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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, 2002.
--------------
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 (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, 2002:
Class A Common 21,773,524
Class B Common 667,814
Page 1 of 27 Pages
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets(In thousands)
Assets June 30, 2002 December 31, 2001
------ ------------------ -------------------
Current assets:
Cash and cash equivalents $ 13,213 $ 30,834
Accounts receivable (net of
allowance for doubtful
accounts of $3,909 in
2002, $3,939 in 2001) 200,365 186,798
Inventories:
Contracts and other
work in process $ 49,208 65,676
Finished goods 6,697 45,315
Merchandise for resale 86,817 142,722 86,409 197,400
------- -------
Income taxes receivable 7,118 342
Deferred income taxes 36,500 16,938
Other current assets 11,245 10,339
------- -------
Total current assets 411,163 442,651
Property, plant & equip., at cost 153,728 173,900
Less accumulated depreciation
and amortization 95,530 113,131
------- -------
Net property, plant & equipment 58,198 60,769
Goodwill 12,874 12,165
Other assets 6,170 6,361
------- -------
$488,405 $521,946
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 4,310 $ 4,038
Accounts payable 45,966 52,044
Accrued contract loss 18,495 -
Accrued restructuring costs 8,290 -
Other accrued liabilities 27,747 25,332
Advances on contracts 30,169 30,781
Other current liabilities 20,868 29,065
------- -------
Total current liabilities 155,845 141,260
Long-term debt, excl. current portion 21,566 23,226
Other long-term liabilities 25,959 23,879
Shareholders' equity 285,035 333,581
------- -------
$488,405 $521,946
======= =======
- 2 -
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,
--------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $209,378 $194,641 $432,741 $439,333
Costs and expenses:
Cost of sales* 228,800 167,865 391,483 350,557
Selling, general and
administrative expense 50,083 47,272 101,490 96,319
Restructuring costs** 8,290 - 8,290 -
Interest (income)/expense, net 421 18 867 (8)
Other (income)/expense, net (1,280) (2,044) (1,064) (2,531)
-------- -------- -------- --------
286,314 213,111 501,066 444,337
-------- -------- -------- --------
Earnings (loss)before
income taxes (76,936) (18,470) (68,325) (5,004)
Income taxes (benefit) (26,570) (5,975) (23,300) (1,250)
-------- -------- -------- --------
Net earnings (loss) $(50,366) $(12,495) $(45,025) $ (3,754)
======== ======== ======== ========
Net earnings (loss)per share:
Basic $ (2.25) $ (.56) $ (2.01) $ (.17)
Diluted*** $ (2.25) $ (.56) $ (2.01) $ (.17)
======== ======== ======== ========
Dividends declared per share $ .11 $ .11 $ .22 $ .22
======== ======== ======== ========
* Cost of sales for 2002 includes the write-off of K-MAX assets of $50,000
and Moosup facility assets of $2,679 and are associated with the charge
taken in the Aerospace segment.
**Restructuring costs relate to the closure of the Moosup facility in 2003
and are associated with the charge taken in the Aerospace segment.
***The calculated diluted per share amounts for 2002 and 2001 are
anti-dilutive, therefore, amounts shown are equal to the basic per share
calculation.
- 3 -
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,
--------------------
2002 2001
------- -------
Cash flows from operating activities:
Net earnings (loss) $(45,025) $ (3,754)
Depreciation and amortization 5,698 5,654
Net gain on sale of product line and other assets (1,904) (2,640)
Restructuring costs 8,290 -
Non-cash write-down of assets 52,679 -
Deferred income taxes (19,596) -
Other, net 1,753 585
Changes in current assets and liabilities,
excluding effects of acquisition/divestiture:
Accounts receivable (13,300) 26,043
Inventory (55) 5,480
Income taxes receivable (6,776) (14,896)
Accounts payable - trade (7,034) (13,893)
Accrued contract loss 18,495 -
Advances on contracts (612) (6,201)
Changes in other current assets and liabilities (7,751) (834)
------- -------
Cash provided by (used in) operating activities (15,138) (4,456)
------- -------
Cash flows from investing activities:
Proceeds from sale of product line and other assets 7,500 4,038
Expenditures for property, plant & equipment (2,752) (2,991)
Acquisition of business, less cash acquired (1,724) -
Other, net 62 (44)
------- -------
Cash provided by (used in) investing activities 3,086 1,003
------- -------
Cash flows from financing activities:
Changes to notes payable 184 172
Reductions to long-term debt (1,660) (1,660)
Dividends paid (4,913) (4,906)
Proceeds from exercise of employee stock plans 820 747
------- -------
Cash provided by (used in) financing activities (5,569) (5,647)
------- -------
Net increase (decrease) in cash and cash equivalents (17,621) (9,100)
Cash and cash equivalents at beginning of period 30,834 48,157
------- -------
Cash and cash equivalents at end of period $ 13,213 $ 39,057
======= =======
- 4 -
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, 2001 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 2001 Annual Report.
