's helicopter program sales. SH-2G programs are
- 12 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
currently in process for the governments of Australia and Poland.
Except for post-production support, the SH-2G program for New
Zealand has been successfully completed.
Work continues on the SH-2G (A) program for Australia which
involves eleven helicopters with support, including a support
services facility, for the Royal Australian Navy (RAN). The total
contract has an anticipated value of about $716 million (US). The
helicopter production portion of the program is valued at
approximately $595 million, of which about 93% has been recorded
as sales through June 30, 2003. As previously reported, this
contract is now in a loss position due to an increase in
anticipated costs to complete the program, which was reflected in
a $25.0 million charge taken in the second quarter of 2002 and a
$31.2 million pre-tax charge taken in the second quarter of 2001.
Production of all the SH-2G(A) aircraft is essentially complete.
As previously reported, all of the aircraft lack the full
Integrated Tactical Avionics System (ITAS) software because of a
contract dispute with the original software supplier. Replacement
subcontractors are in the process of completing that element of
the program and the corporation has responsibility for aircraft
system integration (previously a subcontracted task). Following
the corporation's successful completion of a recent important
performance milestone for the ITAS software, the Australian
government has agreed to proceed with provisional acceptance of
each of the aircraft and this process began in early August,2003.
The RAN intends to use the aircraft for training purposes until
the full ITAS is installed and the aircraft have been finally
accepted. The corporation currently expects that the software
will be fully completed, installed and operational on all of the
Australia aircraft by the end of 2004.
The program for New Zealand, involving five aircraft with support
to serve the Royal New Zealand Navy, has essentially been
completed as the fifth and final aircraft was accepted by the New
Zealand government in the first quarter of 2003. The contract has
an anticipated value of about $190 million (US), of which about
98% has been recorded as revenue through June 30, 2003.
In a smaller program, the corporation has completed work on the
reactivation of four existing SH-2G aircraft previously in service
with the U.S. Navy Reserves for the government of Poland. Under
related contracts, the corporation is now providing spare parts
and training for Polish pilots, sensor operators and maintenance
personnel. Once training is completed, the aircraft are scheduled
to become operational aboard two Polish Navy FFG-7 class frigates.
- 13 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The corporation continues to pursue other opportunities for the
SH-2G helicopter in the international defense market. This market
is highly competitive and heavily influenced by economic and
political conditions. However, management continues to believe
that the aircraft is in a good competitive position to meet the
specialized needs of navies around the world that operate smaller
ships for which the SH-2G is ideally sized.
The corporation also maintains a consignment of the U.S. Navy's
inventory of SH-2 spare parts under a multi-year agreement that
provides the corporation the ability to utilize certain inventory
for support of its SH-2G programs.
Regarding the K-MAX program, the corporation continues to pursue
both a sale and short-term lease program for existing new and used
K-MAX aircraft inventory and will produce additional aircraft only
upon firm order by a customer. As previously reported, this
approach follows a 2002 market evaluation of the K-MAX helicopter
program which had experienced several years of significant market
difficulties. One K-MAX lease was entered into during the second
quarter of 2003 and one additional lease was entered into
subsequent to the end of the second quarter.
The Aerospace segment also performs aerostructure and helicopter
subcontract work for a variety of aerospace manufacturers and
produces proprietary self-lubricating bearings. This business
generated sales of $32.9 million in the second quarter of 2003
(about 52% of Aerospace segment sales) compared to $33.2 million
for same period a year ago (about 55% of this segment's sales).
This element of the segment is an area of strategic emphasis for
the corporation; however, the low current and projected near-term
build rates for commercial airliners affect this business
directly, making the market increasingly competitive and difficult
on an industry-wide basis.
Aerostructures subcontract work involves commercial and military
aircraft programs. Current programs include production of
assemblies such as wing structures and other parts for virtually
all Boeing commercial aircraft and the C-17 military transport.
