Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the fiscal year ended December
31, 2009
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)
Registrant's
telephone number, including area code: (860) 243-7100
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock ($1 par value)
|
The
NASDAQ Stock Market, Inc.
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes x No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by checkmark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated herein by reference in Part III of
this Form 10-K or any amendment to this Form 10-K x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value on July 3, 2009 (the last business day of the Company’s
most recently completed second quarter) of the voting common stock held by
non-affiliates of the registrant, computed by reference to the closing price of
the stock, was approximately $422,772,084.
At January 29, 2010, there
were 25,776,004 shares of Common Stock outstanding.
Documents
Incorporated Herein By Reference
Portions
of our definitive proxy statement for our 2010 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Report.
Kaman
Corporation
Index
to Form 10-K
Part
I
|
||
Item
1
|
Business
|
3
|
Item
1A
|
Risk
Factors
|
8
|
Item
1B
|
Unresolved
Staff Comments
|
14
|
Item
2
|
Properties
|
15
|
Item
3
|
Legal
Proceedings
|
15
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
15
|
Part
II
|
||
Item 5 |
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
16
|
Item
6
|
Selected
Financial Data
|
18
|
Item
7
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
Item 7A
|
Quantitative
and Qualitative Disclosures About Market Risk
|
42
|
Item
8
|
Financial
Statements and Supplementary Data
|
43
|
Item
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
87
|
Item
9A
|
Controls
and Procedures
|
87
|
Item 9B
|
Other
Information
|
87
|
Part
III
|
||
Item
10
|
Directors,
Executive Officers and Corporate Governance
|
88
|
Item
11
|
Executive
Compensation
|
88
|
Item
12
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
88
|
Item
13
|
Certain
Relationships and Related Transactions, and Director
Independence
|
88
|
Item
14
|
Principal
Accounting Fees and Services
|
88
|
Part
IV
|
||
Item
15
|
Exhibits,
Financial Statement Schedules
|
88
|
2
PART
I
ITEM
1. BUSINESS
GENERAL
Kaman
Corporation, headquartered in Bloomfield, Connecticut, was incorporated in 1945.
We are a diversified company that conducts business in the aerospace and
industrial distribution markets. We report information for ourselves and our
subsidiaries (collectively, “we,” “us,” “our,” and “the company”) in two
business segments, Aerospace and Industrial Distribution.
During
the second quarter of 2009, we implemented modifications to our system of
reporting, resulting from changes to our internal organization over the
preceding year, which changed our reportable segments. These changes to the
internal organization included the creation of the Aerospace Group management
team and the establishment of the President of Kaman Aerospace Group, Inc. as
the segment manager of the combined Aerospace businesses. The Industrial
Distribution segment, which has been under the leadership of a segment manager
for some time, was not impacted by these changes. Following these changes, we
determined that we have two reportable segments, Industrial Distribution
and Aerospace.
A
discussion of 2009 developments is included in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, in this Form
10-K.
Industrial Distribution
Segment
Kaman
Industrial Technologies Corporation (“KIT”) brings our commitment to
technological leadership and value-added services to the Industrial Distribution
business. The Industrial Distribution segment is the third largest power
transmission/motion control industrial distributor in North America. We provide
products including bearings, mechanical and electrical power transmission, fluid
power, motion control and materials handling components to a broad spectrum of
industrial markets throughout North America. Locations consist of nearly 200
branches, distribution centers and call centers across the United States
(including Puerto Rico) and in Canada and Mexico. We offer approximately three
million items, as well as value-added services, to a base of approximately
50,000 customers representing a highly diversified cross section of North
American industry. Subsidiaries of KIT include Kaman Industrial
Technologies, Ltd., Delamac de Mexico, S.A. de C.V. and Industrial Rubber and
Mechanics, Inc.
Aerospace
Segment
The
Aerospace segment produces and/or markets widely used proprietary aircraft
bearings and components; complex metallic and composite aerostructures for
commercial, military and general aviation fixed and rotary wing aircraft; safing
and arming solutions for missile and bomb systems for the U.S. and allied
militaries; subcontract helicopter work; and support for its SH-2G
Super Seasprite maritime helicopters and K-MAX ® medium-to-heavy lift
helicopters.
Principal
customers include the U.S. military, Sikorsky Aircraft Corporation, Boeing,
Airbus, Lockheed Martin and Raytheon. The SH-2G aircraft is currently in service
with the Egyptian Air Force and the New Zealand and Polish navies. Operations
are conducted at Kaman Aerospace Corporation’s Aerostructures Division in
Jacksonville, FL, Helicopters Division in Bloomfield, CT and Precision Products
Division in Middletown, CT and Tucson, AZ (collectively “KAC”), Aerostructures
Wichita Inc. in Wichita, KS (“Aerospace Wichita”), Brookhouse Holdings Ltd. in
Darwen, Lancashire, United Kingdom and Hyde, Greater Manchester, United Kingdom
(“U.K. Composites”), Kaman Precision Products, Inc. in Orlando, FL (“KPP
Orlando”), Kamatics Corporation in Bloomfield, CT and RWG Frankenjura-Industrie
Flugwerklager GmbH in Dachsbach, Germany (“RWG”).
FINANCIAL
INFORMATION ABOUT OUR SEGMENTS
Financial
information about our segments is included in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, and Note 21,
Segment and Geographic Information, of the Notes to Consolidated Financial
Statements, included in Item 8, Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K.
WORKING
CAPITAL
A
discussion of our working capital is included in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources, in this Form 10-K.
Our
Industrial Distribution segment requires substantial working capital related to
accounts receivable and inventories. Significant amounts of inventory are
carried to meet our customers’ delivery requirements. Returns are not considered
to have a material effect on our working capital requirements.
3
Our
Aerospace segment’s working capital requirements are dependent on the nature and
life cycle of the programs for which work is performed. A new program may
require higher working capital requirements related to the purchase of inventory
and equipment necessary to perform the work. However, as these programs mature
and efficiencies are gained in the production process, working capital
requirements can be reduced.
PRINCIPAL
PRODUCTS AND SERVICES
The
following is information for the three preceding years concerning the percentage
contribution of each business segments’ products and services to consolidated
net sales from continuing operations:
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Industrial
Distribution
|
56.3 | % | 62.0 | % | 64.5 | % | ||||||
Aerospace
|
43.7 | % | 38.0 | % | 35.5 | % | ||||||
Total
|
100.0 | % | 100.0 | % | 100.0 | % |
AVAILABILITY
OF RAW MATERIALS
While we
believe we have sufficient sources for the materials, components, services and
supplies used in our manufacturing, we are highly dependent on the availability
of essential materials, parts and subassemblies from our suppliers and
subcontractors. The most important raw materials required for our aerospace
products are aluminum (sheet, plate, forgings and extrusions), titanium, nickel,
copper and composites. Many major components and product equipment items are
procured or subcontracted on a sole-source basis with a number of domestic and
non-U.S. companies. Although alternative sources generally exist for these raw
materials, qualification of the sources could take a year or more. We are
dependent upon the ability of a large number of suppliers and subcontractors to
meet performance specifications, quality standards and delivery schedules at
anticipated costs. While we maintain an extensive qualification system to
control risk associated with such reliance on third parties, failure of
suppliers or subcontractors to meet commitments could adversely affect
production schedules and contract profitability, while jeopardizing our ability
to fulfill commitments to our customers. Although high prices for some raw
materials important to some of our businesses (steel, copper, aluminum, titanium
and nickel) may cause margin and cost pressures, we do not foresee any near term
unavailability of materials, components or supplies that would have an adverse
effect on our business, or on either of our business segments. For further
discussion of the possible effects of changes in the cost or availability of raw
materials on our business, see Item 1A, Risk Factors, in this Form
10-K.
PATENTS
AND TRADEMARKS
We hold
patents and trademarks reflecting functional, design and technical
accomplishments in a wide range of areas covering both basic production of
certain aerospace products as well as highly specialized devices and advanced
technology products in defense related and commercial fields.
Although
the company's patents and trademarks enhance our competitive position, we
believe that none of such patents or trademarks is singularly or as a group
essential to our business as a whole. We hold or have applied for U.S. and
foreign patents with expiration dates that range through the year
2027.
Registered
trademarks of Kaman Corporation include KAflex, KAron, and K-MAX. In all, we
maintain 23 U.S. and foreign trademarks.
BACKLOG
Our
entire backlog is attributable to the Aerospace segment. We anticipate that
approximately 82.5% of our backlog at the end of 2009 will be performed in 2010.
Approximately 69.6% of the backlog at the end of 2009 is related to U.S.
Government contracts or subcontracts, which include government orders that are
firm but not yet funded and certain contracts that are awarded but not yet
signed.
Total
backlog at the end of December 31, 2009, 2008 and 2007, and the portion of the
backlog we expect to complete in 2010 is as follows:
Total Backlog at
|
2009 Backlog to be
|
Total Backlog at
|
Total Backlog at
|
|||||||||||||
In thousands
|
December 31, 2009
|
completed in 2010
|
December 31, 2008
|
December 31, 2007
|
||||||||||||
Aerospace
|
$ | 433,707 | $ | 357,784 | $ | 550,736 | $ | 474,529 |
4
GOVERNMENT
CONTRACTS
During
2009, approximately 97.9% of the work performed by the company directly or
indirectly for the U.S. government was performed on a fixed-price basis and the
balance was performed on a cost-reimbursement basis. Under a fixed-price
contract, the price paid to the contractor is negotiated at the outset of the
contract and is not generally subject to adjustment to reflect the actual costs
incurred by the contractor in the performance of the contract. Cost
reimbursement contracts provide for the reimbursement of allowable costs and an
additional negotiated fee.
The
company's U.S. government contracts and subcontracts contain the usual required
provisions permitting termination at any time for the convenience of the
government with payment for work completed and associated profit at the time of
termination.
COMPETITION
The
Aerospace segment operates in a highly competitive environment with many other
organizations, some of which are substantially larger and have greater financial
and other resources. We compete for aerostructures subcontract, helicopter
structures, bearings and components business on the basis of price and quality;
product endurance and special performance characteristics; proprietary
knowledge; and the reputation of our business. Competitors for our
business also include small machine shops and offshore manufacturing
facilities. We compete for advanced technology fuzing business
primarily on the basis of technical competence, product quality, and to some
extent, price; and also on the basis of our experience as a developer and
manufacturer of fuzes for particular weapon types and the availability of our
facilities, equipment and personnel. We are also affected by the
political and economic circumstances of our potential foreign customers. We
compete with helicopter manufacturers on the basis of price, performance, and
mission capabilities; and also on the basis of our experience as a manufacturer
of helicopters, the quality of our products and services, and the availability
of facilities, equipment and personnel to perform contracts. Consolidation in
the industry has increased the level of international competition for helicopter
programs. Our FAA certified K-MAX helicopters compete with military
surplus helicopters and other used commercial helicopters employed for lifting,
as well as with alternative methods of meeting lifting
requirements.
The
Industrial Distribution segment competes for business with several other
national distributors, two of which are substantially larger, and with many
regional and local organizations. Competitive forces have intensified due to the
increasing importance of large national accounts, the use of integrated
suppliers and the increasing consolidation in supplier relationships. We compete
for business on the basis of price, performance and value added services that we
are able to provide as one of the largest national distributors in North
America.
RESEARCH
AND DEVELOPMENT EXPENDITURES
Government
sponsored research expenditures (which are included in cost of sales) were $7.7
million in 2009, $6.3 million in 2008, and $2.6 million in 2007. Independent
research and development expenditures (which are included in selling, general
and administrative expenses) were $4.1 million in 2009, $4.2 million in 2008,
and $3.3 million in 2007.
COMPLIANCE
WITH ENVIRONMENTAL PROTECTION LAWS
We are
subject to the usual reviews, inspections and enforcement actions by various
federal, state and foreign government environmental and enforcement agencies and
have entered into agreements and consent decrees at various times in connection
with such reviews. In addition, we engage in various environmental studies and
investigations and, where legally required to do so, undertake appropriate
remedial actions at facilities we own or control, in connection with the
acquisition, disposal or operation of such facilities.
Such
studies and investigations are ongoing at the company's Bloomfield and Moosup,
Connecticut facilities. Voluntary remediation activities have been
undertaken at the Moosup facility. These items are discussed in more detail in
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Consolidated Results – Other Matters, in this Form
10-K.
Also, in
preparation for disposition of the Moosup facility, we have been given approval
by the State of Connecticut Department of Environmental Protection (“CTDEP”) for
a reclassification of the groundwater in the vicinity to be consistent with the
industrial character of the area. The company has completed work related to such
ground water reclassification (including connection of certain neighboring
properties to public drinking water) in coordination with CTDEP and local
authorities.
In
connection with the sale of the Music segment in 2007, we assumed responsibility
for meeting certain requirements of the Connecticut Transfer Act (the “Transfer
Act”) that applied to our transfer of the New Hartford, Connecticut, facility
leased by that segment for guitar manufacturing purposes (“Ovation”). Under the
Transfer Act, those responsibilities essentially consist of assessing the site's
environmental conditions and remediating environmental impairments, if any,
caused by Ovation's operations prior to the sale. The site is a multi-tenant
industrial park, in which Ovation and other unrelated entities lease space. The
environmental assessment process, which began in 2008, is still in progress. We
estimate our portion of the cost to assess the environmental conditions and
remediate this site is $2.2 million, unchanged from previously reported
estimates, all of which has been accrued.
5
In
connection with the 2008 purchase of the portion of the Bloomfield campus that
Kaman Aerospace Corporation had leased from Navy Air Systems Command (“NAVAIR”),
we have assumed responsibility for environmental remediation at the facility as
may be required under the Transfer Act and we continue the effort to define the
scope of the remediation that will be required by the CTDEP. The assumed
environmental liability of $10.3 million was determined by taking the
undiscounted remediation liability of $20.8 million and discounting it at a rate
of 8%. This remediation process will take many years to complete.
In
connection with the purchase of U.K. Composites, we accrued, at the time of
acquisition, £1.6 million for environmental compliance at their facilities. The
total amount paid to date in connection with these environmental
remediation activities is £0.1 million. The U.S. dollar equivalent of the
remaining environmental compliance liability as of December 31, 2009, is $2.4
million. We continue to assess the work that may be required.
With
respect to all other matters that may currently be pending, in the opinion of
management, based on our analysis of relevant facts and circumstances,
compliance with relevant environmental protection laws is not likely to have a
material adverse effect upon our capital expenditures, earnings or competitive
position. In arriving at this conclusion, we have taken into consideration
site-specific information available regarding total costs of any work to be
performed, and the extent of work previously performed. Where we have been
identified as a “potentially responsible party” (PRP) by environmental
authorities at a particular site, we, using information available to us, have
also reviewed and considered a number of other factors, including: (i) the
financial resources of other PRPs involved in each site, and their proportionate
share of the total volume of waste at the site; (ii) the existence of insurance,
if any, and the financial viability of the insurers; and (iii) the success
others have had in receiving reimbursement for similar costs under similar
insurance policies issued during the periods applicable to each
site.
EMPLOYEES
As of
December 31, 2009, we employed 4,032 individuals throughout our
business segments and corporate headquarters.
FINANCIAL
INFORMATION ABOUT GEOGRAPHIC AREAS
Financial
information about geographic areas is included in Note 21, Segment and
Geographic Information, of the Notes to Consolidated Financial Statements,
included in Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
AVAILABLE
INFORMATION
We are
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) and its rules and regulations. The Exchange Act
requires us to file reports, proxy statements and other information with the
U.S. Securities and Exchange Commission (“SEC”). Copies of these reports, proxy
statements and other information can be read and copied at:
SEC
Public Reference Room
100 F
Street NE
Washington,
D.C. 20549
Information
on the operation of the Public Reference Room may be obtained by calling the SEC
at 1-800-732-0330.
The SEC
maintains a website that contains reports, proxy statements and other
information regarding issuers that file electronically with the SEC. These
materials may be obtained electronically by accessing the SEC’s website at
http://www.sec.gov.
We make
available, free of charge on our website, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, proxy statements, and current reports on Form
8-K as well as amendments to those reports filed or furnished pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, together with
Section 16 insider beneficial stock ownership reports, as soon as reasonably
practicable after we electronically file these documents with, or furnish them
to, the SEC. These documents are posted on our website at www.kaman.com — select
the “Investors & Media” link and then the “SEC Documents” link.
We also
make available, free of charge on our website, the Certificate of Incorporation,
By–Laws, Governance Principles and all Board of Directors' standing Committee
Charters (including Audit, Corporate Governance, Personnel & Compensation
and Finance). These documents are posted on our website at www.kaman.com —
select the “Corporate Governance” link.
The
information contained in our website is not intended to be incorporated into
this Form 10-K.
6
EXECUTIVE
OFFICERS OF THE REGISTRANT
The
company’s executive officers as of the date of this report are as
follows:
T.
Jack Cahill
|
Mr.
Cahill, 61, has been President of Kaman Industrial Technologies
Corporation, a subsidiary of the company, since 1993. He has held various
positions with the company since 1975.
|
Candace
A. Clark
|
Ms.
Clark, 55, has been Senior Vice President, Chief Legal Officer and
Secretary since 1996. Ms. Clark has held various positions with the
company since 1985.
|
William
C. Denninger
|
Mr.
Denninger, 59, joined the company as Senior Vice President – Finance on
November 17, 2008 and was elected Senior Vice President and Chief
Financial Officer effective December 1, 2008. Mr. Denninger served
for eight years as Senior Vice President and Chief Financial Officer of
Barnes Group, Inc., a $1.5 billion global industrial products manufacturer
and distributor. He also served on that company's board of
directors.
|
Ronald
M. Galla
|
Mr.
Galla, 58, has been Senior Vice President and Chief Information Officer
since 1995. Mr. Galla has been director of the company's
Management Information Systems since 1984.
|
Neal
J. Keating
|
Mr.
Keating, 54, was elected President and Chief Operating Officer as well as
a Director of the company effective September 17,
2007. Effective January 1, 2008, he was elected to the offices
of President and Chief Executive Officer and effective March 1, 2008 he
was appointed to the additional position of Chairman. Prior to joining the
company, Mr. Keating served as Chief Operating Officer at Hughes Supply, a
$5.4 billion industrial distributor that was acquired by Home Depot in
2006. Prior to that, from August 2002 to June 2004, he served as Managing
Director/Chief Executive Officer of GKN Aerospace, a $1 billion aerospace
subsidiary of GKN, plc, serving also as Executive Director on the Main
Board of GKN plc and as a member of the Board of Directors of
Agusta-Westland. From 1978 to July 2002, Mr. Keating served in
increasingly senior positions at Rockwell International and as Executive
Vice President and Chief Operating Officer of Rockwell Collins, Commercial
Systems, a $1.7 billion commercial aerospace business from 2001 through
2002.
|
Gregory
L. Steiner
|
Mr.
Steiner, 52, joined the Company as President of Kaman Aerospace Group,
Inc., with overall responsibility for the company's Aerospace segment,
effective July 7, 2008. Since 2005, Mr. Steiner was employed at GE
Aviation-Systems, serving first as Vice President and General Manager,
Military Mission Systems and then as Vice President, Systems for GE
Aviation-Systems, responsible for systems integration. From 2004 to 2005,
he served as Group Vice President at Curtiss-Wright Controls, Inc., with
responsibility for four aerospace and industrial electronics businesses
located in the U.S. and United Kingdom. Prior to that, Mr. Steiner had a
seventeen-year career with Rockwell Collins, Inc., serving in a number of
progressively responsible positions, and departing as Vice President
and General Manager of Passenger Systems.
|
John
J. Tedone
|
Mr.
Tedone, 45, has been Vice President, Finance and Chief Accounting Officer
of the Company since April 2007. From April 2006 to April 2007,
he served as Vice President, Internal Audit and from November 2004 to
April 2006 as Assistant Vice President, Internal
Audit.
|
Each
executive officer holds office for a term of one year and until his or her
successor is duly appointed and qualified, in accordance with the company’s
Bylaws.
7
Item
1A. RISK FACTORS
Set forth
below are the risks and uncertainties that, if they were to occur, could
materially and adversely affect our business or that could cause our actual
results to differ materially from the results contemplated by the
forward-looking statements contained in this report and the other public
statements we make.
Current economic conditions
may have an impact on our future operating results.
The
Company’s future operating results and liquidity may be impacted by the ongoing
economic downturn in several ways, including:
|
·
|
the
inability to obtain further bank financing, which may limit our ability to
fully execute our strategy in the short
term;
|
|
·
|
higher
interest rates on future borrowings, which would limit our cash
flow;
|
|
·
|
a
reduction of the value of our pension plan investments and the associated
impact on required contributions and plan
expense;
|
|
·
|
changes
in the relationships between the U.S. Dollar and the Euro, the British
Pound, the Australian Dollar, the Mexican Peso and the Canadian Dollar,
which could positively or negatively impact our financial
results;
|
|
·
|
less
activity relative to capital projects and planned
expansions;
|
|
·
|
increased
bad debt reserves or slower payments from
customers;
|
|
·
|
decreased
order activity from our customers particularly in the Industrial
Distribution segment, which would result in lower operating profits as
well as less absorption of fixed costs due to the decreased business base;
and
|
|
·
|
the
ability of our suppliers to meet our demand requirements, maintain the
pricing of their products, or continue operations, which may require us to
find and qualify new suppliers.
|
To
mitigate these risks, we evaluate opportunities for future financing, monitor
current borrowing rates, review our receivables to maximize collectability and
monitor the stability of our supply chain. We executed a $225.0 million
revolving credit agreement in the third quarter of 2009 and a $50.0 million term
loan credit agreement late in 2008, as more fully described in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Our financial performance is
significantly influenced by the conditions of the aerospace
industry.
The
Aerospace segment’s results are directly tied to economic conditions in the
commercial aviation and defense industries. As a result, changes in economic
conditions may cause customers to request that firm orders be rescheduled or
canceled, which could put a portion of our backlog at risk. Additionally, a
significant amount of work that we perform under contract tends to be for a few
large customers.
The
commercial aviation industry tends to be cyclical, and capital spending by
airlines and aircraft manufacturers may be influenced by a variety of factors
including current and future traffic levels, aircraft fuel pricing, labor
issues, competition, the retirement of older aircraft, regulatory changes,
terrorism and related safety concerns, general economic conditions, worldwide
airline profits and backlog levels.
The
defense industry is also affected by a changing global political environment,
continued pressure on U.S. and global defense spending, U.S. foreign policy and
the level of activity in military flight operations. Changes to the defense
industry could have a material impact on several of our current aerospace
programs, which could adversely affect our operating results. To mitigate these
risks, we have worked to expand our customer and product base to include both
commercial and military markets.
Furthermore,
because of the lengthy research and development cycle involved in bringing new
products to market, we cannot predict the economic conditions that will exist
when a new product is introduced. A reduction in capital spending in the
aviation or defense industries could have a significant effect on the demand for
our products, which could have an adverse effect on our financial performance or
results of operations.
8
Our U.S. Government programs
are subject to unique risks.
The
company has several significant long-term contracts either directly with the
U.S. government or where it is the ultimate customer, including the Sikorsky
BLACKHAWK cockpit program, the Joint Programmable Fuze (“JPF”) program, and the
Boeing C-17 and A-10 programs. These contracts are subject to unique risks, some
of which are beyond our control. Examples of such risks include:
|
·
|
The
U.S. Government may modify, curtail or terminate its contracts and
subcontracts at its convenience without prior notice, upon payment for
work done and commitments made at the time of termination. Modification,
curtailment or termination of our major programs or contracts could have a
material adverse effect on our future results of operations and financial
condition.
|
|
·
|
Our
U.S. Government business is subject to specific procurement regulations
and other requirements. These requirements, although customary in U.S.
Government contracts, increase our performance and compliance costs. These
costs might increase in the future, reducing our margins, which could have
a negative effect on our financial condition. Although we have procedures
to comply with these regulations and requirements, failure to do so under
certain circumstances could lead to suspension or debarment, for cause,
from U.S. Government contracting or subcontracting for a period of time
and could have a negative effect on our reputation and ability to receive
other U.S. Government contract awards in the
future.
|
|
·
|
The
costs we incur on our U.S. Government contracts, including allocated
indirect costs, may be audited by U.S. Government representatives. Any
costs found to be improperly allocated to a specific contract would not be
reimbursed, and such costs already reimbursed would have to be refunded.
We normally negotiate with the U.S. Government representatives before
settling on final adjustments to our contract costs. We have recorded
contract revenues based upon results we expect to realize upon final
audit. However, we do not know the outcome of any future audits and
adjustments and we may be required to reduce our revenues or profits upon
completion and final negotiation of these audits. Although we have
instituted controls intended to assure our compliance, if any audit
reveals the existence of improper or illegal activities, we may be subject
to civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeiture of profits, suspension of payments,
fines and suspension or prohibition from doing business with the U.S.
Government.
|
|
·
|
We
are from time to time subject to certain routine U.S. Government inquiries
and investigations of our business practices due to our participation in
government contracts. Any adverse finding associated with such an inquiry
or investigation could have a material adverse effect on our results of
operations and financial condition. See Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Aerospace
Segment, Other Matters – Warranty and Contract-Related Matters, for
discussion of U.S. Government inquiries and
investigations.
|
Competition from domestic
and foreign manufacturers may result in the loss of potential contracts and
opportunities.
The
aerospace markets in which we participate are highly competitive and we often
compete for work not only with large Original Equipment Manufacturers (“OEMs”)
but also sometimes with our own customers and suppliers. Many of our large
customers may choose not to outsource production due to, among other things,
their own direct labor and overhead considerations and capacity utilization at
their own facilities. This could result in these customers supplying their own
products or services and competing directly with us for sales of these products
or services, all of which could significantly reduce our revenues.
Our
competitors may have more extensive or more specialized engineering,
manufacturing and marketing capabilities than we do in some areas and we may not
have the technology, cost structure, or available resources to effectively
compete with them. We believe that developing and maintaining a competitive
advantage will require continued investment in product development, engineering,
supply chain management and sales and marketing, and we may not have enough
resources to make the necessary investments to do so.
Further,
our significant customers have in the past used, and may attempt in the future
to use, their position to negotiate a reduction in price of a particular product
regardless of the terms of an existing contract.
We
believe our strategies for our Aerospace segment will allow us to continue to
effectively compete for key contracts and customers; however, there is potential
that we may not be able to compete successfully in this market or against such
competitors.
9
We could be negatively
impacted by the loss of key suppliers, lack of product availability, or changes
in supplier programs that could adversely affect our operating
results.
Our
business depends on maintaining sufficient supply of various products to meet
our customers’ demands. We have several long-standing relationships with key
suppliers but these relationships are non-exclusive and could be terminated by
either party. If we lost a key supplier, or were unable to obtain the same
levels of deliveries from these suppliers and were unable to supplement those
purchases with products obtained from other suppliers, it could have a material
adverse effect on our business. Additionally, we rely on foreign and domestic
suppliers and commodity markets to secure raw materials used in many of the
products we manufacture within the Aerospace segment or sell within our
Industrial Distribution segment. This exposes us to volatility in the price and
availability of raw materials. In some instances, we depend upon a single source
of supply. Supply interruptions could arise from shortages of raw materials,
labor disputes or weather conditions affecting suppliers’ production,
transportation disruptions, or other reasons beyond our control. Even if we
continue with our current supplier relationships, high demand for certain
products may result in us being unable to meet our customers’ demands, which
could put us at a competitive disadvantage. Additionally, our key suppliers
could also increase pricing of their products, which would negatively affect our
operating results if we were not able to pass these price increases through to
our customers. We base our supply management process on an appropriate balancing
of the foreseeable risks and the costs of alternative practices. To protect
ourselves against such risks, we engage in strategic inventory purchases during
the year, negotiate long-term vendor supply agreements and monitor our inventory
levels to ensure that we have the appropriate inventory on hand to meet our
customers’ requirements.
Estimates of future costs
for long-term contracts impact our current and future operating results and
profits.
For
long-term contracts, we generally recognize sales and gross margin based on the
percentage-of-completion method of accounting. This method allows for revenue
recognition as our work progresses on a contract.
The
percentage-of-completion method requires that we estimate future revenues and
costs over the life of a contract. Revenues are estimated based upon the
original contract price, with consideration being given to exercised contract
options, change orders and, in some cases, projected customer requirements.
Contract costs may be incurred over a period of several years, and the
estimation of these costs requires significant judgment based upon the acquired
knowledge and experience of program managers, engineers, and financial
professionals. Estimated costs are based primarily on anticipated purchase
contract terms, historical performance trends, business base and other economic
projections. The complexity of certain programs as well as technical risks and
the availability of materials and labor resources could affect the company’s
ability to estimate future contract costs. Additional factors that could affect
recognition of revenue under the percentage-of-completion method
include:
|
·
|
Accounting
for initial program costs;
|
|
·
|
The
effect of nonrecurring work;
|
|
·
|
Delayed
contract start-up;
|
|
·
|
Transition
of work from the customer or other
vendors;
|
|
·
|
Claims
or unapproved change orders;
|
|
·
|
Product
warranty issues;
|
|
·
|
Delayed
completion of certain programs for which inventory has been built up;
and
|
|
·
|
Accrual
of contract losses.
|
Because
of the significance of the judgments and estimation processes, it is likely that
materially different sales and profit amounts could be recorded if we used
different assumptions or if the underlying circumstances were to change. Changes
in underlying assumptions, circumstances or estimates may adversely affect
future financial performance. We perform quarterly reviews of our long-term
contracts to address and lessen the effects of these risks.
We have not reached
agreement on the final contract price for the Sikorsky Canadian MH-92
program.
The
Sikorsky Canadian MH-92 helicopter program includes the manufacture and assembly
of composite tail rotor pylons. This program has undergone numerous
customer-directed design changes causing costs on this program to
far exceed the price for the contract. We are currently negotiating a
revised contract price and believe that the incremental costs associated with
the customer-directed design changes are recoverable. At December 31, 2009,
contract price negotiations for this program had not been
finalized.
10
We may make acquisitions or
investments in new businesses, products or technologies that involve additional
risks, which could disrupt our business or harm our financial condition or
results of operations.
As part
of our business strategy, we have made, and expect to continue to make,
acquisitions of businesses or investments in companies that offer complementary
products, services and technologies. Such acquisitions or investments involve a
number of risks, including:
|
·
|
Assimilating
operations and products may be unexpectedly
difficult;
|
|
·
|
Management’s
attention may be diverted from other business
concerns;
|
|
·
|
We
may enter markets in which we have limited or no direct
experience;
|
|
·
|
We
may lose key employees, customers or vendors of an acquired
business;
|
|
·
|
The
synergies or cost savings we expected to achieve may not be
realized;
|
|
·
|
We
may not realize the value of the acquired assets relative to the price
paid; and
|
|
·
|
Despite
our diligent efforts, we may not succeed at quality control or other
customer issues.
|
These
factors could have a material adverse effect on our business, financial
condition and operating results. Consideration paid for any future acquisitions
could include our stock or require that we incur additional debt and contingent
liabilities. As a result, future acquisitions could cause dilution of existing
equity interests and earnings per share. Before we enter into any acquisition,
we perform significant due diligence to ensure the potential acquisition fits
with our strategic objectives. In addition, we believe we have adequate
resources and appropriate integration procedures to transition the newly
acquired company efficiently.
Our results of operations
could be adversely affected by impairment of our goodwill or other intangible
assets.
When we
acquire a business, we record goodwill equal to the excess of the amount we pay
for the business, including liabilities assumed, over the fair value of the
tangible and intangible assets of the business we acquire. Goodwill and other
intangible assets that have indefinite useful lives must be tested at least
annually for impairment. The specific guidance for testing goodwill and other
non-amortized intangible assets for impairment requires management to make
certain estimates and assumptions when allocating goodwill to reporting units
and determining the fair value of reporting unit net assets and liabilities,
including, among other things, an assessment of market conditions, projected
cash flows, investment rates, cost of capital and growth rates, which could
significantly impact the reported value of goodwill and other intangible assets.
Fair value is generally determined using a combination of the discounted cash
flow, market multiple and market capitalization valuation approaches. Absent any
impairment indicators, we generally perform our impairment tests annually in the
fourth quarter, using available forecast information.
If at any
time we determine an impairment has occurred, we are required to reflect the
reduction in value as an expense within operating income, resulting in a
reduction of earnings in the period such impairment is identified and a
corresponding reduction in our net asset value.
We rely on the experience
and expertise of our skilled employees, and must continue to attract and retain
qualified technical, marketing and managerial personnel in order to
succeed.
Our
future success will depend largely upon our ability to attract and retain highly
skilled technical, managerial and marketing personnel. There is significant
competition for such personnel in the aerospace and industrial distribution
industries. We try to ensure that we offer competitive compensation and benefits
as well as opportunities for continued development. There can be no assurance
that we will continue to be successful in attracting and retaining the personnel
we require to develop new and enhanced products and to continue to grow and
operate profitably. We continually strive to recruit and train required
personnel as well as retain key employees.
We are subject to litigation
that could adversely affect our operating results.
Our
financial results may be affected by the outcome of legal proceedings and other
contingencies that cannot be predicted. In accordance with generally accepted
accounting principles, if a liability is deemed probable and reasonably
estimable in light of the facts and circumstances known to us at a particular
point in time, we will make an estimate of material loss contingencies and
establish reserves based on our assessment. Subsequent developments in legal
proceedings may affect our assessment. The accrual of a loss contingency
adversely affects our results of operations in the period in which a liability
is recognized. This could also have an adverse impact on our cash flows in the
period during which damages are paid. As of December 31, 2009, we do not have
any loss accruals recorded with respect to current litigation matters, as we do
not believe that we have met the criteria to establish such a
liability.
11
Our acceptance of the return
of the 11 Australian SH-2G(A) Super Seasprite helicopters, including related
inventory and equipment, from the Commonwealth of Australia is subject to a
variety of risks and uncertainties.
On
February 12, 2009, we completed the transfer of title to the 11 Australian
SH-2G(A) Super Seasprite helicopters, including related inventory and equipment,
from the Commonwealth of Australia, as more fully described in Note 18,
Commitments and Contingencies, of the Notes to Consolidated Financial
Statements. Our acceptance of the return of the aircraft and other inventory is
subject to a variety of risks and uncertainties including but not limited
to:
|
·
|
The
potential absence of a market for the aircraft and spare
parts;
|
|
·
|
Risk
of the inventory becoming obsolete over time resulting in the company
recording a lower of cost or market
adjustment;
|
|
·
|
The
additional costs that may be necessary to store, maintain and track the
inventory; and
|
|
·
|
The
obligation to make payments to the Commonwealth of Australia in the
future, regardless of aircraft
sales.
|
We
believe there is a market for these aircraft and we are actively marketing them
to interested potential customers.
The cost and effort to start
up new aerospace programs could negatively impact our operating results and
profits.
In recent
years, we have been ramping up several new programs as more fully discussed in
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations, in this Form 10-K. The time required and cost incurred to ramp up
a new program can be significant and includes nonrecurring costs for tooling,
first article testing, finalizing drawings and engineering specifications and
hiring new employees able to perform the technical work required. New programs
can typically involve greater volume of scrap, higher costs due to
inefficiencies, delays in production, and learning curves that are more extended
than anticipated, all of which can impact operating results. We have been
working with our customers and leveraging our years of experience to effectively
ramp up these new programs.
We currently rely upon
development of national account relationships for growth in our Industrial
Distribution segment.
Over the
past several years, more companies have begun to consolidate their purchases of
industrial products, resulting in their doing business with only a few major
distributors or integrated suppliers, rather than a large number of vendors.
Through our national accounts strategy we have worked to develop the
relationships necessary to be one of those major distributors. Competition
relative to these types of arrangements is significant. If we are not awarded
additional national accounts in the future, or if existing national account
agreements are not renewed, our sales volume could be negatively impacted which
may result in lower gross margins and weaker operating results. Additionally,
national accounts typically require an increased level of customer service as
well as investments in the form of opening of new branches to meet our
customers’ needs. The cost and time associated with these activities could be
significant and if the relationship is not maintained, we could ultimately not
make a return on these investments. One of our key strategies has been to
increase our national account presence and we will continue to focus on this
endeavor through 2010 and beyond.
Our insurance coverage may
be inadequate to cover all significant risk exposures.
We are
exposed to liabilities that are unique to the products and services we provide.
While we believe that we maintain adequate insurance for certain risks,
insurance cannot be obtained to protect against all risks and liabilities. It is
therefore possible that the amount of our insurance coverage may not cover all
claims or liabilities, and we may be forced to bear substantial unanticipated
costs.
Business disruptions could
seriously affect our future sales and financial condition or increase our costs
and expenses.