Restructuring Costs
- --------------------
The Corporation's Aerospace segment recorded pre-tax
restructuring costs of $8,290 in the second quarter of 2002 for
the cost of phasing out the company's aircraft manufacturing
plant in Moosup, Connecticut in 2003. The charges represent
severance costs of $3,290 at the Moosup and Bloomfield, Conn.
locations of approximately 409 employees and the cost of closing
the facility of $5,000. An additional $8,300 of ongoing pre-tax
costs are expected to be incurred in the second half of 2002 and
later periods, mostly in 2003, for moving machinery to other
company facilities and for recertifying products and processes
Asset Write-Downs/Write-Offs
- ----------------------------
During the second quarter of 2002, as a result of management's
current evaluation of the K-MAX program, the Aerospace segment
wrote-down its K-MAX helicopter program assets, including
$46,665 for inventories and $3,335 for fixed assets. In addition,
the segment wrote-off Moosup facility assets of $2,679, as a
result of the previously described facility closure. These
charges are included in cost of sales for 2002.
- 5 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Restructuring Costs and Asset Write-Downs/Write-Offs
- ----------------------------------------------------
The following table displays the activity and balances of these
pre-tax charges as of June 30, 2002:
Deductions
----------
Total Cash Non-Cash Balance at
Charge Payments Charges June 30, 2002
------ -------- -------- -------------
Restructuring costs
- -------------------
Employee termination
benefits $ 3,290 $ - $ - $ 3,290
Facility closings 5,000 - - 5,000
------ ------ ------ ------
Total restructuring costs 8,290 - - 8,290
------ ------ ------ ------
Asset write-downs/write-offs
- ----------------------------
Inventory 46,665 - 46,665 -
Fixed assets 6,014 - 6,014 -
------ ------ ------ ------
Total asset write-downs 52,679 - 52,679 -
------ ------ ------ ------
Total $60,969 $ - $52,679 $ 8,290
====== ====== ====== ======
Accrued Contract Loss
- ---------------------
During the second quarter of 2002, the Corporation's Aerospace
segment recorded a pre-tax charge of $25,000 for estimated cost
growth on the Australia SH-2G(A) helicopter program, which has
put the contract in a loss position. Accordingly, the Company
has eliminated the $6,505 profit element of previously recorded
sales and has recognized pre-tax loss accruals of $18,495 for
anticipated cost growth associated with completion of the
aircraft, final integration and testing of the aircraft's
advanced Integrated Tactical Avionic System (ITAS) software.
In the second quarter of 2001, the Aerospace segment recorded a
sales and pre-tax earnings adjustment of $31,181, substantially
all of which was associated with a change in estimated costs to
complete the SH-2G(A) helicopter program.
- 6 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands except share amounts)
Amendment to Revolving Credit Agreement
- ---------------------------------------
During the second quarter of 2002, the Corporation's Revolving
Credit Agreement was amended to exclude the non-cash portion of
the 2002 second quarter charges, up to $52,500, from the
financial covenant calculations under the Agreement.
Net Gain on Sale of Product Line and Other Assets
- -------------------------------------------------
Included in "Other (income)/expense, net" for the 2002 second
quarter and six month results is a pre-tax $1,928 gain from the
sale of the Company's microwave products line. The 2001 second
quarter and six months results included gains from the sale of
facilities of $677 in the first quarter and an additional $2,002
in the second quarter.
Cash Flow Items
- ---------------
Cash payments for interest were $1,086 and $1,135 for the six
months ended June 30, 2002 and 2001, respectively. Cash
payments for income taxes for the comparable periods were
$2,428 and $13,281, respectively.
Comprehensive Income/(Loss)
- ---------------------------
Comprehensive income (loss) was $(44,955) and $(3,794) for the
six months ended June 30, 2002 and 2001, respectively.
Comprehensive income (loss) was $(50,302) and $(12,398) for the
three months ended June 30, 2002 and 2001, respectively. The
changes to net earnings (loss)used to determine comprehensive
income (loss) are foreign currency translation adjustments.
- 7 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands except share amounts)
Shareholders' Equity
- --------------------
Changes in shareholders' equity were as follows:
Balance, January 1, 2002 $333,581
Net earnings (loss) (45,025)
Foreign currency translation adjustment 70
--------
Comprehensive income/(loss) (44,955)
Dividends declared (4,929)
Employee stock plans 1,338
--------
Balance, June 30, 2002 $285,035
========
Recent Accounting Standards
- ---------------------------
In June 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). This statement provides guidance on
the recognition and measurement of liabilities associated with
disposal activities and is effective for the Corporation on
January 1, 2003. The Corporation is currently reviewing the
provisions of SFAS No. 146 to determine the standard's impact
upon adoption.