Helicopter subcontract work involves commercial and military
programs. Current work includes multi-year contracts for
production of fuselages and rotor systems for various MD
Helicopters, Inc. (MDHI) aircraft. Total orders received from
MDHI are running at significantly lower rates than originally
anticipated due to lower than expected demand. The corporation's
investment in these contracts at August 14, 2003, consists of $5.2
million in billed receivables and $17.2 million in recoverable
costs - not billed (which includes start-up costs and other
program expenditures). The recoverability of unbilled costs will
- 14 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
depend to a significant extent upon MDHI's future requirements.
The corporation has also experienced difficulty with collection of
its billed receivables from this customer. From January 1, 2003
through August 14, 2003, the corporation has received several
partial payments. However, the corporation has stopped production
on these contracts while it works with MDHI to resolve payment
issues.
The segment manufactures proprietary self-lubricating bearings
used in aircraft flight controls, turbine engines and landing gear
and produces driveline couplings for helicopters. This business
continues to be affected by the drop-off in commercial and
regional aircraft manufacturing, although the effect has been
offset to some degree by increases in military programs. The
acquisition a year ago of RWG Frankenjura-Industrie Flugwerklager
GmbH ("RWG"), a small German specialty bearing manufacturer, is
expected to strengthen Kaman's presence in European markets.
Airbus Industrie is RWG's largest customer.
The Aerospace segment also produces advanced technology products.
Sales for the second quarter of 2003 were $11.3 million
(approximately 18% of Aerospace segment sales) compared to $13.5
million in the prior year period (about 22% of this segment's
sales). These products involve systems, devices and assemblies for
a variety of military and commercial applications, including safe,
arm and fuzing devices for several missile and bomb programs; high
reliability memory systems for airborne, shipboard, and ground-
based programs; precision non-contact measuring systems for
industrial and scientific use; and electro-optic systems for mine
detection and other applications. Management continues to expect
that this portion of the segment's business will benefit from
increased defense spending as materiel used in the war in Iraq is
replenished.
The corporation's Dayron operation, which was acquired in July
2002, is a weapons fuze manufacturer for a variety of munitions
programs and has the contract to develop a fuze for the U.S. Air
Force and Navy Joint Programmable Fuze (JPF) program. As a result
of qualification test results received during the first quarter of
2003, the corporation is implementing certain changes to the fuze
production process. The corporation is in the process of
completing the changes and conducting internal testing. Management
currently expects to resume final qualification testing during the
third quarter of 2003.
The corporation has divested two non-core portions of the
Aerospace Segment. Specifically, in the second quarter of 2002,
the corporation sold its microwave products line. That product
line was formerly associated with the Kaman Sciences Corp.
- 15 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
subsidiary which was sold in 1997. Microwave product sales were
about $2.0 million in the first half of 2002. In January 2003,
the corporation sold its Electromagnetics Development Center
(EDC), an electric motor and drive business that had sales of
approximately $7.7 million in the first half of 2002.
Industrial Distribution segment net sales for the second quarter
of 2003 were $121.9 million compared to $121.0 million a year
ago. Net sales for the first half of 2003 were $242.1 million
compared to $238.5 million a year ago. This segment distributes
more than 1.5 million power transmission and motion control items,
from bearings to complete material handling systems, through a
network of nearly 200 branches and regional distribution centers
in the U.S., Canada, and Mexico. The customer base includes over
50,000 businesses in nearly every sector of heavy and light
industry and as a result, this business is influenced by
industrial production levels and has been adversely affected by
continuing weakness in the economy. Cost reduction activity has
helped the segment remain profitable during this period and
management believes that when economic recovery occurs, the
segment will be in a good position to benefit due to its lean
operating posture.
Over the past several years, large companies have increasingly
centralized their purchasing through suppliers that can service
all of their plant locations across a wide geographic area. As
this trend continues, the corporation has expanded its presence in
geographic markets considered key to winning these customers
through acquisitions in the upper Midwest and Mexico, and the
selective opening of new branches. Efforts of this nature are
continuing. Success in the market requires a combination of
competitive pricing and value-added services that save the
customer money while helping it become more efficient and
productive. During the second quarter, this segment worked on
integrating new business with Campbell Soup Company (including
Pepperidge Farms), Hershey Foods, and Phelps Dodge.