Our
business may be impacted by disruptions including, but not limited to, threats
to physical security, information technology attacks or failures, damaging
weather or other acts of nature and pandemics or other public health crises. Any
of these disruptions could affect our internal operations or services provided
to customers, and could impact our sales, increase our expenses or adversely
affect our reputation or our stock price.
12
Our revenue and quarterly
results may fluctuate, which could adversely affect our stock
price.
We have
experienced, and may in the future experience, significant fluctuations in our
quarterly operating results that may be caused by many factors. These factors
include but are not limited to:
|
·
|
Changes
in demand for our products;
|
|
·
|
Introduction,
enhancement or announcement of products by us or our
competitors;
|
|
·
|
Market
acceptance of our new products;
|
|
·
|
The
growth rates of certain market segments in which we
compete;
|
|
·
|
Size,
timing and shipment terms of significant
orders;
|
|
·
|
Budgeting
cycles of customers;
|
|
·
|
Mix
of distribution channels;
|
|
·
|
Mix
of products and services sold;
|
|
·
|
Mix
of domestic and international
revenues;
|
|
·
|
Fluctuations
in currency exchange rates;
|
|
·
|
Changes
in the level of operating expenses;
|
|
·
|
Changes
in our sales incentive plans;
|
|
·
|
Inventory
obsolescence;
|
|
·
|
Accrual
of contract losses;
|
|
·
|
Fluctuations
in oil and utility costs;
|
|
·
|
Completion
or announcement of acquisitions by us;
and
|
|
·
|
General
economic conditions in regions in which we conduct
business.
|
Most of
our expenses are relatively fixed, including costs of personnel and facilities,
and are not easily reduced. Thus, an unexpected reduction in our revenue, or
failure to achieve the anticipated rate of growth, could have a material adverse
effect on our profitability. If our operating results do not meet the
expectations of investors, our stock price may decline.
Changes in global economic
and political conditions could adversely affect our domestic and foreign
operations and results of operations.
If our
customers’ buying patterns, including decision-making processes, timing of
expected deliveries and timing of new projects, unfavorably change due to
economic or political conditions, there could be an adverse effect on our
business. Our foreign business presents us with additional risk exposures;
including:
|
·
|
Longer
payment cycles;
|
|
·
|
Greater
difficulties in accounts receivable
collection;
|
|
·
|
Unexpected
changes in regulatory requirements;
|
|
·
|
Export
restrictions, tariffs and other trade
barriers;
|
|
·
|
Difficulties
in staffing and managing foreign
operations;
|
|
·
|
Seasonal
reductions in business activity during the summer months in Europe and
certain other parts of the world;
|
|
·
|
Economic
instability in emerging markets;
|
|
·
|
Potentially
adverse tax consequences; and
|
|
·
|
Cultural
and legal differences in the conduct of
business.
|
Any one
or more of these factors could have a material adverse effect on our domestic or
international operations, and, consequently, on our business, financial
condition and operating results.
13
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking information relating to the company's business
and prospects, including the Aerospace and Industrial Distribution businesses,
operating cash flow, and other matters that involve a number of uncertainties
that may cause actual results to differ materially from expectations. Those
uncertainties include, but are not limited to: 1) the successful conclusion of
competitions for government programs and thereafter contract negotiations with
government authorities, both foreign and domestic; 2) political conditions in
countries where the company does or intends to do business; 3) standard
government contract provisions permitting renegotiation of terms and termination
for the convenience of the government; 4) domestic and foreign economic and
competitive conditions in markets served by the company, particularly the
defense, commercial aviation and industrial production markets; 5) risks
associated with successful implementation and ramp up of significant new
programs; 6) management's success in increasing the volume of profitable work at
the Aerospace Wichita facility; 7) successful negotiation of the
Sikorsky Canadian MH-92 program price; 8) successful resale of the
SH-2G(I) aircraft, equipment and spare parts; 9) receipt and
successful execution of production orders for the JPF U.S. government contract,
including the exercise of all contract options and receipt of orders from allied
militaries, as all have been assumed in connection with goodwill impairment
evaluations; 10) satisfactory resolution of the company’s litigation relating to
the FMU-143 program; 11) continued support of the existing K-MAX helicopter
fleet, including sale of existing K-MAX spare parts inventory; 12) cost
estimates associated with environmental remediation activities at the
Bloomfield, Moosup and New Hartford, CT facilities and our U.K. facilities; 13)
profitable integration of acquired businesses into the company's operations; 14)
changes in supplier sales or vendor incentive policies; 15) the effects of price
increases or decreases; 16) the effects of pension regulations, pension plan
assumptions and future contributions; 17) future levels of indebtedness and
capital expenditures; 18) continued availability of raw materials and other
commodities in adequate supplies and the effect of increased costs for such
items; 19) the effects of currency exchange rates and foreign competition on
future operations; 20) changes in laws and regulations, taxes, interest rates,
inflation rates and general business conditions; 21) future repurchases and/or
issuances of common stock; and 22) other risks and uncertainties set forth in
the company's annual, quarterly and current reports, and proxy statements. Any
forward-looking information provided in this report should be considered with
these factors in mind. The company assumes no obligation to update any
forward-looking statements contained in this report.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
14
ITEM
2. PROPERTIES
Our
facilities are generally suitable for, and adequate to serve, their intended
uses. At December 31, 2009, we occupied major facilities at the following
principal locations:
Segment
|
Location
|
Property Type (1)
|
||
Aerospace
|
Jacksonville,
Florida
|
Leased
- Manufacturing & Office
|
||
Wichita,
Kansas
|
Leased
- Manufacturing & Office
|
|||
Darwen,
Lancashire, United Kingdom
|
Leased
- Manufacturing & Office
|
|||
Hyde,
Greater Manchester, United Kingdom
|
Leased
- Manufacturing & Office
|
|||
Orlando,
Florida
|
Leased
- Manufacturing & Office
|
|||
Tucson,
Arizona
|
Leased
- Office
|
|||
Dachsbach,
Germany
|
Owned
- Manufacturing & Office
|
|||
Middletown,
CT
|
Owned
- Manufacturing & Office
|
|||
Bloomfield,
Connecticut
|
Owned
- Manufacturing, Office & Service Center
|
|||
Industrial
Distribution (2)
|
Windsor,
CT
|
Leased
- Distribution Centers & Office
|
||
Ontario,
California
|
Leased
- Distribution Centers & Office
|
|||
Albany,
New York
|
Leased
- Distribution Centers & Office
|
|||
Savannah,
Georgia
|
Leased
- Distribution Centers & Office
|
|||
Salt
Lake City, Utah
|
Leased
- Distribution Centers & Office
|
|||
Louisville,
Kentucky
|
Leased
- Distribution Centers & Office
|
|||
Gurabo,
Puerto Rico
|
Leased
- Distribution Centers & Office
|
|||
Mexico
City, Mexico
|
Leased
- Distribution Centers & Office
|
|||
British
Columbia, Canada
|
Leased
- Distribution Centers & Office
|
|||
Corporate
|
Bloomfield,
Connecticut
|
Owned
- Office
|
Square Feet
|
Total
|
|||
Industrial
Distribution
|
1,738,977 | |||
Aerospace
|
1,547,778 | |||
Corporate
(3, 4)
|
619,556 | |||
Total
|
3,906,311 |
(1)
|
Owned
facilities are unencumbered.
|
(2)
|
Branches
for the Industrial Distribution segment are located across the United
States, Puerto Rico, Canada and
Mexico.
|
(3)
|
We
occupy a 40,000 square foot corporate headquarters building in Bloomfield,
Connecticut and own another 76,000 square foot mixed use building that was
formerly occupied by our Music
Segment.
|
(4)
|
Approximately
500,000 square feet of space included in the corporate square footage is
attributable to a facility located in Moosup, Connecticut, that was closed
in 2003 and is being held for
disposition.
|
ITEM
3. LEGAL PROCEEDINGS
From time
to time, the company is subject to various claims and suits arising out of the
ordinary course of business, including commercial, employment and environmental
matters. We do not expect that the resolution of these matters would have a
material adverse effect on our consolidated financial position. Although not
required to be disclosed in response to this Item, certain legal proceedings
that relate to specific segments of our company are discussed in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, and Note 18, Commitments
and Contingencies, of the Notes to Consolidated Financial Statements, included
in Item 8, Financial Statements and Supplementary Data, of this Annual Report on
Form 10-K. Other legal proceedings or enforcement actions relating to
environmental matters, if any, are discussed in the section of Item 1 entitled
Compliance with Environmental Protection Laws.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2009.
15
PART
II
ITEM 5.
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET,
DIVIDEND AND SHAREHOLDER INFORMATION
Our
Common Stock is traded on the NASDAQ Global Market under the symbol
"KAMN”. As of January 29, 2010, there were 4,048 registered holders
of our Common Stock. Holders of the company’s Common Stock are eligible to
participate in the Mellon Investor Services Program administered by Mellon Bank,
N.A. The program offers a variety of services including dividend reinvestment. A
booklet describing the program may be obtained by contacting Mellon at (800)
227-0291 or via the web at www.melloninvestor.com.
The
following table sets forth the high, low and closing sale prices per share of
the Company’s Common Stock on the NASDAQ Global Market and the dividends
declared for the periods indicated:
NASDAQ Market Quotations (1)
|
||||||||||||||||
Dividend
|
||||||||||||||||
High
|
Low
|
Close
|
Declared
|
|||||||||||||
2009
|
||||||||||||||||
First
|
$ | 21.21 | $ | 9.33 | $ | 14.64 | $ | 0.14 | ||||||||
Second
|
18.65 | 14.25 | 16.75 | 0.14 | ||||||||||||
Third
|
22.63 | 15.48 | 20.85 | 0.14 | ||||||||||||
Fourth
|
24.86 | 20.25 | 23.09 | 0.14 | ||||||||||||
2008
|
||||||||||||||||
First
|
$ | 38.56 | $ | 22.08 | $ | 28.55 | $ | 0.14 | ||||||||
Second
|
30.12 | 22.75 | 22.87 | 0.14 | ||||||||||||
Third
|
33.88 | 21.15 | 29.96 | 0.14 | ||||||||||||
Fourth
|
29.95 | 16.48 | 18.13 | 0.14 |
|
(1)
|
NASDAQ
market quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual
transactions.
|
ISSUER
PURCHASES OF EQUITY SECURITIES
The
following table provides information about purchases of Common Stock by the
Company during the three months ended December 31, 2009:
Period
|
Total
Number
of
Shares
Purchased
(a)
|
Average
Price
Paid
per
Share
|
Total
Number of
Shares
Purchased as
Part
of a Publicly
Announced
Plan (b)
|
Maximum
Number
of
Shares
That
May
Yet Be
Purchased
Under
the
Plan
|
||||||||||||
October
3, 2009 – October 30, 2009
|
— | $ | — | — | 1,130,389 | |||||||||||
October
31, 2009 – November 27, 2009
|
879 | 21.73 | — | 1,130,389 | ||||||||||||
November
28, 2009 – December 31, 2009
|
— | — | — | 1,130,389 | ||||||||||||
Total
|
879 | — |
(a)
These shares represent shares repurchased in connection with employee tax
withholding obligations as permitted by the 2003 Stock Incentive Plan, a 16b-3
qualified plan. These are not purchases under our publicly announced
program.
(b)
In November 2000, our board of directors approved a replenishment of the
Company's stock repurchase program providing for repurchase of an aggregate of
1.4 million shares of Common Stock for use in the administration of our stock
plans and for general corporate purposes.
16
PERFORMANCE
GRAPH
Following
is a comparison of our total shareholder return for the period 2004 – 2009
compared to the S&P 600 Small Cap Index, the Russell 2000 Small Cap Index,
and the NASDAQ Non-Financial Composite Index. The performance graph does not
include a published industry or line-of-business index or peer group of similar
issuers because during the performance period the company was conducting
operations in diverse lines of business and we do not believe a meaningful
industry index or peer group can be reasonably identified. Accordingly, as
permitted by regulation, the graph includes the S&P 600 Small Cap Index and
the Russell 2000 Small Cap Index, both of which are comprised of issuers with
generally similar market capitalizations to that of the company, and the NASDAQ
Non-Financial index calculated by the exchange on which company shares are
traded.
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||||||
Kaman
|
100.0 | 160.0 | 186.2 | 311.3 | 157.1 | 206.6 | ||||||||||||||||||
S&P
600
|
100.0 | 107.7 | 124.0 | 123.6 | 85.2 | 107.0 | ||||||||||||||||||
Russell
2000
|
100.0 | 104.6 | 123.8 | 121.8 | 80.7 | 102.6 | ||||||||||||||||||
NASDAQ
Non-Financial
|
100.0 | 102.3 | 112.1 | 127.2 | 58.2 | 87.8 |
17
ITEM
6. SELECTED FINANCIAL DATA
FIVE-YEAR
SELECTED FINANCIAL DATA
(in
thousands except per share amounts, shareholders and employees)
2009
|
2008 1,
2
|
2007 2,3,4
|
2006 2,4
|
2005 2,4,5,6
|
||||||||||||||||
OPERATIONS
|
||||||||||||||||||||
Net
sales from continuing operations
|
$ | 1,146,231 | $ | 1,253,595 | $ | 1,086,031 | $ | 991,422 | $ | 909,878 | ||||||||||
Gain
(loss) on sale of product lines and other assets
|
(4 | ) | 221 | 2,579 | (52 | ) | (27 | ) | ||||||||||||
Operating
income from continuing operations
|
53,942 | 65,266 | 64,728 | 47,822 | 19,741 | |||||||||||||||
Earnings
before income taxes from continuing operations
|
47,010 | 59,166 | 57,527 | 40,660 | 15,817 | |||||||||||||||
Income
tax benefit (expense)
|
(14,361 | ) | (24,059 | ) | (21,036 | ) | (16,017 | ) | (10,743 | ) | ||||||||||
Earnings
from continuing operations
|
32,649 | 35,107 | 36,491 | 24,643 | 5,074 | |||||||||||||||
Earnings
from discontinued operations, net of taxes
|
— | — | 7,890 | 7,143 | 7,954 | |||||||||||||||
Gain
on disposal of discontinued operations, net of taxes
|
— | 492 | 11,538 | — | — | |||||||||||||||
Net
earnings
|
$ | 32,649 | $ | 35,599 | $ | 55,919 | $ | 31,786 | $ | 13,028 | ||||||||||
FINANCIAL
POSITION
|
||||||||||||||||||||
Current
assets
|
$ | 482,603 | $ | 486,516 | $ | 491,629 | $ | 513,231 | $ | 496,403 | ||||||||||
Current
liabilities
|
154,070 | 179,177 | 182,631 | 199,126 | 223,722 | |||||||||||||||
Working
capital
|
328,533 | 307,339 | 308,998 | 314,105 | 272,681 | |||||||||||||||
Property,
plant and equipment, net
|
81,322 | 79,476 | 53,645 | 49,954 | 46,895 | |||||||||||||||
Total
assets
|
773,067 | 762,613 | 634,863 | 630,413 | 598,497 | |||||||||||||||
Long-term
debt
|
56,800 | 87,924 | 11,194 | 72,872 | 62,235 | |||||||||||||||
Shareholders’
equity
|
312,900 | 274,271 | 394,526 | 296,561 | 269,754 | |||||||||||||||
PER
SHARE AMOUNTS
|
||||||||||||||||||||
Basic
earnings per share from continuing operations
|
1.27 | 1.38 | 1.50 | 1.02 | 0.22 | |||||||||||||||
Basic
earnings per share from discontinued operations
|
— | — | 0.32 | 0.30 | 0.35 | |||||||||||||||
Basic
earnings per share from disposal of discontinued
operations
|
— | 0.02 | 0.47 | — | — | |||||||||||||||
Basic
net earnings per share
|
$ | 1.27 | $ | 1.40 | $ | 2.29 | $ | 1.32 | $ | 0.57 | ||||||||||
Diluted
earnings per share from continuing operations
|
1.27 | 1.38 | 1.46 | 1.01 | 0.22 | |||||||||||||||
Diluted
earnings per share from discontinued operations
|
— | — | 0.31 | 0.29 | 0.35 | |||||||||||||||
Diluted
earnings per share from disposal of discontinued
operations
|
— | 0.02 | 0.46 | — | — | |||||||||||||||
Diluted
net earnings per share
|
$ | 1.27 | $ | 1.40 | $ | 2.23 | $ | 1.30 | $ | 0.57 | ||||||||||
Dividends
declared
|
0.560 | 0.560 | 0.530 | 0.500 | 0.485 | |||||||||||||||
Shareholders’
equity
|
12.14 | 10.77 | 15.69 | 12.28 | 11.28 | |||||||||||||||
Market
price range – High
|
24.86 | 38.56 | 39.31 | 25.69 | 24.48 | |||||||||||||||
Market
price range – Low
|
9.33 | 16.48 | 21.38 | 15.52 | 10.95 | |||||||||||||||
AVERAGE
SHARES OUTSTANDING
|
||||||||||||||||||||
Basic
|
25,648 | 25,357 | 24,375 | 24,036 | 23,038 | |||||||||||||||
Diluted
|
25,779 | 25,512 | 25,261 | 24,869 | 23,969 | |||||||||||||||
GENERAL
STATISTICS
|
||||||||||||||||||||
Registered
shareholders
|
4,064 | 4,107 | 4,186 | 4,468 | 4,779 | |||||||||||||||
Employees
|
4,032 | 4,294 | 3,618 | 3,906 | 3,712 |
(Footnotes
on Following Page)
18
(Footnotes to Information on
Preceding Page)
Included
within certain annual results are a variety of unusual or significant items that
may affect comparability. The most significant of such items are described below
as well as within Management’s Discussion and Analysis of Financial Condition
and Results of Operations and the Notes to Consolidated Financial
Statements.
|
1.
|
Results
for 2008 include $7.8 million in non-cash expense related to the
impairment of the goodwill balance related to the Aerospace Wichita
facility, $2.5 million related to the write-off of tooling costs at the
Aerospace Wichita facility and $1.6 million of expense related to the
cancellation of foreign currency hedge contracts originally assumed in
connection with the acquisition of U.K.
Composites.
|
|
2.
|
Effective January 1, 2009, in accordance with guidance
issued by the FASB, we treat unvested share-based payment
awards that contain non-forfeitable rights to dividends or
dividend-equivalents as participating securities in our calculation of earnings per share. We are required to apply this accounting
retrospectively to all prior periods presented. The inclusion of these
securities did not have a material impact on the calculation of earnings
per share.
|
|
3.
|
The company sold Kaman Music
Corporation on December 31, 2007, which resulted in a pre-tax gain on
disposal of discontinued operations of $18.1 million, and the Aerospace
segment’s 40mm product line assets, which resulted in a pre-tax gain of
$2.6 million.
|
|
4.
|
Results
for 2007, 2006 and 2005 include charges for the Australian SH-2G(A)
helicopter program of $6.4 million, $9.7 million and $16.8 million,
respectively. There were no such charges recorded in 2008 or
2009.
|
|
5.
|
Results
for 2005 include $8.3 million of expense for the company’s stock
appreciation rights, $3.3 million for legal and financial advisory fees
associated with the recapitalization and $6.8 million recovery of
previously written off amounts for MD Helicopters, Inc.
(MDHI).
|
|
6.
|
The
effective tax rate for 2005 was 67.9 percent, which was high principally
due to the non-deductibility of expenses associated with stock
appreciation rights and the company’s
recapitalization.
|
19
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is intended to provide readers of our consolidated financial
statements with the perspectives of management. MD&A presents in narrative
form information regarding our financial condition, results of operations,
liquidity and certain other factors that may affect our future results. This
will allow our shareholders to obtain a comprehensive understanding of our
businesses, strategies, current trends and future prospects. MD&A should be
read in conjunction with the Consolidated Financial Statements and related Notes
included in this Form 10-K. Unless otherwise noted, MD&A relates only to
results from continuing operations. All years presented reflect the
classification of Kaman Music’s financial results as discontinued
operations.
OVERVIEW
OF BUSINESS
Kaman
Corporation is composed of two business segments:
·
|
Industrial
Distribution, the third largest power transmission/motion control
industrial distributor in North
America.
|
·
|
Aerospace,
a manufacturer and subcontractor in the international, commercial and
military aerospace and defense
markets.
|
The
following is a summary of key events:
·
|
Our
net sales from continuing operations decreased 8.6% in 2009 compared to
2008.
|
·
|
Our
earnings from continuing operations decreased 7.0% in 2009 compared to
2008.
|
·
|
Diluted
earnings per share from continuing operations declined to $1.27 in 2009, a
decrease of 8.0% compared to 2008.
|
·
|
On
February 12, 2009, we completed the transfer of title to the 11 Australian
SH-2G(A) Super Seasprite helicopters, including related inventory and
equipment, from the Commonwealth of Australia to the
company.
|
·
|
We
entered into a contract modification with the United States Government
(“USG”) for the award of Options 6, 7 and 8 under the multi-option Joint
Programmable Fuze (“JPF”) contract. The total value of the Option 6 award
is approximately $59 million and deliveries are expected to begin in the
second quarter of 2010. Upon exercise, the value of Options 7 and 8 will
depend on the quantity selected by the USG, add-ons, foreign military
orders and future funding.
|
·
|
We
replaced our five-year $200 million revolving credit facility with a new
three-year $225 million senior secured revolving credit facility. The new
facility includes an “accordion” feature that allows us to increase the
aggregate amount available to $300 million with additional commitments
from lenders.
|
·
|
We
were awarded a five-year contract with a potential value of $53 million to
build composite helicopter blade skins and skin core assemblies for Bell
Helicopters.
|
·
|
We
were awarded a $0.9 million contract from the U.S. Marine Corps on behalf
of Team K-MAX®, which includes Lockheed Martin, to demonstrate the ability
of the Unmanned K-MAX® helicopter to deliver cargo to troops in extreme
environments and at high altitudes. In the last week of January 2010, the
Unmanned K-MAX® helicopter successfully completed the
demonstration.
|
RESULTS
OF CONTINUING OPERATIONS
Consolidated
Results
Net
Sales
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Industrial
Distribution
|
$ | 645,535 | $ | 776,970 | $ | 700,174 | ||||||
Aerospace
|
500,696 | 476,625 | 385,857 | |||||||||
Total
|
$ | 1,146,231 | $ | 1,253,595 | $ | 1,086,031 | ||||||
$
change
|
$ | (107,364 | ) | $ | 167,564 | $ | 94,609 | |||||
%
change
|
(8.6 | )% | 15.4 | % | 9.5 | % |
The
decrease in net sales for 2009 as compared to 2008 was attributable to a decline
in organic sales at our Industrial Distribution segment. This decrease was
partially offset by sales growth in our Aerospace segment and the full year
effect of sales from the acquisition of Industrial Supply Corp (“ISC”) in March
2008, the acquisition of U.K. Composites in June 2008, and the acquisition of
Industrial Rubber & Mechanics Incorporated (“INRUMEC”) in October 2008.
Foreign currency exchange rates had an unfavorable impact of $12.3 million on
sales for 2009.
20
The
increase in net sales for 2008 compared to 2007 was attributable to organic
growth at both our segments, as well as the addition of sales related to the
acquired businesses. The Aerospace segment’s net sales increased due to the
acquisition of U.K. Composites, as well as organic sales growth resulting mainly
from increased shipments for the Sikorsky BLACKHAWK helicopter cockpit program
and the JPF fuze program. The Industrial Distribution segment’s net sales
increased for 2008 compared to 2007 due to several new large national accounts,
as well as the acquisitions of ISC and INRUMEC.
Gross
Profit
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Gross
Profit
|
$ | 305,938 | $ | 332,137 | $ | 300,945 | ||||||
$
change
|
(26,199 | ) | 31,192 | 29,522 | ||||||||
%
change
|
(7.9 | )% | 10.4 | % | 10.9 | % | ||||||
%
of net sales
|
26.7 | % | 26.5 | % | 27.7 | % |
Gross
profit decreased in 2009 as compared to 2008 primarily due to a decrease in
gross profit at our Industrial Distribution segment, partially offset by an
increase at our Aerospace segment and the full year effect on gross profit from
the acquisitions of ISC, U.K. Composites and INRUMEC. The decrease in gross
profit at Industrial Distribution was a result of lower sales volume, while the
increase at Aerospace was driven by increased shipments on the Sikorsky
BLACKHAWK helicopter cockpit and JPF fuze programs and increased sales of
bearing products for the military markets. These increases were slightly offset
by the absence of gross profit previously generated from the now terminated
Australian helicopter support program and decreased sales volume related to our
bearing product lines for the commercial and regional / business jet
markets.
Gross
profit in 2008 increased primarily due to the increased sales volume at the
Industrial Distribution segment, higher shipments to the commercial aerospace
industry and the absence of Australia SH-2G(A) program charges, which amounted
to $6.4 million in 2007. These positive results were partially offset by a less
favorable product mix for the JPF fuze program and the charges, excluding
goodwill, recorded by the Aerospace segment due to issues encountered by
Aerospace Wichita, as discussed more fully below. Gross profit as a percentage
of sales (“gross margin”) decreased due to the aforementioned product mix
changes for the JPF fuze program and the impact of the charges recorded by the
Aerospace segment due to issues encountered by Aerospace Wichita.
Selling,
General & Administrative Expenses (S,G&A)
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
S,G&A
|
$ | 251,992 | $ | 259,282 | $ | 238,796 | ||||||
$
change
|
(7,290 | ) | 20,486 | 15,247 | ||||||||
%
change
|
(2.8 | )% | 8.6 | % | 6.8 | % | ||||||
%
of net sales
|
22.0 | % | 20.7 | % | 22.0 | % |
The
decrease in S,G&A for 2009 as compared to 2008 is primarily due to tighter
cost control leading to expense reductions at both our segments and our
Corporate office and reduction in expense for our Supplemental Employees’
Retirement Plan (“SERP”). The expense reductions included furloughs and a
reduction in other employee benefit expenses. These decreases were partially
offset by the acquisitions of ISC, U.K. Composites and INRUMEC during 2008 and
an increase of $8.8 million in pension expense. Furloughs were taken by our
Corporate Officers and employees at our Industrial Distribution segment and
select operations of our Aerospace segment.
The
increase in S,G&A for 2008 compared to 2007 is primarily due to the three
acquisitions made during 2008, increases related to higher personnel costs as
well as increased bid and proposal activity at our Aerospace segment. These
increases were partially offset by lower expenses related to fringe benefits,
incentive compensation and stock appreciation rights.
Goodwill
Impairment
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Goodwill
impairment
|
$ | — | $ | 7,810 | $ | — |
During
the second quarter of 2008, the Aerospace Wichita facility lost two of its major
contracts and experienced continuing production and quality issues. As a result,
we performed an interim test of goodwill for impairment and recorded a
non-tax-deductible goodwill impairment charge of $7.8 million. This represented
the entire goodwill balance for the reporting unit. We performed our annual test
of goodwill impairment during the fourth quarter of 2009 and no impairment
charge was required for the year ended December 31, 2009.
21
Operating
Income
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Operating
Income
|
$ | 53,942 | $ | 65,266 | $ | 64,728 | ||||||
$
change
|
(11,324 | ) | 538 | 16,906 | ||||||||
%
change
|
(17.4 | )% | 0.8 | % | 35.4 | % | ||||||
%
of net sales
|
4.7 | % | 5.2 | % | 6.0 | % |
The
decrease in operating income in 2009 compared to 2008 was primarily driven by a
decrease in operating income at our Industrial Distribution segment and an
increase in pension expense offset in part by the absence of the $7.8 million
non-tax deductible goodwill impairment charge taken in 2008, a slight increase
in Aerospace segment organic operating income and the addition of operating
income associated with the acquisition of U.K. Composites.
The
increase in operating income in 2008 compared to 2007 was due to an increase in
operating income at our Industrial Distribution segment and a decrease in
Corporate expenses, offset by a lower operating income at our Aerospace segment.
The increase in operating income at our Industrial Distribution segment was
primarily a result of the new national accounts. The lower operating income at
our Aerospace segment was primarily driven by the charges associated with
Aerospace Wichita and lower foreign military sales under the JPF Fuze program.
These reductions were offset by the absence of $6.4 million in charges related
to the Australia SH-2G (A) program recorded in 2007. Please refer to the
individual segment discussions for details on their operating
income.
Interest
Expense, Net
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Interest
Expense, net
|
$ | 5,700 | $ | 4,110 | $ | 7,526 |
Net
interest expense generally consists of interest charged on the revolving credit
facility and other borrowings offset by interest income. The increase in net
interest expense for 2009 compared to 2008 was primarily due to higher total
average bank borrowings and lower interest income, partially offset by lower
interest rates in 2009. The higher average bank borrowings for 2009 was the
result of progressively higher borrowings under the revolving credit agreement
and term loan agreement as we funded the three acquisitions completed in
2008.
The
decrease in net interest expense for 2008 compared to 2007 was primarily due to
the repayment of a significant portion of our revolving credit line as of
December 31, 2007, using the proceeds from the sale of the Music segment, as
well as the redemption of all outstanding convertible debentures in late 2007.
In the second quarter of 2008, we borrowed against our revolving credit line
again to fund working capital requirements and the U.K. Composites
acquisition.
Effective
Income Tax Rate
2009
|
2008
|
2007
|
||||||||||
Effective
income tax rate
|
30.6 | % | 40.7 | % | 36.6 | % |
The
effective tax rate represents the combined federal, state and foreign tax
effects attributable to pretax earnings for the year. The decrease in
the effective tax rate for 2009 compared to 2008 is primarily due to a one-time
tax benefit for foreign exchange losses incurred as part of an international
recapitalization, and from a discrete benefit due to certain foreign tax
incentives, as well as the $7.8 million non-tax deductible non-cash goodwill
impairment charge taken during the second quarter of 2008. We anticipate the
full-year effective tax rate for 2010 to be approximately 35%.
The
increase in the effective tax rate for 2008 compared to 2007 is due to the
non-tax-deductible non-cash goodwill impairment charge of $7.8 million recorded
in the second quarter of 2008 by the Aerospace segment.
22
Other
Matters
Moosup
The CTDEP
has given us approval for reclassification of groundwater in the vicinity of the
Moosup, CT facility consistent with the character of the area. This facility is
currently being held for disposal. We have completed the process of connecting
neighboring properties to public drinking water in accordance with such approval
and in coordination with the CTDEP and local authorities. Site characterization
of the environmental condition of the property, which began in 2008, is
continuing.
The total
anticipated cost of the environmental remediation activities associated with the
Moosup property is $4.1 million, all of which has been accrued. The
total amount paid to date in connection with these environmental
remediation activities is $1.9 million. A portion ($0.1 million) of the accrual
related to this property is included in other accruals and payables and the
balance is included in other long-term liabilities. The remaining balance
of the accrual reflects the total anticipated cost of completing these
environmental remediation activities. Although it is reasonably possible that
additional costs will be paid in connection with the resolution of this matter,
we are unable to estimate the amount of such additional costs, if any, at this
time.
New
Hartford
In
connection with the sale of the Music segment in 2007, we assumed responsibility
for meeting certain requirements of the Transfer Act that applied to our
transfer of Ovation. Under the Transfer Act, those responsibilities essentially
consist of assessing the site's environmental conditions and remediating
environmental impairments, if any, caused by Ovation's operations prior to the
sale. The site is a multi-tenant industrial park, in which Ovation and other
unrelated entities lease space. The environmental assessment process, which
began in 2008, is still in process.
We
estimate our portion of the cost to assess the environmental conditions and
remediate this site is $2.2 million, unchanged from previously reported
estimates, all of which has been accrued. The total amount paid to date in
connection with these environmental remediation activities is $0.4 million. A
portion ($0.2 million) of the accrual related to this property is included in
other accruals and payables and the balance is included in other long-term
liabilities. The remaining balance of the accrual reflects the total
anticipated cost of completing these environmental remediation activities.
Although it is reasonably possible that additional costs will be paid in
connection with the resolution of this matter, we are unable to estimate the
amount of such additional costs, if any, at this time.
Bloomfield
In
connection with the 2008 purchase of the portion of the Bloomfield campus that
Kaman Aerospace Corporation had leased from NAVAIR, we have assumed
responsibility for environmental remediation at the facility as may be required
under the Transfer Act and we continue the effort to define the scope of the
remediation that will be required by the CTDEP. The assumed environmental
liability of $10.3 million was determined by taking the undiscounted remediation
liability of $20.8 million and discounting it at a rate of 8%. The
total amount paid to date in connection with these environmental
remediation activities is $2.1 million. A portion ($1.4 million) of the accrual
related to this property is included in other accruals and payables and the
balance is included in other long-term liabilities. This remediation process
will take many years to complete. Although it is reasonably possible that
additional costs will be paid in connection with the resolution of this matter,
we are unable to estimate the amount of such additional costs, if any, at this
time.
United
Kingdom
In
connection with the purchase of U.K. Composites, we accrued, at the time of
acquisition, £1.6 million for environmental compliance at their facilities. The
total amount paid to date in connection with these environmental
remediation activities is £0.1 million. The U.S. dollar equivalent of the
remaining environmental compliance liability as of December 31, 2009 is $2.4
million, which is included in other accruals and payables. We continue to assess
the work that may be required, which may result in a change to this accrual.
Although it is reasonably possible that additional costs will be paid in
connection with the resolution of this matter, we are unable to estimate the
amount of such additional costs, if any, at this time.
In
December 2008, a workplace accident occurred at our U.K. Composites facility in
Darwen in which one employee died and another was seriously injured. In
accordance with U.K. law, the matter has been the subject of an investigation
carried out jointly by Lancashire Police and the Health and Safety Executive
(“HSE”) to determine whether criminal charges are appropriate in this
case. Although we have not received official notification that the
police investigation has ended with no recommendation of criminal charges, we
believe that this is the case because the matter has been transferred to the
regional Coroner to conduct an inquest, which is customary in cases where the
local police have not sought prosecution. The inquest is scheduled for April
2010. Following the inquest, we expect that the HSE will conduct proceedings
under U.K. Health and Safety legislation. We currently estimate that the total
potential financial exposure of the U.K. Composites operation with respect to
these government proceedings is not likely to be material to our consolidated
financial statements.
23
SEGMENT
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Industrial Distribution
Segment
Outlook
Because
of our diverse customer base, our performance tends to track the U.S. Industrial
Production Index. This index is impacted by the broader economic environment,
which will, from time to time, experience periods of downturn. Although these
periods of downturn have historically not lasted for an extended duration, they
do have an impact on the near term performance of our business. We
are therefore affected, to a large extent, by the overall business climate for
our customer industries and their plant capacity utilization levels, and the
effect of pricing spikes and/or supply interruptions for basic commodities such
as steel and oil.
During
2009, we continued to experience weakness in certain markets and industries that
we first encountered late in 2008. While certain markets and products, such as
food and beverage processing and power generation, have been less impacted,
other industries have experienced significant declines, including non-metallic
mineral products, metal mining, machinery and fabricated metals. This
downturn has had a significant impact on our results and we took actions to
mitigate these negative trends through measured and appropriate cost reduction
activities, continued focus on pursuit of additional national account business
and initiatives aimed at improving both our gross profit rates and operating
margins. We continue to focus on the underlying fundamentals of our business
with an emphasis on cost reduction, margin improvements, and adding market
share. For 2010 we expect sales growth to be 3-6% and further improvements in
gross margin rates. We anticipate operation margin to be up 50-100 basis
points.
Our
Strategy
The
primary strategies for the Industrial Distribution segment are to:
1.
|
Expand
our geographic footprint in major industrial markets to enhance our
position in the competition for regional and national
accounts.
|
In order
to increase our geographic footprint, we continue to explore potential
acquisition candidates that are consistent with our strategic objectives. By so
doing, we will more clearly establish our business as one that can provide
comprehensive services to our customers who are continually looking to
streamline their procurement operations and consolidate supplier
relationships.
2.
|
Gain
additional business from existing customers and new opportunities from a
wider slice of the market.
|
In recent
years, we have worked to increase market share in several less cyclical markets
including the food and beverage, coal mining and energy industries. We are also
expanding our presence in the power generation and utilities markets, two other
less cyclical industries. We have been successful in this endeavor, as evidenced
by our national account wins, and continue to target these industries. We also
continued to build our government business group to service our 5-year contract
with the General Services Administration Center for Facilities Maintenance and
Hardware (“GSA”) which allows us to supply government agencies with Maintenance,
Repair and Operations (“MRO”) organizations products from our major product
categories. The first of these contracts was awarded to us during
2009.
