<page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
- --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED June 30, 2004.
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
- --- SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
--------------- --------------
Commission File No. 0-1093
KAMAN CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 06-0613548
- -------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1332 Blue Hills Avenue
Bloomfield, Connecticut 06002
----------------------------------------
(Address of principal executive offices)
(860) 243-7100
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2)
Yes x No
--- ---
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of July 31, 2004:
Class A Common 22,045,268
Class B Common 667,814
Page 1 of 36 Pages
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets(In thousands)
<table>
Assets June 30, 2004 December 31, 2003
------ ------------------ -------------------
<s> <c> <c> <c> <c>
Current assets:
Cash and cash equivalents $ 10,645 $ 7,130
Accounts receivable, net 216,438 193,243
Inventories:
Contracts and other
work in process $ 58,631 60,125
Finished goods 27,746 24,785
Merchandise for resale 98,750 185,127 94,042 178,952
------- -------
Income taxes receivable 2,595 1,043
Deferred income taxes 26,026 26,026
Other current assets 11,979 12,457
------- -------
Total current assets 452,810 418,851
Property, plant & equip., at cost 157,102 154,031
Less accumulated depreciation
and amortization 106,817 102,982
------- -------
Net property, plant & equipment 50,285 51,049
Goodwill 38,719 38,638
Other intangible assets , net 14,656 14,709
Other assets, net 5,996 5,064
------- -------
Total assets $562,466 $528,311
======= =======
</table>
- 2 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets(In thousands) (continued)
<table>
Liabilities and Shareholders' Equity
------------------------------------
June 30, 2004 December 31, 2003
------------------ -------------------
<s> <c> <c> <c> <c>
Current liabilities:
Notes payable inc. current
portion of long-term debt $ 7,241 $ 7,673
Accounts payable - trade 57,634 59,600
Accrued contract loss 28,434 23,611
Accrued restructuring costs 4,590 6,109
Other accrued liabilities 32,945 26,123
Advances on contracts 19,525 19,693
Other current liabilities 17,672 17,746
------- -------
Total current liabilities 168,041 160,555
Long-term debt, excl. current portion 66,765 36,624
Other long-term liabilities 28,576 27,949
Shareholders' equity 299,084 303,183
------- -------
Total liabilities and
shareholders' equity $562,466 $528,311
======= =======
</table>
See accompanying notes to condensed consolidated financial statements.
- 3 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
<table>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net sales $247,171 $216,311 $492,849 $432,321
Costs and expenses:
Cost of sales 191,894 158,161 374,917 316,031
Selling, general and
administrative expense 58,047 52,161 117,474 103,384
Other operating
(income)/expense, net (435) (341) (753) (614)
Interest expense, net 949 751 1,744 1,519
Net (gain) loss on sale of
product line and other assets (235) 23 (235) (16,826)
Other (income)/expense, net 177 187 661 592
-------- -------- -------- --------
250,397 210,942 493,808 404,086
-------- -------- -------- --------
Earnings (loss) before
income taxes (3,226) 5,369 (959) 28,235
Income taxes (benefit) (1,390) 2,085 (415) 10,985
-------- -------- -------- --------
Net earnings (loss) $ (1,836) $ 3,284 $ (544) $ 17,250
======== ======== ======== ========
Net earnings (loss) per share:
Basic $ (.08) $ .15 $ (.02) $ .77
Diluted (1) $ (.08) $ .15 $ (.02) $ .75
======== ======== ======== ========
Average shares outstanding:
Basic 22,686 22,551 22,667 22,523
Diluted (2) 22,686 23,484 22,667 23,482
======== ======== ======== ========
Dividends declared per share $ .11 $ .11 $ .22 $ .22
======== ======== ======== ========
<fn>
(1) The calculated diluted per share amounts for the three months ended
and six months ended June 30, 2004 are anti-dilutive, therefore, amounts
shown are equal to the basic per share calculation.
(2) Additional potentially diluted average shares outstanding of 936 for
the three months ended June 30, 2004 and 974 for the six months ended
June 30, 2004 have been excluded from the average diluted shares
outstanding due to the loss from operations in that time period.
</fn> </table>
See accompanying notes to condensed consolidated financial statements.
- 4 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Condensed Consolidated Statements of Cash Flows(In thousands)
<table>
For the Six Months
Ended June 30,
--------------------
2004 2003
------- -------
<s> <c> <c>
Cash flows from operating activities:
Net earnings (loss) $ (544) $ 17,250
Depreciation and amortization 4,634 5,131
Net gain on sale of product line and other assets (235) (16,826)
Other, net 1,815 905
Changes in current assets and liabilities,
excluding effects of divestiture:
Accounts receivable (23,171) (15,664)
Inventory (6,135) (16,651)
Income taxes receivable (1,552) 5,192
Accounts payable (1,972) 3,757
Accrued contract loss 4,823 2,214
Accrued restructuring costs (1,519) (371)
Advances on contracts (168) 740
Income taxes payable 6 1,015
Changes in other current assets and liabilities 7,214 2,375
------- -------
Cash provided by (used in) operating activities (16,804) (10,933)
------- -------
Cash flows from investing activities:
Proceeds from sale of product line and other assets 348 28,025
Expenditures for property, plant & equipment (3,834) (4,175)
Acquisition of business, less cash acquired (399) -
Other, net (1,129) (574)
------- -------
Cash provided by (used in) investing activities (5,014) 23,276
------- -------
- 5 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
For the Six Months
Ended June 30,
--------------------
2004 2003
------- -------
<s> <c> <c>
Cash flows from financing activities:
Changes to notes payable (451) (819)
Additions/(reductions) to long-term debt 30,141 (4,395)
Proceeds from exercise of employee stock plans 629 650
Purchases of treasury stock (4) (205)
Dividends paid (4,982) (4,948)
------- -------
Cash provided by (used in) financing activities 25,333 (9,717)
------- -------
Net increase (decrease) in cash and cash equivalents 3,515 2,626
Cash and cash equivalents at beginning of period 7,130 5,571
------- -------
Cash and cash equivalents at end of period $ 10,645 $ 8,197
======= =======
See accompanying notes to condensed consolidated financial statements.
</table>
Basis of Presentation
- ----------------------
The December 31, 2003 condensed consolidated balance sheet
amounts have been derived from the previously audited
consolidated balance sheet of Kaman Corporation and subsidiaries.