As previously reported, this segment has experienced an increase
in the number of "John Doe" type legal proceedings filed against
it, generally relating to parts allegedly supplied to the U.S.
Navy's shipyard in San Diego, California by a predecessor company
over 25 years ago, that may have contained asbestos. Certain
claims filed in the past have been settled for nominal amounts,
with contribution from insurance carriers. Approximately sixty
claims are currently outstanding, involving the company among many
- 16 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
other defendants. Management believes that the segment has good
defenses to these claims, which it intends to assert and does not
currently expect that this situation will have a material adverse
effect on the corporation.
Music Distribution segment net sales for the second quarter of
2003 were $31.5 million, including $4.9 million from the
acquisition of Latin Percussion, Inc. ("LP") in October 2002,
compared to $27.7 million for the same period last year. For the
first half of 2003, net sales were $65.6 million, including $8.9
million contributed by LP, compared to $57.7 million in the same
period of 2002. This segment is America's largest independent
distributor of music instruments and accessories, offering more
than 10,000 products to retailers of all sizes, from national
chains to local shops. This segment's business is directly
affected by consumer confidence levels and results in the base
business to date in 2003 reflect a somewhat weak consumer
environment, although this has been more than offset by LP's
performance. LP is considered the world leader in hand percussion
instruments. The segment's distribution agreement with Gretsch
drums, and more recent agreements with Sabian cymbals and Elixir
strings are all contributing to segment performance.
The corporation's segments, in total, had net operating profits of
$11.3 million for the second quarter and $23.1 million for the six
months ended June 30, 2003 compared to net losses of $73.8 million
for the second quarter and $60.7 million for the six months ended
June 30, 2002. Second quarter and six-month period results for
2002 include pre-tax charges totaling $86.0 million covering cost
growth associated with the Australia SH-2G helicopter program, the
write-down of the K-MAX helicopter program assets, and the phasing
out of operations at the corporation's Moosup, Conn. plant.
For the second quarter of 2003, the Aerospace segment had
operating profits of $6.5 million (including the effect of $480
thousand in ongoing relocation and re-certification costs related
to the Moosup, Conn. plant closure)compared to an operating loss
of $78.0 million a year earlier as a result of the pre-tax
charges. For the first half of 2003, this segment had operating
profits of $13.7 million compared to an operating loss of $68.9
million in the 2002 period as a result of the pre-tax charges.
These results reflect reduced revenues in the segment's helicopter
programs and weakness in the commercial aerospace market. As a
whole, the Aerospace segment is experiencing a significant
underutilization of production capacity due to completion of the
New Zealand helicopter program and wind down of the Australia
helicopter program, the absence of new helicopter production
orders and continued softening in the commercial aerospace market.
- 17 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Because of the lower production levels, which have continued
throughout the first half of 2003, overhead expenditures are being
absorbed at higher rates by active programs, which has resulted in
higher costs and generally lower profitability for those programs.
As previously reported, this condition has necessitated
significant measures which are being taken to maintain Aerospace
segment profitability during this period, including staff
reductions and other cost-cutting measures in an attempt to bring
operating overheads in line with a lower revenue base. These
actions are expected to continue. In addition, the previously
announced closure of the corporation's aircraft manufacturing
plant in Moosup, Connecticut is scheduled to occur by the end of
2003. In connection with that plant closure, the corporation
recorded a charge of about $3.3 million in the second quarter of
2002 relating to severance costs at the Moosup and Bloomfield,
Connecticut locations which is expected to involve the separation
from service of approximately 400 employees (of which $1.1 million
had been paid for 174 such separations as of June 30, 2003). The
work performed at the Moosup facility will be relocated to other
company facilities.