Results
of Operations
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Net
Sales
|
$ | 645,535 | $ | 776,970 | $ | 700,174 | ||||||
$
change
|
(131,435 | ) | 76,796 | 34,754 | ||||||||
%
change
|
(16.9 | )% | 11.0 | % | 5.2 | % | ||||||
Operating
Income
|
$ | 12,612 | $ | 35,397 | $ | 33,038 | ||||||
$
change
|
(22,785 | ) | 2,359 | (2,122 | ) | |||||||
%
change
|
(64.4 | )% | 7.1 | % | (6.0 | )% | ||||||
%
of net sales
|
2.0 | % | 4.6 | % | 4.7 | % |
24
Net
Sales
The
decrease in net sales for 2009 as compared to 2008 is due to a decline of 19.2%
in organic sales when measured on a same day sales basis. This decrease in
organic sales was due to a significant decrease in sales to OEMs and reduced
capital spending by MRO customers and changes in foreign currency exchange rates
which had an unfavorable impact of $4.9 million on sales. The decrease was
partially offset by the addition of sales resulting from the acquisitions of ISC
and INRUMEC. By industry there were significant declines in sales in
the non-metallic mineral products, metal mining, machinery and fabricated metals
industries which were partially offset by slight sales increases in the food and
beverage and paper industries.
The
increase in net sales during 2008 as compared to 2007 was due to a balance of
organic growth and the contribution of $43.4 million in sales from the two
acquisitions during the year. The remaining increase was due to higher sales to
new national accounts, some of which were ramping up during 2007. This sales
growth was partially offset by the slowing industrial market and an uncertain
economy, particularly in the latter half of the fourth quarter of 2008. During
2008, we continued to make investments in infrastructure and opened three new
branches and one new distribution center in the United States. As previously
disclosed, these investments in infrastructure and personnel have had an impact
on our operating income and it will take several years for the benefits of these
investments to be fully realized.
Operating
Income
Operating
income decreased for 2009 as compared to 2008 primarily due to the decrease in
organic sales volume and the resulting impact on our ability to leverage
operating costs. Additionally, operating income was impacted by increases in
pension plan expense, employee separation costs and insurance costs. These
factors were partially offset by improved gross margin rates and steps taken by
management to reduce operating costs. These steps included a business wide
furlough and the consolidation of branches and the closure of underperforming
branches, which resulted in a reduction in headcount. Additionally, we closed
the U.S. pension plan to new employees of the Industrial Distribution segment,
effective June 1, 2009. The savings that resulted from the business wide
furlough are nonrecurring and although the other actions have led to increased
costs in the near-term, management believes that the long-term reduction in
operating costs will assist the Industrial Distribution segment to manage
through this economic downturn and emerge as an even more profitable
business.
Operating
income increased for 2008 compared to 2007 primarily due to the increase in
organic sales volume primarily in the first nine months of the
year. Results for the fourth quarter of 2008 were significantly
impacted by the rapid decline in sales to OEMs and deterioration in capital
spending by MRO organizations.
Aerospace
Segment
Outlook
Although
the military aerospace market remained relatively stable during 2009, as a
result of the downturn in the global economy the commercial markets, including
regional / business jets, did not perform at their 2008 levels. The impact of
the downturn in the commercial aerospace market upon the segment has been
mitigated by our existing military work which represents approximately 70% of
total Aerospace sales. The segment performed well with 2009 operating profit
return on net sales greater than 2008. Despite the operating performance
achievements we have seen in 2009, we anticipate 2010 sales to be relatively
flat and operating margin to be up 50-150 basis points. We continue to focus on
gross profit improvements on our current programs with the potential for
increased sales and profitability through sales of the SH-2G(I) inventory and
related equipment. We anticipate that our bearing product lines will continue to
see weakness in the commercial markets with the military markets relatively
consistent with 2009.
Our
Strategy
Our
strategy for the Aerospace segment is to expand our global market position in
military and commercial markets, while maintaining leadership in product
technical performance and application engineering support and continuing to
concentrate on lean manufacturing techniques and lead time
reduction.
25
Results
of Operations
The
following table presents selected financial data for our Aerospace
segment:
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Net
Sales
|
$ | 500,696 | $ | 476,625 | $ | 385,857 | ||||||
$
change
|
24,071 | 90,768 | 59,855 | |||||||||
%
change
|
5.1 | % | 23.5 | % | 18.4 | % | ||||||
Operating
Income
|
$ | 74,996 | $ | 61,608 | $ | 67,783 | ||||||
$
change
|
13,388 | (6,175 | ) | 19,643 | ||||||||
%
change
|
21.7 | % | (9.1 | )% | 40.8 | % | ||||||
%
of net sales
|
15.0 | % | 12.9 | % | 17.6 | % | ||||||
Backlog
on contract
|
$ | 433,707 | $ | 550,736 | $ | 474,529 |
Net
Sales
Net sales
increased for 2009 as compared to 2008 due to increased sales on our military
programs and the incremental contribution of $21.4 million in sales from the
acquisition of U.K. Composites. The increase in sales on our military programs
was due to increased shipments to the United States Government (“USG”) and
foreign militaries (“FMS”) on the JPF program, increased shipments on the
Sikorsky BLACKHAWK helicopter cockpit program, additional upgrade work on the
Egypt SH-2G(E) helicopter fleet, SH-2G spare part sales to New Zealand and
increased sales of our bearing products for military platforms. These increases
were partially offset by the absence of sales related to the Australian
helicopter program support center, a decline in sales of our bearings products
for business jet platforms, and an unfavorable change in foreign currency
exchange rate. The impact of the change in foreign currency exchange rates was
$7.4 million, primarily as a result of the strengthening of the U.S. Dollar
against the Pound Sterling which unfavorably impacted the current year sales of
U.K. Composites. Aerospace sales were lower than we had anticipated
for 2009, due primarily to the absence of JPF fuze sales to the USG and FMS
which were anticipated in the fourth quarter of 2009. The required number of
fuzes were produced for shipment to the USG and FMS; however, delivery was
delayed due to an issue with a component supplied by a third party that had not
been produced to USG specifications. Management has addressed this supplier
issue and expects to ship fuzes during 2010.
The
growth in net sales for 2008 compared to 2007 was attributable to $32.3 million
of sales by U.K. Composites, which was acquired in mid-June 2008, higher sales
to the commercial aerospace market and increased production and shipments under
the segment’s military related programs. The increase in the military
related programs was due to increased production and shipments of the JPF fuze
to the USG, higher shipments on several legacy fuze programs and higher
production levels for the Sikorsky BLACKHAWK helicopter program. These increases
were partially offset by a decrease in sales due to the production and
operational issues experienced by Aerospace Wichita, the termination of the
production and service contract related to the Australian SH-2G(A) Super
Seasprite program, as well as work performed for the Egyptian SH-2G(E) in 2007
that was not repeated during 2008.
Operating
Income
Operating
income increased for 2009 when compared to 2008 due to the absence of the $7.8
million non-cash, non-tax-deductible, goodwill impairment charge taken in 2008,
increased shipments of higher margin JPF fuzes, the addition of operating income
from the acquisition of U.K. Composites, increased sales on the Egypt helicopter
upgrade program, increased sales of spares to New Zealand to support
their helicopter fleet, higher production levels of the Sikorsky BLACKHAWK
helicopter cockpit program and increased sales of bearing products for military
platforms. These increases were partially offset by reduced gross profit
generated by our bearing products for commercial platforms resulting from the
lower sales volume as noted above. The Aerospace segment has taken measures
designed to reduce costs and improve operating performance, such as furloughs at
certain operations. These measures helped improve operating income for the
segment; however, the effect of the furloughs in 2009 is nonrecurring in
nature.
The
decrease in operating income in 2008 as compared to 2007 is due to $13.0 million
in charges related to goodwill impairment and the write-off of Aerospace Wichita
inventory and tooling costs and lower foreign military sales under the JPF fuze
program. These decreases were partially offset by the absence of the $6.4
million contract loss accrual recorded in 2007 related to the Australian
SH-2G(A) Super Seasprite program.
26
Backlog
The
decrease in backlog in 2009 compared to 2008 is the result of the changes in the
buying patterns of our customers during 2009 and the impact of certain new
programs, A-10 and Bell Helicopters, which are not fully included in backlog at
December 31, 2009 due to the timing of order receipt.
The
increase in backlog in 2008 compared to 2007 is due to new orders under the
Sikorsky BLACKHAWK helicopter program and the addition of the U.K. Composites
backlog resulting from its acquisition in June 2008, partially offset by a
decrease in backlog resulting from the termination of the SH-2G(A) Super
Seasprite program with the Commonwealth of Australia.
Major
Programs/Product Lines
Military
Markets
A-10
In 2008,
the segment signed a five-year requirements contract with Boeing for the
production of wing control surfaces (inboard and outboard flaps, slats and
deceleron assemblies) for the U.S. Air Force’s A-10 fleet, with initial
deliveries scheduled to begin in 2010. Full rate production is
expected to begin in 2011 with an average of approximately 47 ship sets per year
through 2015. This multiyear contract has a potential value in excess
of $100 million; however, annual quantities will vary, as they are dependent
upon the orders Boeing receives from the U.S. Air Force (“USAF”).
BLACKHAWK
The
Sikorsky BLACKHAWK helicopter cockpit program involves the manufacture of
cockpits including the installation of all wiring harnesses, hydraulic
assemblies, control pedals and sticks, seat tracks, pneumatic lines, and the
composite structure that holds the windscreen for most models of the BLACKHAWK
helicopter. Total orders placed to date for this program are 630 cockpits. The
total potential value of this program is at least $250 million, with deliveries
on current orders continuing through 2010. Through December 31, 2009, a total of
438 cockpits have been delivered under this contract. We currently expect 2010
production levels to be slightly lower than those experienced in 2009 due to a
reduction in orders received from Sikorsky.
The
segment also performs additional subcontract work involving fuselage joining and
installation tasks, blade erosion coating and the production of certain
mechanical subassemblies for this helicopter program.
Bearings
Our
bearing products are included on military platforms manufactured in North
America and Europe. These products are used as original equipment and/or
specified as replacement parts by the manufacturers. The most significant
portion of our sales is derived from the U.S. military platforms, such as the
AH-64, C-17 and F/A-18 aircraft, with additional sales in Europe on the Typhoon.
These products are primarily proprietary self-lubricating, ball and roller
bearings for aircraft flight controls, turbine engines, and landing gear and
driveline couplings for helicopters.
C-17
The
segment continues production of structural wing subassemblies for the Boeing
C-17. Although recent press reports note that continued production of the C-17
may be at risk, we received orders in 2008 for an additional 30 ship sets which
will extend our work on the program through 2010.
Egypt
SH-2G(E)
The
segment continues work under a program for depot level maintenance and upgrades
for nine Kaman SH-2G(E) helicopters originally delivered to the Egyptian
government during the 1990s. Through December 31, 2009, we are on contract for
$16.5 million of work related to maintenance and upgrades. This program has a
current contract value of approximately $51.8 million.
FMU-152 – Joint Programmable
Fuze (“JPF”)
We
manufacture the JPF fuze, an electro-mechanical bomb safing and arming device,
which allows the settings of a weapon to be programmed in flight. During 2009 we
entered into a contract modification with the USG for the award of Options 6, 7
and 8 under the company's multi-option JPF contract. The modification provides
increased unit prices and quantities for the next three option buys upon
exercise and updates the original contract negotiated in 1997. The total value
of the Option 6 award is approximately $59 million and deliveries are expected
to begin in the second quarter of 2010. Upon exercise, the value of Options 7
and 8 will depend on the quantity selected by the USAF, add-ons, foreign
military orders and future funding.
27
The total
value of JPF contracts awarded by the USG from inception of the program through
December 31, 2009 is $254.7 million. This value primarily consists of Options 1
through 6 under the original contract and various contract modifications,
including a two-phase facilitization contract modification and additional
foreign military sales facilitated by the USG, as well as a variety of
development and engineering contracts, along with special tooling and test
equipment. We expect to continue production under the currently awarded options
through 2012.
The
facilitization program at our Middletown, CT facility has contributed to
increased production capabilities and allowed us to improve our quality and
efficiency on the JPF program. The facilitization program provided us an
opportunity to review production workflow to create greater efficiencies,
qualify a second Kaman site for full production and create an enhanced fuze
design. During 2009, we passed the final testing and began production of the
enhanced fuze.
MH-92
The
Sikorsky Canadian MH-92 helicopter program includes the manufacture and assembly
of composite tail rotor pylons. This program has undergone numerous
customer directed design changes causing costs on this program to exceed the
price for the contract. Management believes that the incremental costs related
to customer directed design changes are recoverable. At December 31, 2009,
contract price negotiations for this program have not yet been finalized. To
date, we have recorded $3.6 million in contract losses, with $0.6 million and
$3.0 million recorded in 2009 and 2008, respectively, for higher scrap,
inefficiencies and tooling costs related to this program.
U.S Army
In
December 2009, we signed a $7.2 million dollar contract with the U.S. Army to
perform blade erosion coating on up to 500 helicopter blades, with initial
deliveries scheduled to begin in the first quarter of 2010.
Commercial
Markets
777 /
767
In late
2007, we signed a seven-year follow-on contract with Boeing for the production
of fixed wing trailing edge assemblies for the Boeing 777 and 767 aircraft.
During 2009, on average we delivered 7 ship sets per month on the Boeing 777
platform and 1 ship set per month on the Boeing 767. For 2010, we currently
anticipate a reduction in the number of ship sets delivered per month to occur
during the year. This multiyear contract has a potential value in excess of $100
million; however, annual quantities will vary, as they are dependent upon the
orders Boeing receives from its customers.
Airbus
Our U.K.
Composites operations provide composite components for many Airbus platforms.
The most significant of these are the A320, A330 and A340. Orders for these
components are dependent on the build rate for these various
platforms.
Bearings
Our
bearing products are included on commercial airliners and regional / business
jets manufactured in North and South America, Europe and Asia and are used as
original equipment and/or specified as replacement parts by airlines and
aircraft manufacturers. These products are primarily proprietary
self-lubricating, ball and roller bearings for aircraft flight controls, turbine
engines, and landing gear, and driveline couplings for helicopters. The most
significant portion of our commercial sales is derived from Boeing and Airbus
platforms, such as the Boeing 737, 747, and 777 and the Airbus A320, A330 and
A380.
Bell
Helicopters
In
September 2009, we were awarded a five-year contract with a potential value of
$53 million to build composite helicopter blade skins and skin core assemblies
for Bell Helicopters. Under the terms of the contract, we will provide 18
different assemblies for H1, 406, 407, 412, 427, 429, 430 and BA609 aircraft.
All work will be performed at our full-service aerospace innovation and
manufacturing support center in Bloomfield, Connecticut. First article
deliveries to Bell's Hurst, Texas facility began in late 2009. Annual quantities
for this program will vary, as they are dependent upon the orders Bell receives
from its customers.
28
Other
Matters
SH-2G(I)
As
previously reported, we reached an agreement with the Commonwealth of Australia
in 2008 providing for the termination of the SH-2G(A) Super Seasprite Program.
Pursuant to the agreement, the Commonwealth transferred ownership of the 11
SH-2G(A) Super Seasprite helicopters to the company, together with
spare parts and associated equipment, in exchange for a release of any remaining
payment obligation for net unbilled receivables totaling approximately $32.0
million. The transfer of ownership was completed on February 12, 2009 and we are
actively engaged in efforts to resell the aircraft, spare parts and equipment to
other potential customers. Pursuant to the terms of the agreement with the
Commonwealth of Australia, we have agreed to share all proceeds from the resale
of the aircraft, spare parts, and equipment with the Commonwealth on a
predetermined basis, and total payments of at least $39.5 million (AUD) must be
made to the Commonwealth regardless of sales, of which at least $26.7 million
(AUD) must be paid by March 2011. To the extent that cumulative payments have
not yet reached $39.5 million (AUD), additional payments of $6.4 million (AUD)
each must be paid in March of 2012 and 2013. In late 2008, we entered into
foreign currency exchange contracts that limit the foreign currency risks
associated with these required payments to $23.7 million. See Note 6, Derivative
Financial Instruments, in the Notes to Consolidated Financial Statements for
further discussion of these instruments. In addition, to secure these payments
the Company has provided the Commonwealth with a $39.5 million (AUD)
unconditional letter of credit, which is being reduced as such payments are
made. At December 31, 2009, we had made required payments of $1.4 million (AUD).
As of that date, the U.S. dollar value of the remaining $38.1 million (AUD)
required payment was $34.2 million.
Sales
generated by the SH-2G(A) service center, which had been a meaningful portion of
our Aerospace segment’s net sales in recent years, ended at the conclusion of
the support center ramp down period, which occurred during the fourth quarter of
2008.
Since the
successful transfer of the helicopters and related equipment, segment management
has attended trade events to market the aircraft, obtained 42 marketing licenses
required by the USG, begun discussions with 7 foreign governments regarding the
sale of the helicopters and received small orders for the spare parts and
related equipment.
Warranty and
Contract-Related Matters
There
continue to be two warranty-related matters that impact the FMU-143 program at
the Aerospace segment’s Orlando Facility (“Orlando Facility”). The items
involved are an impact switch embedded in certain bomb fuzes that was recalled
by a supplier and an incorrect part, called a bellows motor, found to be
contained in bomb fuzes manufactured for the U.S. Army utilizing systems which
originated before we acquired the Orlando Facility. The U.S. Army Sustainment
Command (“USASC”), the procurement agency that administers the FMU-143 contract,
had authorized warranty rework for the bellows motor matter in late 2004/early
2005; however, we were not permitted to finish the rework due to issues raised
by the USASC primarily related to administrative matters and requests for
verification of the accuracy of test equipment (which accuracy was subsequently
verified).
In late
2006, the USASC informed us that it was changing its remedy under the contract
from performance of warranty rework to an "equitable adjustment" to the contract
price. We responded, explaining our view that we had complied with contract
requirements. In June 2007, the USASC affirmed its position and gave
instructions for disposition of the subject fuzes, including both the impact
switch and bellows motor related items, to a Navy facility and we complied with
that direction. In November 2009, the United States Government (“USG”)
instituted suit, alleging liability associated with this matter and including
specific claims of about $6.0 million (treble damages) in connection with
allegedly "false claims" by us for payment for fuzes containing the incorrect
part and $3.0 million in connection with rework. By letter dated July
16, 2009, USASC informed us that it also demands payment of $9.8 million under
the contract related to warranty rework. We believe that all these allegations
are unfounded and we are defending ourselves vigorously. At December 31, 2009,
we had no amount accrued for this demand.
As
reported previously, a separate contract dispute between the Orlando Facility
and the USASC relative to the FMU-143 fuze program is now in litigation. The
USASC has basically alleged the existence of latent defects in certain fuzes due
to unauthorized rework during production and has sought to revoke their
acceptance. We believe that the Orlando Facility performed in accordance with
the contract and it is the government that materially breached the contract
terms in several ways. As a result, during the fourth quarter of 2007, we
cancelled the contract and, in January 2008, commenced litigation before the
Board requesting a declaratory judgment that the cancellation was proper.
Shortly thereafter, the USASC notified us that it was terminating the contract
for default, making the allegations noted above, and we filed a second complaint
with the Board appealing that termination decision. The litigation
process continues. In the same letter of July 16, 2009, referenced above, USASC
also demanded a repayment of $5.7 million for these alleged latent defects. We
contest this demand and have filed an appeal of it before the
Board. At December 31, 2009, we had no amount accrued for these
matters as we believe that the likelihood of an adverse outcome to this
litigation is remote.
29
LIQUIDITY
AND CAPITAL RESOURCES
Discussion and Analysis of
Cash Flows
We assess
liquidity in terms of our ability to generate cash to fund working capital and
investing and financing activities. Significant factors affecting liquidity
include: cash flows generated from or used by operating activities, capital
expenditures, investments in our business segments and their programs,
acquisitions, divestitures, dividends, adequacy of available bank lines of
credit, and factors that might otherwise affect the company's business and
operations generally, as described under the heading “Risk Factors” and
“Forward-Looking Statements” in Item 1A of Part I of this Form
10-K.
We
continue to rely upon bank financing as an important source of support for our
business activities including acquisitions. We believe this, when combined with
cash generated from operating activities, will be sufficient to support our
anticipated liquidity requirements for the foreseeable future. We anticipate our
capital expenditures to be approximately $20.0 - 25.0 million in 2010, primarily
related to information technology investments. We anticipate a variety of items
will have an impact on our liquidity during the next 12 months, aside from our
normal working capital requirements. These may include the resolution of any of
the matters described in MD&A, including the FMU-143 litigation, the cost
sharing arrangement with the Commonwealth of Australia, the cost of existing
environmental remediation matters, the U.K. Composites workplace accident and
required pension contributions. However, we do not believe any of these matters
will lead to a shortage of capital resources or liquidity that would prevent us
from continuing with our business operations as expected.
During
2009, we successfully executed a $225 million Revolving Credit Agreement and, in
late 2008, a $50.0 million Term Loan Credit Agreement; however, the current
market may adversely affect the securing and/or pricing of additional financing,
if any, that might be necessary to continue with our growth strategy and finance
working capital requirements. We are watchful of the developments in the credit
markets and continuously assess the impact that current economic conditions may
have on our operations.
Additionally,
with the significant downturn in the financial markets in 2008, the market value
of our pension plan assets has significantly decreased, resulting in higher
pension plan contributions and a significant increase in pension expense in
2009. Management continuously monitors the assumptions used in the determination
of our benefit obligation and compares them to actual performance. During 2009,
our pension assets have recovered some of their lost value and we believe the
assumptions selected are valid due to the long-term nature of our benefit
obligations.
On
February 23, 2010, our Board of Directors authorized management to amend the
pension plan. The amendment will, among other things, close the pension plan to
all new hires on or after March 1, 2010 and change the benefit calculation for
existing employees related to pay and years of service. Specifically, changes in
pay will be taken into account for benefit calculation purposes until the end of
calendar year 2010, the benefit formula will be improved to use the highest five
years out of the last ten years of service up to December 31, 2010, whether
consecutive or not, and years of service will continue to be added for purposes
of the benefit calculations through December 15, 2015, with no further
accumulation for service thereafter except for vesting
purposes.
We
estimate the changes to the pension plan will result in a net curtailment
loss of approximately $0.2 million. In addition, we estimate that the
projected benefit obligation will be reduced, and the pension plan’s
funded status would change by approximately $47.0 million on March 1, 2010.
Based on the above action, we anticipate our pension expense to decrease by
approximately $5.0 million in 2010 as compared to 2009.
On
February 23, 2010, our Board of Directors also authorized certain enhancements
to the defined contribution plan including, among other things, an increase in
employer matching contributions made to the plan based on each participant’s
pre-tax contributions. The enhancements will become effective January 1,
2011.
A summary
of our consolidated cash flows from continuing operations is as
follows:
2009
|
2008
|
2007
|
09 vs. 08
|
08 vs. 07
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Total
cash provided by (used in)
|
||||||||||||||||||||
Operating
activities
|
$ | 70,454 | $ | (13,705 | ) | $ | 25,581 | $ | 84,159 | $ | (39,286 | ) | ||||||||
Investing
activites
|
(16,267 | ) | (125,776 | ) | 95,661 | 109,509 | (221,437 | ) | ||||||||||||
Financing
activities
|
(45,153 | ) | 75,055 | (56,452 | ) | (120,208 | ) | 131,507 |
30
Net cash
provided by operating activities increased $84.2 million in 2009 compared to
2008, primarily due to the following:
|
·
|
Lower
working capital requirements due to lower sales at our Industrial
Distribution segment.
|
|
·
|
Improvements
in our inventory procurement and management
processes.
|
|
·
|
Focus
on collections of outstanding receivable
balances.
|
|
·
|
Decreased
payments of taxes, due to the absence of payments made in 2008 related to
the sale of our Music segment in the fourth quarter of
2007.
|
|
·
|
Decreased
cash outflows associated with incentive compensation in 2009 compared to
2008.
|
|
·
|
Lower
SERP payments for retiring
executives.
|
Net cash
used in investing activities decreased $109.5 million for 2009 compared to 2008.
The decrease was primarily attributable to cash used for
acquisitions.
Net cash
provided by financing activities decreased $120.2 million for 2009 compared to
2008. In 2009 we had a net repayment under the Revolving Credit Agreement and
Term Loan Agreement of $30.8 million, compared to net proceeds
from borrowings under the Revolving Credit Agreement and Term Loan of $81.6
million received in 2008. The proceeds received in 2008 were used to fund our
acquisitions.
Net cash
provided by operating activities decreased $39.3 million in 2008 compared to
2007. This increase in cash used is primarily attributable to increased cash
requirements to fund working capital needs in 2008 as compared to 2007 as
specifically discussed below:
|
·
|
Inventory
levels increased in the Aerospace segment, primarily due to the
acquisition of a K-MAX aircraft, higher amounts of inventory at Aerospace
Wichita and higher JPF inventory.
|
|
·
|
Higher
payments of prior year accrued fringe benefits and incentive compensation
during 2008.
|
|
·
|
Total
cash payments for income taxes increased significantly, primarily due to
the taxes paid on the gain resulting from the Music segment
sale.
|
|
·
|
The
company paid out a significant amount of SERP payments in 2008 compared to
2007 primarily attributable to the retirement of our former Chief
Executive Officer and Chief Financial
Officer.
|
Net cash
used in investing activities increased $221.4 million in 2008 compared to 2007.
The increase is primarily attributable to the acquisitions of U.K. Composites
and ISC during the second quarter of 2008 and the acquisition of INRUMEC during
the fourth quarter of 2008, the absence of cash inflows from the sale of our
former Music segment in 2007, and the increase in capital expenditures in both
our segments.
Net cash
provided by financing activities increased $131.5 million in 2008 compared to
2007. We had net borrowings under the Revolving Credit Agreement of $31.6
million for 2008 as compared to repayments of $45.3 million for 2007. The
significant change was driven by the issuance of long-term debt in 2008 and
proceeds from the exercise of employee stock options, offset partially by the
payment of dividends.
Financing
Arrangements
On
September 17, 2009, we entered into a three-year $225 million senior secured
revolving credit facility with co-lead arrangers Bank of America, The Bank of
Nova Scotia, and RBS Citizens and a syndicate of lenders (“Revolving Credit
Agreement”), which replaced our then existing $200 million senior revolving
credit facility which was due to expire on August 5, 2010 (the “Former Revolving
Credit Agreement”). The Revolving Credit Agreement includes an “accordion”
feature that allows us to increase the aggregate amount available to $300
million, subject to additional commitments from lenders. The Revolving Credit
Agreement may be used for working capital, letters of credit and other general
corporate purposes, including acquisitions.
The
lenders have been granted a security interest in substantially all of our
domestic personal property and other assets (excluding real estate) and a pledge
of 66% of our equity interest in certain of our foreign subsidiaries and 100% of
our equity interest in our domestic subsidiaries, as collateral for our
obligations under the Revolving Credit Agreement.
Interest
rates on amounts outstanding under the Revolving Credit Agreement are variable
and are determined based on a ratio of Consolidated Total Indebtedness as of the
last day of the most recently ended Measurement Period to Consolidated EBITDA
(the “Consolidated Senior Secured Leverage Ratio”), as defined in the Revolving
Credit Agreement. At December 31, 2009, the interest rate for the outstanding
amounts on the Revolving Credit Agreement was 3.95%. In addition, we are
required to pay a quarterly commitment fee on the unused revolving loan
commitment amount at a rate ranging from 0.50% to 0.75% per annum, based on
the Consolidated Senior Secured Leverage Ratio. Fees for outstanding letters of
credit range from 2.75% to 4.50%, based on the Consolidated Senior Secured
Leverage Ratio. We anticipate the 2010 interest expense to increase by
approximately $3.0 million compared to 2009.
31
On
October 29, 2008, we executed a Term Loan Credit Agreement with co-lead
arrangers Bank of America and The Bank of Nova Scotia and a syndicate of lenders
(“Term Loan Agreement”). The Term Loan Agreement, which is in addition to our
current Revolving Credit Agreement, is a $50 million facility with a four-year
term, requiring quarterly payments of principal at the rate of 2.5% with 62.5%
of the initial aggregate principal payable in the final quarter. We
may increase the term loan, by up to an aggregate of $50 million with additional
commitments from the lenders or new commitments from acceptable financial
institutions. In conjunction with the entry into the Revolving Credit
Agreement on September 17, 2009, the Term Loan Agreement was amended to allow
for security interests and financial covenants consistent with those defined in
the Revolving Credit Agreement.
Facility
fees and interest rates under the Term Loan Agreement are variable and are
determined on the basis of our credit rating from Standard & Poor's. In
April 2009, Standard & Poor's re-affirmed our rating as investment grade
BBB- with an outlook of stable. We believe this is a favorable rating for a
company of our size. Under the terms of the current Term Loan Agreement, if this
rating should decrease, the effect would be to increase facility fees as well as
the interest rates charged. At December 31, 2009, the interest rate for the
outstanding amounts on the Term Loan Agreement was 4.0%.
The
financial covenants associated with the Revolving Credit Agreement and Term Loan
Credit Agreement include a requirement that i) the ratio of Consolidated Senior
Secured Indebtedness to EBITDA, as defined in the Revolving Credit Agreement,
cannot be greater than 3.00 to 1.00, ii) the ratio of Consolidated Total
Indebtedness to EBITDA, as defined in the Revolving Credit Agreement, cannot be
greater than 3.50 to 1.00, and iii) the ratio of EBITDA, as defined in the
Revolving Credit Agreement, to the sum of (i) net interest expense,
(ii) the aggregate principal amount of all regularly scheduled principal
payments of outstanding indebtedness for borrowed money, (iii) all
dividends or other distributions with respect to any equity interests of the
Company and (iv) the aggregate amount of Federal, state, local, and foreign
income taxes paid in cash cannot be less than 1.05 to 1.00 for any measurement
period between September 17, 2009 – March 31, 2011, 1.25 to 1.00 for any
measurement period between April 1, 2011 to September 30, 2011 or 1.35 to 1.00
for any measurement period on or after October 1, 2011. We were in compliance
with these financial covenants as of December 31, 2009 and we do not anticipate
noncompliance in the foreseeable future.
Total
average bank borrowings, including the Revolving Credit Agreement and Term Loan
Agreement, for 2009 were $90.5 million. As of December 31, 2009,
there was $168.2 million available for borrowing under the Revolving Credit
Agreement, net of letters of credit. Letters of credit are considered borrowings
for purposes of the Revolving Credit Agreement. A total of $40.0 million in
letters of credit was outstanding under the Revolving Credit Agreement at
December 31, 2009, $34.2 million of which was related to the guaranteed minimum
payments to Australia in connection with the ownership transfer of the 11
SH-2G(A) helicopters (along with spare parts and associated equipment). Total
average borrowings for the comparable period in 2008 under the Former Revolving
Credit Agreement totaled approximately $62.8 million.
During
the first quarter of 2009, we entered into interest rate swap agreements for the
purpose of hedging our eight quarterly variable-rate interest payments on the
Term Loan Agreement due in 2010 and 2011. These interest rate swap agreements
are designated as cash flow hedges and are intended to manage interest rate risk
associated with our variable-rate borrowings and minimize the negative impact on
our earnings and cash flows of interest rate fluctuations attributable to the
changes in LIBOR rates.
Other Sources/Uses of
Capital
We expect
to contribute $10.7 million to the qualified pension plan and $0.9 million to
the SERP for the 2010 plan year. For the 2009 plan year, we made a contribution
of $10.9 million to the qualified plan and contributions of $5.7 million to the
SERP.
In
November 2000, our board of directors approved a replenishment of our stock
repurchase program, providing for repurchase of an aggregate of 1.4 million
common shares for use in administration of our stock plans and for general
corporate purposes. There were no shares repurchased during 2008 or 2009 under
this program. At December 31, 2009, approximately 1.1 million shares were
authorized for repurchase under this program.
On June
26, 2009, we filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission (“SEC”). This shelf registration statement
allows us to offer, issue or sell from time to time, together or separately, (i)
senior or subordinated debt securities, which may be convertible into shares of
our common stock, preferred stock or other securities; (ii) shares of our common
stock; (iii) shares of our preferred stock, which we may issue in one or more
series; or (iv) warrants to purchase our equity or debt securities or other
securities. The total offering price of the securities will not
exceed $200 million in the aggregate. The shelf registration became effective on
August 3, 2009. Future offerings, if any, will be made only by means
of a written prospectus or other permitted documents. At the time of any such
offering, we will file a prospectus supplement with the SEC outlining the type
of securities, amounts, prices, use of proceeds and other
terms.
32
CONTRACTUAL
OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual
Obligations
The
following table summarizes certain of the company’s contractual obligations as
of December 31, 2009:
Payments due by period (in
millions)
|
||||||||||||||||||||
More
than 5
|
||||||||||||||||||||
Contractual
Obligations
|
Total
|
Within 1 year
|
1-3 years
|
3-5 years
|
years
|
|||||||||||||||
Long-term
debt
|
$ | 61.8 | $ | 5.0 | $ | 56.8 | $ | — | $ | — | ||||||||||
Interest
payments on debt (a)
|
13.1 | 4.4 | 8.0 | 0.7 | — | |||||||||||||||
Operating
leases
|
38.7 | 15.8 | 18.0 | 4.1 | 0.8 | |||||||||||||||
Purchase
obligations (b)
|
95.8 | 89.2 | 6.4 | 0.2 | — | |||||||||||||||
Other
long-term obligations (c)
|
30.5 | 3.3 | 10.6 | 5.8 | 10.8 | |||||||||||||||
Planned
funding of pension and SERP (d)
|
27.4 | 11.6 | 1.7 | 7.4 | 6.7 | |||||||||||||||
Payments
to the Commonwealth of Australia (e)
|
34.2 | — | 28.5 | 5.7 | — | |||||||||||||||
Total
|
$ | 301.5 | $ | 129.3 | $ | 130.0 | $ | 23.9 | $ | 18.3 |
Note: For
more information refer to Note 12, Credit Arrangements – Short-Term Borrowing
and Long-Term Debt; Note 18, Commitments and Contingencies; Note 17, Other
Long-Term Liabilities; Note 16, Pension Plans, and Note 15, Income Taxes in the
Notes to Consolidated Financial Statements included in Item 8 of this Form
10-K.
(a)
|
Interest
payments on debt within one year are based upon the long-term debt that
existed at December 31, 2009. After one year interest payments are based
upon average estimated long-term debt balances outstanding each
year.
|
(b)
|
This
category includes purchase commitments to suppliers for materials and
supplies as part of the ordinary course of business, consulting
arrangements and support services. Only obligations in the amount of at
least fifty thousand dollars are
included.
|
(c)
|
This
category includes obligations under the company's long-term incentive
plan, deferred compensation plan, a supplemental disability income
arrangement for one former company officer and unrecognized tax
benefits.
|
(d)
|
This
category includes planned funding of the company’s SERP and qualified
defined benefit pension plan. Projected funding for the qualified defined
benefit pension plan beyond one year has not been included as there are
several significant factors, such as the future market value of plan
assets and projected investment return rates, which could cause actual
funding requirements to differ materially from projected
funding.
|
(e)
|
As
previously reported, we reached an agreement with the Commonwealth of
Australia in 2008 providing for the termination of the SH-2G(A) Super
Seasprite Program. Pursuant to the agreement, the Commonwealth transferred
ownership of the 11 SH-2G(A) Super Seasprite helicopters to the
company, together with spare parts and associated equipment, in exchange
for a release of any remaining payment obligation for net unbilled
receivables totaling approximately $32.0 million. The transfer of
ownership was completed on February 12, 2009 and we are actively engaged
in efforts to resell the aircraft, spare parts and equipment to other
potential customers. Pursuant to the terms of the agreement with the
Commonwealth of Australia, we have agreed to share all proceeds from the
resale of the aircraft, spare parts, and equipment with the Commonwealth
on a predetermined basis, and total payments of at least $39.5 million
(AUD) must be made to the Commonwealth regardless of sales, of
which at least $26.7 million (AUD) must be paid by March 2011. To the
extent that cumulative payments have not yet reached $39.5 million (AUD),
additional payments of $6.4 million (AUD) each must be paid in March of
2012 and 2013. In late 2008, we entered into foreign currency exchange
contracts that limit the foreign currency risks associated with these
required payments to $23.7 million. At December 31, 2009, we had made
required payments of $1.4 million (AUD). As of that date, the U.S. dollar
value of the remaining $38.1 million (AUD) required payment was $34.2
million.
|
Off-Balance
Sheet Arrangements
The
following table summarizes the company’s off-balance sheet
arrangements:
Payments due by period (in
millions)
|
||||||||||||||||||||
More
than 5
|
||||||||||||||||||||
Off-Balance
Sheet Arrangements
|
Total
|
Within 1 year
|
1-3 years
|
3-5 years
|
years
|
|||||||||||||||
Acquisition
earn-out (1)
|
$ | 4.5 | $ | 0.1 | $ | 2.8 | $ | 1.6 | $ | — | ||||||||||
Total
|
$ | 4.5 | $ | 0.1 | $ | 2.8 | $ | 1.6 | $ | — |
|
1)
|
The
obligation to pay earn-out amounts depends upon the attainment of specific
milestones for KPP Orlando, an operation acquired in
2002.
|
The company currently maintains $40.0
million in outstanding standby letters of credit under the Revolving Credit
Agreement. Of this amount, $34.2 million is related to the guaranteed minimum
payments to Australia in connection with the ownership transfer of the 11
SH-2G(A) helicopters (along with spare parts and associated
equipment).