In the opinion of management, the balance of the condensed
financial information reflects all adjustments which are
necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods
presented and are of a normal recurring nature, unless otherwise
disclosed in this report. Certain amounts in prior period condensed
consolidated financial statements have been reclassified to conform
to current year presentation.
- 6 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
The corporation reports results based on fiscal quarters that
generally consist of two four week months and one five week
month, with the fiscal year beginning on January 1 and ending on
December 31.
The statements should be read in conjunction with the consolidated
financial statements and notes included in the corporation's
annual report on Form 10-K for the year ended December 31, 2003.
The results of operations for the interim period presented are not
necessarily indicative of trends or of results to be expected for
the entire year.
Cash Flow Items
- ---------------
Cash payments for interest were $1,756 and $1,643 for the six
months ended June 30, 2004 and 2003, respectively. Cash
payments for income taxes, net of refunds, for the comparable
periods were $1,055 and $4,629, respectively.
Comprehensive Income/(Loss)
- ---------------------------
Comprehensive income (loss) was $(263) and $17,948 for the
six months ended June 30, 2004 and 2003, respectively.
Comprehensive income (loss) was $(2,367) and $3,925 for the
three months ended June 30, 2004 and 2003, respectively. The
changes to net earnings (loss) used to determine comprehensive
income (loss) are foreign currency translation adjustments.
Contracts
- ---------
During the second quarter of 2004, the corporation recorded a
$7,086 non-cash adjustment for the Boeing Harbour Pointe contract
in the Aerospace segment. The adjustment consisted of an
estimated accrued contract loss of $4,280 and a valuation
adjustment of $2,806 associated with portions of the program
inventory.
Contingencies
- -------------
Since 2001, the company's Electro-Optics Development Center
("EODC") has been working under a $12.8 million fixed-price
contract with the University of Arizona. EODC has experienced
- 7 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
significant cost growth in its portion of the program as a result
of changes in the scope of the project and management believes
that there is a valid basis to recover these amounts. As a result,
in April 2004, the company submitted a claim in the amount of $6.3
million to the University to recover these additional costs.
The parties disagree about the claim and are currently engaged
in discussions about the process for its resolution.
Net Gain on Sale of Product Line
- --------------------------------
On January 15, 2003, the corporation sold its electric motor and
drive business to DRS Technologies, Inc. The results for the
six months of 2003 include an after-tax gain of $10,100 as a
result of this transaction.
Accounts Receivable
- -------------------
Accounts receivable consist of the following:
<table>
June 30, December 31,
2004 2003
-------- -----------
<s> <c> <c>
Trade receivables, net of allowance
for doubtful accounts of
$3,629 in 2004, $3,340 in 2003 $ 83,995 $ 74,816
U.S. Government contracts:
Billed 17,803 9,355
Recoverable costs and accrued profit
- not billed 8,583 10,014
Commercial and other government contracts:
Billed 24,706 19,711
Recoverable costs and accrued profit
- not billed 81,351 79,347
-------- --------
Total $216,438 $193,243
======== ========
</table>
- 8 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
<table>
Shareholders' Equity
- --------------------
Changes in shareholders' equity were as follows:
<s> <c>
Balance, January 1, 2004 $303,183
Net earnings (loss) (544)
Foreign currency translation adjustment 281
--------
Comprehensive income (loss) (263)
Dividends declared (4,990)
Purchase of treasury stock (4)
Employee stock plans 1,158
--------
Balance, June 30, 2004 $299,084
========
</table>
Restructuring Costs
- -------------------
The following table displays the activity and balances of these
pre-tax charges as of and for the six months ended June 30, 2004:
<table>
Deductions
----------
Balance at
December 31, Cash Non-Cash Balance at
2003 Payments Charges June 30, 2004
----------- -------- -------- -------------
<s> <c> <c> <c> <c>
Restructuring costs
- -------------------
Employee termination
benefits $ 1,109 $ 688 $ - $ 421
Facility closings 5,000 831 - 4,169
------ ------ ------ ------
Total restructuring costs $ 6,109 $ 1,519 $ - $ 4,590
====== ====== ====== ======
- 9 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Pension Cost
- ------------
Components of net pension cost are as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
2004 2003 2004 2003
------- ------- ------- ------
<s> <c> <c> <c> <c>
Service cost for benefits earned $ 2,558 $ 2,500 $ 5,116 $ 5,000
Interest cost on projected
benefit obligation 6,163 6,087 12,326 12,174
Expected return on plan assets (7,169) (7,861) (14,338) (15,723)
Net amortization and deferral 2 2 4 4
------- ------ ------ ------
Net pension cost $ 1,554 $ 728 $ 3,108 $ 1,455
====== ====== ====== ======
</table>
The corporation does not expect to make a pension contribution
for the 2004 plan year.
Business Segments
- -----------------
Summarized financial information by business segment is as
follows:
<table>
June 30, December 31,
2004 2003
-------- --------
<s> <c> <c>
Identifiable assets:
Aerospace $308,287 $294,345
Industrial Distribution 160,870 150,115
Music 69,892 65,704
Corporate 23,417 18,147
-------- --------
$562,466 $528,311
======== ========
</table>
- 10 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Business Segments (continued)
- ----------------------------
<table>
For the Three Months For the Six Months
Ended June 30, Ended June 30
-------------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net sales:
Aerospace $ 66,801 $ 62,912 $126,531 $124,636
Industrial Distribution 145,283 121,862 290,890 242,128
Music 35,087 31,537 75,428 65,557
------- ------- ------- -------
$247,171 $216,311 $492,849 $432,321
======= ======= ======= =======
Operating profit (loss):
Aerospace $ (3,953) $ 6,515 $ (400) $ 13,725
Industrial Distribution 5,793 3,365 10,823 6,162
Music 1,363 1,391 3,344 3,238
------- ------- ------- -------
3,203 11,271 13,767 23,125
Corporate and other
expense, net (5,715) (5,128) (13,217) (10,197)
Interest expense, net (949) (751) (1,744) (1,519)
Net gain (loss) on sale of
product line and other assets 235 (23) 235 16,826
------- ------- ------- -------
Earnings (loss)
before income taxes $ (3,226) $ 5,369 $ (959) $ 28,235
======= ======= ======= =======
</table>
- 11 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands except per share amounts)
Stock Option Accounting
- -----------------------
The following table reflects pro forma net earnings (loss) and
earnings (loss) per share had the corporation elected to record
employee stock option expense based on the fair value methodology:
<table>
For the Three Months For the Six Months
Ended June 30, Ended June 30
-------------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net earnings (loss):
As reported $(1,836) $ 3,284 $ (544) $ 17,250
Less stock option expense,
net of tax effect (172) (193) (342) (386)
------ ------- ------- -------
Pro forma net
earnings (loss) $(2,008) $ 3,091 $ (886) $ 16,864
====== ====== ====== ======
Earnings (loss) per share - basic:
As reported (0.08) 0.15 (0.02) 0.77
Pro forma after option expense (0.09) 0.14 (0.04) 0.75
Earnings (loss) per share - diluted:
As reported (0.08)* 0.15 (0.02)* 0.75
Pro forma after option expense (0.09)* 0.14 (0.04)* 0.74
<fn>
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is
amortized to expense over the vesting period, and additional
options may be granted in future years. The pro forma amounts
assume that the corporation had been following the fair value
approach since the beginning.