Subsequent Events
- -----------------
On July 1, 2002, the Corporation completed its acquisition of
Dayron, a weapons fuze manufacturer, located in Orlando, Florida
In late July, the Corporation acquired RWG Frankenjura-Industrie
Flugwerklager GmbH (RWG), a German aerospace bearing
manufacturer. The Corporation used approximately $32,200 for these
acquisitions.
- 8 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands except share amounts)
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
-------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales:
Aerospace $ 60,426 $ 54,554 $136,027 $146,712
Industrial Distribution 121,034 113,033 238,475 236,104
Music Distribution 27,681 26,751 57,732 56,011
------- ------- ------- -------
$209,141 $194,338 $432,234 $438,827
======== ======== ======== ========
Operating profit (loss):
Aerospace $(78,024) $(20,929) $(68,874) $(10,740)
Industrial Distribution 3,464 3,582 6,057 8,660
Music Distribution 707 563 2,062 1,882
------- ------- ------- -------
$(73,853) $(16,784) $(60,755) $ (198)
Interest, corporate and
other expense, net (3,083) (1,686) (7,570) (4,806)
-------- -------- -------- --------
Earnings (loss)
before income taxes $(76,936) $(18,470) $(68,325) $ (5,004)
======= ======= ======= =======
June 30, December 31,
2002 2001
-------- --------
Identifiable assets:
Aerospace $280,249 $302,076
Industrial Distribution 143,482 134,974
Music Distribution 46,543 45,783
Corporate 18,131 39,113
-------- --------
$488,405 $521,946
======== ========
- 9 -
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
- ---------------------
In the quarter ended June 30, 2002, the corporation recorded pre-
tax charges totaling $86.0 million (of which $52.7 million are
non-cash) to cover the write-down of K-MAX (registered trademark)
helicopter assets, principally inventories; for cost growth
associated with the Australia SH-2G (A) program; and to phase out
operations at its Moosup, Conn. plant. Details are discussed
below.
Consolidated revenues for the quarter ended June 30, 2002, were
$209.4 million, compared to $194.6 million the previous year.
Consolidated revenues for the first six months of 2002 were
$432.7 million compared to $439.3 million for the first half of
2001. Revenue in the three and six month periods ended June 30,
2002 were reduced by $6.5 million as a result of the Australia
program adjustment. The 2001 quarter and first half revenues were
reduced by $31.2 million, reflecting a sales and pre-tax earnings
adjustment taken in that year's second quarter relating
principally to cost growth for the Australia program.
Aerospace segment net sales for the second quarter of 2002 were
$60.4 million, compared to $54.6 million in the previous year.
Excluding the impact of the Australia program adjustments, sales
for the 2002 quarter were $66.9 million, compared to $85.8
million in 2001. These results reflect reduced helicopter program
revenues as the Australia and New Zealand SH-2G programs mature
and the lack of K-MAX helicopter sales in both periods. Aerospace
segment sales for the first six months of 2002 were $136.0
million, compared to $146.7 million the previous year. Excluding
the impact of the Australia program adjustments, sales in the
first half of 2002 were $142.5 million, compared to $177.9
million in 2001.
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 driveline 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. For the second quarter, these programs
together constitute about 23 percent of Aerospace segment sales
compared to 21 percent a year ago, including the adjustments.
SH-2G retrofit helicopter sales represent virtually all of the
- 10 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
segment's helicopter program sales. These percentages reflect
reduced revenues from the SH-2G helicopter programs for Australia
and New Zealand as those programs mature as well as the absence
of K-MAX helicopter sales in both periods.
The $86.0 million in pre-tax charges include a non-cash $50.0
million charge for the write-down of K-MAX helicopter program
assets, including $46.7 million for inventories and $3.3 million
for fixed assets associated with the program. Development costs
for the aircraft were previously written off.
The K-MAX helicopter program, for which the corporation has
maintained a substantial inventory, has experienced significant
market difficulties in the past several years. There have been
no sales of this helicopter since the first quarter of 2001.
Following a market evaluation of the program, management has
decided to produce further aircraft only upon firm order by a
customer and to pursue both a sale and short-term lease program
for existing new and used K-MAX aircraft inventory. In connection
with this decision, the corporation has written down the value of
existing aircraft, excess spare parts and equipment inventories
and going forward will continue to maintain adequate inventories
and personnel to support the fleet.