33
CRITICAL ACCOUNTING
ESTIMATES
Our
significant accounting policies are outlined in Note 1 to the Consolidated
Financial Statements. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses and related disclosures based upon
historical experience, current trends and other factors that management believes
to be relevant. We are also responsible for evaluating the propriety of our
estimates, judgments, and accounting methods as new events occur. Actual results
could differ from those estimates. Management periodically reviews the company’s
critical accounting policies, estimates, and judgments with the Audit Committee
of our Board of Directors. The most significant areas currently involving
management judgments and estimates are described below.
Long-Term
Contracts
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
For
long-term aerospace contracts, we generally recognize sales and income
based on the percentage-of-completion method of accounting, which allows
for recognition of revenue as work on a contract progresses. We recognize
sales and profit based upon either (1) the cost-to-cost method, in which
profit is recorded based upon the ratio of costs incurred to estimated
total costs to complete the contract, or (2) the units-of-delivery method,
in which sales are recognized as deliveries are made and cost of sales is
computed on the basis of the estimated ratio of total cost to total
sales.
Management
performs detailed quarterly reviews of all of our significant long-term
contracts. Based upon these reviews, we record the effects of adjustments
in profit estimates each period. If at any time management determines that
in the case of a particular contract total costs will exceed total
contract revenue, we record a provision for the entire anticipated
contract loss at that time.
|
The
percentage-of-completion method requires that we estimate future revenues
and costs over the life of a contract. Revenues are estimated based upon
the original contract price, with consideration being given to exercised
contract options, change orders and in some cases projected customer
requirements. Contract costs may be incurred over a period of several
years, and the estimation of these costs requires significant judgment
based upon the acquired knowledge and experience of program managers,
engineers, and financial professionals. Estimated costs are based
primarily on anticipated purchase contract terms, historical performance
trends, business base and other economic projections. The complexity of
certain programs as well as technical risks and uncertainty as to the
future availability of materials and labor resources could affect the
company’s ability to estimate future contract costs.
|
While
we do not believe there is a reasonable likelihood there will be a
material change in estimates or assumptions used to calculate our
long-term revenues and costs, estimating the percentage of work complete
on certain programs is a complex task. As a result, changes to these
programs could have a significant impact on our results of operations.
These programs include the Sikorsky Canadian MH-92 program, the Sikorsky
BLACKHAWK program, the JPF program, and several other programs including
the Boeing A-10 program. Estimating the ultimate total cost of these
programs has been challenging partially due to the complexity of the
programs, the ramping up of the new programs, the nature of the materials
needed to complete these programs, change orders related to the programs
and the need to manage our customers’ expectations. These programs are an
important element in our continuing strategy to increase operating
efficiencies and profitability as well as broaden our business base.
Management continues to monitor and update program cost estimates
quarterly for these contracts. A significant change in an estimate on one
or more programs could have a material effect on our financial position or
results of operations.
|
Allowance for Doubtful
Accounts
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
The
allowance for doubtful accounts represents management’s best estimate of
probable losses inherent in the receivable balance. These estimates are
based on known past due amounts and historical write-off experience, as
well as trends and factors impacting the credit risk associated with
specific customers. In an effort to identify adverse trends for trade
receivables, we perform ongoing reviews of account balances and the aging
of receivables. Amounts are considered past due when payment has not been
received within a pre-determined time frame based upon the credit terms
extended. For our government and commercial contracts, we evaluate, on an
ongoing basis, the amount of recoverable costs. The recoverability of
costs is evaluated on a contract-by-contract basis based upon historical
trends of payments, program viability and the customer’s
credit-worthiness.
|
Write-offs
are charged against the allowance for doubtful accounts only after we have
exhausted all collection efforts. Actual write-offs and adjustments could
differ from the allowance estimates due to unanticipated changes in the
business environment as well as factors and risks associated with specific
customers.
As
of December 31, 2009 and 2008, our allowance for doubtful accounts was 1.8
percent and 1.2 percent of gross receivables, respectively. Receivables
written off, net of recoveries, in 2009 and 2008 were $1.3 and $0.8
million, respectively.
|
Currently
we do not believe that we have a significant amount of risk relative to
the allowance for doubtful accounts. A 10% change in the allowance would
have a $0.2 million effect on pre-tax
earnings.
|
34
Inventory
Valuation
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
We
have four types of inventory (a) merchandise for resale, (b) contracts in
process, (c) other work in process, and (d) finished goods. Merchandise
for resale is stated at the lower of the cost of the inventory or its fair
market value. Contracts in process, other work in process and finished
goods are valued at production cost comprised of material, labor and
overhead, including general and administrative expenses on certain
government contracts. Contracts in process, other work in process, and
finished goods are reported at the lower of cost or net realizable value.
We include raw material amounts in the contracts in process and other work
in process balances. Raw material includes certain general stock materials
but primarily relates to purchases that were made in anticipation of
specific programs that have not been started as of the balance sheet date.
The total amount of raw material included in these in process amounts is
less than 5.0% of the total inventory balance for 2009 and
2008.
|
The
process for evaluating inventory obsolescence or market value issues often
requires the company to make subjective judgments and estimates concerning
future sales levels, quantities and prices at which such inventory will be
sold in the normal course of business. We adjust our inventory by the
difference between the estimated market value and the actual cost of our
inventory to arrive at net realizable value. Changes in estimates of
future sales volume may necessitate future write-downs of inventory value.
Based upon a market evaluation performed in 2002 we wrote down our K-MAX®
inventory by $46.7 million in that year. The K-MAX® inventory balance,
consisting of work in process and finished goods, was $24.6 million as of
December 31, 2009. We believe that it is stated at net realizable value,
although lack of demand for spare parts in the future could result in
additional write-downs of the inventory value. Overall, management
believes that our inventory is appropriately valued and not subject to
further obsolescence in the near term
On
February 12, 2009, we completed the transfer of title to the 11 Australian
SH-2G(A) Super Seasprite helicopters, including related inventory and
equipment. At December 31, 2009, $55.0 million of SH-2G(I) inventory,
formerly SH-2G(A), was included in contracts and other work in process
inventory. We believe there is market potential for these aircraft and we
are actively marketing them to interested potential customers; however a
significant portion of this inventory will be sold after December 31,
2010, based upon the time needed to market the aircraft and prepare them
for sale.
|
Inventory
valuation at our Industrial Distribution segment generally requires less
subjective management judgment than the valuation of certain inventory in
the Aerospace segment. Management reviews the K-MAX® inventory balance on
an annual basis to determine whether any additional write-downs are
necessary. If such a write down were to occur, this could have a
significant impact on our operating results. A 10% write down of the
December 31, 2009 inventory balance would have affected pre-tax earnings
by approximately $2.5 million in 2009.
Management
reviewed the SH-2G(I) inventory balance at December 31, 2009 to determine
that no write-down was necessary. If such a write down were to occur, this
could have a significant impact on our operating results. A 10% write down
of the December 31, 2009 inventory balance would have affected pre-tax
earnings by approximately $5.5 million in 2009.
|
Self-Insured Retentions
Liabilities
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
To
limit our exposure to losses related to health, workers’ compensation,
auto and product/general liability claims we obtain third party insurance
coverage. We have varying levels of deductibles for these claims. Our
total liability/deductible for workers’ compensation is limited to $0.4
million per claim, and for general liability and auto liability we are
limited to $0.3 million per claim. The cost of such benefits is recognized
as expense based on claims filed in each reporting period and an estimate
of claims incurred but not reported (“IBNR”) during such period. The
estimates for the cost of the claims are based upon information provided
to us by the claims administrators and are periodically revised to reflect
changes in loss trends. Our IBNR estimate is based upon historical
trends.
|
Liabilities
associated with these claims are estimated in part by considering
historical claims experience, severity factors and other actuarial
assumptions. Projections of future losses are inherently uncertain because
of the random nature of insurance claims occurrences and the possibility
that actuarial assumptions could change. Such self-insurance accruals
likely include claims for which the losses will be settled over a period
of years.
|
The
financial results of the company could be significantly affected if future
claims and assumptions differ from those used in determining these
liabilities. If more claims are made than were estimated or if the costs
of actual claims increase beyond what was anticipated, reserves recorded
may not be sufficient and additional accruals may be required in future
periods. We do not believe there is a reasonable likelihood that there
will be a material change in the estimates or assumptions we use to
calculate our self-insured liabilities. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to losses
or gains that could be material. A 10% change in our self-insurance
reserve would affect our 2009 pre-tax earnings by $0.6
million.
|
35
Goodwill and Other
Intangible Assets
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
Goodwill
and certain intangible assets that have indefinite lives are evaluated at
least annually for impairment. All intangible assets are also reviewed for
possible impairment whenever changes in conditions indicate that their
carrying value may not be recoverable. The annual evaluation is generally
performed during the fourth quarter, using currently available forecast
information.
In
accordance with generally accepted accounting principles, we test goodwill
for impairment at the reporting unit level, which is one level below our
operating segment level. A component of an operating segment is deemed to
be a reporting unit if it constitutes a business for which discrete
financial information is available and segment management regularly
reviews the operating results of that component.
The
identification and measurement of goodwill impairment involves the
estimation of fair value of the reporting unit as compared to its carrying
value.
The
carrying value of goodwill and other intangible assets was $116.9 million
and $111.8 million as of December 31, 2009 and 2008, respectively. Based
upon its annual evaluation, management has determined that there has been
no impairment of its goodwill and other intangible assets.
|
Management’s
estimate of fair value using the discounted cash flow method is based upon
factors such as projected revenue and operating margin growth rates
reflecting our internal forecasts, terminal growth rates and market
participant weighted-average cost of capital as our discount rate. We
utilize currently available information regarding present industry and
economic conditions and future expectations to prepare our estimates and
perform impairment evaluations.
Management
believes this technique is the most appropriate due to the lack of
comparable sales transactions in the market or publicly-traded companies
with comparable operating and investment characteristics for which
operating data is available to derive valuation multiples for the
reporting units being tested. There have been no updates or changes to our
methodology during 2009.
In
preparing our annual evaluation we used an assumed terminal growth rate of
3.5% for our reporting units. The discount rate utilized to reflect the
risk and uncertainty in the financial markets and specifically in our
internally developed earnings projections ranged from 12% - 13% for our
Aerospace reporting units and 11.5% - 17% for our Industrial Distribution
reporting units. Future changes in these estimates and assumptions could
materially affect the results of our test for goodwill
impairment.
In
preparing our annual evaluation for 2008 we used an assumed terminal
growth rate of 4% for our reporting units. The discount rate utilized to
reflect the risk and uncertainty in the financial markets and specifically
in our internally developed earnings projections was 12% for our Aerospace
reporting units and 13% for our Industrial Distribution reporting units.
The change in the discount rate, when compared to the current year, was
due to the risk and uncertainty in our internally developed financial
projection resulting from the severity of the economic downturn during
2009 and our estimate as to when a broader economic recovery will impact
our reporting units in 2010 and beyond.
|
We
do not currently believe there is a reasonable likelihood that there will
be a material change in estimates or assumptions used to test for
impairment losses on goodwill and other intangible assets. A decrease of
1% in our terminal growth rate or an increase of 1% in our discount rate
would still result in a fair value calculation exceeding our book value
for each of our reporting units. Additionally, a 10% decrease in the fair
value of our reporting units also would not have resulted in an impairment
of goodwill. However, if actual results are not consistent with our
estimates or assumptions or if current economic conditions persist, we may
be exposed to an impairment charge that could be material.
|
36
Long-Term Incentive
Programs
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
The
company maintains a Stock Incentive Plan, which provides for share-based
payment awards, including non-statutory stock options, restricted stock,
stock appreciation rights, and long-term incentive program (LTIP) awards.
We determine the fair value of our non-qualified stock option awards at
the date of grant using a Black-Scholes model. We determine the fair value
of our restricted share awards at the date of grant using an average of
the high and low market price of our stock.
LTIP
awards provide certain senior executives an opportunity to receive award
payments, generally in cash. For each performance cycle, the company’s
financial results are compared to the Russell 2000 indices for the same
periods based upon the following: (a) average return on total capital, (b)
earnings per share growth and (c) total return to shareholders. No awards
will be payable unless the company’s performance is at least in the 25th
percentile of the designated indices. The maximum award is payable if
performance reaches the 75th
percentile of the designated indices. Awards for performance between the
25th and 75th percentiles are determined by straight-line interpolation.
Awards will be paid out at 100% at the 50th
percentile.
In
order to estimate the liability associated with LTIP awards, management
must make assumptions as to how our current performance compares to
current Russell 2000 data based upon the Russell 2000’s historical
results. This analysis is performed on a quarterly basis. When sufficient
Russell 2000 data for a year is available, which typically will not be
until April or May of the following year, management will adjust the
liability to reflect its best estimate of the total award. Actual results
could differ significantly from management’s estimates. The total
estimated liability as of December 31, 2009 was $5.4
million.
|
Option-pricing
models and generally accepted valuation techniques require management to
make assumptions and to apply judgment to determine the fair value of our
awards. These assumptions and judgments include estimating the future
volatility of our stock price, expected dividend yield, future employee
turnover rates and future employee stock option exercise behaviors.
Changes in these assumptions can materially affect the fair value
estimate.
Our
long-term incentive plan requires management to make assumptions regarding
the likelihood of achieving long-term company goals as well as estimate
the impact the Russell 2000 results may have on our accrual.
|
We
do not currently believe there is a reasonable likelihood that there will
be a material change in the estimates or assumptions we use to determine
stock-based compensation expense. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to changes
in stock-based compensation expense that could be material.
If
actual results are not consistent with the assumptions used, the
stock-based compensation expense reported in our financial statements may
not be representative of the actual economic cost of the stock-based
compensation. A 10% change in our stock-based compensation expense for the
year ended December 31, 2009, would have affected pre-tax earnings by
approximately $0.3 million in 2009. Due to the timing of availability of
the Russell data, there is a risk that the amount we have recorded as LTIP
expense could be different from the actual payout. A 10.0 percentage point
increase in the total performance factor earned for our LTIP would result
in a reduction of 2009 pretax earnings of $0.5 million.
|
37
Pension
Plans
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
We
maintain a qualified defined benefit pension plan for our full-time U.S.
employees (with the exception of certain acquired companies that have not
adopted the plan and employees of our Industrial Distribution segment
hired after June 30, 2009) as well as a non-qualified Supplemental
Employees Retirement Plan (SERP) for certain key executives. Expenses and
liabilities associated with each of these plans are determined based upon
actuarial valuations. Integral to these actuarial valuations are a variety
of assumptions including expected return on plan assets, discount rate and
rate of increase in compensation levels. We regularly review these
assumptions, which are updated at the measurement date, December 31st,
and disclosed in Note 16, Pension Plans, in the Notes to Consolidated
Financial Statements included in this Form 10-K. In accordance with
generally accepted accounting principles, the impact of differences
between actual results and the assumptions are accumulated and generally
amortized over future periods, which will affect expense recognized in
future periods.
We
believe that two assumptions, the discount rate and the expected rate of
return on plan assets, are important elements of expense and/or liability
measurement.
|
The
discount rate represents the interest rate used to determine the present
value of future cash flows currently expected to be required to settle the
pension obligation. For 2009, management reviewed the Citigroup Pension
Discount Curve and Liability Index to determine the continued
appropriateness of our discount rate assumptions. This index was designed
to provide a market average discount rate to assist plan sponsors in
valuing the liabilities associated with postretirement obligations.
Additionally, we reviewed the change in the general level of interest
rates since the last measurement date noting that overall rates had
remained consistent with 2008.
Based
upon this information, we used a 5.85% discount rate as of December 31,
2009 for the qualified benefit pension plan. This rate takes into
consideration the participants in our pension plan and the anticipated
payment stream as compared to the Citigroup Index and rounds the results
to the nearest fifth basis point. For the SERP, we used the same
methodology as the pension plan and derived a discount rate of 5.15% in
2009 for the benefit obligation. The difference in the discount rates is
primarily due to the expected duration of SERP payments, which is shorter
than the anticipated duration of benefit payments to be made to the
average participant in the pension plan. The qualified defined benefit
pension plan and SERP both used discount rates of 6.15% at December 31,
2008 for purposes of calculating the benefit obligation.
The
expected long-term rate of return on plan assets represents the average
rate of earnings expected on the funds invested to provide for anticipated
benefit payments. The expected return on assets assumption is developed
based upon several factors. Such factors include current and expected
target asset allocation, our historical experience of returns by asset
class type, a risk premium and an inflation estimate.
|
A
lower discount rate increases the present value of benefit obligations and
increases pension expense. A one percentage point decrease in the assumed
discount rate would have increased pension expense in 2009 by $6.7
million. A one percentage point increase in the assumed discount rate
would have decreased pension expense in 2009 by $4.7 million.
A
lower expected rate of return on pension plan assets would increase
pension expense. The expected return on plan assets was 8.0% for December
31, 2009. A one-percentage point increase/decrease in the assumed return
on pension plan assets assumption would have changed pension expense in
2009 by approximately $3.9 million. With the significant downturn in the
financial markets in 2008, the market value of our pension plan assets
decreased significantly. The actual return on pension plan assets during
2008 was significantly lower than our expected rate of return on pension
plan assets of 8%. However, management believes that 8% is still a valid
assumption for the expected return on pension plan assets due to the
long-term nature of our benefit obligations and the likely returns
associated with our allocation targets to various
investments.
|
38
Income
Taxes
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
Tax
laws in certain of our operating jurisdictions require items to be
reported for tax purposes at different times than the items are reflected
in our financial statements. One example of such temporary differences is
depreciation expense. Other differences are permanent, such as expenses
that are never deductible on our tax returns, an example being a charge
related to the impairment of goodwill. Temporary differences create
deferred tax assets and liabilities. Deferred tax assets generally
represent items that can be used as a tax deduction or credit in our tax
returns in future years for which we have already recorded the tax benefit
in our financial statements. Deferred tax liabilities generally represent
tax expense recognized in our financial statements for which payment is
not yet due or the realized tax benefit of expenses we have already
reported in our tax returns, but have not yet recognized as expense in our
financial statements.
As
of December 31, 2009, we had recognized $84.5 million of net deferred tax
assets, net of valuation allowances. The realization of these benefits is
dependent in part on future taxable income. For those foreign countries or
U.S. states where the expiration of tax loss or credit carry forwards or
the projected operating results indicates that realization is not likely,
a valuation allowance is provided.
|
Management
believes that sufficient income will be earned in the future to realize
deferred income tax assets, net of valuation allowances recorded. The
realization of these deferred tax assets can be impacted by changes to tax
laws or statutory tax rates and future taxable income levels.
Our
effective tax rate on earnings from continuing operations was 30.6% for
2009. Our effective tax rate is based on expected or reported income or
loss, statutory tax rates, and tax planning opportunities available to us
in the various jurisdictions in which we operate. Significant judgment is
required in determining our effective tax rate and in evaluating our tax
positions. We establish reserves when, despite our belief that our tax
return positions are valid and defensible, we believe that certain
positions may not prevail if challenged. We adjust these reserves in light
of changing facts and circumstances, such as the progress of a tax audit
or changes in tax legislation. Our effective tax rate includes the impact
of reserve provisions and changes to reserves that we consider
appropriate. This rate is then applied to our quarterly operating results.
In the event that there is a significant unusual or one-time item
recognized in our operating results, the tax attributable to that item
would be separately calculated and recorded at the same time as the
unusual or one-time item.
|
We
do not anticipate a significant change in our unrecognized tax benefits
within the next twelve months. We file tax returns in numerous U.S. and
foreign jurisdictions, with returns subject to examination for varying
periods, but generally back to and including 2005. It is our policy to
record interest and penalties on unrecognized tax benefits as income
taxes. A one percent increase/decrease in our tax rate would
affect our 2009 earnings by $0.5 million.
|
Environmental
Costs
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
Our
operations are subject to environmental regulation by federal, state and
local authorities in the United States and regulatory authorities with
jurisdiction over our foreign operations. As a result, we have established
and update, as necessary, policies relating to environmental standards of
performance for our operations worldwide.
When
we become aware of an environmental risk, we perform a site study to
ascertain the potential magnitude of contamination and the estimated cost
of remediation. This cost is accrued using a reasonable discount factor
based on the estimated future cost of remediation.
We
continually evaluate the identified environmental issues to ensure the
time to complete the remediation and the total cost of remediation are
consistent with our initial estimate. If there is any change in the cost
and/or timing of remediation, the accrual is adjusted
accordingly.
|
Environmental
costs are accrued when it is probable that a liability has been incurred
and the amount can be reasonably estimated. The most likely cost to be
incurred is accrued based on an evaluation of currently available facts
with respect to each individual site, including existing technology,
current laws and regulations and prior remediation experience. Liabilities
with fixed or readily determinable payment dates are
discounted.
|
At
December 31, 2009, amounts accrued for known environmental
remediation costs were $15.6 million. A 10% change in this accrual could
have impacted pre-tax earnings by $1.6 million. Further information about
our environmental costs is provided in Note 11, Environmental Costs, in
the Notes to Consolidated Financial Statements.
We
believe that expenditures necessary to comply with the present regulations
governing environmental protection will not have a material effect upon
our competitive position, consolidated financial position, results of
operations or cash flows.
The
most significant accrual for remediation relates to our purchase of the
Navy property in 2008 as more fully discussed in Note 11, Environmental
Costs, and Note 18, Commitments and Contingencies, in the Notes to
Consolidated Financial
Statements.
|
39
Derivatives and
Hedging
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From
Assumptions
|
||
We
use derivatives to manage risks related to foreign exchange, our net
investment in certain foreign subsidiaries and interest rates. Accounting
for derivatives as hedges requires that, at inception and over the term of
the arrangement, the hedged item and related derivative meet the
requirements for hedge accounting. The rules and interpretations related
to derivative accounting are complex. If a derivative does not meet the
complex requirements established as a prerequisite for hedge accounting,
changes in the fair value of the derivative must be reported in earnings
rather than as a component of other comprehensive income, without regard
to the offsetting changes in the fair value of the hedged
item.
|
In
evaluating whether a particular relationship qualifies for hedge
accounting, we first determine whether the relationship meets the strict
criteria to qualify for exemption from ongoing effectiveness testing. For
a relationship that does not meet these criteria, we test effectiveness at
inception and quarterly thereafter by determining whether changes in the
fair value of the derivative offset, within a specified range, changes in
the fair value of the hedged item. This test is conducted each reporting
period. If fair value changes fail this test, we discontinue applying
hedge accounting to that relationship prospectively. Fair values of both
the derivative instrument and the hedged item are calculated using
internal valuation models incorporating market-based
assumptions.
|
At
December 31, 2009, derivative assets were $7.0 million and derivative
liabilities were $0.7 million. We had recorded a net loss of $2.6 million,
net of tax, in other comprehensive income. The amount recorded to other
comprehensive income would have been recorded in the Consolidated
Statement of Operations for the year ended December 31, 2009 had the
criteria for hedge accounting not been met. Changes in the fair value of
these instruments will be recorded to other comprehensive income until the
point where either the Company stops utilizing the derivative instruments
as a hedge or the derivative instruments no longer provide an effective
hedge against the impact of foreign currency changes on the underlying
transaction.
During
2009, certain derivative financial instruments no longer met the criteria
necessary to qualify for hedge accounting. The Company recorded changes in
the fair value of these instruments prospectively to the Consolidated
Statements of Operations. The total amount of gain recorded for derivative
instruments not designated for hedge accounting totaled $8.2 million at
December 31, 2009. Further information about our use of derivatives is
provided in Note 6, Derivative Financial Instruments, in the Notes to
Consolidated Financial
Statements.
|
40
RECENT
ACCOUNTING STANDARDS
A summary
of recent accounting standards is included in Note 1, Summary of Significant
Accounting Policies, of the Notes to Consolidated Financial Statements, included
in Item 8, Financial Statements and Supplementary Data, of this Form
10-K.
SELECTED
QUARTERLY FINANCIAL DATA
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||||||
2009
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
|||||||||||||||
(in
thousands, except per share amounts)
|
||||||||||||||||||||
Net
Sales
|
$ | 294,035 | $ | 293,223 | $ | 289,901 | $ | 269,072 | $ | 1,146,231 | ||||||||||
Gross
Profit
|
$ | 77,695 | $ | 78,471 | $ | 76,692 | $ | 73,080 | $ | 305,938 | ||||||||||
Net
Earnings
|
$ | 5,376 | $ | 9,394 | $ | 9,624 | $ | 8,255 | $ | 32,649 | ||||||||||
Basic
earnings per share
|
$ | 0.21 | $ | 0.37 | $ | 0.37 | $ | 0.32 | $ | 1.27 | ||||||||||
Diluted
earnings per share
|
$ | 0.21 | $ | 0.37 | $ | 0.37 | $ | 0.32 | $ | 1.27 | ||||||||||
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||||||
2008
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
|||||||||||||||
(in
thousands, except per share amounts)
|
||||||||||||||||||||
Net
Sales
|
$ | 285,781 | $ | 316,285 | $ | 335,133 | $ | 316,396 | $ | 1,253,595 | ||||||||||
Gross
Profit
|
$ | 76,591 | $ | 86,272 | $ | 88,873 | $ | 80,401 | $ | 332,137 | ||||||||||
Net
Earnings from Continuing Operations
|
$ | 8,868 | $ | 6,090 | $ | 13,530 | $ | 6,619 | $ | 35,107 | ||||||||||
Gain
on Disposal of Discontinued Operations, net of tax
|
$ | — | $ | 323 | $ | — | $ | 169 | $ | 492 | ||||||||||
Net
Earnings
|
$ | 8,868 | $ | 6,413 | $ | 13,530 | $ | 6,788 | $ | 35,599 | ||||||||||
Basic Earnings Per Share
|
||||||||||||||||||||
Basic
from Continuing Operations
|
$ | 0.35 | $ | 0.24 | $ | 0.53 | $ | 0.26 | $ | 1.38 | ||||||||||
Basic
from Disposal of Discontinued Operations
|
$ | — | $ | 0.01 | $ | — | $ | 0.01 | $ | 0.02 | ||||||||||
Basic
|
$ | 0.35 | $ | 0.25 | $ | 0.53 | $ | 0.27 | $ | 1.40 | ||||||||||
Diluted Earnings Per Share
|
||||||||||||||||||||
Diluted
from Continuing Operations
|
$ | 0.35 | $ | 0.24 | $ | 0.53 | $ | 0.26 | $ | 1.38 | ||||||||||
Diluted
from Disposal of Discontinued Operations
|
$ | — | $ | 0.01 | $ | — | $ | 0.01 | $ | 0.02 | ||||||||||
Diluted
|
$ | 0.35 | $ | 0.25 | $ | 0.53 | $ | 0.27 | $ | 1.40 |
Included
within certain annual results are a variety of unusual or significant
adjustments that may affect comparability. The most significant of such
adjustments are described below as well as within Management’s Discussion and
Analysis of Financial Condition and Results of Operations and the Notes to
Consolidated Financial Statements.
Nonrecurring
charges within the 2008 quarterly results are as follows: first quarter, $2.5
million in charges related to the write-off of tooling costs at our Aerospace
Wichita facility; second quarter, $7.8 million in non-cash expense related to
the impairment of the goodwill balance at our Aerospace Wichita facility; third
quarter, $1.6 million of expense related to the cancellation of foreign currency
hedge contracts acquired in connection with the acquisition of U.K.
Composites.
41
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have
various market risk exposures that arise from our ongoing business operations.
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. Our financial results would be
impacted by changes in interest rates, certain foreign currency exchange rates
and commodity prices.
Foreign
Currencies
We have
manufacturing, sales, and distribution facilities in various locations
throughout the world. As a result, we make investments and conduct business
transactions denominated in various currencies, including the U.S. dollar, the
British pound, the European euro, the Canadian dollar, the Mexican peso, and the
Australian dollar. Total annual foreign sales, including foreign export sales,
averaged approximately $168.7 million over the last three years. More than half
of our foreign sales are to Europe or Canada. Foreign sales represented 14.9% of
consolidated net sales in 2009. We estimate a hypothetical 10% adverse change in
foreign currency exchange rates for 2009 would have had an unfavorable impact of
$11.9 million and $1.0 million on sales and operating income, respectively. This
effect would occur from an appreciation of the foreign currencies relative to
the U.S. dollar. We manage foreign currency exposures that are associated with
committed foreign currency purchases and sales and other assets and liabilities
created in the normal course of business at the subsidiary operations level.
Sometimes we may, through the use of forward contracts, hedge the price risk
associated with committed and forecasted foreign denominated payments and rates.
Historically the use of these forward contracts has been minimal. We do not use
derivatives for speculative or trading purposes.
On
February 12, 2009 (the Transfer Date) we completed the transfer of ownership of
the 11 SH-2G(A) Super Seasprite helicopters (along with spare parts and
associated equipment). In accordance with the settlement agreement proceeds from
the sale of these items will be shared on a predetermined basis. In connection
with sharing sale proceeds, we have agreed that total payments of at least $39.5
million (AUS) will be made to the Commonwealth regardless of sales, with at
least $26.7 million (AUS) to be paid by March 2011, and, to the extent
cumulative payments have not yet reached $39.5 million (AUS), additional
payments of $6.4 million (AUS) each in March of 2012 and 2013. During 2008, we
entered into forward contracts for the purpose of hedging these required
payments. These contracts cover $36.5 million (AUS) of the $39.5 million (AUS)
in required payments. See Note 6, Derivative Financial Instruments, in the Notes
to Consolidated Financial Statements for further discussion.
Additionally,
the euro note, which was part of our revolving credit facility and qualified and
had been designated as an effective hedge against the investment in our German
subsidiary (RWG) was repaid during 2009.
Interest
Rates
Our
primary exposure to interest rate risk results from our outstanding debt
obligations and derivative financial instruments employed in the management of
our debt portfolio with interest at current market rates. The level of fees and
interest charged on revolving credit commitments and borrowings are based upon
borrowing levels, market interest rates, and the company's credit
rating.
The
principal debt facilities are a $225.0 million revolving credit agreement that
expires September 17, 2012 and a $50 million term loan agreement entered into on
October 29, 2008 with a four-year term. Total average bank borrowings for
2009 were $90.5 million. The impact of a hypothetical 100 bps increase in the
interest rates on our average bank borrowings would have resulted in a $0.9
million increase in interest expense. Changes in market interest rates would
impact interest rates on our Revolving Credit Agreement, while changes in market
interest rates or our credit rating would impact the interest rates on our Term
Loan Agreement. The other facilities, established for foreign operations, are
comparatively insignificant in amount.
During
the first quarter of 2009, we entered into interest rate swap agreements for the
purpose of hedging our eight quarterly variable-rate interest payments on the
Term Loan Agreement due in 2010 and 2011. These interest rate swap agreements
are designated as cash flow hedges and are intended to manage interest rate risk
associated with our variable-rate borrowings and minimize the negative impact on
our earnings and cash flows of interest rate fluctuations attributable to
changes in LIBOR rates.
Commodity
Prices
We are
exposed to volatility in the price of raw materials used in certain
manufacturing operations as well as a variety of items procured by our
distribution business. These raw materials include, but are not limited to,
aluminum, titanium, nickel, copper and other specialty metals. We manage our
exposure related to these price changes through strategic procurement and sales
practices.
42
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S
REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
KAMAN
CORPORATION AND SUBSIDIARIES
Management
of Kaman Corporation and subsidiaries is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Securities Exchange Act Rule 13a–15(f). Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America. Internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions
involving dispositions of the company’s assets; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that the company’s receipts and expenditures are
being made only in accordance with authorizations of the company’s management
and directors; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the consolidated financial
statements.
Because
of its inherent limitations, internal control over financial reporting and
procedures may not prevent or detect misstatements. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.
Under the
supervision of and with the participation of our management, including the
undersigned, the company has assessed its internal controls over financial
reporting as of December 31, 2009, based on criteria for effective internal
control over financial reporting described in “Internal Control – Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, the company concluded that the company
maintained effective internal control over financial reporting as of December
31, 2009, based on the specified criteria. During our assessment, management did
not identify any material weaknesses in our internal control over financial
reporting. KPMG LLP, an independent registered accounting firm that also audited
our consolidated financial statements included in this report, audited the
effectiveness of internal control over financial reporting and issued their
report thereon which is included herein.
February
25, 2010
/s/ Neal J. Keating
|
/s/ William C. Denninger
|
||
Neal
J. Keating
|
William
C. Denninger
|
||
President
and
|
Senior
Vice President
|
||
Chief
Executive Officer
|
|
and
Chief Financial Officer
|
43
REPORT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders
Kaman
Corporation:
We have
audited the accompanying consolidated balance sheets of Kaman Corporation and
its subsidiaries (Kaman Corporation) as of December 31, 2009 and 2008 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2009. We
also have audited Kaman Corporation’s internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Kaman Corporation’s management is responsible for
these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Controls Over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company's internal control over financial
reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Kaman Corporation as of
December 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles. Also in our
opinion, Kaman Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG
LLP
Hartford,
Connecticut
February
25, 2010
44
CONSOLIDATED
BALANCE SHEETS
KAMAN
CORPORATION AND SUBSIDIARIES
(In
thousands, except share and per share amounts)
At December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 18,007 | $ | 8,161 | ||||
Accounts
receivable, net
|
135,423 | 173,847 | ||||||
Inventories
|
285,263 | 255,817 | ||||||
Deferred
income taxes
|
23,040 | 23,851 | ||||||
Income
taxes receivable
|
— | 3,450 | ||||||
Other
current assets
|
20,870 | 21,390 | ||||||
Total
current assets
|
482,603 | 486,516 | ||||||
Property,
plant and equipment, net
|
81,322 | 79,476 | ||||||
Goodwill
|
88,190 | 83,594 | ||||||
Other
intangibles assets, net
|
28,684 | 28,211 | ||||||
Deferred
income taxes
|
69,811 | 71,926 | ||||||
Other
assets
|
22,457 | 12,890 | ||||||
Total
assets
|
$ | 773,067 | $ | 762,613 | ||||
Liabilities
and Shareholders’ Equity
|
||||||||
Current
liabilities:
|
||||||||
Notes
payable
|
$ | 1,835 | $ | 1,241 | ||||
Current
portion of long-term debt
|
5,000 | 5,000 | ||||||
Accounts
payable – trade
|
79,309 | 84,059 | ||||||
Accrued
salaries and wages
|
19,049 | 21,104 | ||||||
Accrued
pension costs
|
1,105 | 5,878 | ||||||
Accrued
contract losses
|
1,310 | 9,714 | ||||||
Advances
on contracts
|
1,800 | 10,612 | ||||||
Other
accruals and payables
|
39,204 | 40,105 | ||||||
Income
taxes payable
|
5,458 | 1,464 | ||||||
Total
current liabilities
|
154,070 | 179,177 | ||||||
Long-term
debt, excluding current portion
|
56,800 | 87,924 | ||||||
Deferred
income taxes
|
8,352 | 7,926 | ||||||
Underfunded
pension
|
157,266 | 168,148 | ||||||
Due
to Commonwealth of Australia
|
34,067 | — | ||||||
Other
long-term liabilities
|
49,612 | 45,167 | ||||||
Commitments
and contingencies
|
||||||||
Shareholders'
equity:
|
||||||||
Capital
stock, $1 par value per share:
|
||||||||
Preferred
stock, 200,000 shares authorized; none outstanding
|
— | — | ||||||
Common
stock, 50,000,000 shares authorized, voting, 25,817,477 shares issued in
2009 and 25,514,525 shares issued in 2008
|
25,817 | 25,515 | ||||||
Additional
paid-in capital
|
89,624 | 85,073 | ||||||
Retained
earnings
|
302,058 | 283,789 | ||||||
Accumulated
other comprehensive income (loss)
|
(104,042 | ) | (119,658 | ) | ||||
Less
51,000 shares and 43,907 shares of common stock in 2009 and 2008,
respectively, held in treasury, at cost
|
(557 | ) | (448 | ) | ||||
Total
shareholders’ equity
|
312,900 | 274,271 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 773,067 | $ | 762,613 |
See
accompanying notes to consolidated financial statements.