* The calculated diluted per share amounts for the three months
ended and six months ended June 30, 2004 are anti-dilutive,
therefore, amounts shown are equal to the basic per share
calculation.
</fn>
</table>
- 12 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
Overview
Kaman Corporation is composed of three business segments:
Aerospace, Industrial Distribution, and Music.
The Aerospace segment's programs are conducted through three
principal businesses, consisting of Aircraft Structures and
Components, Advanced Technology Products, and Helicopter Programs.
The Aircraft Structures and Components business involves
aerostructure and helicopter subcontract work as well as
manufacture of components such as self-lubricating bearings and
driveline couplings for aircraft applications. For the second
quarter of 2004, this business constituted about 47 percent of
Aerospace segment sales, compared to about 52 percent for the same
period of 2003. The aerostructure subcontract element of this
business continues to be an area of strategic emphasis for the
corporation. The Advanced Technology Products business
manufactures products involving systems, devices and assemblies
for a variety of military and commercial applications, including
safe, arm and fuzing devices for several missile and bomb
programs; precision non-contact measuring systems for industrial
and scientific use; electro-optical target detection and
designation systems; and high reliability memory systems for
airborne, shipboard, and ground-based programs. For the second
quarter of 2004, this business constituted about 28 percent of
segment sales compared to about 18 percent for the same period of
2003. The Advanced Technology Products business is also an area of
strategic emphasis for the corporation. Helicopter Programs
include prime helicopter production along with spare parts and
support. The helicopters produced by this business are the SH-2G
multi-mission maritime helicopter and the K-MAX medium-to-heavy
external lift helicopter. For the second quarter of 2004, this
business constituted about 25 percent of segment sales, compared
to about 30 percent in the same period of 2003.
The Industrial Distribution segment is the third largest U.S.
industrial distributor servicing the bearing,
electrical/mechanical power transmission, fluid power, motion
control and materials handling markets in the United States.
- 13 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
This segment offers more than 1.5 million items, as well as value-
added services to a base of more than 50,000 customers spanning
nearly every sector of U.S. industry from about 200 branches and
regional distribution centers in the U.S., Canada, and Mexico.
The Music segment is America's largest independent distributor of
music instruments and accessories, and is involved in a
combination of designing, manufacturing, marketing and
distributing more than 15,000 products from five facilities
located in the United States and Canada, to retailers of all sizes
for musicians at all skill levels.
For the quarter and six month periods ended June 30, 2004, sales
and earnings results improved substantially for the Industrial
Distribution segment in an improving U.S. economic environment and
results for the Music segment were good. Certain portions of the
Aerospace segment also had good results for the second quarter and
six month periods ended June 30, 2004, including the Kamatics
bearing business, which continues to experience strong military
sales while also participating in what appears to be an improving
market for commercial aviation products, and the Kaman Dayron
fuzing operation, which is beginning to move forward with initial
production of the newly qualified joint programmable fuze ("JPF").
Second quarter and first half of 2004 results for the corporation
as a whole, however, were adversely affected by the Kaman
Aerospace company, which operated at a loss for both periods.
Specifically, Aerospace segment results reflect a loss
attributable to the company's second quarter $7.1 million non-cash
adjustment to its "Harbour Pointe" contract for Boeing as well as
competitive conditions in the market for detail parts
manufacturing and assembly work at the segment's expanded facility
in Jacksonville, Fla. (the facility to which most of the work
formerly conducted at the Moosup, Conn. facility was moved in
2003), the stop-work mode of the MD Helicopters, Inc. ("MDHI")
subcontract program, the delay experienced in final qualification
of the Joint Programmable Fuze program, and cost and operational
issues associated with the Jacksonville facility.
For discussion of the activities of, and factors affecting, each
of these business segments, please refer to the specific
discussions below.
- 14 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
TABULAR PRESENTATION OF FINANCIAL RESULTS
- -----------------------------------------
The following table summarizes certain financial results of the
corporation and its business segments for the second quarter and
six month period of 2004 compared to the same periods of 2003:
<table>
Segment Information
(In millions)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net sales:
Aerospace $ 66.8 $ 62.9 $ 126.5 $ 124.6
Industrial Distribution 145.3 121.8 290.9 242.1
Music 35.1 31.6 75.4 65.6
- ----------------------------------------------------------------------
247.2 216.3 492.8 432.3
======================================================================
Operating profit (loss):
Aerospace (4.0) 6.5 (.4) 13.7
Industrial Distribution 5.8 3.4 10.8 6.2
Music 1.4 1.3 3.4 3.2
- ----------------------------------------------------------------------
3.2 11.2 13.8 23.1
Corporate and other
expense, net (5.7) (5.2) (13.2) (10.2)
Interest expense, net (.9) (.7) (1.7) (1.5)
Net gain (loss) on sale of
product line and other assets .2 - .2 16.8
- ----------------------------------------------------------------------
Earnings (loss) before
income taxes (3.2) 5.3 (.9) 28.2
Income taxes (benefit) (1.4) 2.0 (.4) 10.9
- ----------------------------------------------------------------------
Net earnings (loss) $ (1.8) $ 3.3 $ (.5) $ 17.3
======================================================================
</table>
- 15 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
DISCUSSION AND ANALYSIS OF NET SALES BY BUSINESS SEGMENT
- --------------------------------------------------------
AEROSPACE SEGMENT
Aerospace segment net sales increased 6.2% for the second quarter
of 2004 compared to the same period of 2003 and were essentially
flat for the six months ended June 30, 2004 compared to the same
period of 2003. The second quarter increase was due primarily to
the JPF program at the Kaman Dayron fuzing operation and the
Kamatics bearing business. However, performance for the quarter
and six-month periods was adversely affected by several factors at
the Kaman Aerospace subsidiary. Detailed information follows.
