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
March 31, 1999.
---------------
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)
Connecticut 06-0613548
(State of Incorporation) (I.R.S. Employer Identification No.)
1332 Blue Hills Avenue
Bloomfield, Connecticut 06002
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (860) 243-7100
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 May 1, 1999:
Class A Common 22,889,423
Class B Common 667,814
Page 1 of 16 Pages
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets(In thousands)
March 31, December 31,
Assets 1999 1998
------ ----------------- ------------------
Current assets:
Cash and cash equivalents $ 87,628 $ 65,130
Accounts receivable (net of
allowance for doubtful
accounts of $4,035 in
1999, $4,047 in 1998) 186,213 213,128
Inventories:
Raw materials $ 5,961 $ 6,668
Work-in-process 45,234 54,536
Finished goods 43,462 37,860
Merchandise for resale 109,836 204,493 108,833 207,897
------- -------
Other current assets 29,121 30,349
-------- -------
Total current assets 507,455 516,504
Property, plant & equip., at cost 169,367 167,787
Less accumulated depreciation
and amortization 104,662 102,014
------- -------
Net property, plant & equipment 64,705 65,773
Other assets 4,912 4,953
-------- --------
$ 577,072 $ 587,230
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 5,093 $ 4,801
Accounts payable 52,112 51,571
Accrued liabilities 29,973 28,725
Advances on contracts 90,516 101,376
Other current liabilities 31,380 36,573
Income taxes payable 7,646 5,929
-------- -------
Total current liabilities 216,720 228,975
Deferred credits 20,975 20,555
Long-term debt, excl. current portion 26,546 28,206
Shareholders' equity 312,831 309,494
-------- --------
$ 577,072 $ 587,230
======== ========
- 2 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
For the Three Months
Ended March 31,
--------------------
1999 1998
---- ----
Revenues $ 249,831 $ 239,065
Costs and expenses:
Cost of sales 184,714 175,707
Selling, general and
administrative expense 52,951 51,556
Interest expense (income), net (160) (196)
Other expense (income), net 256 198
-------- -------
237,761 227,265
-------- -------
Earnings before income taxes 12,070 11,800
Income taxes 4,797 4,824
-------- -------
Net earnings $ 7,273 $ 6,976
======== =======
Net earnings per common share:
Basic $ .31 $ .31
Diluted $ .30 $ .29
======== =======
Dividends declared per share $ .11 $ .11
======== =======
- 3 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Condensed Consolidated Statements of Cash Flows
(In thousands)
For the Three Months
Ended March 31,
--------------------
1999 1998
--------- --------
Cash flows from operating activities:
Net earnings $ 7,273 $ 6,976
Depreciation and amortization 2,915 2,491
Advances on contracts (10,860) (1,131)
Income taxes payable 1,717 (30,145)
Changes in other current assets and liabilities 28,150 (9,234)
Other, net 551 (282)
-------- --------
Cash provided by (used in) operating
activities 29,746 (31,325)
-------- --------
Cash flows from investing activities:
Expenditures for property, plant & equipment (1,796) (7,258)
Other, net 42 (138)
-------- --------
Cash provided by (used in) investing
activities (1,754) (7,396)
-------- --------
Cash flows from financing activities:
Additions (reductions) to notes payable 292 (2,178)
Reductions to long-term debt (1,660) (1,660)
Purchase of treasury stock (2,014) -
Dividends paid (2,605) (2,266)
Other, net 493 555
-------- --------
Cash provided by (used in) financing
activities (5,494) (5,549)
-------- --------
Net increase (decrease) in cash and cash equivalents 22,498 (44,270)
Cash and cash equivalents at beginning of period 65,130 109,974
-------- --------
Cash and cash equivalents at end of period $ 87,628 $ 65,704
======== ========
- 4 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Basis of Presentation
- ----------------------
The December 31, 1998 condensed consolidated balance sheet amounts
have been derived from the previously audited consolidated balance
sheet of Kaman Corporation and subsidiaries.
In the opinion of management, the balance of the condensed financial
information reflects all adjustments which are necessary for a fair
presentation of the financial position, results of operations and
cash flows for the interim periods presented and are of a normal
recurring nature, unless otherwise disclosed in this report.
The statements should be read in conjunction with the notes to the
consolidated financial statements included in Kaman Corporation's
1998 Annual Report.
Cash Flow Items
- ---------------
Cash payments for interest were $1,051 and $1,298 for the three
months ended March 31, 1999 and 1998, respectively. Cash payments
for income taxes for the comparable periods were $1,279 and
$34,956, respectively.
Comprehensive Income
- --------------------
Comprehensive income was $7,325 and $6,995 for the three months ended
March 31, 1999 and 1998, respectively, as the result of foreign currency
translation adjustments.