45
CONSOLIDATED
STATEMENTS OF OPERATIONS
KAMAN
CORPORATION AND SUBSIDIARIES
(In
thousands, except per share amounts)
For the Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
sales
|
$ | 1,146,231 | $ | 1,253,595 | $ | 1,086,031 | ||||||
Cost
of sales
|
840,293 | 921,458 | 785,086 | |||||||||
305,938 | 332,137 | 300,945 | ||||||||||
Selling,
general and administrative expenses
|
251,992 | 259,282 | 238,796 | |||||||||
Goodwill
impairment
|
— | 7,810 | — | |||||||||
Net
(gain)/loss on sale of assets
|
4 | (221 | ) | (2,579 | ) | |||||||
Operating
income from continuing operations
|
53,942 | 65,266 | 64,728 | |||||||||
Interest
expense, net
|
5,700 | 4,110 | 7,526 | |||||||||
Other
(income) expense, net
|
1,232 | 1,990 | (325 | ) | ||||||||
Earnings
from continuing operations before income taxes
|
47,010 | 59,166 | 57,527 | |||||||||
Income
tax expense
|
14,361 | 24,059 | 21,036 | |||||||||
Earnings
from continuing operations
|
32,649 | 35,107 | 36,491 | |||||||||
Earnings
from discontinued operations, net of taxes
|
— | — | 7,890 | |||||||||
Gain
on disposal of discontinued operations, net of taxes
|
— | 492 | 11,538 | |||||||||
Earnings
from discontinued operations
|
— | 492 | 19,428 | |||||||||
Net
earnings
|
$ | 32,649 | $ | 35,599 | $ | 55,919 | ||||||
Net
earnings per share:
|
||||||||||||
Basic
earnings per share from continuing operations
|
$ | 1.27 | $ | 1.38 | $ | 1.50 | ||||||
Basic
earnings per share from discontinued operations
|
— | — | 0.32 | |||||||||
Basic
earnings per share from disposal of discontinued
operations
|
— | 0.02 | 0.47 | |||||||||
Basic
net earnings per share
|
$ | 1.27 | $ | 1.40 | $ | 2.29 | ||||||
Diluted
earnings per share from continuing operations
|
$ | 1.27 | $ | 1.38 | $ | 1.46 | ||||||
Diluted
earnings per share from discontinued operations
|
— | — | 0.31 | |||||||||
Diluted
earnings per share from disposal of discontinued
operations
|
— | 0.02 | 0.46 | |||||||||
Diluted
net earnings per share
|
$ | 1.27 | $ | 1.40 | $ | 2.23 | ||||||
Average
shares outstanding:
|
||||||||||||
Basic
|
25,648 | 25,357 | 24,375 | |||||||||
Diluted
|
25,779 | 25,512 | 25,261 | |||||||||
Dividends
declared per share
|
$ | 0.560 | $ | 0.560 | $ | 0.530 |
See
accompanying notes to consolidated financial statements.
46
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
KAMAN
CORPORATION AND SUBSIDIARIES
(In
thousands, except share amounts)
Accumulated
|
||||||||||||||||||||||||||||||||
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||||||
Common Stock
|
Paid-In
|
Retained
|
Comprehensive
|
Treasury Stock
|
Shareholders '
|
|||||||||||||||||||||||||||
Shares
|
$
|
Capital
|
Earnings
|
Income (Loss)
|
Shares
|
$
|
Equity
|
|||||||||||||||||||||||||
Balance
at December 31, 2006
|
24,565,111 | $ | 24,565 | $ | 60,631 | $ | 219,137 | $ | (2,462 | ) | 421,840 | $ | (5,310 | ) | $ | 296,561 | ||||||||||||||||
Net
earnings
|
— | — | — | 55,919 | — | — | — | 55,919 | ||||||||||||||||||||||||
Foreign
currency translation adjustments, net of tax benefit of
$441
|
— | — | — | — | 3,128 | — | — | 3,128 | ||||||||||||||||||||||||
Pension
plan adjustments, net of tax expense of $17,102
|
— | — | — | — | 27,889 | — | — | 27,889 | ||||||||||||||||||||||||
Comprehensive
income
|
86,936 | |||||||||||||||||||||||||||||||
Dividends
|
— | — | — | (13,054 | ) | — | — | — | (13,054 | ) | ||||||||||||||||||||||
Stock
awards issued, net of tax benefit of $1,211
|
36,066 | 36 | 1,939 | — | — | (252,409 | ) | 3,281 | 5,256 | |||||||||||||||||||||||
Share-based
compensation expense
|
20,000 | 20 | 2,935 | — | — | (63,804 | ) | 789 | 3,744 | |||||||||||||||||||||||
Conversion
of debentures
|
560,717 | 561 | 13,278 | — | — | (67,156 | ) | 829 | 14,668 | |||||||||||||||||||||||
Adoption
of FIN 48
|
— | — | — | 415 | — | — | — | 415 | ||||||||||||||||||||||||
Balance
at December 31, 2007
|
25,181,894 | $ | 25,182 | $ | 78,783 | $ | 262,417 | $ | 28,555 | 38,471 | $ | (411 | ) | $ | 394,526 | |||||||||||||||||
Net
earnings
|
— | — | — | 35,599 | — | — | — | 35,599 | ||||||||||||||||||||||||
Foreign
currency translation adjustments, net of tax expense of
$224
|
— | — | — | — | (27,782 | ) | — | — | (27,782 | ) | ||||||||||||||||||||||
Unrealized
gain on derivative instruments, net of tax expense of $493
|
— | — | — | — | 804 | — | — | 804 | ||||||||||||||||||||||||
Pension
plan adjustments, net of tax benefit of $74,279
|
— | — | — | — | (121,235 | ) | — | — | (121,235 | ) | ||||||||||||||||||||||
Comprehensive
loss
|
(112,614 | ) | ||||||||||||||||||||||||||||||
Dividends
|
— | — | — | (14,227 | ) | — | — | — | (14,227 | ) | ||||||||||||||||||||||
Stock
awards issued, net of tax benefit of $349
|
209,586 | 210 | 3,406 | — | — | — | — | 3,616 | ||||||||||||||||||||||||
Share-based
compensation expense
|
123,045 | 123 | 2,884 | — | — | 5,436 | (37 | ) | 2,970 | |||||||||||||||||||||||
Balance
at December 31, 2008
|
25,514,525 | $ | 25,515 | $ | 85,073 | $ | 283,789 | $ | (119,658 | ) | 43,907 | $ | (448 | ) | $ | 274,271 | ||||||||||||||||
Net
earnings
|
— | — | — | 32,649 | — | — | — | 32,649 | ||||||||||||||||||||||||
Foreign
currency translation adjustments, net of tax benefit of
$268
|
— | — | — | — | 9,241 | — | — | 9,241 | ||||||||||||||||||||||||
Unrealized
loss on derivative instruments, net of tax benefit of
$1,002
|
— | — | — | — | (1,633 | ) | — | — | (1,633 | ) | ||||||||||||||||||||||
Pension
plan adjustments, net of tax expense of $4,851
|
— | — | — | — | 8,008 | — | — | 8,008 | ||||||||||||||||||||||||
Comprehensive
income
|
48,265 | |||||||||||||||||||||||||||||||
Dividends
|
— | — | — | (14,380 | ) | — | — | — | (14,380 | ) | ||||||||||||||||||||||
Stock
awards issued, net of tax expense of $55
|
128,802 | 128 | 1,690 | — | — | 5,154 | (104 | ) | 1,714 | |||||||||||||||||||||||
Share-based
compensation expense
|
174,150 | 174 | 2,861 | — | — | 1,939 | (5 | ) | 3,030 | |||||||||||||||||||||||
Balance
at December 31, 2009
|
25,817,477 | $ | 25,817 | $ | 89,624 | $ | 302,058 | $ | (104,042 | ) | 51,000 | $ | (557 | ) | $ | 312,900 |
See
accompanying notes to consolidated financial statements.
47
CONSOLIDATED
STATEMENTS OF CASH FLOWS
KAMAN
CORPORATION AND SUBSIDIARIES
(In
thousands)
For the Year Ended December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Earnings
from continuing operations
|
$ | 32,649 | $ | 35,107 | $ | 36,491 | ||||||
Adjustments
to reconcile earnings from continuing operations to net cash provided by
(used in) operating activities of continuing operations:
|
||||||||||||
Depreciation
and amortization
|
16,104 | 12,842 | 9,893 | |||||||||
Change
in allowance for doubtful accounts
|
113 | 217 | (3 | ) | ||||||||
Net
(gain) loss on sale of assets
|
4 | (221 | ) | (2,579 | ) | |||||||
Goodwill
impairment
|
— | 7,810 | — | |||||||||
Loss
on Australian payable, net of gain on derivative
instruments
|
1,483 | 306 | — | |||||||||
Stock
compensation expense
|
3,084 | 2,109 | 3,827 | |||||||||
Excess
tax (expense) benefit from share-based compensation
arrangements
|
55 | (349 | ) | (1,171 | ) | |||||||
Deferred
income taxes
|
(1,102 | ) | 10,108 | (7,780 | ) | |||||||
Changes
in assets and liabilities, excluding effects of
acquisitions/divestures:
|
||||||||||||
Accounts
receivable
|
(712 | ) | (3,610 | ) | 4,255 | |||||||
Inventories
|
24,229 | (35,453 | ) | (23,765 | ) | |||||||
Income
tax receivable
|
3,450 | (3,450 | ) | — | ||||||||
Other
current assets
|
944 | 3,540 | (3,373 | ) | ||||||||
Accounts
payable
|
(7,216 | ) | (5,317 | ) | 931 | |||||||
Accrued
contract losses
|
(2,335 | ) | 206 | (2,033 | ) | |||||||
Advances
on contracts
|
(281 | ) | 1,103 | (706 | ) | |||||||
Accrued
expenses and payables
|
(3,644 | ) | (11,999 | ) | (2,871 | ) | ||||||
Income
taxes payable
|
3,797 | (11,591 | ) | 4,275 | ||||||||
Pension
liabilities
|
(1,073 | ) | (12,790 | ) | 3,312 | |||||||
Other
long-term liabilities
|
905 | (2,273 | ) | 6,878 | ||||||||
Net
cash provided by (used in) operating activities of continuing
operations
|
70,454 | (13,705 | ) | 25,581 | ||||||||
Net
cash provided by (used in) operating activities of discontinued
operations
|
— | (14 | ) | 209 | ||||||||
Net
cash provided by (used in) operating activities
|
70,454 | (13,719 | ) | 25,790 | ||||||||
Cash
flows from investing activities:
|
||||||||||||
Proceeds
from sale of assets
|
59 | 210 | 5,741 | |||||||||
Net
proceeds from sale of discontinued operations
|
— | 447 | 112,302 | |||||||||
Expenditures
for property, plant & equipment
|
(13,567 | ) | (16,000 | ) | (14,226 | ) | ||||||
Acquisition
of businesses including earn out adjustment, net of cash
received
|
(704 | ) | (106,131 | ) | (3,238 | ) | ||||||
Other,
net
|
(2,055 | ) | (4,302 | ) | (4,918 | ) | ||||||
Cash
provided by (used in) investing activities of continuing
operations
|
(16,267 | ) | (125,776 | ) | 95,661 | |||||||
Cash
provided by (used in) investing activities of discontinued
operations
|
— | — | 301 | |||||||||
Cash
provided by (used in) investing activities
|
(16,267 | ) | (125,776 | ) | 95,962 | |||||||
Cash
flows from financing activities:
|
||||||||||||
Net
borrowings (repayments) under revolving credit agreements
|
(25,777 | ) | 31,636 | (45,286 | ) | |||||||
Proceeds
from issuance of long-term debt
|
— | 50,000 | — | |||||||||
Debt
repayment
|
(5,000 | ) | — | (1,722 | ) | |||||||
Net
change in book overdraft
|
1,444 | 5,003 | (4,613 | ) | ||||||||
Proceeds
from exercise of employee stock plans
|
1,844 | 3,616 | 5,256 | |||||||||
Dividends
paid
|
(14,338 | ) | (14,181 | ) | (12,552 | ) | ||||||
Debt
issuance costs
|
(3,404 | ) | (645 | ) | (150 | ) | ||||||
Windfall
tax (expense) benefit
|
(55 | ) | 349 | 1,171 | ||||||||
Other
|
133 | (723 | ) | 1,444 | ||||||||
Cash
provided by (used in) financing activities of continuing
operations
|
(45,153 | ) | 75,055 | (56,452 | ) | |||||||
Cash
provided by (used in) financing activities of discontinued
operations
|
— | — | (4,744 | ) | ||||||||
Cash
provided by (used in) financing activities
|
(45,153 | ) | 75,055 | (61,196 | ) | |||||||
Net
increase (decrease) in cash and cash equivalents
|
9,034 | (64,440 | ) | 60,556 | ||||||||
Effect
of exchange rate changes on cash and cash equivalents
|
812 | (1,297 | ) | 622 | ||||||||
Cash
and cash equivalents at beginning of period
|
8,161 | 73,898 | 12,720 | |||||||||
Cash
and cash equivalents at end of period
|
$ | 18,007 | $ | 8,161 | $ | 73,898 |
See
accompanying notes to consolidated financial statements.
48
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009, 2008 and 2007
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kaman
Corporation, headquartered in Bloomfield, Connecticut, was incorporated in 1945.
We are a diversified company that conducts business in the aerospace and
industrial distribution markets. We report information for ourselves and our
subsidiaries (collectively, the "Company") in two business segments, Aerospace
and Industrial Distribution.
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of the
company and its subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation. Certain amounts in prior year financial
statements and notes thereto have been reclassified to conform to current year
presentation.
During
the second quarter of 2009, the Company implemented modifications to its system
of reporting, resulting from changes to its internal organization over the
preceding year, which changed its reportable segments to Industrial Distribution
and Aerospace. The Company previously had five reportable business segments,
Industrial Distribution and four Aerospace segments. See Note 21, Segment and
Geographic Information, for further discussion of the change in the Company’s
segments. Prior period disclosures have been adjusted to reflect the change in
reportable segments.
Use
of Estimates
The
preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Significant items subject to such estimates and assumptions include the carrying
amount of property, plant and equipment, intangibles and goodwill; valuation
allowances for receivables, inventories and deferred income tax assets;
valuation of share-based compensation and vendor incentives; assets and
obligations related to employee benefits; estimates of environmental remediation
costs; and accounting for long-term contracts. Actual results could differ from
those estimates.
Foreign
Currency Translation
The
company has certain operations outside the United States that prepare financial
statements in currencies other than the U.S. dollar. For these operations,
results of operations and cash flows are translated using the average exchange
rate throughout the period. Assets and liabilities are generally translated at
end of period rates. The gains and losses associated with these translation
adjustments are included as a component of accumulated other comprehensive
income (loss) in shareholders’ equity.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of trade accounts receivable. The carrying amounts of
these items as well as trade accounts payable and notes payable approximate fair
value due to the short-term maturity of these instruments. The Aerospace segment
had one customer, the Commonwealth of Australia, which accounted for 23.3% of
the consolidated accounts receivable balance as of December 31, 2008. During
2008, the Company and the Commonwealth of Australia terminated the SH-2G(A)
Super Seasprite program on mutually agreed terms. As part of this termination
agreement the accounts receivable balance, totaling $40.6 million as of December
31, 2008, was eliminated in connection with the transfer of the Australian
program inventory and equipment to the Company on February 12, 2009. See Note
18, Commitments and Contingencies, for further discussion. No individual
customer accounted for more than 10% of consolidated net sales. Foreign sales
were approximately 14.9%, 14.6% and 14.0% of the company’s net sales in 2009,
2008 and 2007, respectively, and are concentrated in the United Kingdom, Canada,
Germany, Mexico, New Zealand, Australia and Asia.
Additional
Cash Flow Information
On
February 12, 2009, the Company completed the transfer of ownership of the
Australian SH-2G(A) Super Seasprite Program inventory and equipment. As a
result, the Company recorded a non-cash inventory acquisition of $52.7 million,
which represented the elimination of $32.0 million of net unbilled receivables,
the elimination of $6.1 million of accrued contract losses, the recognition of
the $25.8 million minimum payment liability due to the Commonwealth of Australia
and $1.0 million of additional costs required to close out the program. See Note
7, Inventories, for further discussion.
Non-cash
investing activities in 2008 include $2.4 million in costs related to the
acquisitions made by the Company’s Industrial Distribution segment as well as
the purchase of the NAVAIR property for $10.3 million, which represents the
assumption of the associated environmental remediation costs. See Note 11,
Environmental Costs, for further discussion. There were no non-cash investing
activities in 2009 or 2007.
49
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Additional
Cash Flow Information - Continued
Non-cash
financing activities in 2009 include an adjustment to other comprehensive income
related to the underfunding of the pension and SERP plans and changes in the
fair value of derivative financial instruments that qualified for hedge
accounting. The total adjustment was $6.4 million, net of tax of $3.8 million.
Non-cash financing activities in 2008 include an adjustment to other
comprehensive income related to the underfunding of the pension and SERP plans
and changes in the fair value of derivative financial instruments that qualified
for hedge accounting. The total adjustment was $120.4 million, net of tax of
$73.8 million. Non-cash financing activities in 2007 include the conversion of
14,668 debentures in 2007 into 627,873 shares of common stock. In 2007, we
recorded an adjustment to other comprehensive income related to the overfunding
of our pension plan, offset to some extent by an underfunding of our SERP.
The total adjustment to other comprehensive income in 2007 was $27.9 million,
net of tax of $17.2 million. The Company describes its pension obligations in
more detail in Note 16, Pension Plans.
Revenue
Recognition
Sales and
estimated profits under long-term contracts are generally recognized using the
percentage-of-completion method of accounting, using as a measurement basis
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. Reviews of contracts are made routinely
throughout their lives and the impact of 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. In
cases where we have multiple contracts with a single customer, each contract is
generally treated as a separate profit center and accounted for as such. Revenue
is recognized when the product has been shipped or delivered depending upon when
title and risk of loss have passed. For certain U.S. government contracts
delivery is deemed to have occurred when work is substantially complete and
acceptance by the customer has occurred by execution of a Material Inspection
and Receiving Report, DD Form 250 or Memorandum of Shipment.
Sales
contracts are initially reviewed to ascertain if there is a multiple element
arrangement. If such an arrangement exists and there is no evidence of
stand-alone value for each element of the undelivered items, recognition of
sales for the arrangement is deferred until all elements of the arrangement are
delivered and risk of loss and title have passed. For elements that do have
stand-alone value or contracts that are not considered multiple element
arrangements, sales and related costs of sales are recognized when services have
been completed or the product has been shipped or delivered depending upon when
title and risk of loss have passed.
As of
December 31, 2009 and 2008, approximately $2.8 million and $1.8 million of
pre-contract costs were included in inventory, which represented 1.0% and 0.7%
of total inventory, respectively. Pre-contract costs incurred for items such as
materials or tooling for anticipated contracts are included in inventory if
recovery of such costs is considered probable. Thereafter, if the Company
determines it will not be awarded an anticipated contract and the associated
pre-contract costs cannot be applied to another program the costs are expensed
immediately. Learning or start-up costs incurred in connection with existing or
anticipated follow-on contracts are charged to the existing contract unless the
terms of the contract permit recovery of these costs over a specific contractual
term and provide for reimbursement if the contract is cancelled.
If it is
probable that a claim with respect to change orders will result in additional
contract revenue and the amount of such additional revenue can be reliably
estimated, then the additional contract revenue is considered in our accounting
for the program, but only if the contract provides a legal basis for the claim,
the additional costs were unforeseen and not caused by deficiencies in our
performance, the costs are identifiable and reasonable in view of the work
performed and the evidence supporting the claim is objective and verifiable. If
these requirements are met, the claim portion of the program is accounted for
separately to ensure revenue from the claim is recorded only to the extent claim
related costs have been incurred; accordingly, no profit with respect to such
costs is recorded until the change order is formally approved. If these
requirements are not met, the forecast of total contract cost at completion
(which is used to calculate the gross margin rate) for the basic contract is
increased to include all incurred and anticipated claim related
costs.
Recognition
of sales not accounted for under long-term contract accounting occurs when the
sales price is fixed, collectability is reasonably assured and the product’s
title and risk of loss has transferred to the customer. The Company includes
freight costs charged to customers in net sales and the correlating expense as a
cost of sales. Sales tax collected from customers is excluded from net sales in
the accompanying Consolidated Statements of Operations.
50
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cost
of Sales and Selling, General and Administrative Expenses
Cost of
sales includes costs of products and services sold (i.e., purchased product, raw
material, direct labor, engineering labor, outbound freight charges,
depreciation and amortization, indirect costs and overhead charges). Selling
expenses primarily consist of advertising, promotion, bid and proposal, employee
payroll and corresponding benefits and commissions paid to sales and marketing
personnel. General and administrative expenses primarily consist of employee
payroll including executive, administrative and financial personnel and
corresponding benefits, incentive compensation, independent research and
development, consulting expenses, warehousing costs, depreciation and
amortization. The Aerospace segment includes general and administrative expenses
as an element of program cost and inventory for certain government
contracts.
Certain
inventory related costs, including purchasing costs, receiving costs and
inspection costs, for the Industrial Distribution segment are not included in
the cost of sales line item. For the years ended December 31, 2009, 2008 and
2007, $2.4 million, $2.7 million and $2.9 million, respectively, of such costs
are included in general and administrative expenses.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash on hand, demand deposits and short-term cash
investments. These investments are liquid in nature and have original maturities
of three months or less. Book overdraft positions, which occur when total
outstanding issued checks exceed available cash balances at a single financial
institution at the end of each reporting period, are reclassified to accounts
payable within the consolidated balance sheets. At December 31, 2009 and 2008,
the Company had book overdrafts of $15.2 million and $13.7 million,
respectively, classified in accounts payable.
Accounts
Receivable
The
Company has three types of accounts receivable: (a) Trade receivables, which
consist of amounts billed and currently due from customers; (b) U.S. Government
contracts, which consist of (1) amounts billed, and (2) costs and accrued profit
– not billed; and (c) Commercial and other government contracts, which consist
of (1) amounts billed, and (2) costs and accrued profit – not
billed.
The
allowance for doubtful accounts reflects management’s best estimate of probable
losses inherent in the trade accounts receivable and billed contracts balance.
Management determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence.
Inventories
Inventory
of merchandise for resale is stated at cost (using the average costing method)
or market, whichever is lower. Contracts and other work in process and finished
goods are valued at production cost represented by raw material, labor and
overhead. Initial tooling and startup costs may be included, where applicable.
Contracts and other work in process and finished goods are not reported at
amounts in excess of net realizable values. The Company includes raw material
amounts in the contracts in process and other work in process balances. Raw
material includes certain general stock materials but primarily relates to
purchases that were made in anticipation of specific programs for which
production has not been started as of the balance sheet date. The total amount
of raw material included in these work in process amounts is less than 5% of the
total inventory balance.
Property,
Plant and Equipment
Property,
plant and equipment is recorded at cost. Depreciation is computed primarily on a
straight-line basis over the estimated useful lives of the assets. The estimated
useful lives for buildings range from 15 to 30 years and for leasehold
improvements range from 5 to 20 years, whereas machinery, office furniture and
equipment generally have useful lives ranging from 3 to 10 years. At the time of
retirement or disposal, the acquisition cost of the asset and related
accumulated depreciation are eliminated and any gain or loss is credited to or
charged against income.
51
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property,
Plant and Equipment – Continued
Long-lived
assets, such as property, plant, and equipment, and purchased intangible assets
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be
recoverable. If circumstances require a long-lived asset be tested for possible
impairment, the Company first compares undiscounted cash flows expected to be
generated by an asset to the carrying value of the asset. If the carrying value
of the long-lived asset is not recoverable on an undiscounted cash flow basis,
an impairment is recognized to the extent that the carrying value exceeds its
fair value. Fair value is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary.
Maintenance
and repair items are charged against income as incurred, whereas renewals and
betterments are capitalized and depreciated.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in a purchase business combination and is reviewed for
impairment at least annually. The goodwill impairment test is a two-step test.
Under the first step, the fair value of the reporting unit is compared with its
carrying value (including goodwill). If the fair value of the reporting unit is
less than its carrying value, an indication of goodwill impairment exists for
the reporting unit and the enterprise must perform step two of the impairment
test (measurement). Under step two, an impairment loss is recognized for any
excess of the carrying amount of the reporting unit’s goodwill over the implied
fair value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation. The residual fair value after this allocation is the
implied fair value of the reporting unit goodwill. Fair value of the reporting
unit is determined using a discounted cash flow analysis. The discounted cash
flow technique calculates the net present value of expected future cash flows
from operations of the reporting unit being tested. Management believes
this technique is the most appropriate due to the lack of comparable sales
transactions in the market or publicly-traded companies with comparable
operating and investment characteristics for which operating data is available
to derive valuation multiples for the reporting units being tested. If the fair
value of the reporting unit exceeds its carrying value, step two need not be
performed.
Goodwill
and intangible assets with indefinite lives are evaluated annually for
impairment in the fourth quarter, based on annual forecast information.
Intangible assets with finite lives are amortized using the straight-line method
over their estimated period of benefit, which generally ranges from 10 to 20
years. The goodwill and other intangible assets are also reviewed for possible
impairment whenever changes in conditions indicate that the fair value of a
reporting unit is below its carrying value. See Note 9, Goodwill and Other
Intangible Assets, Net, for discussion of the goodwill impairment charge taken
during the second quarter of 2008. Based upon the annual impairment assessment,
there were no additional goodwill or intangible asset impairments recorded at
December 31, 2009, 2008 or 2007.
Product
Warranty Costs
Reserves
are recorded on the consolidated balance sheet in other accruals and payables to
reflect the Company’s contractual liabilities related to warranty commitments to
customers. Warranty coverage of various lengths and terms is provided to
customers based upon standard terms and conditions or negotiated contractual
agreements. An estimated warranty expense is recorded at the time of the sale
based upon historical warranty return rates and repair costs, or at the point in
time when a specific warranty related expense is considered probable and can be
estimated.
Vendor
Incentives
The
Company’s Industrial Distribution segment enters into agreements with certain
vendors providing for inventory purchase incentives that are generally earned
upon achieving specified volume-purchasing levels. The company recognizes rebate
income relative to specific rebate programs as a reduction of the cost of
inventory based on a systematic and rational allocation of the cash
consideration offered to each of the underlying transactions that results in
progress toward earning the rebate, provided that the amounts are probable and
reasonably estimable. As of December 31, 2009 and 2008, total vendor incentive
receivables, included in other current assets, was approximately $8.1 million
and $9.2 million, respectively.
52
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Self-Insured
Retentions
To limit
exposure to losses related to health, workers’ compensation, auto and product
general liability claims, the Company obtains third-party insurance coverage.
The Company has varying levels of deductibles for these claims. The total
liability/deductible for workers’ compensation is limited to $0.4 million per
claim and for product/general liability and auto liability the limit is $0.3
million per claim. The cost of such benefits is recognized as expense based on
claims filed in each reporting period and an estimate of claims incurred but not
reported (“IBNR”) during such period. The estimates for the IBNR is based upon
information provided to us by the claims administrators and are periodically
revised to reflect changes in loss trends. The IBNR estimate is based upon
historical trends. These amounts are included in other accruals and payables on
the consolidated balance sheets.
Liabilities
associated with these claims are estimated in part by considering historical
claims experience, severity factors and other actuarial assumptions. Projections
of future losses are inherently uncertain because of the random nature of
insurance claim occurrences and changes that could occur in actuarial
assumptions. Such self-insurance accruals will likely include claims for which
the ultimate losses will be settled over a period of years.
Research
and Development
Research
and development costs not specifically covered by contracts are charged against
income as incurred and included in selling, general and administrative expenses.
Such costs amounted to $4.1 million, $4.2 million and $3.3 million in 2009, 2008
and 2007, respectively.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
The
Company records a benefit for uncertain tax positions in the financial
statements only when it determines it is more likely than not that such a
position will be sustained upon examination by taxing authorities based on the
technical merits of the position. Unrecognized tax benefits represent the
difference between the position taken and the benefit reflected in the financial
statements.
Share-Based
Payment Arrangements
The
Company records compensation expense for share-based awards based upon an
assessment of the grant date fair value of the awards. The fair value of each
option award is estimated on the date of grant using the Black-Scholes option
valuation model. A number of assumptions are used to determine the fair value of
options granted. These include expected term, dividend yield, volatility of the
options and the risk free interest rate.
Derivative
Financial Instruments
On
January 1, 2009, the Company adopted guidance which amends and expands the
disclosure requirements for derivative instruments and hedging activities with
the intent to provide users of financial statements with an enhanced
understanding of: (i) how and why an entity uses derivative instruments; (ii)
how derivative instruments and related hedged items are accounted for; and (iii)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows.
The
Company is exposed to certain risks relating to its ongoing business operations,
including market risks relating to fluctuations in foreign currency exchange
rates and interest rates. Derivative financial instruments are recognized
on the consolidated balance sheets as either assets or liabilities and are
measured at fair value. Changes in the fair values of derivatives are recorded
each period in earnings or accumulated other comprehensive income, depending on
whether a derivative is effective as part of a hedged transaction. Gains and
losses on derivative instruments reported in accumulated other comprehensive
income are subsequently included in earnings in the periods in which earnings
are affected by the hedged item. The Company does not use derivative instruments
for speculative purposes.
53
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pension
Accounting
The
Company accounts for its defined benefit pension plan by recognizing the
overfunded or underfunded status of the plans, calculated as the difference
between the plan assets and the projected benefit obligation, as an asset or
liability on the balance sheet, with changes in the funded status recognized
through comprehensive income in the year in which they occur.
Recent
Accounting Standards
In
September 2009, the Financial Accounting Standards Board (“FASB”) issued
guidance related to revenue recognition for multiple element deliverables which
eliminates the requirement that all undelivered elements must have objective and
reliable evidence of fair value before a company can recognize the portion of
the consideration that is attributable to items that already have been
delivered. Under the new guidance, the relative selling price method is required
to be used in allocating consideration between deliverables and the residual
value method will no longer be permitted. This guidance is effective
prospectively for revenue arrangements entered into or materially modified in
2011 although early adoption is permitted. A company may elect, but will not be
required, to adopt the amendments retrospectively for all prior periods. The
Company is currently evaluating this guidance and has not yet determined the
impact, if any, that it will have on the consolidated financial
statements.
In
June 2009, the FASB issued guidance which eliminates the concept of a
“qualifying special-purpose entity”, replaces the quantitative approach for
determining which enterprise has a controlling financial interest in a variable
interest entity with a qualitative approach focused on identifying which
enterprise has a controlling financial interest through the power to direct the
activities of a variable interest entity that most significantly impact the
entity’s economic performance. Additionally, this guidance requires enhanced
disclosures that will provide users of financial statements with more
information about an enterprise’s involvement in a variable interest entity and
is effective for fiscal years beginning after November 15, 2009. The
adoption of this guidance is not expected to have an impact on the Company’s
consolidated financial statements.
In
June 2009, the FASB established the FASB Accounting Standards Codification
TM
(Codification) which became the source of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. On the effective date, the
Codification superseded all then-existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification became
nonauthoritative. The Codification is effective for interim and annual
reporting periods ending after September 15, 2009. The adoption of the
Codification did not have an impact on the Company’s consolidated financial
statements.
In
May 2009, the FASB issued guidance which established principles and
requirements for recognition and disclosure of subsequent events. In particular,
it sets forth the period after the balance sheet date during which management of
a reporting entity shall evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity shall recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity shall make about events or transactions that occurred
after the balance sheet date. This guidance is to be applied to the
accounting for and disclosure of subsequent events not addressed in other
applicable GAAP and is effective for interim and annual reporting periods ending
after June 15, 2009. The adoption of these principles and requirements did not
have an impact on the Company’s consolidated financial statements.
54
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Standards – Continued
In
April 2009, the FASB issued guidance which amends the provisions for the
initial recognition and measurement, subsequent measurement and accounting, and
disclosures for assets and liabilities arising from contingencies in business
combinations. The guidance eliminated the distinction between contractual and
non-contractual contingencies, including the initial recognition and measurement
criteria for business combinations. The guidance is effective for contingent
assets and contingent liabilities acquired in business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The nature and magnitude of
the specific effects of this guidance, if any, on the Company’s future results
of operations will depend upon the nature and magnitude of any contingencies
associated with future acquisitions.
In
December 2008, the FASB issued guidance on disclosures about plan assets of
defined benefit pension and other postretirement benefit plans, about how plan
investment allocation decisions are made, the major categories of plan assets,
the inputs and valuation techniques used to measure the fair value of plan
assets, the effect of fair value measurements using significant unobservable
inputs and significant concentrations of risk within plan assets. This guidance
is effective for fiscal years ending after December 15, 2009, with
prospective application and requires enhanced disclosures, which the Company is
providing in these consolidated financial statements. This guidance does not
change the accounting for pensions and will not have any impact on the Company’s
results of operations, financial condition or liquidity.
2.
DISCONTINUED OPERATIONS
The
following tables provide information regarding the results of discontinued
operations:
For the year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Net
sales of discontinued operations
|
$ | — | $ | — | $ | 214,091 | ||||||
Income
from discontinued operations
|
— | — | 12,465 | |||||||||
Other
income (expense) from discontinued operations
|
— | — | 98 | |||||||||
Earnings
from discontinued operations before income taxes
|
— | — | 12,563 | |||||||||
Provision
for income taxes
|
— | — | (4,673 | ) | ||||||||
Net
earnings from discontinued operations before gain on
disposal
|
$ | — | $ | — | $ | 7,890 | ||||||
Gain
on disposal of discontinued operations
|
— | 506 | 18,065 | |||||||||
Provision
for income taxes on gain
|
— | (14 | ) | (6,527 | ) | |||||||
Net
gain on disposal
|
— | 492 | 11,538 | |||||||||
Net
earnings from discontinued operations
|
$ | — | $ | 492 | $ | 19,428 |
In
December 2007, the Company completed its sale of all of the capital stock of its
wholly owned subsidiary, Kaman Music Corporation, to Fender Musical Instruments
Corporation (“FMIC” or “Fender”). Pursuant to the terms of the stock purchase
agreement, as amended, Kaman received $119.5 million in cash, which includes the
purchase price of $117.0 million and certain working capital and cash
adjustments made at closing as set forth in the stock purchase agreement. The
purchase price was subject to additional specified post-closing purchase price
adjustments. The total pre-tax gain net of transaction costs was $18.6 million.
The company used a portion of the proceeds to pay down the majority of its
outstanding indebtedness.
This
segment qualified as an asset group to be disposed and therefore the Company has
reported the results of operations and consolidated financial position of this
segment as discontinued operations within the consolidated financial statements
for all periods presented.
55
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
3.
ACQUISITIONS AND DIVESTITURES
The
Company incurred costs of $0.7 million, $106.1 million and $3.2 million for the
acquisition of businesses during 2009, 2008 and 2007, respectively. Included in
these acquisition costs are contingency payments to the former owners of the
Aerospace Orlando facility. These payments are based on the attainment of
certain milestones, and over the term of the agreement could total $25.0
million. These contingency payments are recorded as additional goodwill and
totaled $0.2 million, $0.9 million and $2.8 million during 2009, 2008 and 2007,
respectively.
During
2008, the Company acquired three businesses, which were accounted for as
purchase transactions. Accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on estimates of fair value. The
excess of the purchase price over the fair value of the net assets acquired,
including intangible assets, has been allocated to goodwill. The operating
results for Brookhouse Holdings Ltd (“U.K. Composites”), acquired in June 2008,
Industrial Supply Corp (“ISC”), acquired in March 2008, and Industrial Rubber
and Mechanics Inc. (“INRUMEC”), acquired in October 2008, have been included in
our consolidated financial statements from the date of acquisition.
During
2007 the Company purchased the remaining minority interest in Delamac de Mexico
S.A. de C.V. (“Delamac”) for $0.5 million. In addition, the Company sold the
Aerospace segment’s 40mm assets, comprised principally of equipment and
inventory. These assets were sold to DSE, Inc., the former owner of the
Precision Products, Inc. - Orlando operation (“KPP Orlando”), previously Dayron.