Aircraft Structures and Components
Second quarter 2004 sales for Aircraft Structures and Components
were $31.2 million compared to $32.9 million in the 2003 period.
Sales for the six months ended June 30, 2004 were $64.6 million
compared to $65.1 million in the same period of 2003. This
business involves commercial and military aircraft programs,
including production of aircraft subassemblies and other parts for
Boeing commercial airliners and the C-17 military transport, as
well as helicopter subcontract work. This is a core business area
for the corporation and a focal point for future growth.
There are signs that an improving commercial airline market is
starting to benefit certain elements of this business, including
specifically the Kamatics bearing business. However, the
Jacksonville operation has continued to find the market for
available subcontract detail parts manufacturing and assembly
work very competitive. In this environment, new business awards
have been difficult to achieve, making it more difficult for the
Jacksonville facility to develop a sufficient business base. In
this environment, military work, including the C-17, which is one
of the operation's largest programs, continues to be an important
contributor.
Helicopter subcontract work involves commercial and military
helicopter programs. Commercial programs include multi-year
contracts for production of fuselages for the MDHI 500 and 600
series helicopters and composite rotor blades for the MD Explorer
- 16 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
helicopter. Total orders from MDHI have run at significantly
lower rates than originally anticipated due to lower than
expected demand. The corporation's investment in these contracts
consists principally of $4.2 million in billed receivables and
$16.2 million in recoverable costs - not billed (including start-
up costs and other program expenditures) as of June 30, 2004. To
date in 2004, the corporation has received only nominal payments.
The recoverability of unbilled costs will depend to a
significant extent upon MDHI's future requirements through 2013,
the year to which both contracts extend. The corporation stopped
production on these contracts in the second quarter of 2003, but
continues to work closely with the customer to resolve overall
payment issues and establish conditions under which production
could be resumed, including the timing thereof. Management
believes that some progress is being made in this regard. Based
upon MDHI's projected future requirements and inventory on hand
at both MDHI and the corporation, a resumption of production
would not be expected to occur until late in 2004 at the
earliest. Although the outcome is not certain, the corporation
understands from MDHI management that it is close to executing
its strategy to improve current financial and operational
circumstances.
The segment's Kamatics operation manufactures proprietary self-
lubricating bearings used in commercial airliners operated by the
major and regional airlines, and increasingly in military
programs. This business had increased sales in the second quarter
and six months ended June 30, 2004, bolstered by increased
commercial aircraft manufacturing activity at Boeing and Airbus.
Sales for military and commercial aftermarket applications were
also good.
Advanced Technology Products
Second quarter 2004 sales for Advanced Technology Products were
$18.8 million compared to $11.3 million in the 2003 period. Sales
for the six months ended June 30, 2004 were $30.1 million compared
to $23.2 million in the same period of 2003. This business
manufactures products for military and commercial markets,
including safe, arm and fuzing devices for a number of major
missile and bomb programs as well as precision measuring systems,
mass memory systems and electro-optic systems. In May 2004, the
Kaman Dayron company successfully completed qualification testing
and was given authority to begin production deliveries of the
advanced FMU-152A/B JPF to the U.S. Air Force. The JPF contract
has a value of $13.6 million covering low rate initial production
- 17 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
and lot no. 1 which extends through 2005. The contract includes
options for eight additional years of production, which, if fully
exercised, would bring the total potential value of the contract
to $169.0 million. Production unit sales had been delayed during
2003 and the first quarter of 2004 due to issues with earlier
final qualification testing results.
Since 2001, the company's Electro-Optics Development Center
("EODC") has been teamed with the University of Arizona to build a
6.5-meter aperture collimator that will be used for testing large
optical systems in a vacuum environment. EODC has been working
under a $12.8 million fixed-price contract to design and fabricate
the structural, electrical, mechanical and software control
systems for the collimator. EODC has experienced significant cost
growth in its portion of the program as a result of changes in the
scope of the project and management believes that there is a valid
basis to recover these amounts. As a result, in April 2004, the
company submitted a claim in the amount of $6.3 million to the
University to recover these additional costs. The parties
disagree about the claim and are currently engaged in discussions
about the process for its resolution.
Helicopter Programs
Second quarter 2004 sales for Helicopter Programs were $16.8
million compared to $18.7 million in the 2003 period. Sales for
the six months ended June 30, 2004 were $31.8 million compared to
$36.3 million in the same period of 2003. The segment's
helicopter products include the SH-2G multi-mission maritime
helicopter and the K-MAX medium-to-heavy external lift helicopter,
along with spare parts and sales support. SH-2G-related sales
were the predominant source of sales in both periods of 2004. The
SH-2G helicopter program generally consists of retrofit of the
corporation's SH-2F helicopters to the SH-2G configuration or
refurbishment of existing SH-2G helicopters. The SH-2, including
its F and G configurations, was originally manufactured for the
U.S. Navy. The SH-2G aircraft is currently in service with the
Egyptian Air Force and the New Zealand and Polish navies.
Work continues on the SH-2G(A) program for Australia which
involves eleven helicopters with support, including a support
services facility, for the Royal Australian Navy ("RAN"). The
total contract has a current anticipated value of about $735
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
million. The helicopter production portion of the program is
valued at approximately $599 million, of which about 99% has been
recorded as sales through June 30, 2004. As previously reported,
this contract is now in a loss position due to increases in
anticipated costs to complete the program. The in-service
support center contract has a current anticipated value of about
$136 million of which about 27% has been recorded as sales
through June 30, 2004.
Production of the eleven SH-2G(A) aircraft for the program is
essentially complete. As previously reported, the aircraft lack
the full Integrated Tactical Avionics System ("ITAS") software and
progress is continuing on this element of the program. The RAN
has provisionally accepted five of the aircraft, including one
during the second quarter, and the process continues. The
corporation expects to be able to deliver the full capability of
the ITAS weapons system software in late 2004 with final
acceptance anticipated in 2005. While management believes that
the corporation's reserves are sufficient to cover estimated costs
to complete the program, final development of the software by
subcontractors and its integration, which is the corporation's
responsibility, are underway, and these are complex tasks.
The corporation maintains a consignment of the U.S. Navy's
inventory of SH-2 spare parts under a multi-year agreement that
provides the corporation the ability to utilize certain inventory
for support of its SH-2G programs.