- 5 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands)
Business Segments
- -----------------
Summarized financial information by business segment is as follows:
For the Three Months
Ended March 31,
--------------------
1999 1998
--------- --------
Net sales:
Aerospace $ 92,762 $ 83,788
Industrial Distribution 128,657 126,425
Music Distribution 28,014 28,567
-------- --------
$ 249,433 $ 238,780
======== ========
Operating profit:
Aerospace $ 10,384 $ 10,228
Industrial Distribution 4,007 4,831
Music Distribution 1,296 1,003
-------- --------
15,687 16,062
Interest, corporate and other expense, net (3,617) (4,262)
-------- --------
Earnings before income taxes $ 12,070 $ 11,800
======== ========
March 31, December 31,
1999 1998
-------- --------
Identifiable assets:
Aerospace $ 259,363 $ 294,566
Industrial Distribution 166,545 160,873
Music Distribution 52,322 54,577
Corporate 98,842 77,214
-------- --------
$ 577,072 $ 587,230
======== ========
- 6 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
Consolidated revenues for the three months ended March 31, 1999
increased 4.5% compared to the same period of 1998.
Aerospace segment sales increased 11% for the first quarter of 1999
compared to the first quarter of 1998, principally due to revenue
recorded for the Australia and New Zealand SH-2 helicopter programs.
The Aerospace segment's principal programs include the SH-2G
multi-mission naval helicopter, the K-MAX 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 has recently completed its first international SH-2G
delivery and is currently performing this work for the governments of
Australia and New Zealand.
Specifically, during the fourth quarter of 1998 the corporation
completed deliveries of ten (10) SH-2G helicopters to the Republic of
Egypt under that country's foreign military sale agreement with the
U.S. Navy. The corporation is continuing to conduct pilot training
and providing on site support for program implementation.
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 31% has now been recorded as
revenue. 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 32% has now
been recorded as revenue. Work is proceeding on both programs and
deliveries are expected to begin in the 2000 - 2001 time frame.
The corporation continues the process of building and further
enhancing familiarization with the SH-2's capabilities among various
foreign governments that are in the process of developing naval
helicopter requirements. This market is highly competitive and
naturally influenced by economic and political conditions. The
- 7 -
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 is pursuing this potential SH-2 business (including
possible further orders from current customers) but recognizes that
certain potentials have been slowed due to economic difficulties in
Asia.
The SH-2 is an aircraft that was originally manufactured for the
United States Navy. This is no longer done; however, the U.S. Naval
Reserves continues to have 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. During the first quarter of 1999, the
corporation entered into an agreement with the appropriate federal
agencies to take a consignment of the U.S. Navy's inventory of SH-2
spare parts for an initial period ending in September, 1999; the
corporation hopes to arrive at a longer term agreement prior to that
time. Under this arrangement, the corporation will provide further
support of Naval Reserves requirements and will have the ability to
utilize certain inventory for support of the corporation's other SH-2
programs.
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 be affecting certain current customers as well
as potential sales of the K-MAX and production of the aircraft has
been adjusted accordingly. In this environment, the corporation's
commercial sales efforts are being focused on further development of
the aircraft's other applications. The K-MAX also has a potential
non-combat role for the military in the task of vertical replenishment
("VERTREP"), a function that has been performed by K-MAX for the U.S.
Navy Military Sealift Command in two separate demonstration projects
using charter/lease arrangements. In April 1999, a draft request for
proposal was issued for a charter/lease involving two (2) aircraft for
a period of about three (3) years, beginning in January of 2000. When
a final request for proposal is released, the corporation intends to
bid for the work. As reported previously, the market for this new
aircraft has been also 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.
- 8 -
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 also performs subcontract work for certain airframe
manufacturing programs and manufactures various niche market products,
including self-lubricating bearings for use principally in aircraft.
During the first quarter of 1999, the segment continued to experience
some softness in these businesses due to conditions in the commercial
aviation industry. 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 share of business with this customer,
pricing pressure is expected to intensify.
Industrial Distribution segment sales increased 2% for the first
quarter of 1999 compared to the same period of 1998. This segment
continues its efforts to differentiate the business by offering a
product mix which incorporates more value-added high technology and
providing certain technical services to support customer needs.
However, the segment serves nearly every sector of U.S. industry and
so tends to be influenced by industrial production levels. During the
first quarter of 1999, export demand in certain North American
industries such as lumber, chemicals, paper products and semi-
conductors continued to be adversely affected by global economic
difficulties, particularly in Asia and more recently, in South
America. Additionally, 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 sales decreased 2% for the first quarter of
1999 compared to the same period of last year. The segment is
experiencing ongoing weakness in international markets brought on by
economic difficulties in Asia. The segment 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 changes in the nature of its customer base.
The segments' total operating profits for the quarter ended March 31,
1999 were down slightly compared to the first quarter of 1998.
Operating profits for the Aerospace segment were about the same for
the first quarters of 1999 and 1998 due to softness in the commercial
aviation market. Operating profits for the Industrial Distribution
segment were down 17% due primarily to the effects of the global
economic difficulties upon the company's customers. Operating profits
- 9 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
for the Music Distribution segment were up 29% compared to the first
quarter of 1998, however such levels of increase are not expected to
continue during the year.