Operating profits in the Industrial Distribution segment were $3.4
million in the second quarter of 2003 compared to $3.5 million in
the prior year period. This segment's operating profits for the
first half of 2003 were $6.2 million compared to $6.1 million in
the same period last year. These results reflect continuing
pricing pressures in the marketplace and continuing difficult
economic conditions affecting the segment's customer base. The
industry's practice of providing vendor incentives (i.e., vendors
provide inventory purchase rebates to distributors at specified
volume-purchasing levels) continues to be an important contributor
to this segment's operating profits.
The Music Distribution segment's operating profits for the second
quarter of 2003 were $1.4 million compared to $707 thousand the
previous year while operating profits for the six-month period
were $3.2 million compared to $2.1 million for the 2002 period.
The 2003 results are primarily due to the addition of LP.
Net earnings for the second quarter of 2003 were $3.3 million, or
$0.15 per share diluted, compared to a net loss of $50.4 million,
or $2.25 loss per share diluted in the 2002 period. For the six
months ended June 30, 2003, net earnings were $17.3 million, or
$0.75 per share diluted, compared to a net loss of $45.0 million,
or $2.01 loss per share diluted the previous year. The 2003 six-
month results include a pre-tax gain of $16.5 million from the
- 18 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
sale of the EDC operation in January. The 2002 six-month results
include a pre-tax gain of $1.9 million from sale of the company's
microwave product line.
For the six months ended June 30, 2003, net interest expense was
about $1.5 million compared to approximately $0.9 million in the
2002 time period.
The consolidated effective income tax rate for the period ended
June 30, 2003 was 38.9% compared to a tax recovery rate of 34.1%
for the same period last year.
In April 2003, The Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 149,
"Amendment to Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149") which is effective for the corporation
after June 30, 2003. SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for
hedging activities under SFAS 133. The corporation adopted SFAS
149 effective July 1, 2003 and that adoption did not have a
material impact on its consolidated results of operations or
financial position.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity" ("SFAS 150")
and is effective for the corporation on July 1, 2003. SFAS 150
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. The corporation adopted SFAS 150
effective July 1, 2003 and that adoption did not have a material
impact on its consolidated financial position.
Although the corporation has not been required to make a
contribution to its tax-qualified defined benefit pension plan
since 2000, for 2003 it expects to expense approximately $2.9
million and make a contribution of $1.4 million, based upon the
asset value of the pension trust fund as of December 31, 2002.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
- 19 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant accounting
policies are disclosed in the Notes to Consolidated Financial
Statements in the corporation's Annual Report on Form 10-K for the
year ended December 31, 2002. The most significant current areas
involving management judgments and estimates are described below.
Actual results could differ from those estimates.
LONG-TERM CONTRACTS - REVENUE RECOGNITION
- -----------------------------------------
Sales and estimated profits under long-term contracts are
principally recognized on the percentage-of-completion method of
accounting, generally using either a ratio that costs incurred
bear to estimated total costs, after giving effect to estimates of
costs to complete based upon most recent information for each
contract, or units-of-delivery as the measurement basis for effort
accomplished. Reviews of contracts are made regularly throughout
their lives and revisions in profit estimates are recorded in the
accounting period in which the revisions are made. Any
anticipated contract losses are charged to operations when first
indicated.
ACCOUNTS RECEIVABLE
- -------------------
Trade accounts receivable consist of amounts billed and currently
due from customers. The allowance for doubtful accounts reflects
management's best estimate of probable losses inherent in the
trade accounts receivable balance. Management determines the
allowance for doubtful accounts based on known troubled accounts,
historical experience, and other currently available evidence.
Billed amounts for U.S. Government, commercial, and other
government contracts consist of amounts billed and currently due
from customers. Recoverable costs and accrued profit - not billed
for U.S. Government, commercial, and other government contracts
primarily relate to costs incurred on contracts which are expected
to become billable upon future deliveries, achievement of specific
contract milestones or completion of engineering and service type
contracts.