The 2002 pre-tax charges also include the impact of $25.0 million
of additional cost growth in the Australia SH-2G helicopter
program, which has put the contract in a loss position.
Accordingly, the corporation has eliminated the $6.5 million
profit element of previously recorded sales and has recognized
pre-tax loss accruals of $18.5 million for anticipated cost
growth associated with completion of the aircraft, and final
integration and testing of the aircraft's advanced Integrated
Tactical Avionics System (ITAS) software. This program involves
eleven (11) helicopters with support, including a support
services facility, for the Royal Australian Navy. The total
contract has an anticipated value of about $700 million (US).
The helicopter production portion of the work is valued at $580
million, of which about 88% has now been recorded as revenue,
including the 2002 second quarter adjustment. Ten of the
aircraft are substantially complete. All of the aircraft
presently lack the full ITAS software because the corporation has
been required to select new subcontractors to complete ITAS
software development as a result of a contract dispute settlement
with the original software supplier. One result of the new
subcontractor arrangements is that Kaman now has responsibility
- 11 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
for aircraft system integration (previously a subcontracted
task). Work with the new subcontractors is proceeding and the
corporation continues its discussions with the Royal Australian
Navy to develop an acceptable plan for completion of aircraft
Deliveries with the full ITAS software, which plan is expected to
include phased acceptance of the aircraft. The corporation
anticipates that the fully completed ITAS software will be
installed and operational by the end of 2004. When equipped with
the full ITAS, the SH-2G(A)helicopter will have the most
sophisticated, integrated cockpit and weapons system available in
an intermediate weight helicopter.
The program for New Zealand involves five (5) aircraft, and
support, for the Royal New Zealand Navy. The contract has an
anticipated value of about $186 million (US), of which about 97%
has now been recorded as revenue. Four SH-2G(NZ) helicopters
have been delivered and have completed final acceptance by the
New Zealand Defence Force. The fifth aircraft, ordered on option
under the original contract, is scheduled for delivery before the
end of 2002.
In June, the corporation received a $4.2 million contract to
support 10 SH-2G aircraft already in service with the Egyptian
Air Force primarily in anti-submarine warfare and utility roles.
The corporation is also in a competition to supply up to six
search and rescue helicopters to Egypt. Previously, the
corporation has indicated that it does not expect an award to be
made prior to the fourth quarter of 2002. Events in that region
of the world are now making it more difficult to estimate when
the government might act upon this procurement.
In February, the corporation received a small initial contract
from the U.S. Navy to begin a process towards refurbishing four
existing SH-2G aircraft previously in service with the U.S. Navy
Reserves to operate aboard two Polish Navy frigates in multi-
mission roles such as surface surveillance and anti-submarine
warfare. The corporation also expects to contract for follow-on
work to provide for reactivation of the aircraft, modifications,
pilot, sensor and mechanic training, as well as initial spare
parts and ongoing contractor engineering and technical support.
The corporation is actively pursuing other opportunities for the
SH-2G helicopter in the international defense market. Management
- 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)
believes 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, while
also recognizing that this market is highly competitive and
influenced by economic and political conditions.
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 ability to utilize certain inventory for support of
the corporation's SH-2G programs.
Also included in the second quarter 2002 pre-tax charges is $11.0
million for the cost of phasing out the corporation's aircraft
manufacturing plant in Moosup, Connecticut, in 2003. The work
performed at that facility, the corporation's oldest and least
efficient, will be relocated to other company facilities. The
charge represents severance costs of about $3.3 million at the
Moosup and Bloomfield, Conn. locations which is expected to
involve the separation from service of approximately 409
employees; asset write-offs of about $2.7 million; and $5.0
million for the cost of closing the facility. An additional
$8.3 million of ongoing pre-tax costs are expected to be
incurred in the second half of 2002 and later periods, mostly
in 2003, for moving machinery and recertifying products and
processes.
The Aerospace segment also performs aerostructure and helicopter
subcontract work for a variety of aerospace manufacturing
programs as well as manufacture of proprietary self-lubricating
bearings. This work currently constitutes about 55% of Aerospace
segment sales, compared to about 58% a year ago.
Aerostructures subcontract work involves commercial and military
aircraft programs. Current programs include production of
various structures for virtually all Boeing commercial aircraft
and major structural assemblies for the C-17 military transport.
During the second quarter, the corporation received a new
contract from Boeing related to the production and fabrication of
an additional group of subassemblies that will become part of
aircraft fuselages, wings and tail structures for Boeing 747,
757, 767 and 777 families of commercial airplanes. Under this new
contract, the Aerospace segment will receive and assemble parts
from other suppliers and ship higher-level assemblies to Boeing.