The total sales price was $7.0 million, consisting of cash of $5.5 million and
offsets of acquisition earn out liabilities associated with the Company’s
purchase of KPP Orlando in 2002, a portion of which was being withheld pending
the resolution of the warranty matter relative to the FMU-143 program. (See Note
18, Commitment and Contingencies, for further discussion.) In 2007, the Company
recorded a gain on the sale of the assets of $2.6 million. In 2008, additional
consideration of $0.5 million was received in the form of offsets against earn
out payments due to the former owners as a result of Precision Products, Inc.
achieving certain milestones and therefore in 2008 the Company recorded an
additional $0.5 million gain on the sale of the 40mm assets.
In 2007,
the Company completed its sale of all of the capital stock of its wholly owned
subsidiary, Kaman Music Corporation, to FMIC. See Note 2, Discontinued
Operations, for discussion of the Kaman Music Corporation sale.
4.
ACCOUNTS RECEIVABLE, NET
Accounts
receivable consist of the following:
At December 31,
|
||||||||
2009
|
2008
|
|||||||
In
thousands
|
||||||||
Trade
receivables
|
$ | 65,524 | $ | 77,071 | ||||
U.S.
Government contracts:
|
||||||||
Billed
|
33,784 | 28,361 | ||||||
Costs
and accrued profit – not billed
|
7,034 | 2,450 | ||||||
Commercial
and other government contracts:
|
||||||||
Billed
|
30,046 | 26,845 | ||||||
Costs
and accrued profit – not billed
|
1,442 | 41,292 | ||||||
Less
allowance for doubtful accounts
|
(2,407 | ) | (2,172 | ) | ||||
Total
|
$ | 135,423 | $ | 173,847 |
Accounts
receivable, net also includes amounts for matters such as contract changes,
negotiated settlements and claims for unanticipated contract costs, which
totaled $0.9 million and $2.9 million at December 31, 2009 and December 31,
2008, respectively.
On
February 12, 2009, the unbilled receivables associated with the SH-2G(A) program
were $40.6 million and the balance of amounts received as advances on this
contract were $8.6 million. These balances, totaling a net $32.0 million, were
eliminated in connection with the transfer of the Australian program inventory
and equipment to the Company. See Note 7, Inventories, for further
discussion.
56
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
5.
FAIR VALUE MEASUREMENTS
Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date.
The
Company uses a three-level fair value hierarchy that prioritizes the inputs used
to measure fair value. This hierarchy requires us to maximize the use of
observable inputs and minimize the use of unobservable inputs. The three levels
of inputs used to measure fair value are as follows:
|
•
|
Level 1 —
Quoted prices in active markets for identical assets or
liabilities.
|
|
•
|
Level 2 —
Observable inputs other than quoted prices included in Level 1, such
as quoted prices for markets that are not active or other inputs that are
observable or can be corroborated by observable market
data.
|
|
•
|
Level 3 —
Unobservable inputs that are supported by little or no market activity and
are significant to the fair value of the assets or liabilities. This
includes certain pricing models, discounted cash flow methodologies and
similar techniques that use significant unobservable
inputs.
|
The table
below segregates all financial assets and liabilities that are measured at fair
value on a recurring basis (at least annually) into the most appropriate level
within the fair value hierarchy based on the inputs used to determine their fair
value at the measurement date:
Total Carrying
|
Significant other
|
Significant
|
||||||||||||||
Value at
|
Quoted prices in
|
observable
|
unobservable
|
|||||||||||||
December 31,
|
active markets
|
inputs
|
inputs
|
|||||||||||||
2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
In
thousands
|
||||||||||||||||
Derivative
instruments
|
$ | 7,047 | $ | — | $ | 7,047 | $ | — | ||||||||
Total
Assets
|
$ | 7,047 | $ | — | $ | 7,047 | $ | — | ||||||||
Derivative
instruments
|
$ | 664 | $ | — | $ | 664 | $ | — | ||||||||
Total
Liabilities
|
$ | 664 | $ | — | $ | 664 | $ | — |
Total Carrying
|
Significant other
|
Significant
|
||||||||||||||
Value at
|
Quoted prices in
|
observable
|
unobservable
|
|||||||||||||
December 31,
|
active markets
|
inputs
|
inputs
|
|||||||||||||
2008
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
In
thousands
|
||||||||||||||||
Derivative
instruments
|
$ | 991 | $ | — | $ | 991 | $ | — | ||||||||
Total
Assets
|
$ | 991 | $ | — | $ | 991 | $ | — |
The
Company’s derivative instruments are limited to foreign exchange contracts and
interest rate swaps that are measured at fair value using observable market
inputs such as forward rates and our counterparties’ credit risks. Based on
these inputs, the derivative instruments are classified within Level 2 of the
valuation hierarchy and have been included in other current assets, other assets
and other long-term liabilities on the Consolidated Balance Sheet at December
31, 2009 and 2008. Based on the continued ability to trade and enter into
forward contracts and interest rate swaps, we consider the markets for our fair
value instruments to be active.
The
Company evaluated the credit risk associated with the counterparties to these
derivative instruments and determined, that as of December 31, 2009, such credit
risks have not had an adverse impact on the fair value of these
instruments.
57
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
6.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives
Designated as Cash Flow Hedges
The
Company’s Term Loan Credit Agreement (“Term Loan”) contains floating rate
obligations and is subject to interest rate fluctuations. During the first
quarter of 2009, the Company entered into interest rate swap agreements for the
purposes of hedging the eight quarterly variable-rate interest payments on its
Term Loan due in 2010 and 2011. These interest rate swap agreements are
designated as cash flow hedges and are intended to manage interest rate risk
associated with the Company’s variable-rate borrowings and minimize the impact
of interest rate fluctuations on the Company’s earnings and cash flows
attributable to changes in LIBOR rates. The Company will include in earnings
amounts previously included in accumulated other comprehensive income upon
payment of its eight quarterly variable-rate interest payments.
The
Company holds forward exchange contracts designed to hedge forecasted
transactions denominated in foreign currencies and to minimize the impact of
foreign currency fluctuations on the Company’s earnings and cash flows. These
contracts are no longer designated as cash flow hedges. The Company will include
in earnings amounts previously included in accumulated other comprehensive
income upon recognition of cost of sales related to the underlying
transaction.
In
connection with the acquisition of U.K. Composites, the Company assumed foreign
currency hedge contracts originally intended to hedge forecasted cash flows on a
significant U.S. dollar denominated contract. During the third quarter of 2008,
the Company determined that these hedges were ineffective due to a significant
shift in the timing of the forecasted cash flows. Therefore, the Company
cancelled the contracts, resulting in a loss of $1.6 million. This loss has been
included in non-operating income in the consolidated statements of
operations.
The
following table shows the fair value of derivative instruments designated as
cash flow hedging instruments:
Fair Value
|
||||||||||
Balance Sheet
|
December 31,
|
December 31,
|
Notional
|
|||||||
Location
|
2009
|
2008
|
Amount
|
|||||||
In
thousands
|
||||||||||
Derivative
Assets
|
||||||||||
Foreign
exchange contracts (a)
|
Other
current assets
|
$ | — | $ | 212 |
466
Euro
|
||||
Foreign
exchange contracts (b)
|
Other
assets
|
— | 779 |
36,516
Australian Dollars
|
||||||
Total
|
$ | — | $ | 991 | ||||||
Derivative
Liabilities
|
||||||||||
Interest
rate swap contracts
|
Other
liabilities
|
$ | 607 | $ | — |
$45,000
- $40,000
|
||||
Total
|
$ | 607 | $ | — |
|
a)
|
Forward
exchange contracts dedesignated on July 4, 2009. See information below for
fair value after dedesignation.
|
|
b)
|
Forward
exchange contracts dedesignated on February 12, 2009. See information
below for fair value after
dedesignation.
|
The
following table shows the gain or (loss) recognized in other comprehensive
income for derivatives designated as cash flow hedges:
For the year ended
|
||||||||||||
December 31,
|
December 31,
|
December 31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Foreign
exchange contracts (a)
|
$ | (37 | ) | $ | 244 | $ | — | |||||
Foreign
exchange contracts (b)
|
(1,941 | ) | 1,053 | — | ||||||||
Interest
rate swap contracts
|
(607 | ) | — | — | ||||||||
Total
|
$ | (2,585 | ) | $ | 1,297 | $ | — |
|
a)
|
Forward
exchange contract dedesignated on July 4, 2009. See information below for
amounts recognized in the Consolidated Statement of Operations after
dedesignation.
|
|
b)
|
Forward
exchange contract dedesignated on February 12, 2009. See information below
for amounts recognized in the Consolidated Statement of Operations after
dedesignation.
|
58
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
6.
DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Derivatives
Designated as Cash Flow Hedges – Continued
For the
year ended December 31, 2009, the loss reclassified to income from other
comprehensive income for derivative instruments designated as cash flow hedges
was not material. No amounts were reclassified from other comprehensive income
for the year ended December 31, 2008. Over the next twelve months, the Company
expects to reclassify expense of approximately $0.3 million from other
comprehensive income.
For the
year ended December 31, 2009 and 2008, the gain recorded in other income for the
ineffective portion of derivative instruments designated as cash flow hedges was
not material.
Derivatives
Not Designated as Hedging Instruments
The
following table shows the fair value of derivative instruments not designated as
hedging instruments:
Fair Value
|
|||||||||||||
Balance Sheet
|
December 31,
|
December 31,
|
Notional
|
||||||||||
Location
|
2009
|
2008
|
Amount
|
||||||||||
In
thousands
|
|||||||||||||
Derivative
Assets
|
|||||||||||||
Foreign
exchange contracts
|
Other
current assets
|
$ | 16 | $ | — | $ | 135 | ||||||
Foreign
exchange contracts
|
Other
current assets
|
72 | — |
466
Euro
|
|||||||||
Foreign
exchange contracts
|
Other
assets
|
6,959 | — |
36,516
Australian Dollars
|
|||||||||
Total
|
$ | 7,047 | $ | — | |||||||||
Derivative
Liabilities
|
|||||||||||||
Foreign
exchange contracts
|
Other
liabilities
|
$ | 57 | $ | — | $ | 1,900 | ||||||
Total
|
$ | 57 | $ | — |
On
February 12, 2009, the Company dedesignated the forward contract it had entered
into to hedge $36.5 million (AUD) of its $39.5 million (AUD) future minimum
required payments to the Commonwealth of Australia. At December 31, 2009, the
U.S. dollar value of the $36.5 million (AUD) payable was $32.8
million.
On July
4, 2009, the Company dedesignated the forward contract it had entered into to
hedge future Euro obligations, due to a change in the timing of those
payments.
The
following table shows the location and amount of the gain or (loss) recognized
on the Consolidated Statements of Operations for derivatives not designated as
hedge instruments:
For the year ended
|
|||||||||||||
Income Statement
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
Location
|
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
|||||||||||||
Derivative
Assets
|
|||||||||||||
Foreign
exchange contracts
|
Other
expense, net
|
$ | 45 | $ | — | $ | — | ||||||
Foreign
exchange contracts
|
Other
expense, net
|
85 | — | — | |||||||||
Foreign
exchange contracts (a)
|
Other
expense, net
|
8,122 | — | — | |||||||||
Total
|
$ | 8,252 | $ | — | $ | — | |||||||
Derivative
Liabilities
|
|||||||||||||
Foreign
exchange contracts
|
Other
expense, net
|
$ | (57 | ) | $ | — | $ | — | |||||
Total
|
$ | (57 | ) | $ | — | $ | — | ||||||
(a) For the year ended December 31, 2009, the Company recorded expense of $9.0 million in Other expense, net related to the change in the value of the $36.5 million (AUD) payable. |
59
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
6.
DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Hedges
of a Net Investment in Foreign Operations
The
Company also maintained a $7.6 million Euro note, which was part of the
revolving credit facility and qualified and had been designated as an effective
hedge against the Company’s investment in its German subsidiary (RWG).
During the fourth quarter of 2009 the Company repaid the Euro note.
The
following table shows the amount of the cumulative translation gain or (loss)
associated with this note recorded in other comprehensive income:
For the year ended
|
||||||||||||||
December 31,
|
December 31,
|
December 31,
|
||||||||||||
Location
|
2009
|
2008
|
2007
|
|||||||||||
In
thousands
|
||||||||||||||
Euro
note
|
Cumulative
Translation Adjustment
|
$ | 706 | $ | (116 | ) | $ | 1,161 | ||||||
Total
|
$ | 706 | $ | (116 | ) | $ | 1,161 |
The
Company did not reclassify any amounts associated with this note from other
comprehensive income to earnings during the years ended December 31, 2009 and
2008 and the Company does not expect to reclassify any such amounts over the
next twelve months.
7.
INVENTORIES
Inventories
consist of the following:
At December 31,
|
||||||||
2009
|
2008
|
|||||||
In
thousands
|
||||||||
Merchandise
for resale
|
$ | 95,904 | $ | 106,757 | ||||
Contracts
in process:
|
||||||||
U.S.
Government, net of progress payments of $40,377 and $28,029 in 2009 and
2008, respectively
|
52,754 | 58,784 | ||||||
Commercial
and other government contracts
|
40,903 | 41,227 | ||||||
Other
work in process (including certain general stock materials
)
|
77,085 | 30,288 | ||||||
Finished
goods
|
18,617 | 18,761 | ||||||
Total
|
$ | 285,263 | $ | 255,817 |
K-MAX®
inventory of $24.6 million and $23.6 million is included in other work in
process and finished goods as of December 31, 2009 and 2008, respectively.
Management believes that a significant portion of this K-MAX® inventory will be
sold after December 31, 2010, based upon the anticipation of supporting the
fleet for the foreseeable future.
Inventories
also include amounts associated with matters such as contract changes,
negotiated settlements and claims for unanticipated contract costs, which
totaled $11.4 million and $10.0 million at December 31, 2009 and 2008,
respectively.
60
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
7.
INVENTORIES (CONTINUED)
On
February 12, 2009, the Company completed the transfer of ownership of the
Australian SH-2G(A) Super Seasprite Program inventory and equipment. As a
result, the Company recorded $51.7 million of contracts and other work in
process inventory, which represented the following:
In
thousands
|
||||
Net
unbilled accounts receivable (a)
|
$ | 32,041 | ||
Accrued
contract loss eliminated
|
(6,072 | ) | ||
USD
equivalent of $39.5 million (AUD) minimum liability due to the
Commonwealth of Australia (translated at the exchange rate in effect on
the transaction date, which was 0.6522)
|
25,772 | |||
Additional
costs required to close out program (b)
|
— | |||
Total
inventory recorded on February 12, 2009
|
$ | 51,741 |
|
(a)
|
The
unbilled receivables associated with the SH-2G(A) program were $40.6
million and the balance of amounts received as advances on this contract
were $8.6 million. These balances, netting to $32.0 million, were
eliminated in connection with the transfer of the Australian program
inventory and equipment to the
Company.
|
|
(b)
|
Previously
included in the book value of the inventory was $1.0 million, which
represented the Company’s estimate for additional costs required to close
out the program. During the fourth quarter, the Company deemed that it was
no longer required to incur these additional costs and the accrual for
these costs was reversed. This resulted in a $1.0 million reduction in the
book value of the Australian SH2-G(A) Super Seasprite Program inventory
and equipment.
|
At
December 31, 2009, $55.0 million of SH-2G(I) inventory, formerly SH-2G(A), was
included in contracts and other work in process inventory. Management believes
that a significant portion of this inventory will be sold after December 31,
2010, based upon the time needed to market the aircraft and prepare them for
sale. For more information on the SH-2G(I) inventory see Note 18, Commitments
and Contingencies.
The
aggregate amounts of general and administrative costs charged to inventory by
the Aerospace segment during 2009, 2008 and 2007 were $39.1 million, $41.3
million, and $35.5 million, respectively. The estimated amounts of general and
administrative costs remaining in contracts in process at December 31, 2009 and
2008 are $6.8 million and $6.3 million, respectively. These estimates are based
on the ratio of such costs to total costs of production.
The
Company had inventory of $5.7 million and $5.5 million as of December 31, 2009
and 2008, respectively, on consignment at customer locations, the majority of
which is located with Industrial Distribution segment customers.
8.
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net is summarized as follows:
At December 31,
|
||||||||
2009
|
2008
|
|||||||
In
thousands
|
||||||||
Land
|
$ | 9,547 | $ | 9,448 | ||||
Buildings
|
41,445 | 40,115 | ||||||
Leasehold
improvements
|
15,458 | 14,889 | ||||||
Machinery,
office furniture and equipment
|
134,014 | 124,382 | ||||||
Total
|
200,464 | 188,834 | ||||||
Less
accumulated depreciation
|
(119,142 | ) | (109,358 | ) | ||||
Property,
plant and equipment, net
|
$ | 81,322 | $ | 79,476 |
The
Aerospace segment charged excess capacity and related costs of $1.0 million and
$1.3 million in 2008 and 2007, respectively, to cost of sales. In 2009, such
charges were not significant.
Depreciation
expense was $13.2 million, $11.4 million and $9.5 million for 2009, 2008 and
2007, respectively.
61
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
9.
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The
following table sets forth the change in the carrying amount of goodwill for
each reportable segment and for the Company:
Balance at
|
Foreign
|
Balance at
|
||||||||||||||||||
December 31,
|
Currency
|
December 31,
|
||||||||||||||||||
2008
|
Additions
|
Impairments
|
Adjustments
|
2009
|
||||||||||||||||
In
thousands
|
||||||||||||||||||||
Industrial
Distribution
|
$ | 15,615 | $ | 21 | $ | — | $ | (213 | ) | $ | 15,423 | |||||||||
Aerospace
|
67,979 | 206 | — | 4,582 | 72,767 | |||||||||||||||
Total
|
$ | 83,594 | $ | 227 | $ | — | $ | 4,369 | $ | 88,190 |
Balance
at
|
Foreign
|
Balance
at
|
||||||||||||||||||
December
31,
|
Currency
|
December
31,
|
||||||||||||||||||
2007
|
Additions
|
Impairments
|
Adjustments
|
2008
|
||||||||||||||||
In
thousands
|
||||||||||||||||||||
Industrial
Distribution
|
$ | 4,305 | $ | 11,310 | $ | — | $ | — | $ | 15,615 | ||||||||||
Aerospace
|
41,688 | 45,804 | (7,810 | ) | (11,703 | ) | 67,979 | |||||||||||||
Total
|
$ | 45,993 | $ | 57,114 | $ | (7,810 | ) | $ | (11,703 | ) | $ | 83,594 |
During
2008, our Aerospace Wichita, Kansas facility experienced production and quality
issues, which, along with circumstances unique to each contract, resulted in the
separate termination of two long-term contracts with Spirit AeroSystems and
Shenyang Aircraft Corporation. These contracts, which represented
significant work for the facility, were both loss contracts. The Company tests
goodwill for potential impairment annually during the fourth quarter and between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
Due to the loss of the two major contracts as well as the continued production
and quality issues, the Company performed a goodwill impairment analysis for
this reporting unit as of June 27, 2008. The resulting non-cash goodwill
impairment charge was $7.8 million, which represented the entire goodwill
balance for this reporting unit. This charge was not deductible for tax purposes
and represented a discrete item impacting our 2008 effective tax rate. No such
charge was taken during 2009.
Other
Intangible Assets
Other
intangible assets consisted of:
At December 31,
|
||||||||||||||||||
2009
|
2008
|
|||||||||||||||||
Amortization
|
Gross
|
Accumulated
|
Gross
|
Accumulated
|
||||||||||||||
Period
|
Amount
|
Amortization
|
Amount
|
Amortization
|
||||||||||||||
In
thousands
|
||||||||||||||||||
Other
intangible assets:
|
||||||||||||||||||
Customer
lists / relationships
|
10-21
years
|
$ | 30,652 | $ | (2,559 | ) | $ | 28,099 | $ | (809 | ) | |||||||
Trademarks
/ trade names
|
2-7
years
|
987 | (627 | ) | 924 | (201 | ) | |||||||||||
Patents
|
17
years
|
873 | (642 | ) | 828 | (630 | ) | |||||||||||
Total
|
$ | 32,512 | $ | (3,828 | ) | $ | 29,851 | $ | (1,640 | ) |
The
increase in the gross balance of the Company’s intangible assets for 2009
compared to 2008 is due entirely to fluctuations in foreign currencies.
Intangible asset amortization expense was $2.1 million, $1.1 million and $0.1
million in 2009, 2008 and 2007, respectively. Amortization expense for the next
five years is expected to approximate $1.7 million per year.
In order
to determine the useful life of our customer lists/relationships acquired in
2008, the Company considered numerous factors, most importantly the industry
considerations associated with the acquired entity.
62
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
9.
GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)
Other
Intangible Assets - Continued
The
Company determined the amortization period for the customer list/relationships
intangible assets for its 2008 aerospace acquisition based primarily on program
life cycles. The Company calculated the remaining life of each program as the
total years in the program life cycle less the expired years as of the date of
the acquisition.
The
Company determined the amortization period for the customer lists/relationships
intangible assets for its Industrial Distribution acquisitions in 2008 based
primarily on an analysis of their historical customer sales attrition
information.
10.
ACCRUED CONTRACT LOSSES
The
following is a summary of activity and balances associated with accrued contract
losses:
2009
|
2008
|
|||||||
In
thousands
|
||||||||
Balance
at January 1
|
$ | 9,714 | $ | 9,513 | ||||
Additions
to loss accrual
|
3,407 | 7,950 | ||||||
Costs
incurred
|
(5,289 | ) | (7,400 | ) | ||||
Elimination
of Australian loss accrual
|
(6,072 | ) | — | |||||
Release
to income
|
(450 | ) | (349 | ) | ||||
Balance
at December 31
|
$ | 1,310 | $ | 9,714 |
The
additions in 2009 relate primarily to work performed on the unmanned K-MAX®
program and legacy fuze programs. The additions in 2008 related primarily to
several programs that were awarded to the Aerospace segment’s Wichita facility
over the past few years. The largest amount related to additional
costs for tooling on the Sikorsky Canadian MH-92 program. Additionally, the
Aerospace segment incurred contract losses on some of the JPF work performed for
the United States Government (“USG”).
The
Sikorsky Canadian MH-92 helicopter program includes the manufacture and assembly
of composite tail rotor pylons. This program has undergone numerous
customer-directed design changes causing costs on this program to exceed the
price for the contract. The Company is currently negotiating a revised contract
price and believes that the incremental costs associated with the
customer-directed design changes are recoverable. At December 31, 2009, contract
price negotiations for this program had not been finalized. To date, the Company
has recorded $3.6 million in contract losses, with $0.6 million and $3.0 million
recorded in 2009 and 2008, respectively, for higher scrap, inefficiencies and
tooling costs related to this program.
During
2008, the Company and the Commonwealth of Australia terminated the SH-2G(A)
Super Seasprite program on mutually agreed terms. As a result of this
termination agreement, the remaining accrued contract loss of $6.1 million was
eliminated in connection with the transfer of the Australian program inventory
and equipment to the Company on February 12, 2009. This matter is discussed more
fully in Note 18, Commitments and Contingencies.
11.
ENVIRONMENTAL COSTS
The
following table displays the activity and balances associated with accruals
related to environmental costs included in other accruals and payables and other
long-term liabilities:
2009
|
2008
|
|||||||
In
thousands
|
||||||||
Balance
at January 1
|
$ | 16,136 | $ | 4,705 | ||||
Additions
to accrual
|
787 | 12,982 | ||||||
Payments
|
(1,566 | ) | (1,551 | ) | ||||
Changes
to foreign currency
|
249 | — | ||||||
Balance
at December 31
|
$ | 15,606 | $ | 16,136 |
63
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
11.
ENVIRONMENTAL COSTS (CONTINUED)
In August
2008, the Company completed its purchase of the portion of the Bloomfield campus
that Kaman Aerospace Corporation had leased from NAVAIR for many years. In
connection with the purchase, the Company has assumed responsibility for
environmental remediation at the facility as may be required under the
Connecticut Transfer Act (the “Transfer Act”) and it continues the effort to
define the scope of the remediation that will be required by the Connecticut
Department of Environmental Protection (“CTDEP”). The transaction was recorded
by taking the undiscounted remediation liability of $20.8 million and
discounting it at a rate of 8% to its present value. The fair value
of the Navy Property asset, which approximates the discounted present value of
the assumed environmental liability of $10.3 million, is included in Property,
Plant and Equipment. This remediation process will take many years to
complete.
The
following represents estimated future payments for the undiscounted
environmental remediation liability related to the Bloomfield campus as of
December 31, 2009 (in thousands):
2010
|
$ | 1,372 | ||
2011
|
1,258 | |||
2012
|
770 | |||
2013
|
889 | |||
2014
|
1,327 | |||
Thereafter
|
13,001 | |||
Total
|
$ | 18,617 |
The
accrual also includes estimated ongoing environmental remediation costs for the
idle Moosup, CT facility and environmental remediation costs that the Company
expects to incur at the former Music segment’s New Hartford, Connecticut
facility. Additionally, the Company accrued $2.4 million for environmental
compliance at our recently acquired U.K. Composites facilities. The Company
continues to assess the work that may be required, which may result in a change
to this accrual.
12.
CREDIT ARRANGEMENTS – SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On
September 17, 2009, the Company entered into a three-year $225 million senior
secured revolving credit facility with co-lead arrangers Bank of America, The
Bank of Nova Scotia, and RBS Citizens and a syndicate of lenders (“Revolving
Credit Agreement”), which replaced its then existing $200 million senior
revolving credit facility which was due to expire on August 5, 2010 (the “Former
Revolving Credit Agreement”). The Revolving Credit Agreement includes an
“accordion” feature that allows the Company to increase the aggregate amount
available to $300 million, subject to additional commitments from lenders. The
Revolving Credit Agreement may be used for working capital, letters of credit
and other general corporate purposes, including acquisitions.
The
lenders have been granted a security interest in substantially all of the
Company’s domestic personal property and the other assets (excluding real
estate) and a pledge of 66% of the Company’s equity interest in certain foreign
subsidiaries and 100% of the Company’s equity interest in its domestic
subsidiaries, as collateral for the Company’s obligations under the Revolving
Credit Agreement. At December 31, 2009, there was $56.8 million outstanding
under the Revolving Credit Agreement, including letters of credit, with $168.2
million available for borrowing. Letters of credit are considered borrowings for
purposes of the Revolving Credit Agreement. A total of $40.0 million in letters
of credit was outstanding under the Revolving Credit Agreement at December 31,
2009, $34.2 million of which was related to the guaranteed minimum payments to
Australia in connection with the ownership transfer of the 11 SH-2G(A)
helicopters (along with spare parts and associated equipment). At December 31,
2008, there was $70.6 million outstanding under the Former Revolving Credit
Agreement, including letters of credit, with $129.4 million available for
borrowing. A total of $27.7 million in letters of credit was outstanding under
the Former Revolving Credit Agreement at December 31, 2008, $20.4 million of
which was related to the Australian SH-2G(A) Super Seasprite
Program.
64
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
12.
CREDIT ARRANGEMENTS – SHORT-TERM BORROWINGS AND LONG-TERM DEBT
(CONTINUED)
Interest
rates on amounts outstanding under the Revolving Credit Agreement are variable
and are determined based on a ratio of Consolidated Total Indebtedness as of the
last day of the most recently ended Measurement Period to Consolidated EBITDA
(the “Consolidated Senior Secured Leverage Ratio”), as defined in the Revolving
Credit Agreement. At December 31, 2009, the interest rate for the outstanding
amounts on the Revolving Credit Agreement was 3.95%. In addition, the Company is
required to pay a quarterly commitment fee on the unused revolving loan
commitment amount at a rate ranging from 0.50% to 0.75% per annum, based on
the Consolidated Senior Secured Leverage Ratio. Fees for outstanding letters of
credit range from 2.75% to 4.50%, based on the Consolidated Senior Secured
Leverage Ratio.
On
October 29, 2008, the Company executed a Term Loan Credit Agreement with co-lead
arrangers Bank of America and The Bank of Nova Scotia and a syndicate of lenders
(“Term Loan Agreement”). The Term Loan Agreement, which is in addition to the
Revolving Credit Agreement, is a $50 million facility with a four-year term,
requiring quarterly payments of principal at the rate of 2.5% with 62.5% of the
initial aggregate principal payable in the final quarter. The Company
may increase the term loan, by up to an aggregate of $50 million, with
additional commitments from the lenders or new commitments from acceptable
financial institutions. In conjunction with the entry into the
Revolving Credit Agreement on September 17, 2009, the Term Loan Agreement was
amended to allow for security interests and financial covenants consistent with
those defined in the Revolving Credit Agreement. As of December 31, 2009 and
2008, $45.0 million and $50.0 million was outstanding, respectively, on the Term
Loan Agreement.
Facility
fees and interest rates under the Term Loan Agreement are variable and are
determined on the basis of our credit rating from Standard & Poor's. In
April 2009, Standard & Poor's re-affirmed our rating as investment grade
BBB- with an outlook of stable. Under the terms of the current Term Loan
Agreement, if this rating should decrease, the effect would be to increase
facility fees as well as the interest rates charged. At December 31, 2009, the
interest rate for the outstanding amounts on the Term Loan Agreement was
4.0%.
The
financial covenants associated with the Revolving Credit Agreement and Term Loan
Agreement include a requirement that i) the ratio of Consolidated Senior Secured
Indebtedness to EBITDA, as defined in the Revolving Credit Agreement, cannot be
greater than 3.00 to 1.00, ii) the ratio of Consolidated Total Indebtedness
to EBITDA, as defined in the Revolving Credit Agreement, cannot be greater than
3.50 to 1.00, and iii) the ratio of EBITDA, as defined in the Revolving Credit
Agreement, to the sum of (i) net interest expense, (ii) the aggregate
principal amount of all regularly scheduled principal payments of outstanding
indebtedness for borrowed money, (iii) all dividends or other distributions
with respect to any equity interests of the Company and (iv) the aggregate
amount of Federal, state, local, and foreign income taxes paid in cash cannot be
less than 1.05 to 1.00 for any measurement period between September 17, 2009 –
March 31, 2011, 1.25 to 1.00 for any measurement period between April 1, 2011 to
September 30, 2011 or 1.35 to 1.00 for any measurement period on or after
October 1, 2011. The Company was in compliance with these financial covenants as
of December 31, 2009 and management does not anticipate noncompliance in the
foreseeable future.
The
Company incurred $3.4 million in debt issuance costs in connection with the
Revolving Credit Agreement and Term Loan Agreement amendment. These costs have
been capitalized and will be amortized over the term of the facility. Total
amortization expense for the year ended December 31, 2009 was $0.7 million.
Total amortization expense related to the Former Revolving Credit Agreement and
Term Loan Agreement for the year ended December 31, 2008 was approximately $0.2
million.
Short-Term
Borrowings
In
addition to the Revolving Credit Agreement and the Term Loan Agreement, the
Company also has certain other credit arrangements to borrow funds on a
short-term basis with interest at current market rates. Short-term borrowings
outstanding under such other credit arrangements as of December 31, 2009 and
2008 were $1.8 million and $1.2 million, respectively. The weighted average
interest rate on short-term borrowings for 2009 and 2008 was 2.44% and 4.82%,
respectively.
65
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
12.
CREDIT ARRANGEMENTS – SHORT-TERM BORROWINGS AND LONG-TERM DEBT
(CONTINUED)
Long-Term
Debt
The
company has long-term debt as follows:
At December 31,
|
||||||||
2009
|
2008
|
|||||||
In
thousands
|
||||||||
Revolving
credit agreement
|
$ | 16,800 | $ | 42,924 | ||||
Term
loan
|
45,000 | 50,000 | ||||||
Total
|
61,800 | 92,924 | ||||||
Less
current portion
|
5,000 | 5,000 | ||||||
Total
excluding current portion
|
$ | 56,800 | $ | 87,924 |
The
weighted average interest rate on long-term borrowings outstanding as of
December 31, 2009 and 2008 was 2.66% and 4.15%, respectively.
The
aggregate amounts of annual maturities of long-term debt for each of the next
five years are approximately as follows (in thousands):
2010
|
5,000 | |||
2011
|
5,000 | |||
2012
|
51,800 | |||
2013
|
— | |||
2014
|
— |
Letters
of Credit
The face
amounts of irrevocable letters of credit issued under the Revolving Credit
Agreement totaled $40.0 million and $27.7 million at December 31, 2009 and 2008,
respectively. Of those amounts, $34.2 million and $20.4 million at December 31,
2009 and 2008, respectively, is attributable to the Australian SH-2G(A) Super
Seasprite program.
Convertible
Subordinated Debentures
The
Company issued its 6% Convertible Subordinated Debentures during 1987. The
debentures were convertible into shares of the common stock of Kaman Corporation
at any time on or before March 15, 2012 at a conversion price of $23.36 per
share at the option of the holder unless previously redeemed by the company. The
debentures were subordinated to the claims of senior debt holders and general
creditors.
On
November 26, 2007, the Company issued a redemption notice calling for full
redemption on December 20, 2007 of all $11.2 million of its remaining
outstanding 6% Convertible Subordinated Debentures due 2012 at a redemption
price of 100% of principal amount plus accrued interest to December 20, 2007.
From the date of the announcement to the date prior to the redemption, holders
converted 10,985 debentures, with a value of $11.0 million, into an aggregate of
470,226 shares of the Company’s common stock. There were additional conversions
during 2007 prior to the redemption announcement of 3,683 debentures for 157,647
shares of common stock. On December 20, 2007, the Company paid $0.2 million for
the redemption of 179 debentures. Additionally, as a result of this redemption,
the Company expensed the remaining deferred debenture related charges of $0.1
million. There were no debentures outstanding at anytime during 2008 or
2009.
Interest
Payments
Cash
payments for interest were $4.0 million, $3.4 million and $6.9 million for 2009,
2008 and 2007, respectively.
66
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
13.
ADVANCES ON CONTRACTS
Advances
on contracts include customer advances together with customer payments and
billings associated with the achievement of certain contract milestones in
excess of costs incurred. As of December 31, 2008, $8.6 million of this
liability was associated with the Australian SH-2G(A) helicopter contract. As
part of the Australia program termination agreement, these balances were
eliminated in connection with the transfer of the Australian program inventory
and equipment to the Company. See Note 4, Accounts Receivable, Note 7, Inventory
and Note 18, Commitments and Contingencies, for further discussion of this
termination agreement.
14.
PRODUCT WARRANTY COSTS
Changes
in the carrying amount of accrued product warranty costs, included in Other
Accruals and Payables, for 2009 and 2008 are summarized as follows:
2009
|
2008
|
|||||||
In
thousands
|
||||||||
Balance
at January 1
|
$ | 1,073 | $ | 1,087 | ||||
Warranty
costs incurred
|
(79 | ) | (86 | ) | ||||
Product
warranty accrual
|
436 | 127 | ||||||
Release
to income
|
(266 | ) | (55 | ) | ||||
Balance
at December 31
|
$ | 1,164 | $ | 1,073 |
The
Company has been working to resolve two warranty-related matters at the
Aerospace Orlando facility. The first issue involves a supplier's recall of a
switch embedded in certain bomb fuzes. The second warranty issue involves bomb
fuzes manufactured for the U.S. Army utilizing systems which originated before
this entity was acquired by the Company that have since been found to contain an
incorrect part. The net reserve as of December 31, 2009 related to these two
matters is $1.0 million. This matter is more fully discussed in Note 18,
Commitments and Contingencies. The remainder of the accrual as of December 31,
2009 relates to routine warranty rework at our segments.
15.
INCOME TAXES
The
components of income tax expense (benefit) associated with earnings from
continuing operations are as follows:
For the year ended December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Current:
|
||||||||||||
Federal
|
$ | 12,474 | $ | 10,628 | $ | 20,062 | ||||||
State
|
675 | 1,287 | 1,956 | |||||||||
Foreign
|
2,205 | 2,083 | 2,261 | |||||||||
15,354 | 13,998 | 24,279 | ||||||||||
Deferred:
|
||||||||||||
Federal
|
(887 | ) | 9,087 | (2,730 | ) | |||||||
State
|
190 | 1,092 | (656 | ) | ||||||||
Foreign
|
(296 | ) | (118 | ) | 143 | |||||||
(993 | ) | 10,061 | (3,243 | ) | ||||||||
Total
|
$ | 14,361 | $ | 24,059 | $ | 21,036 |
67
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
15.