- 20 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
INVENTORIES
- -----------
Inventory of merchandise for resale is stated at cost (using the
average costing method) or market, whichever is lower. Contracts
and work in process, and finished goods are valued at production
cost represented by material, labor and overhead, including
general and administrative expenses where applicable. Contracts
and work in process, and finished goods are not recorded in excess
of net realizable values.
GOODWILL AND OTHER INTANGIBLE ASSETS ACCOUNTING
- -----------------------------------------------
Goodwill and certain other intangible assets are no longer
required to be amortized but rather are evaluated at least
annually for impairment. The corporation utilizes discounted cash
flow models to determine fair value used in the goodwill and other
intangible asset impairment evaluations. Management's estimates
of fair value are based upon factors such as projected sales and
cash flows and other elements requiring significant judgments. The
corporation utilizes the best available information to prepare its
estimates and perform impairment evaluations; however, actual
results could differ significantly, resulting in the future
impairment of recorded goodwill and other intangible asset
balances.
VENDOR INCENTIVES
- -----------------
The corporation enters into agreements with certain vendors
providing for inventory purchase rebates that are generally earned
upon achieving specified volume-purchasing levels. The corporation
recognizes these rebates as a reduction in cost of goods sold as
rebates are earned. While management believes that the
corporation will continue to receive rebates from vendors, there
can be no assurance that vendors will continue to provide
comparable amounts in the future.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the six months of 2003, operating activities used a net
$10.9 million of cash, principally due to increased accounts
receivable and inventories in the Aerospace segment. In the
Aerospace segment, accounts receivable increased primarily due to
- 21 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
SH-2G programs, the largest element being the Australia program.
This was offset in part by a decrease in income taxes receivable
and an increase in income taxes payable, and also to some degree
by increases in accounts payable, mostly in the Industrial
Distribution segment.
During the first half of 2003, the largest element of cash
provided from investing activities consisted of the proceeds from
the sale of the EDC operation. Cash used in financing activities
for the first half of 2003 consisted of reductions in long-term
debt and payments of dividends to shareholders.
At June 30, 2003, the corporation had $21.6 million of its 6%
convertible subordinated debentures outstanding. The debentures
are convertible into shares of Class A common stock at any time on
or before March 15, 2012 at a conversion price of $23.36 per
share, generally at the option of the holder. Pursuant to a
sinking fund requirement that began March 15, 1997, the
corporation redeems approximately $1.7 million of the outstanding
principal of the debentures each year.
In November 2000, the corporation's board of directors approved a
replenishment of the corporation's stock repurchase program,
providing for repurchase of an aggregate of 1.4 million Class A
common shares for use in administration of the corporation's
stock plans and for general corporate purposes. As of June 30,
2003, a total of about 269,000 shares had been repurchased under
this replenishment program.
The corporation maintains a revolving credit agreement involving a
group of financial institutions. The agreement provides a maximum
unsecured line of credit of $225 million which consists of a $150
million commitment for five years, and a $75 million commitment
under a "364 day" arrangement which is renewable annually for an
additional 364 days, upon the consent of the banks. The entire
facility expires in 2005. The $75 million commitment is renewable
in November 2003. The most restrictive of the covenants contained
in the agreement requires the corporation to have EBITDA, as
defined, at least equal to 300% of net interest expense, on the
basis of a rolling four quarters and a ratio of consolidated total
indebtedness to total capitalization of not more than 55%. Late in
the second quarter of 2002, an amendment to the revolving credit
agreement was entered into, under which the non-cash portion of
charges taken in the second quarter of 2002 were excluded from the
financial covenant calculations.
Letters of credit are generally considered borrowings for purposes
of the revolving credit agreement. A total of $29.8 million in
- 22 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
letters of credit were outstanding at June 30, 2003 much of which
is related to the Australia SH-2G program. During the second
quarter, the letter of credit for the helicopter production
portion of the Australia program was reduced to a balance of $20
million, which will remain in place until final acceptance of the
aircraft by the RAN.
