EXHIBIT 13, PORTIONS OF THE CORPORATION'S ANNUAL REPORT TO
SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In response to a recommendation made by Charles H. Kaman, the
corporation's founder, chairman, chief executive officer and
president, the board of directors established a committee in
December, 1998, to conduct a search for a new chief executive
officer. Mr. Kaman will continue as chief executive officer in the
interim and will remain as Chairman of the Board of Directors once
a successor is named. In announcing the decision, Mr. Kaman
emphasized that the goal is for the corporation to continue to be
led in the cultural tradition that has sustained it for more than
50 years. The search is in progress.
Mr. Kaman continues to make an excellent recovery from a mild
stroke suffered in August of last year. Until his return to the
office, ongoing business activities will continue to be coordinated
through Robert M. Garneau, the corporation's executive vice
president and chief financial officer.
Effective with calendar year 1998, the corporation has
reorganized its business segment reporting in accordance with the
criteria of Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." The corporation now reports information in
the following segments: Aerospace, Industrial Distribution and
Music Distribution. Prior periods have been restated to reflect
these segments and an additional segment identified as Scientific
Services, representing operations at Kaman Sciences Corporation, a
subsidiary that was sold on December 30, 1997.
Consolidated revenues were $1.0 billion for 1998 and 1997,
compared to $953.7 million for 1996. Results for 1998 reflect
increased revenue in the Aerospace segment that, to a large extent,
offset the loss of revenue that had been contributed by the
Scientific Services segment. The 1997 increase of almost 10% was
due to results in the Aerospace, Scientific Services and Industrial
Distribution segments.
Aerospace segment net sales increased almost 33% in 1998, 28%
in 1997, and 8% in 1996. The Aerospace segment's principal programs
include the SH-2G multi-mission naval helicopter, the K-MAX
(Registered Trademark) helicopter, subcontract work involving
airframe structures, and the manufacture of niche market products
such as self-lubricating bearings and driveline couplings for
aircraft applications.
The SH-2G helicopter program generally involves retrofit of
the corporation's SH-2F helicopters, previously manufactured for
the U.S. Navy (and currently in desert storage), to the SH-2G
configuration. The corporation is currently performing this work
KAMAN CORPORATION AND SUBSIDIARIES Page 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
under three contracts with foreign governments. Specifically, the
corporation has completed delivery of ten (10) SH-2G helicopters to
the Republic of Egypt under that country's foreign military sale
agreement with the U.S. Navy. This work has a value of about $150
million, virtually all of which has been recorded as sales. The
corporation is currently conducting pilot training and providing
support for program start-up issues.
The corporation also has commercial sale contracts with the
Commonwealth of Australia and the Government of New Zealand for the
supply of retrofit SH-2G aircraft. The work for Australia involves
eleven (11) helicopters (incorporating a new cockpit and new
weapons and sensors) with support, including a support services
facility, for the Royal Australian Navy. This contract has an
anticipated value of nearly $600 million, of which about 26% has
been recorded as sales. The work for New Zealand involves four (4)
aircraft, and support, for New Zealand defense forces. This
contract has an anticipated value of nearly $170 million, of which
about 24% has been recorded as sales. Work is proceeding on both
programs, and deliveries are expected to begin in the 2000 - 2001
time frame.
The corporation is pursuing other potential SH-2 business
(including possible further orders from current customers) as
various countries develop their naval helicopter requirements. This
market is highly competitive and naturally influenced by global
economic and political conditions. Management believes that
conditions currently prevailing in some areas have slowed the
prospects for potential sales, a prime example being economic
difficulties in Asia.
The SH-2 is an aircraft that was originally manufactured for
the United States Navy. This is no longer the case, however, the
U.S. Naval Reserves has twelve (12) SH-2G aircraft active in its
fleet. Management anticipates that at some point, the aircraft will
be retired from this type of service as well. In the meantime, the
corporation expects to continue providing logistics and spare
parts support for the aircraft.
Since the K-MAX helicopter received its certification in
August of 1994, the corporation has been conservative in its
production of this medium to heavy lift 'aerial truck' which has a
variety of potential applications, including logging, oil and gas
exploration, power line construction and fire fighting. Having
operated in the aviation industry for more than fifty years,
management has anticipated that it would take some time to develop
markets for a new aircraft and thus achieve sales and
profitability. The principal application for the K-MAX to date has
been in the commercial logging industry. During the past two years,
this market has weakened significantly, particularly in the U.S.
Pacific Northwest and Canada, due in part to the effect of economic
conditions in Asia upon export sales. These circumstances appear to
KAMAN CORPORATION AND SUBSIDIARIES Page 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
be affecting certain current customers as well as potential sales
of the K-MAX. Production of the aircraft has been adjusted
accordingly. The K-MAX also has a potential non-combat role for the
military in the task of vertical replenishment ("VERTREP"). As the
federal government has explored the concept of outsourcing this
role to commercial providers, the U.S. Navy Military Sealift
Command has awarded K-MAX two separate demonstration projects using
charter/lease arrangements. Although there was no activity in this
arena during 1998, management believes that the federal government
is continuing to consider the commercial outsourcing alternative.
As reported previously, the market for this new aircraft also has
been affected by the existence of military surplus aircraft that
have been (and may be in the future) released to the public at
lower cost than new aircraft.
The corporation also performs subcontract work for certain
airframe manufacturing programs and manufactures various niche
market products, including self-lubricating bearings for use
principally in aircraft; and driveline couplings for use in
helicopters. These businesses have benefitted from growth
in the commercial aviation industry, although management believes
that this growth trend is beginning to level off. Boeing, for
example, is an important and long-standing customer for our
airframe subcontract work and certain niche market products; while
management believes that the corporation is well positioned to
maintain its level of business with this customer, pricing
pressure is expected to intensify.
As to the Scientific Services segment, the corporation sold
Kaman Sciences to ITT Industries, Inc. on December 30, 1997 for
$135 million in cash. There was a pre-tax gain on the sale of
approximately $90 million, which is not included in the operating
profits for the Scientific Services segment. In the third
quarter of 1998, the corporation received an additional $5.4
million in cash, determined in accordance with the Stock Purchase
Agreement for the sale. This segment's net sales increased 16% for
1997 to approximately $145 million, and 9.6% for 1996 to
approximately $125 million. Management's decision to sell the
operation was based upon its assessment of trends in the defense
sciences industry, including increasing consolidation and a
tendency for defense sciences contracts to become larger in size
and longer in duration in relation to the corporation's
determination to focus capital investment in its aerospace and
industrial distribution businesses.
Industrial Distribution segment net sales increased 5% in
1998, 7% in 1997, and 4% in 1996. Increased net sales for this
segment are due in part to its expansion of branch locations in the
past few years and to its ongoing efforts to differentiate the
business by offering a product mix which incorporates more
value-added high technology and providing certain technical
KAMAN CORPORATION AND SUBSIDIARIES Page 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
services to support customer needs. However, the Industrial
Distribution segment serves nearly every sector of U.S. industry
and so tends to be influenced by industrial production levels.
Export demand in certain industries has been adversely affected by
economic difficulties in Asia, including the lumber, chemicals,
paper products and semiconductor industries, which has resulted in
increased competition and price pressure on the Industrial
Distribution segment's operations. Moreover, while industrial
distribution has traditionally been a very competitive business,
increasing consolidation in the industry appears to be resulting in
even more intense competition. In this environment, the company is
working to focus sales efforts in the markets that offer the best
opportunities and to carry out initiatives to enhance operating
efficiencies, including consolidation and centralization of various
support functions.
Music Distribution segment net sales decreased by 10% in 1998
and by 13% in 1997, while increasing by 4% in 1996. The decrease in
segment net sales for 1998 is largely due to loss of sales
associated with the European amplifier manufacturing business that
was sold during 1997 and to continuing weakness in international
markets brought on by the economic difficulties in Asia.