During the quarter and six-month period ended June 30, 2004, the
company continued marketing its existing K-MAX helicopter
inventory (which was written down to estimated fair market value
in 2002) utilizing both a sale and short-term lease program.
Three new leases were entered into during the second quarter.
With the sale of one additional aircraft in July 2004, the
corporation has now sold or leased all of its remaining available
K-MAX helicopters.
Kaman Aerospace Subsidiary Reorganization
Work continues on this company's reorganization which was
undertaken earlier this year in order to address differences
between its various businesses and their specific requirements.
Three divisions are being created to replace portions of the
existing structure: Kaman Aerostructures, having production
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
facilities in Jacksonville and Wichita (the Wichita facility being
the Plastic Fabricating Company operation), will be responsible
for aerostructure subcontract programs; Kaman Fuzing, having
production facilities in Middletown, Conn. and Orlando, Fla. (the
Orlando facility being the Kaman Dayron operation), will be
responsible for fuze operations; and Kaman Helicopters, having
production facilities in Bloomfield, Conn., will be responsible
for helicopter programs. By placing purchasing, operations,
finance, contracts and human resources personnel within each
division, management expects that each will be better able to
effectively manage expenses for the services and/or functions they
require, and achieve optimal customer service. It is expected
that the reorganization will be completed by the end of 2004 and
in the meantime, financial results will be reported in the manner
described in this report. The Kamatics operation will remain a
separate business within the Aerospace segment.
INDUSTRIAL DISTRIBUTION SEGMENT
Industrial Distribution segment net sales increased about 19% in
the second quarter of 2004 and about 20% for the first half of
2004 compared to the same periods of 2003. Sales included $7.2
million for the second quarter and $14.4 million for the first
half of 2004 from the former Industrial Supplies, Inc. which was
acquired in the fourth quarter of 2003. Results for the quarter
and six months ended June 30, 2004 reflect an improving U.S.
economic environment and to some extent in the six-month period,
the inclusion of four extra sales days in the first quarter of
2004 compared to the same period of 2003. With industrial
production and capacity utilization indices both indicating long-
awaited vitality in the national economy, the segment's customer
base is benefiting and sales increased to both MRO and OEM
customer groups. Management believes that pent up demand from
those customers who have delayed purchases because of economic
conditions has been a factor in the segment's increased sales.
Penetrating the national account market has also been a
significant focus for the business and during the second quarter,
the segment was awarded national account agreements with Tyco
International (US) Inc. and Cadbury Schweppes U.S. affiliates
(Mott's LLP, Dr. Pepper/Seven Up, Inc., Snapple Beverage
Corporation., and Cadbury Adams LLC). In addition, during the
quarter, the segment was also named a national distributor for the
full line of IMI Norgren, Inc.'s fluid power products, providing
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
the company with a major line to sell through its entire U.S.
branch network. This addition to the catalogue broadens Kaman's
product offerings in this important market sector.
This segment is the third largest U.S. industrial distributor
servicing the bearing, electrical/mechanical power transmission,
fluid power, motion control and materials handling markets in the
United States. The segment offers more than 1.5 million items, as
well as value-added services, to a base of more than 50,000
customers spanning nearly every sector of U.S. industry.
Because the segment's customers include a broad spectrum of U.S.
industry, this business is directly affected by national
macroeconomic variables such as the percentage of plant capacity
utilization within the U.S. industrial base, and the business
tends to track the U.S. Industrial Production Index with a short
lag. Success in the segment's markets requires a combination of
competitive pricing and value-added services that save the
customer money while helping it become more efficient and
productive. Over the past several years, large companies have
increasingly centralized their purchasing, focusing on suppliers
that can service all of their plant locations across a wide
geographic area. To meet these requirements, the segment has
expanded its geographic presence through the selective opening of
new branches and acquisitions in key markets of the upper Midwest,
the South, and Mexico. The segment's footprint of nearly 200
branches and regional distribution centers now covers 70 of the
top 100 industrial markets in the United States. Management's
goal is to grow the Industrial Distribution segment by expanding
into additional areas that enhance its ability to compete for
large regional and national customer accounts.
MUSIC SEGMENT
Music segment net sales increased 11.3% and about 15% for the
second quarter and first half of 2004, respectively, compared to
the same periods of 2003. Results reflect improvement in U.S.
economic conditions along with the competitive positioning of the
segment's brand name products. Sales increased to both
independent retailers and large chain store accounts, however
sales to the large chain store accounts were particularly strong.
- 21 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The segment is America's largest independent distributor of music
instruments and accessories and is involved in a combination of
designing, manufacturing, marketing and distributing more than
15,000 products from five facilities in the U.S. and Canada to
retailers of all sizes for musicians of all skill levels. The
segment's array of instruments includes premier and proprietary
products, such as the Ovation (registered trademark) and Hamer
(registered trademark) guitars, and Takamine (registered
trademark) guitars under an exclusive distribution agreement. The
segment has also significantly extended its line of percussion
products and accessories over the past few years, augmenting its
CB, Toca (registered trademark) and Gibraltar (registered
trademark) lines to include an exclusive distribution agreement
with Gretsch (registered trademark) drums and acquiring Latin
Percussion (a leading distributor of hand percussion instruments)
and Genz Benz (an amplification equipment manufacturer). The
segment continues to seek opportunities to add exclusive premier
brand product lines that would build upon the segment's market
position.
DISCUSSION AND ANALYSIS OF OPERATING PROFITS - CONSOLIDATED
- -----------------------------------------------------------
As would be expected with any commercial business, operating
profits is a key indicator utilized by management in its
evaluation of the performance of its business segments. The net
operating profits of the corporation's segments, in total,
decreased 71.6% and 40.5% for the second quarter and first half of
2004, respectively, compared to the same periods of 2003. Despite
substantial increases in operating profits for the Industrial
Distribution segment in both the second quarter and the six months
ended June 30, 2004 (72.2% and 75.6% respectively) and a slight
decrease of 2.0% in operating profits for the Music segment
in the second quarter and an increase of 3.3% for the six-month
period of 2004 compared to the prior year periods, the Aerospace
segment operated at a loss for the second quarter and the six-
month period of 2004 and that more than offset the increases in
the corporation's other business segments.