INCOME TAXES (CONTINUED)
The tax
effects of temporary differences that give rise to deferred tax assets and
liabilities are presented below:
At December 31,
|
||||||||
|
2009
|
2008
|
||||||
In thousands | ||||||||
Deferred
tax assets:
|
||||||||
Deferred
employee benefits
|
$ | 77,978 | $ | 81,227 | ||||
Inventory
|
12,316 | 9,728 | ||||||
Environmental
|
5,643 | 5,844 | ||||||
Tax
loss and credit carry-forwards
|
9,456 | 9,407 | ||||||
Accrued
liabilities and other items
|
7,730 | 7,704 | ||||||
Total
deferred tax assets
|
113,123 | 113,910 | ||||||
Deferred
tax liabilities:
|
||||||||
Fixed
assets
|
(9,570 | ) | (8,624 | ) | ||||
Intangibles
|
(12,880 | ) | (11,714 | ) | ||||
Other
items
|
(953 | ) | (721 | ) | ||||
Total
deferred tax liabilities
|
(23,403 | ) | (21,059 | ) | ||||
Net
deferred tax assets before valuation allowance
|
89,720 | 92,851 | ||||||
Valuation
allowance
|
(5,221 | ) | (5,000 | ) | ||||
Net
deferred tax assets after valuation allowance
|
$ | 84,499 | $ | 87,851 |
Valuation
allowances of $5.2 million and $5.0 million at December 31, 2009 and 2008,
respectively, reduced the deferred tax asset attributable to foreign loss and
state loss and credit carry-forwards to an amount that, based upon all available
information, is more likely than not to be realized. Reversal of the valuation
allowance is contingent upon the recognition of future taxable income in the
respective jurisdictions or changes in circumstances which cause the realization
of the benefits of the loss carry-forwards to become more likely than not. The
net increase in the valuation allowance of $0.2 million is due to the generation
of $1.1 million in U.S. state and Canadian loss and tax credit carry-forwards,
offset by utilization of $0.5 million of state carry-forwards and expiration of
$0.4 million of state and Canadian carry-forwards.
Canadian
tax loss carry-forwards are approximately $0.5 million, with $0.1 million
expiring in 2010 and the balance in 2027 and beyond. State carry-forwards are in
numerous jurisdictions with varying lives. U.S. foreign tax credit
carry-forwards of $3.6 million expire between 2014 and 2019.
No
valuation allowance has been recorded against the other deferred tax assets
because the Company believes that these deferred tax assets will, more likely
than not, be realized. This determination is based largely upon the company’s
earnings history, anticipated future taxable income, foreign-source income, and
its ability to carry-back reversing items within two years to offset taxes paid.
In addition, the Company has the ability to offset deferred tax assets against
deferred tax liabilities created for such items as depreciation and
amortization.
Pre-tax
income from foreign operations amounted to $6.3 million, $5.4 million and $5.0
million in 2009, 2008 and 2007, respectively. Income taxes have not been
provided on undistributed earnings of $20.9 million from foreign subsidiaries
since it is the Company’s intention to permanently reinvest such earnings or to
distribute them only when it is tax efficient to do so. It is impracticable to
estimate the total tax liability, if any, which would be created by the future
distribution of these earnings.
68
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
15.
INCOME TAXES (CONTINUED)
The
provision for income taxes associated with earnings from continuing operations
differs from that computed at the federal statutory corporate tax rate as
follows:
For the year ended December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Federal
tax at 35% statutory rate
|
$ | 16,453 | $ | 20,708 | $ | 20,134 | ||||||
State
income taxes, net of federal benefit
|
562 | 1,547 | 744 | |||||||||
Tax
effect of:
|
||||||||||||
International
Recapitalization
|
(1,577 | ) | — | — | ||||||||
Goodwill
impairment
|
— | 2,733 | — | |||||||||
Other,
net
|
(1,077 | ) | (929 | ) | 158 | |||||||
Income
taxes
|
$ | 14,361 | $ | 24,059 | $ | 21,036 |
The Company records a benefit for
uncertain tax positions in the financial statements only when it determines it
is more likely than not that such a position will be sustained upon examination
by taxing authorities. Unrecognized tax benefits represent the difference
between the position taken and the benefit reflected in the financial
statements. On December
31, 2009, 2008 and 2007 the total liability for unrecognized tax benefits was
$2.7 million, $2.6 million and $3.6 million, respectively (including interest
and penalties of $0.4 million, $0.3 million and $0.6 million,
respectively). The change in the liability for 2009, 2008 and 2007 is
explained as follows:
2009
|
2008
|
2007
|
||||||||||
In thousands | ||||||||||||
Balance
at January 1
|
$ | 2,585 | $ | 3,645 | $ | 5,118 | ||||||
Additions
based on current year tax positions
|
1,035 | 133 | 80 | |||||||||
Changes
for tax positions of prior years
|
(8 | ) | 56 | (235 | ) | |||||||
Settlements
|
(933 | ) | (1,103 | ) | (392 | ) | ||||||
Reductions
due to lapses in statutes of limitation
|
— | (146 | ) | (926 | ) | |||||||
Balance
at December 31
|
$ | 2,679 | $ | 2,585 | $ | 3,645 |
Included
in unrecognized tax benefits at December 31, 2009 were items approximating $2.2
million that, if recognized, would favorably affect the Company’s effective tax
rate in future periods. The Company files tax returns in numerous
U.S. and foreign jurisdictions, with returns subject to examination for varying
periods, but generally back to and including 2005. During 2009, 2008
and 2007, $0.1 million, $0.1 million and $0.2 million of interest and penalties,
respectively, were recognized as a component of income tax expense. It is the
Company’s policy to record interest and penalties on unrecognized tax benefits
as income taxes.
Cash
payments for income taxes, net of refunds, were $6.9 million, $30.4 million, and
$30.3 million in 2009, 2008 and 2007, respectively.
16.
PENSION PLANS
The
Company has a non-contributory qualified defined benefit pension plan (the
“Qualified Pension Plan”) covering the full-time U.S. employees of all U.S.
subsidiaries (with the exception of certain acquired companies that have not
adopted the plan and employees at the Company’s Industrial Distribution segment
hired after May 31, 2009). Employees become participants in the Qualified
Pension Plan upon their completion of hours of service requirements. Benefits
under the Qualified Pension Plan are generally based upon an employee’s years of
service and compensation levels during employment with an offset provision for
social security benefits. The Company also has a Supplemental Employees’
Retirement Plan (“SERP”), which is considered a non-qualified pension plan. The
SERP provides certain key executives, whose compensation is in excess of the
limitations imposed by federal law on the qualified defined benefit pension
plan, with supplemental benefits based upon eligible earnings, years of service
and age at retirement. The measurement date for both these plans is December 31.
On February 23, 2010, the Company’s Board of Directors authorized management to
amend the Qualified Pension Plan. See Note 23, Subsequent Events, for further
discussion.
69
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
16.
PENSION PLANS (CONTINUED)
Obligations
and Funded Status
The
changes in the actuarial present value of the projected benefit obligation and
fair value of plan assets are as follows:
For the year ended December
31,
|
||||||||||||||||
Qualified Pension Plan
|
SERP
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
In
thousands
|
||||||||||||||||
Projected
benefit obligation at beginning of year
|
$ | 502,269 | $ | 468,291 | $ | 20,732 | $ | 37,053 | ||||||||
Service
cost
|
13,423 | 12,277 | 389 | 698 | ||||||||||||
Interest
cost
|
30,462 | 29,352 | 1,012 | 1,591 | ||||||||||||
Plan
amendments
|
444 | — | — | — | ||||||||||||
Actuarial
liability (gain) loss (A )
|
25,613 | 15,128 | 1,586 | (562 | ) | |||||||||||
Benefit
payments
|
(27,476 | ) | (22,779 | ) | (5,682 | ) | (18,048 | ) | ||||||||
Projected
benefit obligation at end of year
|
$ | 544,735 | $ | 502,269 | $ | 18,037 | $ | 20,732 | ||||||||
Fair
value of plan assets at beginning of year
|
$ | 334,121 | $ | 498,778 | $ | — | $ | — | ||||||||
Actual
return on plan assets (B)
|
68,183 | (149,602 | ) | — | — | |||||||||||
Employer
contributions
|
12,641 | 7,724 | 5,682 | 18,048 | ||||||||||||
Benefit
payments
|
(27,476 | ) | (22,779 | ) | (5,682 | ) | (18,048 | ) | ||||||||
Fair
value of plan assets at end of year
|
$ | 387,469 | $ | 334,121 | $ | — | $ | — | ||||||||
Funded
status at end of year
|
$ | 157,266 | $ | 168,148 | $ | 18,037 | $ | 20,732 | ||||||||
Accumulated
benefit obligation
|
$ | 490,960 | $ | 455,381 | $ | 17,605 | $ | 20,515 |
(A) The
actuarial liability loss amount for the qualified pension plan for 2009 is
principally due to the effect of changes in the discount rate. The actuarial
liability loss amount for the qualified pension plan for 2008 is principally due
to the decrease in net assets and a decrease in the discount rate. The decrease
in net assets was due to the effect of changes in the discount rate and the
significant downturn in the U.S financial markets.
(B) The
negative actual return on plan assets in 2008 was due to the significant
downturn in the U.S. financial markets.
The
Company has recorded assets and liabilities related to our qualified pension
plan and SERP as follows:
At December 31,
|
||||||||||||||||
Qualified Pension Plan
|
SERP
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
In
thousands
|
||||||||||||||||
Noncurrent
assets
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Current
liabilities (A )
|
— | — | (887 | ) | (5,678 | ) | ||||||||||
Noncurrent
liabilities
|
(157,266 | ) | (168,148 | ) | (17,150 | ) | (15,054 | ) | ||||||||
Total
|
$ | (157,266 | ) | $ | (168,148 | ) | $ | (18,037 | ) | $ | (20,732 | ) |
(A) The
current liabilities are included in other accruals and payables on the
Consolidated Balance Sheets.
70
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
16.
PENSION PLANS (CONTINUED)
Obligations
and Funded Status – Continued
Certain
amounts included in accumulated other comprehensive income on the Consolidated
Balance Sheets represent costs that will be recognized as components of pension
cost in future periods. These consist of:
At December 31,
|
||||||||||||||||
Qualified Pension Plan
|
SERP
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
In
thousands
|
||||||||||||||||
Unrecognized
(gain) or loss
|
$ | 138,732 | $ | 153,109 | $ | 3,854 | $ | 3,326 | ||||||||
Urecognized
prior service cost (credit)
|
770 | 388 | (192 | ) | (1,155 | ) | ||||||||||
Amount
included in accumulated other comprehensive income (loss )
|
$ | 139,502 | $ | 153,497 | $ | 3,662 | $ | 2,171 |
The
estimated net loss and prior service cost (credit) for the qualified pension
plan and the SERP that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next year will be $4.8 million
and $0.2 million, respectively.
The
pension plan net periodic benefit costs on the Consolidated Statements of
Operations and other amounts recognized in other comprehensive income on the
Statements of Shareholders’ Equity were computed using the projected unit credit
actuarial cost method and included the following components:
For the year ended December 31,
|
||||||||||||||||||||||||
Qualified Pension Plan
|
SERP
|
|||||||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||
In
thousands
|
||||||||||||||||||||||||
Service
cost for benefits earned during the year
|
$ | 13,423 | $ | 12,277 | $ | 13,318 | $ | 389 | $ | 698 | $ | 464 | ||||||||||||
Interest
cost on projected benefit obligation
|
30,462 | 29,352 | 27,723 | 1,012 | 1,591 | 2,019 | ||||||||||||||||||
Expected
return on plan assets
|
(31,615 | ) | (34,724 | ) | (32,297 | ) | — | — | — | |||||||||||||||
Amortization
of prior service credit (cost)
|
61 | 61 | 61 | (962 | ) | (691 | ) | (371 | ) | |||||||||||||||
Recognized
net loss
|
3,423 | — | 841 | 291 | 1,586 | 3,902 | ||||||||||||||||||
Additional
amount recognized due to settlement
|
— | — | — | 767 | 2,833 | — | ||||||||||||||||||
Net
pension benefit cost
|
$ | 15,754 | $ | 6,966 | $ | 9,646 | $ | 1,497 | $ | 6,017 | $ | 6,014 | ||||||||||||
Change
in prior service cost
|
$ | 444 | $ | — | $ | — | $ | — | $ | — | $ | 1,220 | ||||||||||||
Change
in net gain or loss
|
(10,955 | ) | 199,454 | (43,084 | ) | 820 | (3,394 | ) | 1,137 | |||||||||||||||
Amortization
of prior service cost (credit)
|
(61 | ) | (61 | ) | (61 | ) | 962 | 691 | 371 | |||||||||||||||
Amortization
of net gain (loss )
|
(3,423 | ) | — | (841 | ) | (291 | ) | (1,586 | ) | (3,902 | ) | |||||||||||||
Total
recognized in other comprehensive income
|
$ | (13,995 | ) | $ | 199,393 | $ | (43,986 | ) | $ | 1,491 | $ | (4,289 | ) | $ | (1,174 | ) | ||||||||
Total
recognized in net periodic benefit cost and other comprehensive
income
|
$ | 1,759 | $ | 206,359 | $ | (34,340 | ) | $ | 2,988 | $ | 1,728 | $ | 4,840 |
The
Company expects to contribute $10.7 million to the qualified pension plan and
$0.9 million to the SERP for the 2010 plan year. For the 2009 plan year, the
Company made a contribution of $10.9 million to the qualified plan and
contributions of $5.7 million to the SERP.
71
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
16.
PENSION PLANS (CONTINUED)
Obligations
and Funded Status – Continued
Expected
future benefit payments, which reflect expected future service, are as follows
(in thousands):
Qualified
|
||||||||
Pension Plan
|
SERP
|
|||||||
2010
|
$ | 26,903 | $ | 887 | ||||
2011
|
27,560 | 879 | ||||||
2012
|
28,142 | 870 | ||||||
2013
|
28,941 | 6,512 | ||||||
2014
|
30,095 | 842 | ||||||
2015-2019
|
175,003 | 6,660 |
The
actuarial assumptions used in determining benefit obligations of the pension
plans are as follows:
At December 31,
|
||||||||||||||||
Qualified Pension Plan
|
SERP
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Discount
rate
|
5.85 | % | 6.15 | % | 5.15 | % | 6.15 | % | ||||||||
Average
rate of increase in compensation levels
|
3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % |
The
discount rates take into consideration the populations of our pension plans and
the anticipated payment streams as compared to the Citigroup Discount Yield
Curve index and rounds the results to the nearest fifth basis
point.
The
actuarial assumptions used in determining the net periodic benefit cost of the
pension plans are as follows:
At December 31,
|
||||||||||||||||
Qualified Pension Plan
|
SERP
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Discount
rate
|
6.15 | % | 6.40 | % | 6.15 | % | 5.90 | % | ||||||||
Expected
return on plan assets
|
8.00 | % | 8.00 | % | n/a | n/a | ||||||||||
Average
rate of increase in compensation levels
|
3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % |
Plan
Assets for Qualified Pension Plan
The
expected return on plan assets rate was determined based upon historical returns
adjusted for estimated future market fluctuations.
Plan
assets are invested in a diversified portfolio consisting of equity and fixed
income securities (including $17.6 million of common stock of Kaman Corporation
at December 31, 2009). The investment policies and goals for pension plan assets
are (a) to place assets with investment managers approved by the Finance
Committee of the Board of Directors, (b) to diversify across traditional equity
and fixed income asset classes to minimize the risk of large losses, and (c) to
seek the highest total return (through a combination of income and asset
appreciation) consistent with prudent investment practice, and on a five-year
moving average basis, not less than the actuarial earnings
assumption.
The
target equity/fixed income asset allocation ratio is 60%/40% over the long term.
If the ratio for any asset class moves outside permitted ranges, the pension
plan’s Administrative Committee (the management committee that is responsible
for plan administration) will act through an immediate or gradual process, as
appropriate, to reallocate assets.
Under the
current investment policy no investment is made in commodities, nor are short
sales, margin buying hedges, covered or uncovered call options, puts, straddles
or other speculative trading devices permitted. No manager may invest in
international securities, inflation linked treasuries, real estate, private
equities, or securities of Kaman Corporation without authorization from the
Finance Committee of the Board of Directors. In addition, with the exception of
U.S. Government securities, managers’ holdings in the securities of any one
issuer, at the time of purchase, may not exceed 7.5% of the total market value
of that manager’s account.
72
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
16.
PENSION PLANS (CONTINUED)
Plan
Assets for Qualified Pension Plan – Continued
The
pension plan assets are valued at fair value. The following is a description of
the valuation methodologies used for the investments measured at fair value,
including the general classification of such instruments pursuant to the
valuation hierarchy.
Cash equivalents – Investments
with maturities of three months or less when purchased, including certain
short-term fixed-income securities, are considered cash equivalents and are
included in the recurring fair value measurements hierarchy as Level
1.
Corporate Stock – This
investment category consists of common and preferred stock issued by U.S. and
non-U.S. corporations. Common and preferred shares are traded actively on
exchanges and price quotes for these shares are readily available. Holdings of
corporate stock are classified as Level 1 investments.
Mutual Funds – Mutual funds
are traded actively on public exchanges. The share prices for mutual funds are
published at the close of each business day. Holdings of mutual funds are
classified as Level 1 investments.
Common Trust Funds – Common
trust funds are comprised of shares or units in commingled funds that are not
publicly traded. The values of the commingled funds are not publically quoted
and must trade through a broker. For equity and fixed-income commingled funds
traded through a broker, the fund administrator values the fund using the net
asset value (“NAV”) per fund share, derived from the value of the underlying
assets. The underlying assets in these funds (equity securities,
fixed income securities, and commodity-related securities) are publicly traded
on exchanges and price quotes for the assets held by these funds are readily
available. Holdings of common trust funds are classified as Level 2
investments.
Fixed-income Securities - For
fixed income securities, multiple prices and price types are obtained from
pricing vendors whenever possible, which enables cross-provider validations. A
primary price source is identified based on asset type, class or issue for each
security. The fair values of fixed-income securities are based on evaluated
prices that reflect observable market information, such as actual trade
information of similar securities, adjusted for observable differences and are
categorized as Level 2.
Real Estate – Real estate
investment trusts are valued daily based on quoted prices in active markets and
are categorized as Level 1.
The fair
value of the Company’s qualified pension plan assets at December 31, 2009 are as
follows:
Total Carrying
|
Significant other
|
Significant
|
||||||||||||||
Value at
|
Quoted prices in
|
observable
|
unobservable
|
|||||||||||||
December 31,
|
active markets
|
inputs
|
inputs
|
|||||||||||||
2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
In
thousands
|
||||||||||||||||
Cash
& Cash Equivalents
|
$ | 12,137 | $ | 12,137 | $ | — | $ | — | ||||||||
Corporate
Stock
|
137,054 | 137,054 | — | — | ||||||||||||
Mutual Funds | 39,312 | 39,312 | — | — | ||||||||||||
Common
Trust Funds
|
90,175 | — | 90,175 | — | ||||||||||||
Fixed-income
Securities:
|
||||||||||||||||
U.S.
Government Securities (a)
|
25,819 | — | 25,819 | — | ||||||||||||
Corporate
Securities
|
67,078 | — | 67,078 | — | ||||||||||||
Foreign
Securities
|
5,233 | — | 5,233 | — | ||||||||||||
Other
(b)
|
10,179 | — | 10,179 | — | ||||||||||||
Real
Estate
|
482 | 482 | — | — | ||||||||||||
Total
|
$ | 387,469 | $ | 188,985 | $ | 198,484 | $ | — |
(a)
|
This
category represents investments in debt securities issued by the U.S.
Treasury, other U.S. government corporations and agencies, states and
municipalities.
|
(b)
|
This
category primarily represents investments in commercial and residential
mortgage-backed securities.
|
Investment
manager performance is evaluated over various time periods in relation to peers
and the following indexes: Domestic Equity Investments, S&P 500;
International Equity Investments, Morgan Stanley EAFE; Fixed Income Investments,
and Barclay’s Capital Aggregate.
73
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
16.
PENSION PLANS (CONTINUED)
Other
Plans
The
Company also maintains a defined contribution plan that has been adopted by most
of its U.S. subsidiaries. Employees of the adopting employers who meet the
eligibility requirements of the plan may participate. Employer matching
contributions are currently made to the plan based on a percentage of each
participant’s pre-tax contribution. For each dollar that a participant
contributes up to 5% of compensation, participating subsidiaries make employer
contributions of fifty cents ($0.50). Employer contributions to the plan totaled
$3.5 million, $3.3 million and $3.2 million in 2009, 2008 and 2007,
respectively.
One of
the Company’s acquired U.S. subsidiaries maintains a defined contribution plan
for its eligible employees. Employer matching contributions are made on a
discretionary basis. Additionally, two of our foreign subsidiaries each maintain
a defined benefit plan of their own for their local employees. The pension
liabilities of $0.2 million associated with these plans are included in accrued
pension costs on the Consolidated Balance Sheets.
17.
OTHER LONG-TERM LIABILITIES
Other
long-term liabilities consist of the following:
At December 31,
|
||||||||
2009
|
2008
|
|||||||
In
thousands
|
||||||||
Supplemental
employees' retirement plan (SERP)
|
$ | 17,150 | $ | 15,054 | ||||
Deferred
compensation
|
11,655 | 11,305 | ||||||
Long-term
incentive plan
|
3,382 | 1,991 | ||||||
Long-term
income taxes payable
|
2,748 | 1,801 | ||||||
Environmental
remediation liability
|
11,571 | 11,749 | ||||||
Other
|
3,106 | 3,267 | ||||||
Total
|
$ | 49,612 | $ | 45,167 |
Disclosures
regarding the assumptions used in the determination of the SERP liabilities are
included in Note 16, Pension Plans. Discussions of our environmental remediation
liabilities are in Note 11, Environmental Costs, and Note 18, Commitments and
Contingencies.
The
Company maintains a non-qualified deferred compensation plan for certain of its
employees as well as a non-qualified deferred compensation plan for its Board of
Directors. Generally, participants in these plans have the ability to defer a
certain amount of their compensation, as defined in the agreement. The deferred
compensation liability will be paid out either upon retirement or as requested
based upon certain terms in the agreements and in accordance with Internal
Revenue Code Section 409A.
18.
COMMITMENTS AND CONTINGENCIES
Leases
Rent
commitments under various leases for office space, warehouses, land and
buildings expire at varying dates from January 2010 to December 2015. The
standard term for most leases ranges from 3 to 5 years. Some of the Company’s
leases have rent escalations, rent holidays or contingent rent that are
generally recognized on a straight-line basis over the entire lease term.
Material leasehold improvements and other landlord incentives are amortized over
the shorter of their economic lives or the lease term, including renewal
periods, if reasonably assured. Certain annual rentals are subject to
renegotiation, with certain leases renewable for varying periods. The company
recognizes rent expense for leases on a straight-line basis over the entire
lease term.
Lease
periods for machinery and equipment range from 1 to 5 years.
Substantially
all real estate taxes, insurance and maintenance expenses are obligations of the
Company. It is expected that in the normal course of business leases that expire
will be renewed or replaced by leases on other similar
property.
74
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
18.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases
– Continued
The
following future minimum rental payments are required under operating leases
that have initial or remaining non-cancelable lease terms in excess of one year
as of December 31, 2009 (in thousands):
2010
|
$ | 15,775 | ||
2011
|
11,619 | |||
2012
|
6,334 | |||
2013
|
2,953 | |||
2014
|
1,141 | |||
Thereafter
|
837 | |||
Total
|
$ | 38,659 |
Lease
expense for all operating leases, including leases with terms of less than one
year, amounted to $17.0 million, $17.9 million and $14.7 million for 2009, 2008
and 2007, respectively.
Asset
Retirement Obligations
The
Company currently leases various properties under leases that give the lessor
the right to make the determination as to whether the lessee must return the
premises to their original condition, except for normal wear and tear. The
Company does not normally make substantial modifications to leased property, and
many of the Company's leases either require lessor approval of planned
improvements or transfer ownership of such improvements to the lessor at the
termination of the lease. Historically we have not incurred significant costs to
return leased premises to their original condition.
The
Company also has unrecorded Asset Retirement Obligation’s (“ARO’s”) that are
conditional upon certain events. These ARO’s generally include the removal and
disposition of non-friable asbestos. The Company has not recorded a liability
for these conditional ARO’s at December 31, 2009 because the Company does not
currently believe there is a reasonable basis for estimating a date or range of
dates for major renovation or demolition of these facilities. In reaching this
conclusion, the Company considered the historical performance of each facility
and has taken into account factors such as planned maintenance, asset
replacement and upgrades, which, if conducted as in the past, can extend the
physical lives of the facilities indefinitely. The Company also considered the
possibility of changes in technology and risk of obsolescence in arriving at its
conclusion.
Legal Matters
There
continue to be two warranty-related matters that impact the FMU-143 program at
the Aerospace segment’s Orlando facility (“Orlando Facility”). The items
involved are an impact switch embedded in certain bomb fuzes that was recalled
by a supplier and an incorrect version of a part, called a bellows
motor, found to be contained in bomb fuzes manufactured for the U.S. Army
utilizing systems which originated before the Orlando Facility was acquired by
the Company. The U.S. Army Sustainment Command (“USASC”), the procurement agency
that administers the FMU-143 contract, had authorized warranty rework for the
bellows motor matter in late 2004/early 2005; however, the Company was not
permitted to finish the rework due to issues raised by the USASC primarily
related to administrative matters and requests for verification of the accuracy
of test equipment (which accuracy was subsequently verified).
In late
2006, the USASC informed the Company that it was changing its remedy under the
contract from performance of warranty rework to an "equitable adjustment" to the
contract price. The Company responded, explaining its view that it had complied
with contract requirements. In June 2007, the USASC affirmed its position and
gave instructions for disposition of the subject fuzes, including both the
impact switch and bellows motor-related items, to a Navy facility and the
Company complied with that direction. In November 2009, the United States
Government (“USG”) instituted suit, alleging liability associated with this
matter, including specific claims of about $6.0 million (treble damages) in
connection with allegedly "false claims" by the Company for payment for fuzes
containing the incorrect version of the part and $3.0 million in connection
with rework. By letter dated July 16, 2009, USASC informed the Company that it
also demands payment of $9.8 million under the contract related to warranty
rework The Company believes that all these allegations are unfounded and it is
defending itself vigorously. At December 31, 2009, the Company had no amount
accrued for this demand.
75
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
18.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal
Matters – Continued
As
reported previously, a separate contract dispute between the Orlando Facility
and the USASC relative to the FMU-143 fuze program is now in litigation. The
USASC has basically alleged the existence of latent defects in certain fuzes due
to unauthorized rework during production and has sought to revoke their
acceptance. Management believes that the Orlando Facility has performed in
accordance with the contract and it is the government that has materially
breached its terms in several ways; as a result, during the fourth quarter of
2007, the Company cancelled the contract and, in January 2008, commenced
litigation before the Board requesting a declaratory judgment that the
cancellation was proper. Shortly thereafter, the USASC notified the Company that
it was terminating the contract for default, making the allegations noted above,
and the Company filed a second complaint with the Board appealing that
termination decision. The litigation process continues. In the same July
2009 letter referenced above, USASC also demanded a repayment by the Company of
$5.7 million for these alleged latent defects. The Company also contests this
demand and has filed an appeal before the Board. At December 31, 2009, the
Company had no amount accrued for these matters as it believes that the
likelihood of an adverse outcome to this litigation is remote.
Other
Matters
Revenue Sharing Agreement
with the Commonwealth of Australia
As
previously reported, the Company reached an agreement with the Commonwealth of
Australia in 2008 providing for the termination of the SH-2G(A) Super Seasprite
Program. Pursuant to the agreement, the Commonwealth transferred ownership of
the 11 SH-2G(A) Super Seasprite helicopters to the Company, together
with spare parts and associated equipment, in exchange for a release of any
remaining payment obligation for net unbilled receivables totaling approximately
$32.0 million. The transfer of ownership was completed on February 12, 2009 and
the Company is actively engaged in efforts to resell the aircraft, spare parts
and equipment to other potential customers. Pursuant to the terms of the
agreement with the Commonwealth of Australia, the Company has agreed to share
all proceeds from the resale of the aircraft, spare parts, and equipment with
the Commonwealth on a predetermined basis, and total payments of at least $39.5
million (AUD) must be made to the Commonwealth regardless of sales, of which at
least $26.7 million (AUD) must be paid by March 2011. To the extent that
cumulative payments have not yet reached $39.5 million (AUD), additional
payments of $6.4 million (AUD) each must be paid in March of 2012 and 2013. In
late 2008, the Company entered into foreign currency exchange contracts that
limit the foreign currency risks associated with these required payments to
$23.7 million. See Note 6, Derivative Financial Instruments, for further
discussion of these instruments. In addition, to secure these payments, the
Company has provided the Commonwealth with a $39.5 million (AUD) unconditional
letter of credit, which is being reduced as such payments are made. Through
December 31, 2009, the Company had made required payments of $1.4 million (AUD).
As of that date, the U.S. dollar value of the remaining $38.1 million (AUD)
required payment was $34.2 million.
Moosup
The
Connecticut Department of Environmental Protection (“CTDEP”) has given the
Company approval for reclassification of groundwater in the vicinity of the
Moosup, CT facility consistent with the character of the area. This facility is
currently being held for disposal. The Company has completed the process of
connecting neighboring properties to public drinking water in accordance with
such approval and in coordination with the CTDEP and local
authorities. Site characterization of the environmental condition of
the property, which began in 2008, is continuing.
The total
anticipated cost of the environmental remediation activities associated with the
Moosup property is $4.1 million, all of which has been accrued. The
total amount paid to date in connection with these environmental
remediation activities is $1.9 million. A portion ($0.1 million) of the accrual
related to this property is included in other accruals and payables and the
balance is included in other long-term liabilities. The remaining balance
of the accrual reflects the total anticipated cost of completing these
environmental remediation activities. Although it is reasonably possible that
additional costs will be paid in connection with the resolution of this matter,
the Company is unable to estimate the amount of such additional costs, if any,
at this time.
New
Hartford
In
connection with sale of the Music segment in 2007, the Company assumed
responsibility for meeting certain requirements of the Connecticut Transfer Act
(the “Transfer Act”) that applied to our transfer of the New Hartford,
Connecticut, facility leased by that segment for guitar manufacturing purposes
(“Ovation”). Under the Transfer Act, those responsibilities essentially consist
of assessing the site's environmental conditions and remediating environmental
impairments, if any, caused by Ovation's operations prior to the sale. The site
is a multi-tenant industrial park, in which Ovation and other unrelated entities
lease space. The environmental assessment process, which began in 2008, is still
in process.
76
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
18.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other
Matters – Continued
New Hartford -
Continued
The
Company's estimate of its portion of the cost to assess the environmental
conditions and remediate this site is $2.2 million, unchanged from previously
reported estimates, all of which has been accrued. The total amount paid to
date in connection with these environmental remediation activities is $0.4
million. A portion ($0.2 million) of the accrual related to this property is
included in other accruals and payables and the balance is included in other
long-term liabilities. The remaining balance of the accrual reflects the
total anticipated cost of completing these environmental remediation activities.
Although it is reasonably possible that additional costs will be paid in
connection with the resolution of this matter, the Company is unable to estimate
the amount of such additional costs, if any, at this time.
Bloomfield
In
connection with the 2008 purchase of the portion of the Bloomfield campus that
Kaman Aerospace Corporation had leased from NAVAIR, the Company assumed
responsibility for environmental remediation at the facility as may be required
under the Transfer Act and continues the effort to define the scope of the
remediation that will be required by the CTDEP. The assumed environmental
liability of $10.3 million was determined by taking the undiscounted remediation
liability of $20.8 million and discounting it at a rate of 8%. This remediation
process will take many years to complete. The total amount paid to date in
connection with these environmental remediation activities is $2.1 million. A
portion ($1.4 million) of the accrual related to this property is included in
other accruals and payables and the balance is included in other long-term
liabilities. Although it is reasonably possible that additional costs will be
paid in connection with the resolution of this matter, the Company is unable to
estimate the amount of such additional costs, if any, at this time.
United
Kingdom
In
connection with the purchase of U.K. Composites, the Company accrued, at the
time of acquisition, £1.6 million for environmental compliance at the
facilities. The total amount paid to date in connection with these
environmental remediation activities is £0.1 million. The U.S. dollar equivalent
of the remaining environmental compliance liability as of December 31, 2009, is
$2.4 million, which is included in other accruals and payables. The Company
continues to assess the work that may be required, which may result in a change
to this accrual. Although it is reasonably possible that additional costs will
be paid in connection with the resolution of this matter, the Company is unable
to estimate the amount of such additional costs, if any, at this
time.
In
December 2008, a workplace accident occurred at one of the Company’s U.K.
Composites facilities in which one employee died and another was seriously
injured. In accordance with U.K. law, the matter has been the subject of an
investigation carried out jointly by Lancashire Police and the Health and Safety
Executive (“HSE”) to determine whether criminal charges are appropriate in this
case. Although the Company has not received official notification
that the police investigation has ended with no recommendation of criminal
charges, it believes that this is the case because the matter has been
transferred to the regional Coroner to conduct an inquest, which is customary in
cases where the local police have not sought prosecution. The inquest is
scheduled for April 2010. Following the inquest, the Company expects that the
HSE will conduct proceedings under U.K. Health and Safety legislation. The
Company currently estimates that the total potential financial exposure of the
U.K. Composites operation with respect to these government proceedings is not
likely to be material to our consolidated financial
statements.
77
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
19.
COMPUTATION OF EARNINGS PER SHARE
Effective January 1,
2009, in accordance with guidance issued by the FASB, the Company treats
unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend-equivalents as participating securities in its calculation
of earnings per share. The Company is required to apply this accounting
retrospectively to all prior periods presented. The inclusion of these
securities did not have a material impact on the calculation of earnings per
share. The computation of basic earnings per share is based on net earnings
divided by the weighted average number of shares of common stock outstanding for
each year. The computation of diluted earnings per share includes the common
stock equivalency of dilutive options and unvested restricted stock awards
granted to employees under the Stock Incentive Plan.
Excluded
from the diluted earnings per share calculation for the years ended December 31,
2009 and 2008 are 610,436 and 242,259 shares granted to employees that are
anti-dilutive based on the average stock price. There were no anti-dilutive
shares in 2007. The diluted earnings per share computation for 2007 assumes that
at the beginning of the year the 6% convertible subordinated debentures were
converted into common stock with a resultant reduction in interest costs net of
tax.
For the Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
In
thousands, except per share amounts
|
||||||||||||
Basic:
|
||||||||||||
Earnings
from continuing operations
|
$ | 32,649 | $ | 35,107 | $ | 36,491 | ||||||
Earnings
from discontinued operations, net of tax
|
— | — | 7,890 | |||||||||
Gain
on disposal of discontinued operations, net of tax
|
— | 492 | 11,538 | |||||||||
Net
earnings
|
$ | 32,649 | $ | 35,599 | $ | 55,919 | ||||||
Weighted
average number of shares outstanding
|
25,648 | 25,357 | 24,375 | |||||||||
Earnings
per share from continuing operations
|
$ | 1.27 | $ | 1.38 | $ | 1.50 | ||||||
Earnings
per share from discontinued operations
|
— | — | 0.32 | |||||||||
Earnings
per share from gain on disposal of discontinued operations
|
— | 0.02 | 0.47 | |||||||||
Net
earnings per share
|
$ | 1.27 | $ | 1.40 | $ | 2.29 | ||||||
Diluted:
|
||||||||||||
Earnings
from continuing operations
|
$ | 32,649 | $ | 35,107 | $ | 36,491 | ||||||
Elimination
of interest expense on 6% subordinated convertible
debentures (net after taxes)
|
— | — | 507 | |||||||||
Earnings
from continuing operations (as adjusted)
|
32,649 | 35,107 | 36,998 | |||||||||
Earnings
from discontinued operations, net of tax
|
— | — | 7,890 | |||||||||
Gain
on disposal of discontinued operations, net of tax
|
— | 492 | 11,538 | |||||||||
Net
earnings (as adjusted)
|
$ | 32,649 | $ | 35,599 | $ | 56,426 | ||||||
Weighted
average number of shares outstanding
|
25,648 | 25,357 | 24,375 | |||||||||
Weighted
averages shares issuable on conversion of 6% subordinated convertible
debentures
|
— | — | 573 | |||||||||
Weighted
average shares issuable on exercise of dilutive stock
options
|
131 | 155 | 313 | |||||||||
Total
|
25,779 | 25,512 | 25,261 | |||||||||
Earnings
per share from continuing operations
|
$ | 1.27 | $ | 1.38 | $ | 1.46 | ||||||
Earnings
per share from discontinued operations
|
— | — | 0.31 | |||||||||
Earnings
per share from gain on disposal of discontinued operations
|
— | 0.02 | 0.46 | |||||||||
Diluted
net earnings per share
|
$ | 1.27 | $ | 1.40 | $ | 2.23 |
78
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
20.