Management continues implementation of initiatives to improve
operating efficiency while reorienting its product offerings to
adapt to shifts in musical tastes and buying habits as well as
changes in the nature of its customer base.
Total operating profits for the segments in 1998 increased by
almost 6% compared to 1997 (including the Scientific Services
segment in 1997). Operating profits for the Aerospace segment
increased 38% for 1998 compared to the prior year, primarily due to
the SH-2G program and demand for its specialty bearings, offset to
some degree by costs associated with the K-MAX program and
difficulties experienced by the electromagnetics business in
developing new markets for niche market products and transitioning
from defense to commercial business. Operating profits for the
Industrial Distribution segment decreased 7% for 1998 compared to
1997, due primarily to the effects of the economic difficulties in
Asia upon certain of the company's customers. Operating profits
for the Music Distribution segment were up substantially in 1998
compared to the prior year, due primarily to the loss resulting
from charges taken in this segment during 1997.
Net earnings for 1998 were $30.0 million, compared to $70.5
million in 1997. Results for 1997 include a post-tax gain of
approximately $53.5 million on the sale of the Scientific Services
segment and a post-tax loss of $6.1 million on the sale of the
Music Distribution segment's European amplifier manufacturing
business. Net earnings per common share basic in 1998 were $1.28
($1.23 per common share diluted) compared to $3.53 per common share
basic ($2.86 per common share diluted) in 1997. The sale of the
KAMAN CORPORATION AND SUBSIDIARIES Page 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Scientific Services segment resulted in a post-tax gain of
approximately $2.80 per common share basic in 1997 while the
sale of the amplifier business in the Music Distribution segment
resulted in a post-tax loss of 32 cents per common share basic in
1997.
Total operating profits for the segments for 1997 increased
by 2% compared to 1996. Operating profits for the Aerospace segment
increased 19% for 1997 compared to the prior year, primarily due to
the SH-2G program and demand for specialty bearings, offset to some
extent by the aforementioned difficulties in the electromagnetics
business. Operating profits for the Scientific Services segment in
1997 were level with 1996. Operating profits for the Industrial
Distribution segment increased 8% in 1997 compared to 1996, due
primarily to growth in new branch locations. Operating profits for
the Music Distribution segment were down substantially in
1997, principally due to the charge taken and loss of amplifier
sales in the segment.
Net earnings for 1997 were $70.5 million compared to $23.6
million in 1996. Excluding all special items for each year,
earnings available to common shareholders increased more than 11%
to $19.5 million in 1997 from $17.5 million in 1996. Net earnings
for 1997 include a post-tax gain of approximately $53.5
million, or $2.80 per common share basic, on the sale of the
Scientific Services segment and a post-tax loss of $6.1 million, or
32 cents per common share basic, on the sale of the European
amplifier manufacturing business. Net earnings for 1996 include a
post-tax gain of $2.3 million, or 12 cents per common share
basic, on the sale of real estate within the Scientific Services
segment. Earnings available to common shareholders for 1997,
including special items, were $66.8 million, or $3.53 per common
share basic, $2.86 per common share diluted, compared to $19.9
million, or $1.07 per common share basic, $1.00 per common share
diluted in 1996.
Interest expense decreased almost 68% for the year ended
December 31, 1998 compared to the prior year, primarily due to the
application of a substantial portion of advance payments received
from the governments of Australia and New Zealand and a portion of
the proceeds from the sale of the Scientific Services segment to
pay down bank debt. For the year, interest expense attributable to
the corporation's debentures was more than offset by interest
income earned from investment of surplus cash. Interest expense
decreased 21% in 1997 compared to 1996. The reduction was primarily
due to the application of a substantial portion of advance payments
received from the governments of Australia and New Zealand to pay
down bank debt.
The consolidated effective income tax rate was 40.4% for
1998, 41.4% for 1997, and 42.0% for 1996.
KAMAN CORPORATION AND SUBSIDIARIES Page 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Effective January 1, 1998, the corporation adopted: (1) Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The Statement requires the corporation to report
"comprehensive income" as defined therein. Please refer to the
Notes to Consolidated Financial Statements for more information;
(2) Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related
Information." The Statement changes the criteria used to determine
the segments for which the corporation must report information.
This item is discussed herein; please also see the Notes to
Consolidated Financial Statements for more information; and (3)
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
Statement requires additional disclosures on changes in the benefit
obligations and fair values of plan assets during the year. Please
refer to the Notes to Consolidated Financial Statements for more
information.
As to Year 2000 (Y2K) compliance, management began
discussions on this subject with its board of directors and the
board's audit committee in early 1997. During the fourth quarter of
that year, KPMG LLP was retained as a consultant to assist in
formalizing the Y2K compliance program and to provide periodic
assessment of the corporation's progress. During the first quarter
of 1998, each operating subsidiary designated a program manager
responsible for coordinating its activities and developed a plan
providing for inventory assessment of all Y2K related matters
(including hardware, software, networks, facilities systems and
embedded systems in product deliverables) as well as the status of
suppliers and service providers; conversion, upgrade or replacement
of applications, as needed; and compliance testing and problem
solving, all to be accomplished within timetables established under
the plan. Planning and assessment phases have been completed with
all matters that are not satisfactory "as is" to be remediated
either with a vendor upgrade or replacement. Activities in the
fourth quarter of 1998 focused principally on testing to confirm
compliance. To date, compliance timetables are being met, such that
the corporation is on schedule to achieve overall Y2K compliance,
including testing, by June 30, 1999. Contingency plans will be
established in the event they become appropriate at that time. In
addition, the corporation and each operating subsidiary are
currently working with suppliers, customers and service providers
to gauge their Y2K readiness and monitor their progress toward
compliance. An oversight committee reporting to the executive vice
president and chief financial officer, has been established at
corporate headquarters to monitor the progress of each subsidiary's
compliance work. Senior management provides progress reports to the
corporation's board of directors and audit committee on a regular
basis. The corporation separately identifies costs of Y2K efforts
as an internal management tool and based upon information known to
it at this time, management does not anticipate that the costs of
addressing Y2K issues will be material to the corporation's
KAMAN CORPORATION AND SUBSIDIARIES Page 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
financial position, results of operations, or cash flows in future
periods. Naturally, there can be no assurance that third parties'
systems, upon which the corporation and its subsidiaries may rely,
will become Y2K compliant in a timely manner. The corporation
cannot foresee the eventual outcome associated with the arrival of
the millennium and the impact that potential computer failures
within the corporation or among significant customers, suppliers or
service providers might have on the corporation's operations. It is
conceivable that if such failures occur, there could be an adverse
impact upon the corporation's operations.
LIQUIDITY AND CAPITAL RESOURCES
The corporation's cash flow from operations has generally been
sufficient to finance a significant portion of its working capital
and other capital requirements. In 1997, additional cash was
provided by the sale of the Scientific Services segment and the
advance payments made by the governments of Australia and New
Zealand relative to their SH-2G orders.
During 1998, operating activities used cash, principally due
to increases in accounts receivable and inventories in the
Aerospace segment, and payment of taxes due on the Kaman Sciences
transaction, offset by increases in accounts payable in the
Aerospace segment. During the year, cash used in investing
activities was for items such as acquisition of machinery and
computer equipment used in manufacturing and distribution, while
cash provided by investing activities consisted principally of a
post closing adjustment to the purchase price of the Scientific
Services segment. Cash used by financing activities was primarily
attributable to the repayment of debt, the payment of dividends to
common shareholders, and repurchase of Class A common stock
pursuant to a repurchase program for use in connection with
administration of the corporation's stock plans.