Net earnings for the first quarter of 1999 were 30 cents per common
share on a diluted basis compared to 29 cents for the first quarter of
1998 on the same basis.
For the quarter ended March 31, 1999, interest income earned from
investment of surplus cash more than offset interest expense.
The consolidated effective income tax rate was 39.7% for the first
quarter of 1999 compared to 40.9% for the same period of 1998.
Management has been working with its board of directors and audit
committee since 1997 on the matter of year 2000 (Y2K) compliance.
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. 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,
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 time tables established under
the plan. Planning and assessment phases have been completed with all
matters that are not satisfactory "as is" to be remediated with a
vendor upgrade or replacement or rewritten software. Activities in
the first quarter of 1999 have focused principally on testing to
confirm compliance. To date, compliance time tables are being met,
such that the corporation is on schedule to achieve substantial
overall Y2K compliance, including testing, by June 30, 1999.
Contingency plans will be established in the event they become
appropriate. 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 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
- 10 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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.
During the first quarter of 1999, operating activities generated cash,
primarily as a result of the receipt of additional payments on
accounts receivable, offset to some degree by payments on accounts
payable and a reduction in the advance on contracts in the Aerospace
segment's SH-2G helicopter programs. During the quarter, cash used in
investing activities was primarily for the acquisition of machinery
and computer equipment used in manufacturing and distribution. Cash
used by financing activities was primarily attributable to 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 $80.5 million in surplus cash at
March 31, 1999, with an average of $63.8 million for the quarter.
The quarter end figure is somewhat more than expected because certain
higher than expected payments were made by customers under the current
SH-2G programs. These funds have been invested in high quality, short
term instruments.
At March 31, 1999, the corporation had approximately $28 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
- 11 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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.
Letters of credit are generally considered borrowings for purposes of
the agreement. The governments of Australia and New Zealand made
advance payments of $104.3 million in connection with their SH-2G
contracts in 1997 and those payments were fully secured by the
corporation through the issuance of irrevocable letters of credit. As
of March 31, 1999, the face amount of these letters of credit has been
reduced to about $53 million, in accordance with the terms of the
relevant contracts. Further reductions are anticipated as certain
contract milestones are achieved.
Under the revolving credit agreement, the corporation has the ability
to borrow funds on both a short-term and long-term basis. As of March
31, 1999, the corporation had virtually no outstanding borrowing.
Average borrowings were $3.3 million and $5.0 million for the first
quarters of 1999 and 1998, respectively. Substantially all of the
advance payments described above and certain of the proceeds from the
sale of Kaman Sciences Corporation were used to pay down bank debt in
1997.
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.
Chief Executive Officer Search
- ------------------------------
As reported previously, the corporation's board of directors has
appointed a committee to conduct a search for a new chief executive
officer, at the recommendation of Charles H. Kaman, the corporation's
founder, chairman, chief executive officer, and president.
The search is proceeding at a pace that would be expected for a search
of this nature. 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.
- 12 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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 and South America); 5) the timing, degree and scope of market
acceptance for products such as a repetitive lift helicopter; 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.
- 13 -
KAMAN CORPORATION AND SUBSIDIARIES
Part II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
The annual meeting of the shareholders of the Corporation was
held at the offices of the Corporation on April 13, 1999. Following
is a brief description of each matter voted upon at the meeting:
1. Election of Directors
---------------------
The following twelve (12) individuals were elected directors of
the Corporation to serve until the next annual meeting and until their
successors have been elected:
Brian E. Barents Huntington Hardisty
E. Reeves Callaway III C. William Kaman II
Frank C. Carlucci Eileen S. Kraus
Laney J. Chouest Hartzel Z. Lebed
John A. DiBiaggio Walter H. Monteith, Jr.
Charles H. Kaman Wanda Lee Rogers
For each director, the Class B shareholders voted 580,343 shares
in favor, 400 shares against. There were no abstentions and no
broker non-votes.
2. Authority to Elect One (1) Additional Director
----------------------------------------------
A proposal to authorize the Board of Directors to elect one (1)
additional director during the ensuing year was adopted by the Class B
shareholders who voted 580,343 in favor and 400 shares against with no
abstentions and no broker non-votes.
3. Appointment of KPMG LLP
-----------------------
A proposal to appoint KPMG LLP as the Corporation's auditors
during the ensuing year was adopted by the Class B shareholders who
voted 580,743 shares in favor with none against, no abstentions and no
broker non-votes.
- 14 -
KAMAN CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits to Form 10-Q:
(11) Earnings per common share computation
(27) Financial Data Schedule
(b) Reports on Form 8-K filed in the first quarter of
1999:
There have been no reports on Form 8-K filed
during the quarter ended March 31, 1999.
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: May 10, 1999 By Charles H. Kaman
Chairman and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 10, 1999 By Robert M. Garneau
Executive Vice President and
Chief Financial Officer
-15-
KAMAN CORPORATION AND SUBSIDIARIES
Index to Exhibits
Exhibit 11 Earnings Per Common Share
Computation Attached
Exhibit 27 Financial Data Schedule Attached
- 16 -