- 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)
Helicopter subcontract work involves commercial helicopter
programs. Current work includes the production of fuselages and
rotor systems for various MD-Helicopters, Inc. programs. This
work is now projected to run at significantly lower sales rates
than originally anticipated.
The segment's proprietary self-lubricating bearings are used in
aircraft flight controls, turbine engines and landing gear as
well as 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 commercial aftermarket and
military programs. In late July, the corporation acquired RWG
Frankenjura-Industrie Flugwerklager GmbH (RWG), a German
aerospace bearing manufacturer that complements the corporation's
proprietary line of bearings and provides a presence in European
aerospace markets. The German company had sales of about US $10
million in 2001 and its largest customer is Airbus Industries.
Management considers the aircraft structures and components
operations to be a growth business and has placed strategic
emphasis on building revenues in this area, both internally and
by acquisition. Specifically, in December 2001, the Corporation
acquired Plastic Fabricating Company, Inc., a Wichita, Kansas
manufacturer of composite parts and assemblies for aerospace
applications. This acquisition provides the segment with a
presence in one of the largest aerospace manufacturing areas in
the United States and complements its existing composites and
metal bonding operations.
The Aerospace segment also produces advanced technology products,
which accounted for approximately 22% of Aerospace segment
revenues in the second quarter of 2002, about the same as
the prior year period. This portion of the segment's business is
benefiting from increased defense spending. Products include
safe, arm and fuzing devices for several missile programs; high
reliability memory systems for airborne, shipboard, and ground-
based applications; precision non-contact measuring systems for
industrial and scientific use; and high-power permanent magnet
motors used commercially in the oil service and transportation
industries and for military uses.
- 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)
On July 1, the corporation completed its acquisition of Dayron,
(a division of DSE, Inc.) a weapons fuze manufacturer, located
in Orlando, Florida. Dayron manufactures bomb fuzes for a
variety of munitions programs, and has the contract to develop
a fuze for the Air Force Joint Programmable Fuze (JPF) program.
The Corporation expects to receive the results of qualification
testing for the JPF program late in the first quarter of 2003.
Dayron had sales of approximately $14 million for calendar year
2001.
The corporation is part of the industry team selected by the U.S.
Navy to design the integrated electric drive system for the
Navy's DD(X) next generation surface vessel. The DD(X) contract
award has not yet been made pending resolution of the losing
team's protest, and then final contract negotiations. The
corporation also received small contracts during the quarter to
supply permanent magnet motors and electronic drives for an
advanced technology bus program in Boston and for oil and gas
drilling rigs.
During the second quarter, the corporation sold its microwave
products line, which had sales of about $7.5 million in 2001.
That product line was associated with the former Kaman Sciences
Corp. subsidiary which was sold in 1997 to ITT Industries and was
no longer core to the segment's advanced technology business.
Industrial Distribution segment net sales for the second quarter
of 2002 were $121.0 million (including $9.8 million from recent
acquisitions) compared to $113.0 in the 2001 quarter. For the
six-month period, segment net sales were $238.5 million
(including $17.3 million from recent acquisitions) compared to
$236.1 million the previous year. Without acquisitions, 2002
second quarter sales were only slightly below the prior year
period, the best quarterly year to year comparison since the
fourth quarter of 2000.
Since the segment's customers include nearly every
sector of U.S. industry, this business is influenced by
industrial production levels and has been adversely affected by
the conditions in the manufacturing sector that have existed
since late 2000. While there is some indication that the
manufacturing sector is slowly starting a recovery, there is
some concern that the U.S. economy could relapse into recession
later this year. If the recovery does occur, management believes
- 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)
that this segment will be in a good position to benefit later
this year (since historically the industrial distribution
industry tends to experience recovery several months after the
upturn actually begins). Ongoing cost reduction activity has
helped the segment to remain profitable despite difficult
economic conditions for its customer base.
The Industrial Distribution segment's 2002 results include
A-C Supply of Milwaukee, Wisconsin, which was acquired in
September 2001. During the first quarter, the corporation also
acquired a 60% interest in Delamac de Mexico S.A. de C.V.
("Delamac"), a leading distributor of industrial products
headquartered in Mexico City. These acquisitions expand the
segment's presence into new geographical areas and improve its
ability to serve national account customers. These acquisitions
also represent incremental steps in the corporation's overall
strategy of building the value of its businesses through
acquisitions and internal growth. Operating results for A-C
Supply have thus far been marginal as market conditons continue
to be very soft. Management is working to integrate this
operation into the segment.