The corporation had approximately $59.6 million in surplus
cash at December 31, 1998, with an average of $55.3 million for the
year. These funds have been invested in high quality, short-term
instruments.
For 1997, operating activities generated cash, principally
due to advance payments from the governments of Australia and New
Zealand under their SH-2G programs (which payments are discussed
further below). This result was partially offset by working capital
requirements, primarily due to increases in accounts receivable for
the SH-2G programs for Egypt, Australia and New Zealand. For 1996,
operating activities required additional cash due principally to
growth in accounts receivable and inventories. Accounts receivable
increased in 1996 due to the SH-2G program for Egypt. Increases in
inventory levels have been primarily attributable to the K-MAX
helicopter program. Inventories at December 31, 1996 include K-MAX
aircraft that were principally being used in various applications
KAMAN CORPORATION AND SUBSIDIARIES Page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
under shorter-term lease or charter/lease arrangements. Inventory
growth in the Industrial Distribution segment was in line with
increased business. Cash used in investing activities has
traditionally been for the acquisition of machinery and computer
equipment used in manufacturing and distribution. During 1997,
these customary requirements were more than offset by proceeds from
the sale of businesses and other assets, principally the
disposition of the Scientific Services segment. For 1996, proceeds
from the sale of property, plant and equipment increased, primarily
due to the sale of certain real estate associated with Scientific
Services segment. During 1997, cash used by financing activities
was primarily attributable to payments made to reduce bank debt and
the payment of dividends. Cash provided by financing activities
during 1996, after payment of dividends, was used primarily to
support the increase in working capital requirements previously
described.
At December 31, 1998, the corporation had approximately $30
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.
For borrowing purposes, the corporation maintains a revolving
credit agreement involving a group of domestic and foreign banks.
This facility provides a maximum unsecured line of credit of $250
million. The agreement has a term of five years ending in January
2001, and contains various covenants, including debt to
capitalization, consolidated net worth requirements, and
limitations on other loan indebtedness that the corporation may
incur. The agreement was amended and restated during 1997 to
specifically address the issuance of certain letters of credit,
which are considered borrowings under the agreement.
During 1997, the governments of Australia and New Zealand
made advance payments of $104.3 million in connection with their
SH-2G contracts, which were fully secured by the corporation
through the issuance of irrevocable letters of credit. As of
December 31, 1998, the face amount of these letters of credit has
been reduced to about $54 million, in accordance with the terms of
the relevant contracts. Further reductions are anticipated as
certain contract milestones are achieved.
KAMAN CORPORATION AND SUBSIDIARIES Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Under the revolving credit agreement, the corporation has the
ability to borrow funds on both a short-term and long-term basis.
As of December 31, 1998, the corporation had virtually no
outstanding borrowings. Average borrowings were $3.3 million
compared to $84.8 million for 1997 and $125 million for 1996.
Substantially all of the advance payments described above and
certain of the proceeds from the sale of the Scientific Services
segment were used to pay down bank debt in 1997.
As of December 23, 1997, 95,106 shares of the corporation's
Series 2 preferred stock were converted to Class A common stock
pursuant to a call for partial redemption issued on November 20,
1997. During the first quarter of 1998, pursuant to another
redemption call, the corporation completed the process of
converting virtually all of its Series 2 preferred stock to Class A
common stock with an immaterial number of Series 2 preferred shares
being redeemed by the corporation and settled in cash.
Management believes that the corporation's cash flow from
operations and available unused bank lines of credit under its
revolving credit agreement will be sufficient to finance its
working capital and other capital requirements for the foreseeable
future.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking information relating to the
corporation's business and prospects, including the SH-2G and K-MAX
helicopter programs, specialty self-lubricating bearings and
couplings, the industrial and music distribution businesses, 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 contract negotiations with government authorities,
including foreign governments; 2) political developments in
countries where the corporation intends to do business; 3) standard
government contract provisions permitting renegotiation of terms
and termination for the convenience of the government; 4) economic
and competitive conditions in markets served by the corporation,
including industry consolidation in the United States and global
economic conditions (most notably, in Asia); 5) the degree of
acceptance of new products in the marketplace; 6) U.S. industrial
production levels; 7) achievement of Year 2000 compliance by the
corporation, its customers, suppliers and service providers,
including various federal, state and foreign governments and
agencies thereof; 8) currency exchange rates, taxes, laws and
regulations, inflation rates, general business conditions and other
factors. Any forward-looking information should be considered with
these factors in mind.
KAMAN CORPORATION AND SUBSIDIARIES Page 9
SELECTED QUARTERLY FINANCIAL DATA
(In thousands except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------
NET SALES:
1998 $ 238,780 $ 247,106 $ 249,184 $ 269,471 $1,004,541
1997 251,794 249,920 269,852 271,799 1,043,365
GROSS PROFIT:
1998 $ 63,073 $ 65,179 $ 64,310 $ 70,260 $ 262,822
1997 62,726 61,475 63,574 67,619 255,394
NET EARNINGS (LOSS):
1998 $ 6,976 $ 7,617 $ 7,600 $ 7,815 $ 30,008
1997 (4,407) 6,710 7,097 61,104 70,504
PER COMMON SHARE - BASIC:
1998 $ .31 $ .32 $ .32 $ .33 $ 1.28
1997 (.28) .31 .33 3.15 3.53
PER COMMON SHARE - DILUTED:
1998 $ .29 $ .31 $ .31 $ .32 $ 1.23
1997 (.28) .28 .29 2.43 2.86
- ---------------------------------------------------------------------
Due to the loss in the first quarter of 1997, the quarterly per
common share amounts for 1997 do not equal the "Total Year" figure.
KAMAN CORPORATION AND SUBSIDIARIES Page 10
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
December 31 1998 1997
- -----------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 65,130 $ 109,974
Accounts receivable 213,128 191,154
Inventories 207,897 199,485
Deferred income taxes 20,900 21,475
Other current assets 9,449 13,216
- -----------------------------------------------------------------
Total current assets 516,504 535,304
- -----------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 65,773 57,625
OTHER ASSETS 4,953 5,232
- -----------------------------------------------------------------
$ 587,230 $ 598,161
=================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 3,141 $ 5,547
Current portion of long-term debt 1,660 1,660
Accounts payable - trade 51,571 45,264
Accrued salaries and wages 9,696 10,254
Accrued vacations 6,464 5,575
Advances on contracts 101,376 104,723
Other accruals and payables 49,138 49,774
Income taxes payable 5,929 36,728
- -----------------------------------------------------------------
Total current liabilities 228,975 259,525
- -----------------------------------------------------------------
DEFERRED CREDITS 20,555 18,759
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 28,206 29,867
KAMAN CORPORATION AND SUBSIDIARIES Page 11
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
December 31 1998 1997
- ---------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Capital stock, $1 par value per share:
Preferred stock, authorized 700,000 shares:
Series 2 preferred stock, 6 1/2%
cumulative convertible (stated at
liquidation preference of $200 per share)
authorized 500,000 shares,
issued 188,456 shares in 1997 -- 37,691
Common stock:
Class A, authorized 48,500,000 shares,
nonvoting; $.10 per common share
dividend preference; issued
23,066,260 shares in 1998 and
19,936,385 shares in 1997 23,066 19,936
Class B, authorized 1,500,000 shares,
voting; issued 667,814 shares
in 1998 and 1997 668 668
Additional paid-in capital 78,899 42,876
Retained earnings 209,920 190,336
Unamortized restricted stock awards (1,500) (1,147)
Accumulated other comprehensive income (loss) (774) (320)
- --------------------------------------------------------------------
310,279 290,040
Less 51,171 shares and 2,929 shares of
Class A common stock in 1998 and 1997,
respectively, held in treasury, at cost (785) (30)
- --------------------------------------------------------------------
Total shareholders' equity 309,494 290,010
- --------------------------------------------------------------------
$ 587,230 $ 598,161
====================================================================
See accompanying notes to consolidated financial statements.