SHARE-BASED ARRANGEMENTS
General
The
Company accounts for stock options and restricted stock as equity awards whereas
the stock appreciation rights and employee stock purchase plan are accounted for
as liability awards.
The
following table summarizes share-based compensation expense recorded during each
period presented:
For the Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Stock
options
|
$ | 1,137 | $ | 1,268 | $ | 1,316 | ||||||
Restricted
stock awards
|
1,653 | 1,503 | 925 | |||||||||
Stock
appreciation rights
|
54 | (862 | ) | 1,374 | ||||||||
Employee
stock purchase plan
|
240 | 200 | 212 | |||||||||
Total
share-based compensation
|
$ | 3,084 | $ | 2,109 | $ | 3,827 |
Compensation
expense for stock options and restricted stock awards is recognized on a
straight-line basis over the vesting period of the awards.
In
conjunction with the sale of the Music segment, the Company accelerated vesting
for all outstanding options and restricted shares that were issued to employees
of the Music segment. This resulted in additional expense of $1.3 million in
2007 that was included in the determination of the net gain on the
sale.
Stock
Incentive Plan
The 2003
Stock Incentive Plan (the "2003 Plan") provides for the issuance of 2,000,000
shares of common stock and includes a continuation and extension of the
predecessor plan. As with the predecessor plan, the 2003 Plan provides for
equity compensation awards, including principally incentive and non-statutory
stock options, restricted stock, stock appreciation rights, and long-term
incentive program (LTIP) awards. In addition, the 2003 Plan contains provisions
intended to qualify the LTIP under Section 162(m) of the Internal Revenue Code
of 1986, as amended. As of December 31, 2009, there were 488,214 shares
available for grant under the plan.
Effective
October 13, 2009, the Company’s Board of Directors amended the 2003 Plan. In
general, the amendment increased the total number of shares of common stock
available for issuance by 2,000,000. The amendment to the 2003 Plan is subject
to approval by the shareholders entitled to vote thereon at the 2010 annual
meeting of shareholders. The October 13, 2009 amendment also added
Restricted Stock Units (“RSU”s) to the potential awards that can be made under
the 2003 Plan. In addition, on February 23, 2010, the 2003 Plan was further
amended to clarify the definition of persons eligible to receive
awards.
LTIP
awards provide certain senior executives an opportunity to receive award
payments in either stock or cash as determined by the Personnel and Compensation
Committee of the Board of Directors in accordance with the Plan, at the end of a
three-year performance cycle. For the performance cycle, the Company’s financial
results are compared to the Russell 2000 indices for the same periods based upon
the following: (a) average return on total capital, (b) earnings per share
growth and (c) total return to shareholders. No awards will be payable unless
the Company’s performance is at least in the 25th percentile of the designated
indices. The maximum award is payable if performance reaches the 75th percentile
of the designated indices. Awards for performance between the 25th and 75th
percentiles are determined by straight-line interpolation. Generally, LTIP
awards are paid in cash.
Stock
options are granted with an exercise price equal to the average market price of
our stock at the date of grant. Stock options and Stock Appreciation Rights
(“SAR”s) granted under the plan generally expire ten years from the date of
grant and vest 20% each year over a 5-year period on each of the first five
anniversaries from the date of grant. Restricted stock awards (“RSA”s) are
generally granted with restrictions that lapse at the rate of 20% per year over
a 5-year period on each of the first five anniversaries from the date of grant.
Generally, these awards are subject to forfeiture if a recipient separates from
service with the Company.
79
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
20.
SHARE-BASED ARRANGEMENTS (CONTINUED)
Stock
Incentive Plan – Continued
Stock
option activity is as follows:
Weighted average-
|
||||||||
Options
|
exercise price
|
|||||||
Options
outstanding at December 31, 2008
|
743,679 | $ | 18.81 | |||||
Granted
|
213,210 | 16.35 | ||||||
Exercised
|
(45,033 | ) | 13.34 | |||||
Forfeited
or expired
|
(21,980 | ) | 18.84 | |||||
Options
outstanding at December 31, 2009
|
889,876 | $ | 18.50 |
The
following table presents information regarding options outstanding as of
December 31, 2009:
Weighted-average
remaining contractual term - options outstanding
|
6.46
years
|
|||
Aggregate
intrinsic value - options outstanding (in thousands )
|
$ | 4,844 | ||
Weighted-average
exercise price - options outstanding
|
$ | 18.50 | ||
Options
exercisable
|
374,404 | |||
Weighted-average
remaining contractual term - options exercisable
|
4.43
years
|
|||
Aggregate
intrinsic value - options exercisable (in thousands )
|
$ | 2,682 | ||
Weighted-average
exercise price - options exercisable
|
$ | 16.52 |
The
intrinsic value represents the amount by which the market price of the stock on
the measurement date exceeds the exercise price of the option. The intrinsic
value of options exercised in 2009, 2008 and 2007 was $0.3 million, $2.3 million
and $3.9 million, respectively. The Company currently has an open stock
repurchase plan, which would enable the Company to repurchase shares as needed.
Historically the Company has issued shares related to option exercises and RSAs
from treasury stock; however, in 2007 the Company began to issue shares from its
authorized pool of available common stock.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model. The following table indicates the
weighted-average assumptions used in estimating fair value:
2009
|
2008
|
2007
|
||||||||||
Expected
option term
|
6.5
years
|
6.5
years
|
6.5
years
|
|||||||||
Expected
volatility
|
47.7 | % | 41.2 | % | 36.2 | % | ||||||
Risk-free
interest rate
|
2.0 | % | 3.2 | % | 4.6 | % | ||||||
Expected
dividend yield
|
2.2 | % | 1.8 | % | 2.5 | % | ||||||
Per
share fair value of options granted
|
$ | 6.43 | $ | 9.64 | $ | 8.04 |
The
expected term of options granted represents the period of time that option
grants are expected to be outstanding. In predicting the life of option grants,
all stock options meet the definition of “plain vanilla” options and therefore,
the “simplified” method was used to calculate the term for grants.
Forfeitures
of options are estimated based upon historical data and are adjusted based upon
actual occurrences. The cumulative effect of restricted stock forfeitures was
immaterial.
The
volatility assumption is based on the historical daily price data of the
Company’s stock over a period equivalent to the weighted-average expected term
of the options. Management evaluates whether there were factors during that
period which were unusual and which would distort the volatility figure if used
to estimate future volatility and concluded that there were no such factors. The
Company relies only on historical volatility since future volatility is expected
to be consistent with historical volatility.
80
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
20.
SHARE-BASED ARRANGEMENTS (CONTINUED)
Stock
Incentive Plan – Continued
The
risk-free interest rate assumption is based upon the interpolation of various
U.S. Treasury rates determined at the date of option grant. Expected dividends
are based upon a historical analysis of our dividend yield over the past
year.
Restricted
Stock activity is as follows:
Weighted-
|
||||||||
Resticted
Stock
|
average
grant
|
|||||||
Awards
|
date
fair value
|
|||||||
Restricted
Stock outstanding at December 31, 2008
|
149,794 | $ | 26.39 | |||||
Granted
|
174,150 | 17.92 | ||||||
Vested
|
(52,056 | ) | 21.96 | |||||
Forfeited
or expired
|
(1,600 | ) | 24.11 | |||||
Restricted
Stock outstanding at December 31, 2009
|
270,288 | $ | 21.80 |
The grant
date fair value for restricted stock is the average market price of the
unrestricted shares on the date of grant.
Stock
Appreciation Rights activity is as follows:
Stock
|
Weighted-
|
|||||||
Appreciation
|
average
|
|||||||
Rights
|
exercise
price
|
|||||||
SARs
outstanding at December 31, 2008
|
39,700 | $ | 10.32 | |||||
Granted
|
— | — | ||||||
Exercised
|
(18,000 | ) | 9.90 | |||||
Forfeited
or expired
|
— | — | ||||||
SARs
outstanding at December 31, 2009
|
21,700 | $ | 10.66 |
Total
cash paid to settle stock appreciation rights (at intrinsic value) for 2009,
2008 and 2007 was $0.1 million, $0.5 million and $1.2 million, respectively.
SARs are re-evaluated on a quarterly basis using the Black-Scholes valuation
model.
We record
a tax benefit and associated deferred tax asset for compensation expense
recognized on non-qualified stock options and restricted stock for which we are
allowed a tax deduction. For 2009, 2008 and 2007, we recorded a tax benefit of
$1.1 million, $1.0 million and $1.3 million for these two types of compensation
expense.
The
windfall tax benefit is the tax benefit realized on the exercise of
non-qualified stock options and disqualifying dispositions of stock acquired by
exercise of incentive stock options and Employee Stock Purchase Plan stock
purchases in excess of the deferred tax asset originally recorded. The total
windfall tax benefit realized 2008 and 2007 was $0.3 million and $1.2 million,
respectively. In 2009 the Company recorded a windfall tax expense of $0.1
million.
As of
December 31, 2009, future compensation costs related to non-vested stock options
and restricted stock grants is $7.2 million. The Company anticipates that this
cost will be recognized over a weighted-average period of 3.3
years.
81
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
20.
SHARE-BASED ARRANGEMENTS (CONTINUED)
Employees
Stock Purchase Plan
The Kaman
Corporation Employees Stock Purchase Plan allows employees to purchase common
stock of the Company, through payroll deductions, at 85% of the market value of
shares at the time of purchase. The plan provides for the grant of rights to
employees to purchase a maximum of 1,500,000 shares of common stock. During
2009, 88,683 shares were issued to employees at prices ranging from $9.58 to
$20.49. During 2008, 51,664 shares were issued to employees at prices ranging
from $17.02 to $27.35. At December 31, 2009, there were 280,930 shares available
for purchase under the plan.
Effective
October 13, 2009, the Company’s Board of Directors amended the Employees Stock
Purchase Plan. In general, the amendment increased the total number of shares of
common stock that may be purchased by participating employees by 500,000. The
amendment to the Employees Stock Purchase Plan is subject to approval by the
shareholders entitled to vote thereon at the 2010 annual meeting of
shareholders.
21.
SEGMENT AND GEOGRAPHIC INFORMATION
During
the second quarter of 2009, the Company implemented modifications to its system
of reporting, resulting from changes to its internal organization over the
preceding year, which changed its reportable segments. These changes to the
internal organization included the creation of the Aerospace Group management
team and the establishment of the President of Kaman Aerospace Group, Inc. as
the segment manager of the combined Aerospace companies. The Industrial
Distribution segment, which has been under the leadership of a segment manager
for some time, was not impacted by these changes. Following these changes, the
Company determined that it has two reportable segments, Industrial
Distribution and Aerospace. These segments are reflective of how the
Company’s Chief Operating Decision Maker (“CODM”) reviews operating results
for the purposes of allocating resources and assessing performance. The
Company’s CODM is its Chief Executive Officer. Prior period disclosures have
been adjusted to reflect the change in reportable segments.
The
Aerospace Segment produces and/or markets widely used proprietary aircraft
bearings and components; complex metallic and composite aerostructures for
commercial, military and general aviation fixed and rotary wing aircraft; safing
and arming solutions for missile and bomb systems for the U.S. and allied
militaries; subcontract helicopter work; and support for the Company’s SH-2G
Super Seasprite maritime helicopters and K-MAX® medium-to-heavy lift
helicopters.
The
Industrial Distribution segment is the third largest power transmission/motion
control industrial distributor in North America. The segment provides products
including bearings, electrical/mechanical power transmission, fluid power,
motion control and materials handling components to a broad spectrum of
industrial markets throughout North America. Locations consist of nearly 200
branches, distribution centers and call centers across the United States
(including Puerto Rico) and in Canada and Mexico. The segment offers
approximately three million items, as well as value-added services, to a base of
more than 50,000 customers representing a highly diversified cross-section of
North American industry.
82
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
21.
SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Summarized
financial information by business segment is as follows:
For
the year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Net
sales:
|
||||||||||||
Industrial
Distribution
|
$ | 645,535 | $ | 776,970 | $ | 700,174 | ||||||
Aerospace
|
500,696 | 476,625 | 385,857 | |||||||||
Net
sales from continuing operations
|
$ | 1,146,231 | $ | 1,253,595 | $ | 1,086,031 | ||||||
Operating
income:
|
||||||||||||
Industrial
Distribution
|
$ | 12,612 | $ | 35,397 | $ | 33,038 | ||||||
Aerospace
(a)
|
74,996 | 61,608 | 67,783 | |||||||||
Net
gain (loss) on sale of assets
|
(4 | ) | 221 | 2,579 | ||||||||
Corporate
expense
|
(33,662 | ) | (31,960 | ) | (38,672 | ) | ||||||
Operating
income from continuing operations
|
53,942 | 65,266 | 64,728 | |||||||||
Interest
expense, net
|
5,700 | 4,110 | 7,526 | |||||||||
Other
expense (income), net
|
1,232 | 1,990 | (325 | ) | ||||||||
Earnings
from continuing operations before income taxes
|
47,010 | 59,166 | 57,527 | |||||||||
Income
tax expense
|
14,361 | 24,059 | 21,036 | |||||||||
Net
earnings from continuing operations
|
32,649 | 35,107 | 36,491 | |||||||||
Earnings
from discontinued operations before gain
|
— | — | 7,890 | |||||||||
Gain
on disposal of discontinued operations, net of taxes
|
— | 492 | 11,538 | |||||||||
Earnings
from discontinued operations
|
— | 492 | 19,428 | |||||||||
Total
net earnings
|
$ | 32,649 | $ | 35,599 | $ | 55,919 |
(a) Includes a non-cash,
non-tax-deductible, impairment charge of $7.8 million recorded in
2008.
83
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
21.
SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
At
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
Identifiable
assets:
|
||||||||||||
Industrial
Distribution
|
$ | 203,845 | $ | 229,460 | $ | 195,518 | ||||||
Aerospace
|
458,475 | 421,650 | 304,601 | |||||||||
Corporate
|
110,747 | 111,503 | 134,744 | |||||||||
Total
assets
|
$ | 773,067 | $ | 762,613 | $ | 634,863 | ||||||
Capital
expenditures:
|
||||||||||||
Industrial
Distribution
|
$ | 3,139 | $ | 4,216 | $ | 2,650 | ||||||
Aerospace
|
8,884 | 9,872 | 10,760 | |||||||||
Corporate
|
1,544 | 1,912 | 816 | |||||||||
Total
capital expenditures
|
$ | 13,567 | $ | 16,000 | $ | 14,226 | ||||||
Depreciation
and amortization:
|
||||||||||||
Industrial
Distribution
|
$ | 3,536 | $ | 3,096 | $ | 2,507 | ||||||
Aerospace
|
10,930 | 8,833 | 6,543 | |||||||||
Corporate
|
1,638 | 913 | 843 | |||||||||
Total
depreciation and amortization
|
$ | 16,104 | $ | 12,842 | $ | 9,893 |
During
2008, the Aerospace segment completed the non-cash purchase of the NAVAIR
property for $10.3 million, which represents the assumption of the associated
environmental remediation costs. See Note 11, Environmental Costs, for further
discussion.
Operating
income is total revenues less cost of sales and selling, general and
administrative expenses including corporate expense. Operating income includes
net gain (loss) on sale of assets. Operating income for the Aerospace
segment in 2008 includes a non-cash goodwill impairment charge of $7.8
million.
During
2007, the Aerospace segment recorded charges of $6.4 million to increase the
accrued contract loss on the SH-2G(A) program. During 2009 and 2008, there were
no such charges.
Identifiable
assets are year-end assets at their respective net carrying values segregated as
to segment and corporate use.
For the
periods presented, the corporate identifiable assets are principally comprised
of cash, short-term and long-term deferred income tax assets, cash surrender
value of life insurance policies and fixed assets.
Net sales
by the Aerospace segment under contracts with U.S. Government agencies
(including sales to foreign governments through foreign military sales contracts
with U.S. Government agencies) totaled $292.3 million, $254.6 million and $200.0
million in 2009, 2008 and 2007, respectively.
84
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
21.
SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Sales are
attributed to geographic regions based on their location of origin. Geographic
distribution of sales from continuing operations is as follows:
For
the year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
In
thousands
|
||||||||||||
United
States
|
$ | 975,501 | $ | 1,070,041 | $ | 934,113 | ||||||
United
Kingdom
|
57,308 | 41,884 | 10,962 | |||||||||
Canada
|
25,063 | 36,026 | 35,058 | |||||||||
Germany
|
17,128 | 15,597 | 15,188 | |||||||||
Mexico
|
16,773 | 20,271 | 21,201 | |||||||||
Australia/New
Zealand
|
11,537 | 20,980 | 25,953 | |||||||||
Other
|
42,921 | 48,796 | 43,556 | |||||||||
Total
|
$ | 1,146,231 | $ | 1,253,595 | $ | 1,086,031 |
Geographic
distribution of long-lived assets is as follows:
At
December 31,
|
||||||||
2009
|
2008
|
|||||||
In
thousands
|
||||||||
United
States
|
$ | 195,715 | $ | 193,543 | ||||
United
Kingdom
|
73,279 | 68,340 | ||||||
Germany
|
13,377 | 11,695 | ||||||
Mexico
|
937 | 1,232 | ||||||
Canada
|
196 | 296 | ||||||
Total
|
$ | 283,504 | $ | 275,106 |
22.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The
components of accumulated other comprehensive income (loss) are shown
below:
At
December 31,
|
||||||||
2009
|
2008
|
|||||||
In
thousands
|
||||||||
Changes
in pension and post-retirement benefit plans
|
$ | (88,887 | ) | $ | (96,895 | ) | ||
Foreign
currency translation adjustment
|
(14,326 | ) | (23,567 | ) | ||||
Unrealized
gain (loss) on derivative instruments
|
(829 | ) | 804 | |||||
Accumulated
other comprehensive income (loss)
|
$ | (104,042 | ) | $ | (119,658 | ) |
No
amounts were reclassified from other comprehensive income into net income for
foreign currency translation adjustments in 2009 and 2008.
23.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through February 25, 2010, which
represents the date the financial statements were issued. The following
subsequent events were identified that required disclosure.
On
February 23, 2010, the Company’s Board of Directors authorized management to
amend the Qualified Pension Plan. The amendment will, among other things, close
the Qualified Pension Plan to all new hires on or after March 1, 2010 and change
the benefit calculation for existing employees related to pay and years of
service. Specifically, changes in pay will be taken into account for benefit
calculation purposes until the end of calendar year 2010, the benefit formula
will be improved to use the highest five years out of the last ten years of
service up to December 31, 2010, whether consecutive or not, and years of
service will continue to be added for purposes of the benefit calculations
through December 15, 2015, with no further accumulation for service thereafter
except for vesting purposes.
85
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2009, 2008 and 2007
(In
thousands except share and per share amounts)
23.
SUBSEQUENT EVENTS (CONTINUED)
The
Company estimates the changes to the Qualified Pension Plan will result in
an estimated net curtailment loss of approximately $0.2 million. In
addition, the Company estimates that the projected benefit obligation will be
reduced, and the Qualified Pension Plan’s funded status would change
by approximately $47.0 million on March 1, 2010. This will be recorded as a
$47.0 million reduction of the pension liability, a $29.1 million reduction of
accumulated other comprehensive loss and a $17.9 million decrease
of deferred tax assets on the Company’s Consolidated Balance
Sheet.
On
February 23, 2010, the Company’s Board of Directors also authorized certain
enhancements to the defined contribution plan including, among other things, an
increase in employer matching contributions made to the plan based on each
participant’s pre-tax contributions. The enhancements will become effective
January 1, 2011.
86
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
The
company has carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of the
company’s disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer have concluded that, as
of December 31, 2009, the disclosure controls and procedures were
effective.
Internal
Control Over Financial Reporting
The
company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Management has assessed the effectiveness of the company’s
internal control over financial reporting as of December 31, 2009.
In making
its assessment, management has utilized the criteria set forth by the Committee
of Sponsoring Organizations (COSO) of the Treadway Commission in Internal
Control—Integrated Framework. Management concluded that based on its assessment,
the company’s internal control over financial reporting was effective as of
December 31, 2009. The effectiveness of internal control over financial
reporting as of December 31, 2009 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report, which is included
in this Form 10-K.
Changes
in Internal Control Over Financial Reporting
Management
of the company has evaluated, with the participation of the company’s Chief
Executive Officer and Chief Financial Officer, changes in the company’s internal
controls over financial reporting during 2009.
During
the fourth quarter ended December 31, 2009, management made no changes to the
internal controls over financial reporting that materially affected, nor are
they reasonably likely to have a material effect on, our internal controls over
financial reporting.
Inherent
Limitations of Disclosure Controls and Procedures and Inherent Control over
Financial Reporting
The
company’s evaluation described in this item was undertaken acknowledging that
there are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
ITEM
9B. OTHER
INFORMATION
None.
87
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
All
information under this caption, except for the list of executive officers of the
company set forth in Item 1, Executive officers of the registrant, may be found
in the company’s proxy statement to be delivered to stockholders in connection
with the Annual Meeting of Shareholders, which is scheduled for April 21, 2010
(the “Proxy Statement”) and such information is incorporated in this report by
reference.
ITEM
11. EXECUTIVE
COMPENSATION
The
information under this caption in the Proxy Statement is incorporated in this
report by reference.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information under this caption in the Proxy Statement is incorporated in this
report by reference.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information under this caption in the Proxy Statement is incorporated in this
report by reference.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information under this caption in the Proxy Statement is incorporated in this
report by reference.
PART
IV
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
(a)(1)
|
FINANCIAL
STATEMENTS.
|
See Item 8 of this Form 10-K setting
forth our Consolidated Financial Statements.
(a)(2)
|
FINANCIAL
STATEMENT SCHEDULES.
|
An index to the financial statement
schedules immediately precedes such schedules.
(a)(3)
|
EXHIBITS.
|
An index to the exhibits filed or
incorporated by reference immediately precedes such exhibits.
88
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Bloomfield, State of Connecticut, on this
25th
day of February 2010.
KAMAN
CORPORATION
(Registrant)
|
||
By:
|
/s/ Neal J. Keating
|
|
Neal
J. Keating
|
||
President
and
|
||
Chief
Executive
Officer
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature
|
Title:
|
Date:
|
||
/s/ Neal J. Keating
|
President |
February
25, 2010
|
||
Neal
J. Keating
|
and
Chief Executive Officer
|
|
||
/s/ William C.
Denninger
|
Senior Vice President |
February
25, 2010
|
||
William
C. Denninger
|
and
Chief Financial Officer
(Principal
Financial Officer)
|
|
||
/s/ John J. Tedone
|
Vice President – Finance and |
February
25, 2010
|
||
John
J. Tedone
|
Chief
Accounting Officer
|
|
||
/s/ Neal J. Keating
|
February
25, 2010
|
|||
Neal
J. Keating
|
|
|||
Attorney-in-Fact
for:
|
||||
Brian
E. Barents
|
Director
|
|||
E.
Reeves Callaway III
|
Director
|
|||
Karen
M. Garrison
|
Director
|
|||
A.
William Higgins
|
Director
|
|||
Edwin
A. Huston
|
Director
|
|||
Eileen
S. Kraus
|
Director
|
|||
George
E. Minnich
|
Director
|
|||
Thomas
W. Rabaut
|
Director
|
|||
Richard
J. Swift
|
Director
|
89
KAMAN
CORPORATION AND SUBSIDIARIES
Index to
Financial Statement Schedule
Report
of Independent Registered Public Accounting Firm
|
|
|
Financial
Statement Schedule:
|
||
Schedule
II - Valuation and Qualifying Accounts
|
|
90
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders
Kaman
Corporation:
Under
date of February 25, 2010, we reported on the consolidated balance sheets of
Kaman Corporation and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2009,
and the effectiveness of internal controls over financial reporting as of
December 31, 2009, as contained in the 2009 annual report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index. The financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG
LLP
Hartford,
Connecticut
February
25, 2010
91
KAMAN
CORPORATION AND SUBSIDIARIES
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars
in Thousands)
Additions
|
||||||||||||||||||||
Balance
|
Charged
to
|
|||||||||||||||||||
Beginning
of
|
Costs
and
|
Balance
End of
|
||||||||||||||||||
DESCRIPTION
|
Period
|
Expenses
|
Others
(A)
|
Deductions
(B)
|
Period
|
|||||||||||||||
2009
|
||||||||||||||||||||
Allowance
for doubtful accounts
|
$ | 2,172 | $ | 1,547 | $ | 0 | $ | 1,312 | $ | 2,407 | ||||||||||
2008
|
||||||||||||||||||||
Allowance
for doubtful accounts
|
$ | 1,811 | $ | 910 | $ | 266 | $ | 815 | $ | 2,172 | ||||||||||
2007
|
||||||||||||||||||||
Allowance
for doubtful accounts
|
$ | 1,796 | $ | 725 | $ | 0 | $ | 710 | $ | 1,811 |
(A)
|
Additions
to allowance for doubtful accounts attributable to
acquisitions.
|
(B)
|
Write-off
of bad debts, net of recoveries.
|
Additions
|
||||||||||||||||
Balance
|
Current
Year
|
|||||||||||||||
Beginning
of
|
Provision
|
Balance
End
|
||||||||||||||
Period
|
(Benefit)
|
Others
|
of
Period
|
|||||||||||||
2009
|
||||||||||||||||
Valuation
allowance on deferred tax assets
|
$ | 5,000 | $ | 236 | $ | (15 | ) | $ | 5,221 | |||||||
2008
|
||||||||||||||||
Valuation
allowance on deferred tax assets
|
$ | 3,946 | $ | 1,308 | $ | (254 | ) | $ | 5,000 | |||||||
2007
|
||||||||||||||||
Valuation
allowance on deferred tax assets
|
$ | 3,710 | $ | 159 | $ | 77 | $ | 3,946 |
92
KAMAN
CORPORATION
INDEX TO
EXHIBITS
Exhibit
3a
|
The
Amended and Restated Certificate of Incorporation of the company, was
filed as Exhibit 3.1 to Form 8-K on November 4, 2005, Document No.
0001341004-05-000188.
|
by
reference
|
||
Exhibit
3b
|
The
Amended and Restated Bylaws of the company dated February 26, 2008 were
filed as Exhibit 3.1 to Form 8-K on February 28, 2008, Document No.
0000054381-08-000011.
|
by
reference
|
||
Exhibit
10a
|
Kaman
Corporation 2003 Stock Incentive Plan, as amended effective October 13,
2009 filed as Exhibit 10a(i) on Form 10-Q on November 5, 2009, Document
No. 0000054381-09-000052 as amended on February 23, 2010.
*
|
attached
|
||
Exhibit
10b
|
Kaman
Corporation Employees Stock Purchase Plan as amended effective October 13,
2009 was filed as Exhibit 10b(i) to Form 10-Q on November 5, 2009,
Document No. 0000054381-09-000052. *
|
by
reference
|
||
Exhibit
10c
|
Kaman
Corporation Supplemental Employees' Retirement Plan was filed as Exhibit
10c to Form 10-K on March 15, 2001, Document No. 0000054381-02-000005, and
the Plan as amended was filed as Exhibit 10c to Form 10-K on March 5,
2004, Document No. 0000054381-04-000032 and as Exhibit 10.10 to Form 8-K
on February 26, 2007, Document No. 0000054381-07-000015. *
|
by
reference
|
||
Exhibit
10c(i)
|
Post-2004
Supplemental Employees’ Retirement Plan was filed as Exhibit 10.11 to Form
8-K on February 26, 2007, Document No. 000054381-07-000015.
*
|
by
reference
|
||
Exhibit
10c(ii)
|
First
Amendment to Kaman Corporation Post-2004 Supplemental Employees’
Retirement Plan effective January 1, 2005 filed as Exhibit 10.1 to Form
8-K on February 28, 2008, Document No.
0000054381-08-000011.
|
by
reference
|
||
Exhibit
10c(iii)
|
Second
Amendment to Kaman Corporation Post-2004 Supplemental Employees’
Retirement Plan effective generally March 1, 2010. *
|
attached
|
||
Exhibit
10d
|
Kaman
Corporation Amended and Restated Deferred Compensation Plan (Effective as
of November 12, 2002, except where otherwise indicated) was filed as
Exhibit 10d to Form 10-K, Document No. 0000054381-03-000079, filed with
the Securities and Exchange Commission on March 26, 2003. Amendments to
the Plan were filed as Exhibit 10d to Form 10-K, Document No.
0000054381-04-000032, filed with the Securities and Exchange Commission on
March 5, 2004, and Exhibit 10(a) on Form 10-Q, Document No.
0000054381-04-000059, filed with the Securities and Exchange Commission on
August 3, 2004. *
|
by
reference
|
||
Exhibit
10d(i)
|
Kaman
Corporation Post-2004 Deferred Compensation Plan filed as Exhibit 10.2 to
Form 8-K on February 28, 2008, Document No. 0000054381-08-000011.
*
|
by
reference
|
||
Exhibit
10e(i)
|
Kaman
Corporation Cash Bonus Plan (Amended and Restated effective as of January
1, 2008) filed as Exhibit 10e(i) to Form 10-K on February 28, 2008,
Document No. 0001193125-08-041841. *
|
by
reference
|
||
Exhibit
10g(iv)
|
Executive
Employment Agreement between Candace A. Clark and Kaman Corporation, dated
as of January 1, 2007, as amended and restated November 11, 2008 filed as
Exhibit 10g(iv) to Form 10-K on February 26, 2009, Document No.
0001193805-19-000523. *
|
by
reference
|
93
Exhibit
10g (v)
|
Executive
Employment Agreement between Ronald M. Galla and Kaman Corporation, dated
as of January 1, 2007, as amended and restated November 11, 2008 filed as
Exhibit 10g(v) to Form 10-K on February 26, 2009, Document No.
0001193805-19-000523. *
|
by
reference
|
||
Exhibit
10g (vii)
|
Executive
Employment Agreement between T. Jack Cahill and Kaman Industrial
Technologies Corporation, dated as of January 1, 2007, as amended and
restated November 11, 2008 filed as Exhibit 10g(vii) to Form 10-K on
February 26, 2009, Document No. 0001193805-19-000523. *
|
by
reference
|
||
Exhibit
10g (x)
|
Amended
and Restated Change in Control Agreement between Candace A. Clark and
Kaman Corporation, dated as of January 1, 2007, as amended and restated
November 11, 2008 filed as Exhibit 10g(x) to Form 10-K on February 26,
2009, Document No. 0001193805-19-000523. *
|
by
reference
|
||
Exhibit
10g (xi)
|
Amended
and Restated Change in Control Agreement between Ronald M. Galla and Kaman
Corporation, dated as of January 1, 2007, as amended and restated November
11, 2008 filed as Exhibit 10g(xi) to Form 10-K on February 26, 2009,
Document No. 0001193805-19-000523. *
|
by
reference
|
||
Exhibit
10g (xiii)
|
Amended
and Restated Change in Control Agreement between T. Jack Cahill and Kaman
Industrial Technologies Corporation, dated as of January 1, 2007, as
amended and restated November 11, 2008 filed as Exhibit 10g(xiii) to Form
10-K on February 26, 2009, Document No. 0001193805-19-000523.
*
|
by
reference
|
||
Exhibit
10g (xviii)
|
Executive
Employment Agreement between Kaman Corporation and Neal J. Keating dated
August 7, 2007 (as amended) as further amended on February 23, 2010 filed
as Exhibit 10.1 to Form 8-K on February 25, 2010. *
|
by
reference
|
||
Exhibit
10g (xix)
|
Change
in Control Agreement between Kaman Corporation and Neal J. Keating dated
August 7, 2007 (as amended) as further amended on February 23, 2010 and
filed as Exhibit 10.2 to Form 8-K on February 25, 2010. *
|
by
reference
|
||
Exhibit
10g (xx)
|
Executive
Employment Agreement dated July 7, 2008 between Kaman Aerospace Group,
Inc. and Gregory L. Steiner, as amended and restated November 11, 2008
filed as Exhibit 10g(xx) to Form 10-Q on May 11, 2009, Document No.
0000054381-09-000015. *
|
by
reference
|
||
Exhibit
10g (xxi)
|
Change
in Control Agreement dated July 7, 2008 between Kaman Aerospace
Group, Inc. and Gregory L. Steiner, as amended and restated November 11,
2008 filed as Exhibit 10g(xxi) to Form 10-Q on May 11, 2009, Document No.
0000054381-09-000015 *
|
by
reference
|
||
Exhibit
10g (xxii)
|
Executive
Employment Agreement dated November 17, 2008 between Kaman Corporation and
William C. Denninger and Offer Letter dated November 11, 2008 as amended
on February 23, 2010 and filed as Exhibit 10.3 to Form 8-K on February 25,
2010. *
|
by
reference
|
||
Exhibit
10g (xxiii)
|
Change
in Control Agreement dated November 17, 2008 between Kaman Corporation and
William C. Denninger dated November 12, 2008 as amended on February 23,
2010 and filed as Exhibit 10.4 to Form 8-K on February 25, 2010.
*
|
by
reference
|
94
Exhibit
10h (i)
|
Form
of Incentive Stock Option Agreement under the Kaman Corporation 2003 Stock
Incentive Plan filed as Exhibit 10h(i) to Form 10-K on February 26, 2009,
Document No. 0001193805-19-000523. *
|
by
reference
|
||
Exhibit
10h (ii)
|
Form
of Non-Statutory Stock Option Agreement under the Kaman Corporation 2003
Stock Incentive Plan filed as Exhibit 10h(ii) to Form 10-K on
February 26, 2009, Document No. 0001193805-19-000523. *
|
by
reference
|
||
Exhibit
10h (iii)
|
Form
of Stock Appreciation Rights Agreement under the Kaman Corporation 2003
Stock Incentive Plan filed as Exhibit 10h(iii) to Form 10-K on February
26, 2009, Document No. 0001193805-19-000523. *
|
by
reference
|
||
Exhibit
10h (iv)
|
Form
of Restricted Stock Agreement under the Kaman Corporation 2003 Stock
Incentive Plan was filed as Exhibit 10h(iv) to Form 10-Q on August 2,
2007, Document No. 0000054381-07-000092. *
|
by
reference
|
||
Exhibit
10h(v)
|
Form
of Long Term Performance Award Agreement (Under the Kaman Corporation 2003
Stock Incentive Plan) was filed as Exhibit 10.2 to Form 8-K filed on
November 10, 2005, Document No. 0000054381-05-000090. *
|
by
reference
|
||
Exhibit
10h(vi)
|
Form
of Restricted Stock Unit Agreement (Under the Kaman Corporation 2003 Stock
Incentive Plan). *
|
attached
|
||
Exhibit
10h(vii)
|
Deferred
Compensation Agreement between Kaman Corporation and Eileen S. Kraus dated
August 8, 1995 and First Amendment dated December 8, 2005 was filed as
Exhibit 10h(vii) to Form 10-K on February 27, 2006, Document No.
0000054381-06-000036. *
|
by
reference
|
||
Exhibit
10.1
|
Revolving
Credit Agreement between the company and Bank of America, N.A.
and The Bank of Nova Scotia, as Co-Administrative Agents and Bank of
America, N.A. as Administrator and Collateral Agent, RSB Citizens,
National Association, as Syndication Agent and various Lenders
was filed as Exhibit 10.1 to Form 8-K on September 18, 2009, Document
No. 0000950123-09-044065.
|
by
reference
|
||
Exhibit
10.2
|
Term
Credit Agreement dated October 29, 2008 among Kaman Corporation, the banks
listed therein, The Bank of Nova Scotia and Bank of America, N.A., as the
Co-Administrative Agents for the Banks filed as Exhibit 10.1 to Form 8-K
on October 30, 2008, Document No. 0000054381-08-000069 as amended and
restated by an Amended and Restated Term Credit Agreement dated as of
September 17, 2009 among Kaman Corporation, Bank of America, N.A. and the
Bank of Nova Scotia, as the Co-Administrative Agents, Bank of America,
N.A., as Administrator and Collateral Agent and various Lenders filed as
Exhibit 10.2 to Form 8-K on September 18, 2009, Document No.
0000950123-09-044065.
|
by
reference
|
||
Exhibit
14
|
Kaman
Corporation Code of Business Conduct dated October 13,
2009.
|
attached
|
||
Exhibit
21
|
List
of Subsidiaries
|
attached
|
||
Exhibit
23
|
Consent
of Independent Registered Public Accounting Firm
|
attached
|
||
Exhibit
24
|
Power
of attorney under which this report was signed on behalf of certain
directors
|
attached
|
||
Exhibit
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities
and Exchange Act of 1934.
|
attached
|
95
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
|
* Management
contract or compensatory plan
96