Music Distribution segment net sales were $27.7 million for the
second quarter of 2002 compared to $26.8 million the previous
year. Net sales for the first half of 2002 were $57.7 million,
compared to $56.0 million in the 2001 period. The segment had a
good quarter despite sluggishness in both domestic and
international markets. Sales to large domestic national chain
stores were slower than had been anticipated, however there were
some gains in the balance of the segment's customer base.
During the second quarter, the Music segment began distributing
Sabian cymbals and percussion accessories as part of its line of
premium products. In addition, this segment is now in the second
year of its exclusive distribution and sales license with Fred
Gretsch Enterprises and has successfully launched the high
quality Gretsch drum kit lines in domestic and foreign markets.
As a result of the charges previously described, for the quarter
and six-months ended June 30, 2002, the corporation's segments,
in total, experienced a net loss of $73.8 million and $60.7
million, respectively, compared to a net loss of $16.8 million
and $198 thousand for the prior year periods. The 2001 periods
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KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
include a $31.2 million sales and pre-tax earnings adjustment,
primarily attributable to the Australia SH-2G program.
As a result of the charges previously described, the Aerospace
segment had operating losses of $78.0 million and $68.9 million
for the three-month and six-month periods of 2002 compared to an
operating loss of $20.9 million and $10.7 million in the
comparable periods of 2001. Excluding the 2002 pre-tax charges
and the 2001 sales and pre-tax earnings adjustment, operating
profit for the Aerospace segment was $8.0 million for the second
quarter of 2002, compared to $10.3 million the previous year.
Excluding the 2002 charges and 2001 adjustment, for the first
half of 2002, the Aerospace segment had an operating profit of
$17.1 million compared to $20.5 million the previous year. These
results reflect reduced revenues in the segment's helicopter
programs.
Operating profit for the Industrial Distribution segment was
$3.5 million for the second quarter and $6.1 million for the six-
month period, compared to $3.6 million and $8.7 million in the
comparable 2001 time periods. Results reflect intense pricing
pressures in the marketplace and very difficult economic
conditions affecting the segment's customer base.
Operating profit for the Music Distribution segment was $707
thousand in the second quarter and $2.1 million for the six
months ended June 30, 2002 compared to $563 thousand and $1.9
million for the comparable periods of 2001.
For the six months ended June 30, 2002, interest expense was
about $1.1 million, level with the same period of 2001. For the
six months ended June 30, 2002, interest income was $190
thousand, compared to $1.1 million the previous year. These
amounts are netted together on the Condensed Consolidated
Statements of Operations.
Other income for the quarter and six-months ended June 30, 2002
includes a pre-tax $1.9 million gain from the sale of the
corporation's microwave products line. The 2001 periods included
gains from the sale of facilities of $0.7 million in the first
quarter and an additional $2.0 million in the second quarter.
The tax benefit for the first half of 2002 is calculated at
approximately 34% and represents the combined estimated federal
and state tax effect attributable to the second quarter loss. In
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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 2001 period, the corporation adjusted its estimated tax rate
to 25 percent, primarily due to reduced tax considerations on the
Australian helicopter program.
Including the pre-tax charges, the corporation reported a net
loss for the second quarter of $50.4 million, or $2.25 loss per
share diluted, compared to a net loss of $12.5 million, or $0.56
net loss per share diluted in the 2001 second quarter. Excluding
the charges, 2002 second quarter net earnings were $5.6 million,
or $0.25 per share diluted. The 2001 second quarter loss
included the $31.2 million sales and pre-tax adjustment
associated with the change in estimated costs to complete the
Australia SH-2G program. Excluding the adjustment, 2001 second
quarter net earnings were $8.3 million, or $0.36 per share
diluted. For the first half of 2002, including the $86.0 in pre-
tax charges, the corporation reported a net loss of $45.0
million, or $2.01 loss per share diluted, compared to a net loss
of $3.8 million, or $0.17 loss per share diluted in the same
period last year. Excluding the charges, the 2002 six-month net
earnings were $11.0 million, or $0.48 per share diluted.
Excluding the 2001 adjustment, six month earnings for that year
were $17.0 million, or $0.74 per share diluted.
In June 2002,the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). This statement provides guidance on the recognition and
measurement of liabilities associated with disposal activities
and is effective for the corporation on January 1, 2003. The
corporation is currently reviewing the provisions of this
statement to determine its impact upon adoption.
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 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, 2001. The
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KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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 periodically
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.
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.
Liquidity and Capital Resources
- -------------------------------
During the first half of 2002, operating activities used $15.1
million in cash, principally due to increased accounts receivable
in the Aerospace and Industrial Distribution segments. Aerospace
accounts receivable increased principally as a result of the
Australian SH-2G helicopter program and the MD helicopter
subcontract work, while Industrial Distribution receivables were
higher as a result of increased sales compared to the
traditionally weaker fourth quarter of the prior year. Cash was
also used as accounts payable and other liabilities decreased
during the first half of 2002, principally in the Aerospace
segment. Cash flow for the six-month period was generally not
affected by the $86.0 million second quarter charges previously
described because $52.7 million of the charges were non-cash in
nature and $6.5 million consisted of a write-down of receivables.