KAMAN CORPORATION AND SUBSIDIARIES Page 12
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
Year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------
REVENUES:
Net sales $1,004,541 $1,043,365 $ 948,106
Other 1,465 1,450 5,548
- ----------------------------------------------------------------------------
1,006,006 1,044,815 953,654
- ----------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales 741,719 787,971 708,505
Selling, general & administrative expense 212,724 208,763 193,747
Net gain on sale of businesses -- (80,351) --
Interest expense (income), net (353) 7,894 10,023
Other expense 1,558 234 702
- -----------------------------------------------------------------------------
955,648 924,511 912,977
- -----------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 50,358 120,304 40,677
INCOME TAXES 20,350 49,800 17,100
- -----------------------------------------------------------------------------
NET EARNINGS $ 30,008 $ 70,504 $ 23,577
=============================================================================
PREFERRED STOCK DIVIDEND REQUIREMENT $ -- $ (3,716) $ (3,716)
=============================================================================
EARNINGS APPLICABLE TO COMMON STOCK $ 30,008 $ 66,788 $ 19,861
=============================================================================
PER SHARE:
Net earnings per common share:
Basic $ 1.28 $ 3.53 $ 1.07
Diluted 1.23 2.86 1.00
Dividends declared:
Series 2 preferred stock -- 13.00 13.00
Common stock .44 .44 .44
=============================================================================
See accompanying notes to consolidated financial statements.
KAMAN CORPORATION AND SUBSIDIARIES Page 13
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands except share amounts)
Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------
SERIES 2 PREFERRED STOCK:
Balance - beginning of year $ 37,691 $ 57,167 $ 57,167
Shares converted (37,691) (19,451) --
Shares redeemed -- (25) --
- -------------------------------------------------------------------------
Balance - end of year -- 37,691 57,167
- -------------------------------------------------------------------------
CLASS A COMMON STOCK:
Balance - beginning of year 19,936 18,075 17,788
Shares issued upon conversion 3,000 1,548 --
Shares issued - other 130 313 287
- -------------------------------------------------------------------------
Balance - end of year 23,066 19,936 18,075
- -------------------------------------------------------------------------
CLASS B COMMON STOCK 668 668 668
- -------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance - beginning of year 42,876 21,696 19,319
Conversion of Series 2 preferred stock 34,691 17,903 --
Employee stock plans 318 2,506 1,871
Restricted stock awards 1,014 771 506
- -------------------------------------------------------------------------
Balance - end of year 78,899 42,876 21,696
- -------------------------------------------------------------------------
RETAINED EARNINGS:
Balance - beginning of year 190,336 132,058 120,399
Net earnings 30,008 70,504 23,577
Dividends declared:
Preferred stock -- (3,716) (3,716)
Common stock (10,424) (8,510) (8,202)
- -------------------------------------------------------------------------
Balance - end of year 209,920 190,336 132,058
- -------------------------------------------------------------------------
UNAMORTIZED RESTRICTED STOCK AWARDS:
Balance - beginning of year (1,147) (818) (609)
Stock awards issued (949) (804) (517)
Amortization of stock awards 596 475 308
- -------------------------------------------------------------------------
Balance - end of year (1,500) (1,147) (818)
- -------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance - beginning of year (320) (612) (280)
Foreign currency translation adjustment* (220) (157) (332)
Reclassification adjustment (234) 449 --
- -------------------------------------------------------------------------
Balance - end of year (774) (320) (612)
- -------------------------------------------------------------------------
KAMAN CORPORATION AND SUBSIDIARIES Page 14
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands except share amounts)
Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------
TREASURY STOCK:
Balance - beginning of year (30) (104) (169)
Shares acquired in 1998
- 131,462; 1997 - 259; 1996 - 501 (2,212) (5) (5)
Shares reissued under
various stock plans 1,457 79 70
- -------------------------------------------------------------------------
Balance - end of year (785) (30) (104)
- -------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $309,494 $290,010 $228,130
=========================================================================
[FN]
*Pursuant to the adoption of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," the above
foreign currency translation adjustment would be deducted from net
earnings for each of the years to arrive at comprehensive income of
$29,788, $70,347, and $23,245 for 1998, 1997, and 1996,
respectively.
</FN>
See accompanying notes to consolidated financial statements.
KAMAN CORPORATION AND SUBSIDIARIES Page 15
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands except share amounts)
Year ended December 31 1998 1997 1996
- --------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 30,008 $ 70,504 $ 23,577
Adjustments to reconcile net earnings to cash
provided by (used in)operating activities:
Depreciation and amortization 11,068 12,223 12,358
Net gain on sale of businesses -- (80,351) --
Net gain on sale of assets (36) (859) (4,094)
Deferred income taxes 200 3,718 (1,298)
Other, net 2,841 1,532 1,785
Changes in current assets and liabilities,
net of effects of businesses sold:
Accounts receivable (21,974) (30,321) (7,638)
Inventories (8,412) 6,241 (20,734)
Other current assets 768 (7,218) 1,614
Accounts payable - trade 6,307 (13,720) (395)
Advances on contracts (3,347) 104,723 --
Accrued expenses and payables (3,054) (8,555) (9,744)
Income taxes payable (30,799) 37,591 --
- --------------------------------------------------------------------------
Cash provided by(used in)
operating activities (16,430) 95,508 (4,569)
- --------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of
businesses and other assets 5,642 139,580 6,883
Expenditures for property, plant and equipment (19,184) (13,690) (7,966)
Other, net (478) 559 (333)
- ---------------------------------------------------------------------------
Cash provided by(used in)
investing activities (14,020) 126,449 (1,416)
- ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable (2,406) (55,290) (2,014)
Changes in current portion of long-term debt -- (250) 1,518
Additions to long-term debt -- -- 20,000
Reduction of long-term debt (1,661) (52,564) (2,446)
Proceeds from exercise of employee stock plans 1,970 2,907 2,217
Purchases of treasury stock (2,212) (5) (5)
Dividends paid-Series 2 preferred stock -- (3,716) (3,716)
Dividends paid - common stock (10,085) (8,510) (8,202)
- --------------------------------------------------------------------------
Cash provided by (used in)
financing activities (14,394)(117,428) 7,352
- --------------------------------------------------------------------------
NET INCREASE(DECREASE)IN CASH AND
CASH EQUIVALENTS (44,844) 104,529 1,367
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 109,974 5,445 4,078
- --------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 65,130 $109,974 $ 5,445
==========================================================================
KAMAN CORPORATION AND SUBSIDIARIES Page 16
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands except share amounts)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During 1998 and 1997, holders of the corporation's Series 2
preferred stock converted 188,456 and 97,254 shares into 3,000,174
and 1,548,242 shares of Class A common stock, respectively.
See accompanying notes to consolidated financial statements.
KAMAN CORPORATION AND SUBSIDIARIES Page 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated
financial statements include the accounts of the parent corporation
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents - Surplus funds are invested in cash
equivalents which consist of highly liquid investments with
original maturities of three months or less.
Long-Term Contracts - Revenue Recognition - Sales and estimated
profits under long-term contracts are principally recognized on the
percentage-of-completion method of accounting. This method uses the
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. Sales and estimated
profits on other contracts are recorded as products are shipped or
services are performed. Reviews of contracts are made periodically
throughout their lives and revisions in profit estimates are
recorded in the accounting period in which the revisions are made.
Any anticipated contract losses are charged to operations when
first indicated.
Inventories - Inventory of merchandise for resale is stated at cost
(using the average costing method) or market, whichever is lower.