Another key performance indicator for management is each business
segment's return on investment. Management defines "return on
investment" as operating profits divided by average investment for
each segment. Average investment is computed by combining equity,
- 22 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
inter-company borrowings plus letters of credit and, for foreign
subsidiaries, outside debt financings. The corporation's goals
for return on investment are expressed as a range, with 15% at the
lower end of the range. Management reviews both the year to date
annualized rate of return on investment for each segment and each
segment's projection of its annual return on investment based upon
its latest budget update. For the first half of 2004, the
Industrial Distribution segment performed above the minimum
percentage, the Music segment performed slightly below the
minimum, and the Aerospace segment incurred a loss. Each
segment's projection of its 2004 return on investment derived from
the June 30 budget update suggests that management of each of the
Industrial Distribution and Music segments believes that the
segment will perform above the minimum percentage, while the
Aerospace segment will perform substantially below the minimum.
DISCUSSION AND ANALYSIS OF OPERATING PROFITS BY BUSINESS SEGMENT
- ----------------------------------------------------------------
AEROSPACE SEGMENT
The Aerospace segment had a second quarter operating loss of $4.0
million compared to operating profits of $6.5 million a year ago.
The loss is primarily attributable to a $7.1 million non-cash
adjustment to its Boeing Harbour Pointe contract, and to some
extent the continuing insufficient business base at the
corporation's Bloomfield, Conn. and Jacksonville, Fla. aircraft
manufacturing facilities and $1.6 million growth in workers'
compensation claims. The second quarter of 2004 included $0.8
million in underutilized facility costs primarily associated with
the absence of new helicopter orders at the Bloomfield facility.
Costs associated with ongoing maintenance of the Moosup facility,
which was closed last year, were previously reserved as part of
the charge taken in 2002.
For the first half of 2004, the segment had an operating loss of
$0.4 million as a result of the issues discussed above, compared
to operating profits of $13.7 million the previous year.
Underutilized facility costs for the period were $1.6 million.
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Kamatics was an important contributor to overall results for the
second quarter and first half of 2004. Kamatics is continuing to
experience strong military sales while participating in what
appears to be an improving market for commercial aviation
products.
The Kaman Aerospace company's Boeing Harbour Pointe parts and
subassemblies contract has generated a lower than expected
order flow and an unprofitable mix of work. During the second
quarter, it became clear that future demand for these parts, many
of which are associated with programs that Boeing is either
cutting back or eliminating, would be lower than previously
anticipated. As a consequence, in the second quarter, the
company recorded a $7.1 million non-cash adjustment to the
program, consisting of an estimated accrued contract loss of
$4.3 million and a valuation adjustment of $2.8 million
associated with portions of the program inventory.
The expanded Jacksonville facility's capabilities are taking some
time to develop and manufacturing performance continues to be an
area of focus. The company is working to improve performance at
the plant and reestablish levels of product quality and customer
quality rankings and management believes that progress is being
made. At the same time as the Jacksonville facility works through
these issues, operating costs have also increased due to manpower
and third-party processing costs incurred to expedite required
deliveries, and due to the standard FAA and customer requirements
to requalify manufacturing and quality processes made necessary by
the move from Connecticut to Florida. The lower sales level at
Jacksonville in particular has resulted in overhead and general
and administrative expenditures being absorbed at higher rates by
the company's active programs, and generally lower profitability
or losses for these programs. Management continues to believe
that operating conditions at the Jacksonville facility will
improve and that the move from Moosup to Jacksonville will
ultimately provide a lower cost structure from which to compete.
Results for the second quarter and the six-month period of 2004
also reflect competitive conditions in the market for detail parts
manufacturing and assembly work, the stop-work mode of the MDHI
subcontract program, and the delay experienced in final
qualification of the JPF program.
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Aerospace subsidiary management continues to evaluate ways to grow
in a competitive global business environment, including
reassessment of "make or buy" strategies and the shift of
production to other locations expected to provide lower cost
structures.
Despite current circumstances, management has elected to continue
its focus on positioning itself for longer-term competitiveness
in the commercial aircraft market and to maintain its prime
helicopter program capabilities. In this regard, management is in
discussions with the U.S. Naval Air Systems Command (NAVAIR)
regarding the potential purchase of a facility located on its
Bloomfield campus that the Aerospace subsidiary currently leases
from NAVAIR and has operated for several decades, for the
principal purpose of performing U.S. government contracts.
Pursuant to the federal government's policy of disposing of such
government-owned, contractor-operated facilities and the terms of
the current lease, the Aerospace company must submit a formal
request to enter into negotiations for purchase of the facility by
September 30, 2004, which will be followed by determination of the
price and other terms of the sale. Management believes that the
facility, which is currently utilized for flight and ground test
operations and limited parts manufacturing, is important to its
ongoing operations. As part of its decision-making process, the
company is discussing with NAVAIR and the U.S. General Services
Administration the method that would be used to calculate the
purchase price of the facility, which could possibly include the
corporation undertaking some level of the environmental
remediation that may be legally required in the event of a
sale of the property. In applying the guidance of Statement of
Financial Accounting Standards No. 5 "Accounting for
Contingencies", the corporation's management has concluded that,
while not probable, it is reasonably possible that the corporation
may agree to undertake some level of environmental remediation,
should the facility be sold to the corporation. At this stage of
preliminary discussions, however, it is not possible to determine
the magnitude, if any, of such a potential undertaking.
Therefore, no liability for environmental remediation at the
facility has been recorded to date.
Finally, with respect to the $11.0 million charge taken in 2002
for the cost of phasing out the corporation's Moosup facility,
$3.3 million represents severance costs at the Moosup and
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Bloomfield locations, which is expected to involve the separation
from service of approximately 400 employees. A total of about
$2.9 million had been paid for 339 such separations as of June 30,
2004.
INDUSTRIAL DISTRIBUTION SEGMENT
This segment's operating profits increased 72.2% and 75.6% for the
quarter and six-month period ended June 30, 2004, respectively,
compared to the same periods of 2003. For the most part, these
results reflect increased sales to both MRO and OEM customer
groups in an improving U.S. economy. The operating profits
increase also reflects the impact of the company's 'lean-thinking'
practices and maintenance of cost controls that were implemented
by the segment during the difficult economic times of the past few
years. In addition, vendor incentives in the form of rebates
(i.e., vendors provide inventory purchase rebates to distributors
at specified volume-purchasing levels) continue to be an important
contributor to operating profits.
Management is also monitoring the effects of rising energy and
steel prices, which could impact its customer base and by
extension, this segment's operations. Management believes that,
to date, it has been successful in working with customers and
suppliers to minimize the impact of these items on its margins.