Additionally, $8.3 million of the Moosup restructuring and the
$18.5 million loss accrual attributable to the Australia SH-2G
program are expected to be spent in later 2002 and future
- 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)
periods. The charges are expected to result in a tax benefit of
about 34 percent and actual cash recovery will be deferred into
2003 and future periods.
During the first half of 2002, cash was generated from investing
activities principally due to the sale of the microwave products
line. This was offset to some degree by the acquisition of
Delamac and by the purchase of items such as machinery and
computer equipment. Cash used by financing activities was
primarily attributable to the payment of dividends to
shareholders and to a lesser degree the sinking fund requirement
for the corporation's debentures (described below).
At June 30, 2002, the corporation had $23.2 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. No shares were
purchased during the first half of 2002. As of June 30, 2002,
a total of almost 212,000 shares have been repurchased under the
program.
The corporation maintains a revolving credit agreement involving
a group of financial institutions. The agreement has a maximum
unsecured line of credit of $225 million which consists of a $150
million commitment for 5 years, which expires in 2005, 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 most restrictive of the covenants contained
in the new agreement requires the corporation to have EBITDA, as
defined, at least equal to 300% of net interest expense and a
ratio of consolidated total indebtedness to total capitalization
of not more than 55%. Prior to the end of the second quarter,
management discussed the potential for second quarter charges
with the bank group and in late June, an amendment to the
- 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)
revolving credit agreement was entered into, under which the
non-cash portion of the 2002 second quarter charges, up to
$52.5 million, can be excluded from the financial covenant
calculations.
Letters of credit are generally considered borrowings for
purposes of the revolving credit agreement. A total of $51.0
million in letters of credit are currently outstanding under
the agreement, most of which is related to the Australia SH-2G
program. Reductions to the Australia letters of credit are
anticipated as agreed upon performance milestones are reached
and as the corporation and the Australian government agree upon
a process for completion of delivery of the SH-2G(A) aircraft
with the full ITAS software.
Total average bank borrowings were $3.0 million and $2.1 million
for the six months ended June 30, 2002 and 2001, respectively.
Subsequent to June 30,2002, cash in the amount of approximately
$32.2 million was used for the acquisitions of Dayron and RWG. In
connection with the acquisition of RWG, in July the corporation
established a 10 million Euro term loan and revolving credit
facility with one of its revolving credit agreement lenders
having offices in London. In general, the term of this facility
will expire at the same time as the five-year revolving credit
facility described previously.
Management believes that the corporation's 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, helicopter structures,
and components, advanced technology products, including fuzes for
the JPF program, 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
- 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)
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, including industry consolidation in the United
States and global economic conditions; 5) timing of satisfactory
completion of the Australian SH-2G(A) program; 6) sales under the
MDHI helicopter subcontract program; 7) actual costs for moving
equipment and recertifying products and processes in connection
with phase out of the Moosup, Connecticut facility; 8) JPF
program qualification test results; 9) timing, degree and scope
of market acceptance for products such as a repetitive lift
helicopter; 10) U.S. industrial production levels; 11) changes in
supplier sales policies; 12) the effect of price increases or
decreases; and 13) 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
The corporation has various market risk exposures that arise
from its normal business operations, including currency exchange
rates, supplier price changes, and interest rates as well as
other factors described in the Forward-Looking Statements
section of this report.
The corporation's exposure to currency exchange rates is managed
at the corporate and subsidiary operations levels as an integral
part of the business.
The corporation's exposure to supplier sales policies and price
changes relates primarily to its distribution businesses and
the corporation seeks to manage this risk through its
procurement policies and maintenance of favorable relationships
with suppliers.
The corporation's exposure to interest rate risk relates
primarily to its financial instruments, and is managed through
the use of a combination of short-term investments with market
interest rates, long-term debt obligations with fixed interest
- 22 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 3. Quantitative and Qualitative Disclosures About
Market Risk (Continued)
rates, and revolving credit facilities with variable interest
rates. Fees and interest rates charged on revolving credit
commitments and borrowings are based upon borrowing levels,
market interest rates, and the corporation's credit rating.
Letters of credit are generally considered borrowings for
purposes of the corporation's revolving credit agreement.
While there has been no significant change in the corporation's
exposure to these market risk factors during the second quarter
of 2002, the corporation anticipates an increase in bank
borrowings during 2002, principally for planned acquisitions.