Contracts and work in process and finished goods are valued at
production cost represented by material, labor and overhead,
including general and administrative expenses where applicable.
Contracts and work in process and finished goods are not recorded
in excess of net realizable values.
Property, Plant and Equipment - Depreciation of property, plant and
equipment is computed primarily on a straight-line basis over the
estimated useful lives of the assets. 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 or
charged against income.
KAMAN CORPORATION AND SUBSIDIARIES Page 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
Maintenance and repair items are charged against income as
incurred, whereas renewals and betterments are capitalized and
depreciated.
Research and Development - Research and development costs not
specifically covered by contracts are charged against income as
incurred. Such costs amounted to $8,534 in 1998, $6,889 in 1997 and
$8,036 in 1996.
Income Taxes - Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases using enacted
tax rates expected to apply in the years in which temporary
differences are expected to be recovered or settled.
Comprehensive Income - In 1998, the corporation adopted Statement
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." This statement establishes rules for the
reporting of comprehensive income and its components. The
corporation's comprehensive income consists of net earnings and
foreign currency translation adjustments and is presented in the
Consolidated Statements of Changes in Shareholders' Equity. The
adoption of SFAS 130 had no impact on net earnings or on total
shareholders' equity. Prior year financial statements have been
reclassified to conform to the SFAS 130 requirements.
SALE OF BUSINESSES
On December 30, 1997, the corporation sold Kaman Sciences
Corporation (a wholly owned subsidiary) for $135,000 in cash. The
sale resulted in a pre-tax gain of $90,751. Certain proceeds from
the sale were used to reduce borrowings under the revolving credit
agreement with the balance invested in cash equivalents. In the
third quarter of 1998, the corporation received an additional
$5,400 in cash determined in accordance with the Stock Purchase
Agreement for the sale. Kaman Sciences Corporation, an information
technology and services operation, contributed $145,000 to 1997
sales.
On June 27, 1997, the corporation sold Trace Elliot Limited
(a wholly owned subsidiary) to a Trace Elliot management group. As
a result of the sale, the corporation recorded a pre-tax charge of
$10,400. Trace Elliot, Kaman Music's amplifier manufacturing
business in Great Britain, contributed $4,200 to sales for the
first six months of 1997.
KAMAN CORPORATION AND SUBSIDIARIES Page 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31 1998 1997
- -------------------------------------------------------------------------
Trade receivables, net of allowance for doubtful
accounts of $4,047 in 1998, $3,827 in 1997 $ 79,215 $ 71,197
U.S. Government contracts:
Billed 20,011 15,467
Recoverable costs and accrued profit - not billed 30,181 60,329
Commercial and other government contracts:
Billed 48,914 18,950
Recoverable costs and accrued profit - not billed 34,807 25,211
- -------------------------------------------------------------------------
Total $213,128 $191,154
=========================================================================
Recoverable costs and accrued profit - not billed represent costs
incurred on contracts which will become billable upon future
deliveries, achievement of specific contract milestones or
completion of engineering and service type contracts. Management
estimates that approximately $5,810 of such costs and accrued
profits at December 31, 1998 will be collected after one year.
INVENTORIES
Inventories are comprised as follows:
December 31 1998 1997
- ---------------------------------------------------------------------
Merchandise for resale $108,833 $107,112
Contracts in process:
U.S. Government 4,035 7,757
Commercial 12,168 12,194
Other work in process (including certain
general stock materials) 45,001 41,088
Finished goods 37,860 31,334
- ---------------------------------------------------------------------
Total $207,897 $199,485
=====================================================================
Included above in other work in process and finished goods at
December 31, 1998 and 1997 is K-MAX inventory of $73,249 and
$61,936, respectively.
The aggregate amounts of general and administrative costs
allocated to contracts in process during 1998, 1997 and 1996 were
$55,178, $57,474, and $47,985, respectively.
KAMAN CORPORATION AND SUBSIDIARIES Page 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
The estimated amounts of general and administrative costs
remaining in contracts in process at December 31, 1998 and 1997
amount to $2,003 and $3,808, respectively, and are based on the
ratio of such allocated costs to total costs incurred.
PROPERTY, PLANT AND EQUIPMENT, NET - Property, plant and equipment
are recorded at cost and summarized as follows:
December 31 1998 1997
- ------------------------------------------------------------------------
Land $ 6,310 $ 6,332
Buildings 34,612 32,552
Leasehold improvements 12,725 12,827
Machinery, office furniture and equipment 114,140 101,435
- ------------------------------------------------------------------------
Total 167,787 153,146
Less accumulated depreciation and amortization 102,014 95,521
- ------------------------------------------------------------------------
Property, plant and equipment, net $ 65,773 $ 57,625
========================================================================
CREDIT ARRANGEMENTS - SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Revolving Credit Agreement - The corporation maintains a revolving
credit agreement involving several domestic and foreign lenders.
The agreement, which expires in 2001, provides for an aggregate
maximum commitment of $250,000 with interest payable at various
market rates. The agreement was amended in 1997 to specifically
address the issuance of irrevocable letters of credit which are
treated in the same manner as borrowings under the agreement.
Short-Term Borrowings - Under its revolving credit agreement, the
corporation has the ability to borrow funds on both a short-term
and long-term basis. The corporation also has arrangements with
other banks, generally to borrow funds on a short-term basis with
interest at current market rates.
Short-term borrowings outstanding are as follows:
December 31 1998 1997
- --------------------------------------------------------------------
Revolving credit agreement $ -- $ --
Other credit arrangements 3,141 5,547
- --------------------------------------------------------------------
Total $3,141 $5,547
====================================================================
KAMAN CORPORATION AND SUBSIDIARIES Page 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
(In thousands except share and per share amounts)
Long-Term Debt - The corporation has long-term debt as follows:
December 31 1998 1997
- ---------------------------------------------------------------
Revolving credit agreement $ -- $ --
Convertible subordinated debentures 29,866 31,527
- ---------------------------------------------------------------
Total 29,866 31,527
Less current portion 1,660 1,660
- ---------------------------------------------------------------
Total excluding current portion $28,206 $29,867
===============================================================
Restrictive Covenants - The most restrictive of the covenants
contained in the revolving credit agreement requires the
corporation to have operating income, as defined, at least equal to
275% of interest expense; consolidated total indebtedness to total
capitalization of not more than 55%; and consolidated net worth at
least equal to $200,000.
Certain Letters of Credit - The face amounts of irrevocable letters
of credit issued under the corporation's revolving credit agreement
totaled $53,944 and $104,300 at December 31, 1998 and 1997,
respectively.
Convertible Subordinated Debentures - The corporation issued its 6%
convertible subordinated debentures during 1987. The debentures are
convertible into shares of the Class A 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 corporation. Pursuant to a sinking fund
requirement that began March 15, 1997, the corporation redeems
$1,660 of the outstanding principal amount of the debentures
annually. The debentures are subordinated to the claims of senior
debt holders and general creditors. These debentures have a fair
value of $29,119 at December 31, 1998 based upon current market
prices.
Long-Term Debt Annual Maturities - The aggregate amounts of annual
maturities of long-term debt for each of the next five years is
$1,660.
Interest Payments - Cash payments for interest were $2,565, $8,695
and $9,682 for 1998, 1997 and 1996, respectively.
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 for SH-2G helicopter contracts. A portion of the
customer advances are secured by letters of credit. It is
anticipated that the face amounts of these letters of credit will
be further reduced as various contract milestones are achieved.