MUSIC SEGMENT
This segment's operating profits decreased 2.0% for the quarter
ended June 30, 2004 while increasing 3.3% for the first half of
the year, compared to the same periods of 2003. These results are
attributable to an overall improvement in the national economy and
the competitive positioning of the segment's brand name products,
however business in the second quarter favored a somewhat lower
margin mix of products and customers.
NET EARNINGS (LOSS) AND CERTAIN EXPENSE ITEMS
- --------------------------------------
For the quarter ended June 30, 2004, the corporation experienced a
net loss of $1.8 million, or $0.08 loss per share diluted,
compared to net earnings of $3.3 million, or $0.15 earnings per
share diluted the previous year. For the six-month period of
- 26 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
2004, the corporation experienced a net loss of $0.5 million, or
$0.02 loss per share diluted compared to net earnings of $17.3
million, or $0.75 earnings per share diluted in the same period of
2003. The 2003 six-month results include an after-tax gain of
$10.1 million, or $0.45 per share, from the sale of the
corporation's Electromagnetics Development Center. The
corporation has continued to pay dividends at the rate of $0.11
per share in each of the first two quarters of 2004.
Selling, general and administrative expenses for the first half
of 2004 were 13.6% higher than last year for several reasons,
including increased sales, the ISI acquisition in the Industrial
Distribution segment, increases in Aerospace segment general and
administrative expenses and increases in corporate expenses,
principally attributable to pension expense.
For the six months ended June 30, 2004, interest expense increased
13.5% due to higher average borrowings.
The consolidated effective income tax rate for the six month
period ended June 30, 2004 was 43.3% compared to 38.9% for the
same period in 2003.
For a discussion of Financial Accounting Standards Board
Statements applicable to the corporation, please refer to the
corporation's annual report on Form 10-K for the year ended
December 31, 2003.
CRITICAL ACCOUNTING ESTIMATES
- -----------------------------
There have been no significant changes in the corporation's
critical accounting estimates in the quarter ended June 30, 2004.
Please see the corporation's annual report on Form 10-K for the
year ended December 31, 2003 for discussion of the most
significant areas currently involving management judgments and
estimates.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Discussion and Analysis of Cash Flows
Management assesses the corporation's liquidity in terms of its
ability to generate cash to fund operating, investing and
financing activities. Cash flow generation is another key
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
performance indicator reviewed by management in evaluating
business segment performance. Significant factors affecting the
management of liquidity include earnings, cash flows generated
from or used by operating activities, capital expenditures,
investments in the business segments and their programs,
acquisitions, dividends, adequacy of available bank lines of
credit, and factors which might otherwise affect the corporation's
business and operations generally, as described below under the
heading "Forward-Looking Statements". Management believes that
the corporation's annual cash flow from operations and available
unused bank lines of credit under its revolving credit agreement
will be sufficient to finance its working capital and other
recurring capital requirements for the next twelve-month period.
The corporation as a whole has operated at a loss for the first
half of 2004 due to the performance of the Aerospace company which
has been adversely affected by competitive conditions in the
commercial aerospace market and certain operational issues
discussed above. Aerospace management is working to address these
issues through its sales efforts as well as ongoing evaluation of
its current cost structure with the goal of improving operating
profits and cash flow generation.
Operating activities used cash in the amount of $16.8 million in
the first six months of 2004. Cash usage was attributable
principally to increases in accounts receivable in the Aerospace
and Industrial Distribution segments, inventories in the Aerospace
and Music segments and a reduction in accounts payable. These
items were offset by an increase in accrued contract losses due to
the adjustment in the Harbour Pointe contract and changes in other
current assets and liabilities.
Investing activities used cash in the amount of $5.0 million in
the first half of 2004, principally due to capital expenditures
for property, plant and equipment. Cash provided by financing
activities for the first half of 2004 consisted largely of an
increase in borrowings (most of which occurred during the first
quarter), offset somewhat by the payment of dividends to
shareholders.
Contractual Obligations
Overall, there has been no substantial change in the corporation's
contractual obligations as of June 30, 2004, except that there
were increased borrowings during the first six months (most of
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
which occurred during the first quarter). Please see the
corporation's annual report on Form 10-K for the year ended
December 31, 2003 for a discussion of its contractual obligations.
Off-Balance Sheet Arrangements
There has been no substantial change in the corporation's off-
balance sheet arrangements as of June 30, 2004. Please see the
corporation's annual report on Form 10-K for the year ended
December 31, 2003 for a discussion of such arrangements.
Other Sources/Uses of Capital
At June 30, 2004, the corporation had $19.9 million of its 6%
convertible subordinated debentures outstanding. The debentures
are convertible into shares of Class A common stock at any time on
or before March 15, 2012 at a conversion price of $23.36 per
share, generally at the option of the holder. Pursuant to a
sinking fund requirement that began March 15, 1997, the
corporation redeems approximately $1.7 million of the outstanding
principal of the debentures each year.
In November 2000, the corporation's board of directors approved a
replenishment of the corporation's stock repurchase program,
providing for repurchase of an aggregate of 1.4 million Class A
common shares for use in administration of the corporation's stock
plans and for general corporate purposes. As of June 30, 2004, a
total of 269,152 shares had been repurchased since inception of
this replenishment program. For a discussion of share repurchase
activity during the first half of 2004, please refer to Part II,
Item 2, of this report.
Financing Arrangements
Total average bank borrowings for the six-month period ended June
30, 2004 were $49.8 million compared to $42.6 million for same
period last year.
The corporation maintains a revolving credit agreement (the
"Revolving Credit Agreement") with several banks that provides a
$150 million five-year commitment scheduled to expire in November
2005 with interest at current market rates. Facility fees are
charged on the basis of the corporation's credit rating from
Standard & Poor's, which is a BBB investment grade rating.
Management believes that this is a favorable rating for a
- 29 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
corporation of its size and the rating was reaffirmed by Standard
& Poor's in April 2004. The rating is accompanied by the negative
outlook" which was assigned to the corporation and several other
aerospace companies in the wake of the events of September 11,
2001 and the subsequent weakness in aerospace markets. Under the
terms of the current Revolving Credit Agreement, if this rating
should decrease, the effect would be to increase interest rates
charged and facility fees.
The most restrictive of the covenants contained in the Revolving
Credit Agreement requires the corporation to have EBITDA, as
defined, at least equal to 300% of net interest expense, on the
basis of a rolling four quarters and a ratio of consolidated total
indebtedness to total capitalization of not more than 55%.