Management believes that any near-term change in the market
risk factors described above should not materially affect the
consolidated financial position, results of operations or cash
flows of the corporation.
- 23 -
KAMAN CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 25, 2002, a motion was filed in the United States
District Court for the District of Oregon in the case of Robert
G. Baker v. Kaman Aerospace Corporation, K-MAX Corporation,
and Kamatics Corporation (all subsidiaries of the Corporation)
seeking to amend the complaint in this action to include a claim
for punitive damages in the amount of $25 million. The original
complaint was filed on April 2, 2001 by Mr. Baker as a claim for
$10 million in damages for economic and non-economic injuries
arising out of an accident involving one of the corporation's
K-MAX helicopters alleged to have been caused by the failure of a
clutch assembly on the aircraft. The corporation is engaged in
a vigorous defense of the case and has objected to the motion for
punitive damages. A suit has been filed against the Corporation
by the customer's hull insurer in the same accident and there are
three other cases pending against the Corporation in which
damages sustained in two other accidents involving K-MAX
helicopters are alleged to have been caused by similar equipment
failures. The corporation believes that neither the Baker claim
nor any of the earlier claims is or will be material to the
business of the corporation, either individually or in the
aggregate. Further, management believes that each claim is
covered by insurance, subject to applicable deductibles, and in
the case of a punitive damage claim, provided that insurance
coverage is permitted under applicable law and public policy.
In addition, on April 5, 2002, Kaman Music Corporation, a
subsidiary of the corporation, together with a number of other
unrelated parties, received from the U.S. Environmental
Protection Agency ("EPA") Special Notice Letters ("SNL") advising
of potential liability with respect to the Barkhamsted-New
Hartford Landfill Superfund Site (the "Site"), located in
Barkhamsted, Connecticut. Through the SNL, the EPA seeks a
commitment for the performance of a "monitored natural
attenuation" groundwater remedy at the Site. Since receiving the
SNL, the corporation and other parties have been negotiating with
EPA and each other over the terms of a potential settlement.
Based on such negotiations, the corporation believes that it may
have the opportunity to enter into agreements releasing it from
substantially all current responsibility for such remedy in
exchange for payments totaling approximately $200,000.
Negotiations are continuing. The corporation previously settled
its responsiblity for the initial stages of investigation and
study for the Site in the mid-1990s for a similar amount.
- 24 -
KAMAN CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits to Form 10-Q:
3(ii) Bylaws of the Corporation
10 Amendment No. 1 to Revolving Credit
Agreement dated as of June 28, 2002
11 Earnings (Loss) Per Share Computation
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Report on Form 8-K filed in the second quarter of
2002:
(1) A report on Form 8-K was filed on May 20,2002,
reporting that the Company has signed an
agreement to acquire the Dayron division of
DSE, Inc., a privately held company based in
Orlando, Florida.
(2) A report on Form 8-K was filed on June 14,
2002, reporting that the Company will phase
out operations at Kaman Aerospace's Moosup,
Connecticut manufacturing plant over the next
12-18 months. The facility is expected to be
closed by the end of 2003.
(c) Report on Form 8-K filed subsequent to the second
quarter of 2002:
(1) A report on Form 8-K was filed on July 24, 2002,
reporting that the Company has signed an
agreement to acquire the privately held German
aerospace bearing manufacturing company, RWG
Frankenjura-Industrie Flugwerklager GmbH,
headquartered in Dachsbach, Germany.
(2) A report on Form 8-K was filed on August 1,
2002, reporting the Company's financial results
for the second quarter and six months ended
June 30, 2002. In the quarter, the Company
recorded pre-tax charges totaling $86.0 million
(of which $52.7 million are non-cash) to cover
the write down of K-MAX helicopter assets,
principally inventories; for cost growth
associated with the Australian SH-2G(A)
helicopter program; and to phase out operations
at its Moosup, Conn. plant.
- 25 -
KAMAN CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
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, 2002 By: /s/ Paul R. Kuhn
-----------------------------
Paul R. Kuhn
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 2002 By: /s/ Robert M. Garneau
-----------------------------
Robert M. Garneau
Executive Vice President and
Chief Financial Officer
- 26 -
KAMAN CORPORATION AND SUBSIDIARIES
Index to Exhibits
Exhibit 3(ii) Bylaws of the Corporation Attached
Exhibit 10 Amendment No. 1 to Revolving Credit Attached
Agreement dated as of June 28, 2002
Exhibit 11 Earnings (Loss) Per Share Computation Attached
Exhibit 99.1 Certification of Chief Executive Officer Attached
Exhibit 99.2 Certification of Chief Financial Officer Attached
- 27 -