KAMAN CORPORATION AND SUBSIDIARIES Page 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
INCOME TAXES
The components of income taxes are as follows:
1998 1997 1996
- ----------------------------------------------------------------
Current:
Federal $ 15,650 $ 36,532 $ 13,734
State 4,500 9,550 4,664
- ----------------------------------------------------------------
20,150 46,082 18,398
- ----------------------------------------------------------------
Deferred:
Federal 150 2,968 (434)
State 50 750 (864)
- ----------------------------------------------------------------
200 3,718 (1,298)
- ----------------------------------------------------------------
Total $ 20,350 $ 49,800 $ 17,100
================================================================
The components of the deferred tax assets and deferred tax
liabilities are presented below:
December 31 1998 1997
- --------------------------------------------------------------------
Deferred tax assets:
Long-term contracts $ 1,756 $ 4,178
Deferred employee benefits 15,961 12,268
Inventory 1,529 2,326
Accrued liabilities and other items 7,879 7,803
- --------------------------------------------------------------------
Total deferred tax assets 27,125 26,575
- --------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization (7,730) (6,551)
Other items (3,695) (4,124)
- --------------------------------------------------------------------
Total deferred tax liabilities (11,425) (10,675)
- --------------------------------------------------------------------
Net deferred tax asset $ 15,700 $ 15,900
====================================================================
No valuation allowance has been recorded because the corporation
believes that these deferred tax assets will, more likely than not,
be realized. This determination is based largely upon the
corporation's historical earnings trend as well as its ability to
KAMAN CORPORATION AND SUBSIDIARIES Page 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
carryback reversing items within two years to offset taxes paid. In
addition, the corporation has the ability to offset deferred tax
assets against deferred tax liabilities created for such items as
depreciation and amortization.
The provisions for federal income taxes approximate the
amounts computed by applying the U.S. federal income tax rate to
earnings before income taxes after giving effect to state income
taxes. Cash payments for income taxes were $51,590, $8,623 and
$15,823 in 1998, 1997 and 1996, respectively.
PENSION PLAN
Effective January 1, 1998, the corporation adopted Statement of
Financial Accounting Standards No. 132 (SFAS 132), "Employers'
Disclosures about Pensions and Other Postretirement Benefits,"
which requires additional disclosures on changes in the benefit
obligation and fair value of plan assets during the year.
All prior periods presented have been restated in accordance with
SFAS 132.
The corporation has a non-contributory defined benefit
pension plan covering all of its full-time employees. Benefits
under this plan are generally based upon an employee's years of
service and compensation levels during employment with an offset
provision for social security benefits. It is the corporation's
policy to fund pension costs accrued. Plan assets are invested in
a diversified portfolio consisting of equity and fixed income
securities (including $12,248 of Class A common stock of Kaman
Corporation at December 31, 1998).
The pension plan costs were computed using the projected unit
credit actuarial cost method and include the following components:
1998 1997 1996
- --------------------------------------------------------------------
Service cost for benefits earned
during the year $ 8,794 $ 10,424 $ 9,888
Interest cost on projected
benefit obligation 19,648 20,010 18,756
Expected return on plan assets (22,757) (22,277) (21,220)
Net amortization and deferral (1,909) (1,909) (1,904)
- --------------------------------------------------------------------
Net pension cost $ 3,776 $ 6,248 $ 5,520
====================================================================
KAMAN CORPORATION AND SUBSIDIARIES Page 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
The change in actuarial present value of the projected
benefit obligation is as follows:
December 31 1998 1997
- --------------------------------------------------------------------
Projected benefit obligation at
beginning of year $ 261,127 $ 273,196
Service cost 8,794 10,424
Interest cost 19,648 20,010
Actuarial liability loss 22,387 1,196
Disposition of business units -- (30,271)
Benefit payments (14,440) (13,428)
- --------------------------------------------------------------------
Projected benefit obligation at
end of year $ 297,516 $ 261,127
====================================================================
The actuarial liability loss of $22,387 for 1998 consists
predominantly of adjustments for changes in the discount
rate and mortality rate assumptions.
The change in fair value of plan assets is as follows:
December 31 1998 1997
- ---------------------------------------------------------------------
Fair value of plan assets at
beginning of year $ 322,010 $ 307,796
Actual return on plan assets 50,991 51,708
Disposition of business units (337) (29,800)
Employer contribution 4,534 5,706
Benefit payments (14,440) (13,400)
- ---------------------------------------------------------------------
Fair value of plan assets at end of year $ 362,758 $ 322,010
=====================================================================
December 31 1998 1997
- ---------------------------------------------------------------------
Excess of assets over projected
benefit obligation $ 65,242 $ 60,883
Unrecognized prior service cost (400) (456)
Unrecognized net gain (60,291) (54,780)
Unrecognized net transition asset (5,561) (7,415)
- ---------------------------------------------------------------------
Accrued pension cost $ 1,010 $ 1,768
=====================================================================
KAMAN CORPORATION AND SUBSIDIARIES Page 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
The actuarial assumptions used in determining the funded
status of the pension plan are as follows:
December 31 1998 1997
- ---------------------------------------------------------------
Discount rate 7% 7 1/2%
Expected return on plan assets 8 5/8% 8 5/8%
Average rate of increase in
compensation levels 4% 4 1/2%
===============================================================
In connection with the sale of Kaman Sciences Corporation,
effective December 30, 1997, the corporation segregated
approximately $29,800 of its plan assets in anticipation of a
transfer of such assets to the buyer's pension plan to cover the
then estimated accrued benefit obligation for the Kaman Sciences
"active employee" group for which the buyer assumed responsibility.
The present value of the accrued benefit obligation was determined
using the December 1997 PBGC interest rates used to value
annuities: 5.6% for the 25 years immediately following the
valuation date and 5.0% thereafter, among other assumptions
including mortality and estimated retirement ages. In the second
quarter of 1998, the sum of $30,137 was transferred to the buyer's
pension trust.
The company also has a thrift and retirement plan in which
all employees meeting the eligibility requirements may participate.
Employer matching contributions are currently made to the plan with
respect to a percentage of each participant's pre-tax contribution.
Company contributions to the plan totaled $1,683, $2,612, and
$2,404 in 1998, 1997, and 1996, respectively.
COMMITMENTS AND CONTINGENCIES
Rent commitments under various leases for office space, warehouse,
land and buildings expire at varying dates from January 1999 to
December 2004. Certain annual rentals are subject to renegotiation,
with certain leases renewable for varying periods. Lease periods
for machinery and equipment vary from 1 to 5 years.
Substantially all real estate taxes, insurance and
maintenance expenses are obligations of the corporation. It is
expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other properties.
KAMAN CORPORATION AND SUBSIDIARIES Page 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
The following future minimum rental payments are required
under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 1998:
1999 $12,069
2000 5,347
2001 3,784
2002 2,677
2003 903
Thereafter 117
- ----------------------------------------------------------
Total $24,897
==========================================================
Lease expense for all operating leases, including leases with terms
of less than one year, amounted to $14,683, $15,311 and $14,889 for
1998, 1997 and 1996, respectively.
From time to time, the corporation is subject to various
claims and suits arising out of the ordinary course of business,
including commercial, employment and environmental matters. While
the ultimate result of all such matters is not presently
determinable, based upon its current knowledge, management does not
expect that their resolution will have a material adverse effect on
the corporation's consolidated financial position.
COMPUTATION OF EARNINGS PER COMMON SHARE
The earnings per common share - basic computation is based on the
earnings applicable to common stock divided by the weighted average
number of shares of common stock outstanding for each year. In 1997
and 1996, the preferred stock dividend on the then outstanding
Series 2 preferred stock was deducted from net earnings to arrive
at earnings applicable to common stock.
The earnings per common share - diluted computation includes
the common stock equivalency of options granted to employees under
the Stock Incentive Plan. The earnings per common share - diluted
computation also assumes that at the beginning of the year the 6%
convertible subordinated debentures are converted into Class A
common stock with the resultant reduction in interest costs net of
tax. During 1997 and 1996, the then outstanding Series 2 preferred
stock is assumed converted into Class A common stock eliminating
the preferred stock dividend requirement. Excluded from the
earnings per common share - diluted calculation are options granted
to employees that are anti-dilutive based on the average stock
price for the year.