Total average bank borrowings were $42.6 million for the first
half of 2003 compared to $3.0 million in the same period of
2002. During 2002, cash in the amount of $51.2 million was used
for the acquisitions of RWG and Dayron in the Aerospace segment, a
sixty percent interest in Delamac de Mexico S.A. de C.V. in the
Industrial Distribution segment, and LP in the Music Distribution
segment. In connection with the acquisition of RWG, in July 2002
the corporation established a 9.5 million Euro term loan and
revolving credit facility with one of its revolving credit
agreement lenders having offices in London. In general, the
agreement contains the same financial covenants as the revolving
credit agreement described previously and the term of this
facility will expire at the same time as the revolving credit
agreement.
Management believes that the corporation's annual cash flow from
operations and available unused bank lines of credit under its
revolving credit agreement will be sufficient to finance its
working capital and other recurring capital requirements for the
foreseeable future.
FORWARD-LOOKING STATEMENTS
- --------------------------
This report contains forward-looking information relating to the
corporation's business and prospects, including the SH-2G and
K-MAX helicopter programs, aerostructures and helicopter
subcontract programs and components, advanced technology products,
the industrial and music 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 and thereafter
contract negotiations with government authorities, including
foreign governments; 2) political developments in countries where
the corporation intends to do business; 3) standard government
contract provisions permitting renegotiation of terms and
termination for the convenience of the government; 4) economic
and competitive conditions in markets served by the corporation,
particularly industrial production and commercial aviation, and
- 23 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
global economic conditions; 5) attainment of remaining project
milestones and satisfactory completion of the Australian SH-2G(A)
program; 6) recovery of the corporation's investment in the MD
Helicopters, Inc. contracts; 7) actual costs for moving equipment
and recertifying products and processes in connection with phase
out of the Moosup, Connecticut facility; 8) JPF program final
qualification test results and receipt of production orders; 9)
achievement of enhanced business base in the Aerospace segment in
order to better absorb overhead; 10) successful sale or lease of
existing K-MAX inventory; 11) profitable integration of acquired
businesses into the corporation's operations; 12) changes in
supplier sales or vendor incentive policies; 13) the effect of
price increases or decreases; and 14) currency exchange rates,
taxes, changes in laws and regulations, inflation rates, general
business conditions and other factors. Any forward-looking
information should be considered with these factors in mind.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
There has been no significant change in the corporation's exposure
to market risk during the quarter ended June 30, 2003. Please see
the corporation's annual report on Form 10-K for the year ended
December 31, 2002 for discussion of the corporation's exposure to
market risk.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based
on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures were
effective.
- 24 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 4. Controls and Procedures (continued)
We note, however, that even the most well designed and executed
control systems are subject to inherent limitations and as a
result, the control system can provide reasonable but not absolute
assurance that its objectives will be met under all potential
future conditions. The corporation's chief executive officer and
chief financial officer have concluded that the corporation's
disclosure controls and procedures are effective at a reasonable
assurance level.
(b) Internal Control Over Financial Reporting. There have not
been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act) during the fiscal quarter to which
this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal
control over financial reporting.
- 25 -
KAMAN CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits to Form 10-Q:
11 Earnings (Loss) Per Share Computation
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
(b) Reports on Form 8-K:
(1) A report on Form 8-K was filed on April 15, 2003
reporting the company's financial results for
the quarter ended March 31, 2003 and describing
actions taken at the shareholders' meeting on
April 15, 2003.
(2) A report on Form 8-K was filed on July 22, 2003
reporting the company's financial results
for the quarter ended June 30, 2003.
- 26 -
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: August 14, 2003 By: /s/ Paul R. Kuhn
-----------------------------
Paul R. Kuhn
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 2003 By: /s/ Robert M. Garneau
-----------------------------
Robert M. Garneau
Executive Vice President and
Chief Financial Officer
- 27 -
KAMAN CORPORATION AND SUBSIDIARIES
Index to Exhibits
Exhibit 11 Earnings (Loss) Per Share Computation Attached
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
- 28 -