In connection with the acquisition of RWG Frankenjura-Industrie
Flugwerklager GmbH in 2002, the corporation established a 9.5
million Euro term loan and revolving credit facility (the "Euro
Credit Agreement") with Wachovia Bank, National Association
("Wachovia"), one of its Revolving Credit Agreement lenders having
offices in London. In general, the Euro Credit Agreement contains
the same financial covenants as the Revolving Credit Agreement
described previously and the term of the Euro Credit Agreement
expires at the same time as the Revolving Credit Agreement.
Letters of credit are generally considered borrowings for purposes
of the Revolving Credit Agreement. A total of $29.2 million in
letters of credit were outstanding at June 30, 2004, a significant
portion of which is related to the Australia SH-2G(A) program.
The letter of credit for the production portion of the Australia
program has a balance of $20 million, which is expected to remain
in place until final acceptance of the aircraft by the RAN.
FORWARD-LOOKING STATEMENTS
- --------------------------
This report contains forward-looking information relating to the
corporation's business and prospects, including aerostructures and
helicopter subcontract programs and components, advanced
technology products, the SH-2G and K-MAX helicopter programs, the
industrial distribution and music businesses, operating cash flow,
and other matters that involve a number of uncertainties that may
cause actual results to differ materially from expectations.
Those uncertainties include, but are not limited to: 1) the
successful conclusion of competitions and thereafter contract
- 30 -
<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
negotiations with government authorities, including foreign
governments; 2) political developments in countries where the
corporation intends to do business; 3) standard government
contract provisions permitting renegotiation of terms and
termination for the convenience of the government; 4) economic and
competitive conditions in markets served by the corporation,
particularly industrial production and commercial aviation, and
global economic conditions; 5) satisfactory completion of the
Australian SH-2G(A)program, including successful completion and
integration of the full ITAS software; 6) recovery of the
corporation's investment in the MDHI contracts; 7) achievement of
and actual costs for recertifying products and processes in
connection with the expanded Jacksonville facility; 8) receipt and
successful execution of production orders for the JPF program;
9) satisfactory resolution of the EODC Collimator matter;
10) achievement of enhanced business base in the Aerospace segment
in order to better absorb overhead and general and administrative
expenses; 11) satisfactory results of negotiations with NAVAIR
concerning the corporation's leased facility in Bloomfield, Conn.;
12) profitable integration of acquired businesses into the
corporation's operations; 13) changes in supplier sales or vendor
incentive policies; 14) the effect of price increases or
decreases; 15) pension plan assumptions and future contributions;
and 16) currency exchange rates, taxes, changes in laws
and regulations, interest rates, inflation rates, general business
conditions and other factors. Any forward-looking information
should be considered with these factors in mind.
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
There has been no significant change in the corporation's exposure
to market risk during the quarter ended June 30, 2004. Please see
the corporation's annual report on Form 10-K for the year ended
December 31, 2003 for discussion of the corporation's exposure to
market risk.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures
The corporation's management, with the participation of the
corporation's Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the corporation's disclosure
controls and procedures (as such term is defined in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered
by this report. Based on such evaluation, the corporation's Chief
Executive Officer and Chief Financial Officer have concluded that,
as of the end of such period, the corporation's disclosure
controls and procedures were effective.
We note, however, that even the most well designed and executed
control systems are subject to inherent limitations and as a
result, the control system can provide reasonable but not absolute
assurance that its objectives will be met under all potential
future conditions. The corporation's Chief Executive Officer and
Chief Financial Officer have concluded that the corporation's
disclosure controls and procedures are effective at a reasonable
assurance level.
(b) Internal Control Over Financial Reporting
There have not been any changes in the corporation's internal
control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15 (f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the
corporation's internal control over financial reporting.
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
(e)Purchases of Equity Securities
In November 2000, the corporation's board of directors approved a
replenishment of the corporation's stock repurchase program
providing for repurchase of an aggregate of 1.4 million Class A
common shares for use in administration of the corporation's stock
plans and for general corporate purposes.
The following table provides information about purchases by the
corporation during the three months ended June 30, 2004 of equity
securities that are registered by the corporation pursuant to
Section 12 of the Exchange Act:
<table>
Total Number
of Shares Maximum
Purchased as Number of
Total Part of Shares That
Number Average Publicly May Yet Be
of Shares Price Paid Announced Purchased Under
Period Purchased per Share Plan the Plan
- ------- --------- ---------- ------------ ---------------
<s> <c> <c> <c> <c>
04/01/04-
04/30/04 2 $15.15 269,152 1,130,848
05/01/04-
05/31/04 - - 269,152 1,130,848
06/01/04-
06/30/04 - - 269,152 1,130,848
</table>
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits to Form 10-Q:
10(a) Second Amendment to Kaman Corporation Amended
and Restated Deferred Compensation Plan
10(b) Third Amendment to Kaman Corporation Cash
Bonus Plan (Amended and Restated as of
January 1, 2002)
11 Earnings (Loss) Per Share Computation
31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14 under the
Securities and Exchange Act of 1934
31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14 under the
Securities and Exchange Act of 1934
32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
(1) A report on Form 8-K was filed on April 21, 2004
reporting the corporation's financial results for
the quarter ended March 31, 2004 and describing
actions taken at the shareholders' meeting on
April 20, 2004.
(2) A report on Form 8-K was filed on May 7, 2004
regarding approval received by the U.S. Air Force
to begin production on the Kaman Dayron unit's
Joint Programmable Fuze.
(3) A report on Form 8-K was filed on August 3, 2004
reporting the corporation's financial results
for the quarter ended June 30, 2004.
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
KAMAN CORPORATION
Registrant
Date: August 3, 2004 By: /s/ Paul R. Kuhn
-----------------------------
Paul R. Kuhn
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 3, 2004 By: /s/ Robert M. Garneau
-----------------------------
Robert M. Garneau
Executive Vice President and
Chief Financial Officer
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<page>
KAMAN CORPORATION AND SUBSIDIARIES
Index to Exhibits
Exhibit 10(a) Second Amendment to Kaman Corporation Attached
Amended and Restated Deferred
Compensation Plan
Exhibit 10(b) Third Amendment to Kaman Corporation Attached
Cash Bonus Plan (Amended and Restated
as of January 1, 2002)
Exhibit 11 Earnings (Loss) Per Share Computation Attached
Exhibit 31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14 under the
Securities and Exchange Act of 1934 Attached
Exhibit 31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14 under the
Securities and Exchange Act of 1934 Attached
Exhibit 32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 Attached
Exhibit 32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 Attached
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