KAMAN CORPORATION AND SUBSIDIARIES Page 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
1998 1997 1996
- ------------------------------------------------------------------
Earnings per common share-basic
Earnings applicable to common stock $30,008 $66,788 $19,861
===================================================================
Weighted average shares
outstanding (000) 23,407 18,941 18,607
===================================================================
Earnings per common share-basic $ 1.28 $ 3.53 $ 1.07
===================================================================
Earnings per common share - diluted
Earnings applicable to common stock $30,008 $66,788 $19,861
Plus: Dividends on
Series 2 preferred stock -- 3,716 3,716
After-tax interest savings on
convertible debentures 1,075 1,188 1,145
- -------------------------------------------------------------------
Earnings applicable to common
stock assuming conversion $31,083 $71,692 $24,722
===================================================================
Weighted average shares
outstanding (000) 23,407 18,941 18,607
Plus shares issuable on:
Conversion of Series 2
preferred stock 282 4,523 4,552
Conversion of 6% convertible
debentures 1,293 1,359 1,421
Exercise of dilutive options 253 285 129
- -------------------------------------------------------------------
Weighted average shares outstanding
assuming conversion (000) 25,235 25,108 24,709
===================================================================
Earnings per common share-diluted $ 1.23 $ 2.86 $ 1.00
===================================================================
As of December 23, 1997, 95,106 shares of the corporation's Series
2 preferred stock were converted to Class A common stock pursuant
to a call for partial redemption issued on November 20, 1997.
Pursuant to a redemption call on January 8, 1998 for the balance of
the Series 2 preferred stock, the remaining shares were converted
into 3,000,174 shares of Class A common stock as of February 9,
1998. An immaterial amount of Series 2 preferred stock shares were
redeemed by the corporation and settled in cash.
KAMAN CORPORATION AND SUBSIDIARIES Page 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
STOCK PLANS
Employees Stock Purchase Plan - The Kaman Corporation Employees
Stock Purchase Plan allows employees to purchase Class A common
stock of the corporation, 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 Class A common stock. There are no charges or
credits to income in connection with the plan. During 1998, 115,374
shares were issued to employees at prices ranging from $12.43 to
$16.47 per share. During 1997, 177,523 shares were issued to
employees at prices ranging from $10.84 to $16.79 per share. During
1996, 228,148 shares were issued to employees at prices ranging
from $8.82 to $11.21 per share. At December 31, 1998, there were
approximately 1,384,626 shares available for offering under the
plan.
Stock Incentive Plan - The corporation maintains a Stock Incentive
Plan which includes a continuation and extension of a predecessor
stock incentive program. The Stock Incentive Plan provides for the
grant of non-statutory stock options, incentive stock options,
restricted stock awards and stock appreciation rights primarily to
officers and other key employees. Effective November 18, 1997, the
number of shares of Class A common stock reserved for issuance
under this plan was increased by 1,250,000 shares to a total of
2,210,000 shares.
Stock options are generally granted at prices not less than
the fair market value at the date of grant. Options granted under
the plan generally expire ten years from the date of grant and are
exercisable on a cumulative basis with respect to 20% of the
optioned shares on each of the five anniversaries from the date of
grant. Restricted stock awards are generally granted with
restrictions that lapse at the rate of 20% per year and are
amortized accordingly. These awards are subject to forfeiture if a
recipient separates from service with the corporation. Stock
appreciation rights generally expire ten years from the date of
grant and are exercisable on a cumulative basis with respect to 20%
of the rights on each of the five anniversaries from the date of
grant.
Restricted stock awards were made for 62,500 shares at prices
ranging from $17.00 to $19.25 per share in 1998, 62,900 shares at
prices ranging from $12.13 to $14.63 per share in 1997 and 54,000
shares at $10.38 per share in 1996. At December 31, 1998, there
were 134,300 shares remaining subject to restrictions pursuant to
these awards. Stock appreciation rights were issued for 165,000
shares at $17.00 per share in 1998 and 350,000 shares at $13.25 per
share in 1997, to be settled only for cash. The corporation
recorded approximately $203 and $500 in expense in 1998 and 1997,
respectively, for these stock appreciation rights.
KAMAN CORPORATION AND SUBSIDIARIES Page 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
Stock option activity is as follows:
Weighted-
average
exercise
Stock options outstanding: Options price
- -------------------------------------------------------------------
Balance at January 1, 1996 677,047 $ 8.90
Options granted 169,100 10.38
Options exercised (55,102) 7.86
Options cancelled (26,065) 9.00
- -------------------------------------------------------------------
Balance at December 31, 1996 764,980 9.30
Options granted 193,700 13.41
Options exercised (147,720) 8.28
Options cancelled (19,880) 9.33
- -------------------------------------------------------------------
Balance at December 31, 1997 791,080 10.50
Options granted 205,000 17.00
Options exercised (79,845) 8.94
Options cancelled (121,415) 10.56
- -------------------------------------------------------------------
Balance at December 31, 1998 794,820 $ 12.32
===================================================================
Weighted average contractual life
remaining at December 31, 1998 6.8 years
===================================================================
Range of exercise prices for options $ 7.50- $ 12.26-
outstanding at December 31, 1998 $ 12.25 $ 17.06
- -------------------------------------------------------------------
Options outstanding 429,270 365,550
Options exercisable 317,940 32,010
Weighted average contractual remaining
life of options outstanding 5.3 years 8.7 years
Weighted average exercise price:
Options outstanding $ 9.70 $ 15.40
Options exercisable $ 9.42 $ 13.44
===================================================================
As of December 31, 1997 and 1996, there were 378,300 and
437,000 options exercisable, respectively.
KAMAN CORPORATION AND SUBSIDIARIES Page 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
As permitted by the Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," the corporation has elected to continue following
the guidance of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for measurement and
recognition of stock-based transactions with employees.
Accordingly, no compensation cost has been recognized for its stock
plans other than for the restricted stock awards and stock
appreciation rights. Under the disclosure alternative of SFAS 123,
the pro forma net earnings and earnings per common share
information presented below includes the compensation cost of stock
options issued to employees based on the fair value at the grant
date and includes compensation cost for the 15% discount offered to
participants in the employees stock purchase plan.
1998 1997 1996
- -----------------------------------------------------------------
Net earnings:
As reported $ 30,008 $ 70,504 $ 23,577
Pro forma 29,534 70,075 23,212
Earnings per common share - basic:
As reported 1.28 3.53 1.07
Pro forma 1.26 3.50 1.05
Earnings per common share - diluted:
As reported 1.23 2.86 1.00
Pro forma 1.22 2.86 .99
- -----------------------------------------------------------------
The fair value of each option grant is estimated on the date of
grant by using the Black-Scholes option-pricing model. The
following weighted-average assumptions were used for grants in
1998, 1997, and 1996:
1998 1997 1996
- ------------------------------------------------------------
Expected dividend yield 2.6% 3.3% 4.2%
Expected volatility 31% 24% 25%
Risk-free interest rate 5.6% 6.4% 5.8%
Expected option lives 8 Years 8 years 8 years
Per share fair value of
options granted $ 5.78 $ 3.65 $ 2.38
============================================================
KAMAN CORPORATION AND SUBSIDIARIES Page 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
SEGMENT INFORMATION
Effective January 1, 1998, the corporation adopted Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures
about Segments of an Enterprise and Related Information" which has
changed the method of reporting information about its businesses.
Based upon the criteria described in SFAS 131, the corporation now
reports three business segments - Aerospace, Industrial
Distribution and Music Distribution. All prior periods presented
have been restated in accordance with SFAS 131.
The Aerospace segment consists primarily of aerospace related
business for government and commercial markets, including the
retrofit of SH-2 helicopters from the SH-2F to the SH-2G
configuration as well as support services, logistics and spare
parts for that helicopter; manufacture of the K-MAX helicopter
together with spare parts and technical support; subcontract work
consisting of fabrication of airframe substructures; and production
of self-lubricating bearings and couplings for commercial aircraft
applications.
The Industrial Distribution segment provides replacement
parts, including bearings, power transmission, motion control and
materials handling components to nearly every sector of industry in
North America, along with industrial engineering support services.
Operations are conducted from 190 locations in 36 states and
British Columbia, Canada.
The Music Distribution segment consists of distribution of
music instruments and accessories in the U.S. and abroad through
offices in the U.S. and Canada. Music operations also include some
manufacture of guitars. On June 27, 1997, the corporation sold its
amplifier manufacturing business located in Great Britain.
The Scientific Services segment which consisted of Kaman
Sciences Corporation, an information technology and services
operation, was sold on December 30, 1997. The Scientific Services
segment operating profit for 1996 includes a gain of approximately
$4,000 on the sale of real estate.
KAMAN CORPORATION AND SUBSIDIARIES Page 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997
and 1996 (In thousands except share and per share amounts)
Summarized financial information by business segment is as follows:
1998 1997 1996
- -------------------------------------------------------------------
Net sales:
Aerospace $ 382,697 $ 288,407 $ 224,984
Scientific Services -- 145,086 125,098
Industrial Distribution 503,532 478,879 447,977
Music Distribution 118,312 130,993 150,047
- -------------------------------------------------------------------
$ 1,004,541 $ 1,043,365 $ 948,106
===================================================================
Operating profit:
Aerospace $ 43,304 $ 31,312 $ 26,256
Scientific Services -- 13,629 13,570
Industrial Distribution 18,550 20,017 18,526
Music Distribution 5,315 (1,279) 4,029
- -------------------------------------------------------------------
67,169 63,679 62,381
Net gain on sale of businesses -- 80,351 --
Interest, corporate and other
expense, net (16,811) (23,726) (21,704)
- --------------------------------------------------------------------
Earnings before income taxes $ 50,358 $ 120,304 $ 40,677
====================================================================
Identifiable assets:
Aerospace $ 294,566 $ 265,746 $ 235,314
Scientific Services -- -- 52,187
Industrial Distribution 160,873 156,816 147,071
Music Distribution 54,577 55,207 74,414
Corporate 77,214 120,392 12,750
- -------------------------------------------------------------------
$ 587,230 $ 598,161 $ 521,736
===================================================================
Capital expenditures:
Aerospace $ 11,369 $ 6,444 $ 2,755
Scientific Services -- 1,247 963
Industrial Distribution 3,568 3,682 2,234
Music Distribution 1,770 1,943 1,562
Corporate 2,477 374 452
- -------------------------------------------------------------------
$ 19,184 $ 13,690 $ 7,966
===================================================================
Depreciation and amortization:
Aerospace $ 5,586 $ 5,188 $ 5,549
Scientific Services -- 2,266 2,404
Industrial Distribution 3,077 2,676 2,161
Music Distribution 1,317 1,271 1,394
Corporate 1,088 822 850
- -------------------------------------------------------------------
$ 11,068 $ 12,223 $ 12,358
===================================================================
KAMAN CORPORATION AND SUBSIDIARIES Page 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998,
1997 and 1996 (In thousands except share and per share amounts)
1998 1997 1996
- -------------------------------------------------------------------
Geographic information - sales:
United States $ 780,961 $ 926,495 $ 867,345
Australia/New Zealand 158,068 41,809 764
Canada 35,438 32,873 28,948
Europe 11,980 21,121 22,282
Japan 9,527 10,944 18,555
Other 8,567 10,123 10,212
- -------------------------------------------------------------------
$ 1,004,541 $ 1,043,365 $ 948,106
===================================================================
Operating profit is total revenues less cost of sales and selling,
general and administrative expense other than general corporate
expense.
Identifiable assets are year-end assets at their respective
net carrying value segregated as to segment and corporate use.
Corporate assets are principally cash and cash equivalents and net
property, plant and equipment.
Net sales by the Aerospace and Scientific Services segments
made under contracts with U.S. Government agencies (including sales
to foreign governments through foreign military sales contracts
with U.S. Government agencies) account for $92,539 in 1998,
$262,405 in 1997 and $253,260 in 1996.
Sales made by the Aerospace segment under a contract with one
customer were $119,222 in 1998.
KAMAN CORPORATION AND SUBSIDIARIES Page 34
REPORT OF INDEPENDENT AUDITORS
KPMG LLP
Certified Public Accountants
CityPlace II
Hartford, Connecticut 06103
THE BOARD OF DIRECTORS AND SHAREHOLDERS
KAMAN CORPORATION:
We have audited the accompanying consolidated balance sheets
of Kaman Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the
years in the three year period ended December 31, 1998.
These consolidated financial statements are the responsibility of
the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Kaman Corporation and subsidiaries at
December 31, 1998 and 1997 and the results of their operations and
their cash flows for each of the years in the three year
period ended December 31, 1998 in conformity with generally
accepted accounting principles.
KPMG LLP
January 27, 1999
KAMAN CORPORATION AND SUBSIDIARIES Page 35
FIVE-YEAR SELECTED FINANCIAL DATA
(In thousands except per share amounts, shareholders and employees)
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------
OPERATIONS:
Revenues $1,006,006 $1,044,815 $953,654 $899,476 $820,774
Cost of sales 741,719 787,971 708,505 666,761 611,762
Selling, general and
administrative expense 212,724 208,763 193,747 190,604 173,853
Restructuring, impairment
and other costs -- -- -- -- 44,000
Operating income (loss) 51,563 48,081 51,402 42,111 (8,841)
Net gain on sale of businesses -- 80,351 -- -- --
Interest expense (income), net (353) 7,894 10,023 8,834 4,694
Other expense (income), net 1,558 234 702 546 646
Earnings (loss) before
income taxes 50,358 120,304 40,677 32,731 (14,181)
Income taxes (benefit) 20,350 49,800 17,100 13,129 (1,000)
Net earnings (loss) 30,008 70,504 23,577 19,602 (13,181)
FINANCIAL POSITION:
Current assets $516,504 $535,304 $434,131 $404,864 $339,012
Current liabilities 228,975 259,525 195,638 206,273 192,882
Working capital 287,529 275,779 238,493 198,591 146,130
Property, plant and
equipment, net 65,773 57,625 76,393 83,054 84,621
Total assets 587,230 598,161 521,736 500,069 442,949
Long-term debt 28,206 29,867 83,940 66,386 37,433
Shareholders' equity 309,494 290,010 228,130 214,283 203,754
PER SHARE AMOUNTS:
Net earnings (loss) per
common share - basic $1.28 $ 3.53 $ 1.07 $ .87 $ (.93)
Net earnings (loss)
per common share - diluted 1.23 2.86 1.00 .85 (.93)
Dividends declared -
Series 2 preferred stock -- 13.00 13.00 13.00 13.00
Dividends declared -
common stock .44 .44 .44 .44 .44
Shareholders' equity -
common stock 13.07 12.25 9.13 8.52 8.07
Market price range 20 3/8 20 3/8 13 3/8 13 3/8 11 1/8
13 12 9 3/8 10 8 1/2
GENERAL STATISTICS:
Shareholders 6,921 7,291 7,632 7,646 7,198
Employees 4,276 4,318 5,476 5,400 5,239
=============================================================================
KAMAN CORPORATION AND SUBSIDIARIES Page 36
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