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
September 30, 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 October 31, 1999:
Class A Common 22,604,903
Class B Common 667,814
Page 1 of 15 Pages
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets(In thousands)
September 30, December 31,
Assets 1999 1998
------ ----------------- ------------------
Current assets:
Cash and cash equivalents $ 87,615 $ 65,130
Accounts receivable (net of
allowance for doubtful
accounts of $4,320 in
1999, $4,047 in 1998) 162,794 213,128
Inventories:
Contracts and other
work in process 49,606 61,204
Finished goods 57,783 37,860
Merchandise for resale 104,010 211,399 108,833 207,897
------- -------
Other current assets 30,969 30,349
------- -------
Total current assets 492,777 516,504
Property, plant & equip., at cost 163,970 167,787
Less accumulated depreciation
and amortization 100,477 102,014
------- -------
Net property, plant & equipment 63,493 65,773
Other assets 4,820 4,953
-------- --------
$561,090 $ 587,230
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 4,596 $ 4,801
Accounts payable 52,767 51,571
Accrued liabilities 30,473 28,725
Advances on contracts 63,949 101,376
Other current liabilities 34,607 36,573
Income taxes payable 7,460 5,929
------- -------
Total current liabilities 193,852 228,975
Deferred credits 21,494 20,555
Long-term debt, excl. current portion 26,546 28,206
Shareholders' equity 319,198 309,494
-------- --------
$561,090 $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 For the Nine Months
Ended September 30, Ended September 30,
-------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues $242,581 $249,661 $739,097 $736,173
Costs and expenses:
Cost of sales 179,082 184,874 546,446 542,507
Selling, general and
administrative expense 50,601 51,656 154,551 155,546
Interest expense (income), net (453) 66 (978) (332)
Other expense (income), net 404 406 910 1,120
-------- -------- -------- --------
229,634 237,002 700,929 698,841
-------- -------- -------- --------
Earnings before income taxes 12,947 12,659 38,168 37,332
Income taxes 4,750 5,059 14,667 15,139
-------- -------- -------- --------
Net earnings $ 8,197 $ 7,600 $ 23,501 $ 22,193
======== ======== ======== ========
Net earnings per common share:
Basic $ .35 $ .32 $ 1.00 $ .95
Diluted $ .34 $ .31 $ .97 $ .91
======== ======== ======== ========
Dividends declared per share $ .11 $ .11 $ .33 $ .33
======== ======== ======== ========
- 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 Nine Months
Ended September 30,
--------------------
1999 1998
--------- --------
Cash flows from operating activities:
Net earnings $ 23,501 $ 22,193
Depreciation and amortization 9,042 7,844
Accounts receivable 50,334 (2,945)
Advances on contracts (37,427) (13,372)
Income taxes payable 1,531 (33,665)
Changes in other current assets and liabilities (3,101) (9,096)
Other, net 1,525 1,117
-------- --------
Cash provided by (used in) operating
activities 45,405 (27,924)
-------- --------
Cash flows from investing activities:
Proceeds from sale of businesses and other assets 442 5,625
Expenditures for property, plant & equipment (6,938) (13,385)
Other, net 54 (342)
-------- --------
Cash provided by (used in) investing
activities (6,442) ( 8,102)
-------- --------
Cash flows from financing activities:
Reductions to notes payable (205) (2,434)
Reductions to long-term debt (1,660) (1,661)
Purchase of treasury stock (8,146) (1,943)
Dividends paid (7,790) (7,482)
Other, net 1,323 1,579
-------- --------
Cash provided by (used in) financing
activities (16,478) (11,941)
-------- --------
Net increase (decrease) in cash and cash equivalents 22,485 (47,967)
Cash and cash equivalents at beginning of period 65,130 109,974
-------- --------
Cash and cash equivalents at end of period $ 87,615 $ 62,007
======== ========
- 4 -
KAMAN CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Continued
Item 1. Financial Statements, Continued:
Notes to Condensed Consolidated Financial Statements
(In thousands except share amounts)
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 $2,264 and $2,384 for the nine
months ended September 30, 1999 and 1998, respectively. Cash
payments for income taxes for the comparable periods were $14,436
and $45,056, respectively.
Comprehensive Income
- --------------------
Comprehensive income was $23,595 and $22,045 for the nine months
ended September 30, 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 except share amounts)
Business Segments
- -----------------
Summarized financial information by business segment is as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- --------
Net sales:
Aerospace $ 86,457 $ 94,799 $276,396 $268,772
Industrial Distribution 123,164 125,062 377,647 381,924
Music Distribution 32,395 29,323 83,706 84,374
-------- -------- -------- --------
$242,016 $249,184 $737,749 $735,070
======== ======== ======== ========
Operating profit:
Aerospace $ 10,327 $ 11,055 $ 33,399 $ 32,063
Industrial Distribution 4,040 4,035 11,216 14,554
Music Distribution 1,618 1,419 3,278 3,173
-------- -------- -------- --------
15,985 16,509 47,893 49,790
Interest, corporate and
other expense, net (3,038) (3,850) (9,725) (12,458)
-------- -------- -------- --------
Earnings before income
taxes $ 12,947 $ 12,659 $ 38,168 $ 37,332
======== ======== ======== ========
September 30, December 31,
1999 1998
-------- --------
Identifiable assets:
Aerospace $242,939 $294,566
Industrial Distribution 157,156 160,873
Music Distribution 60,848 54,577
Corporate 100,147 77,214
-------- --------
$561,090 $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 quarter ended September 30, 1999 were
down 2.8% compared to the same period of 1998 while consolidated
revenues for the first nine months of 1999 were level compared to
the prior year.
Aerospace segment sales were down 8.8% for the quarter while
increasing 2.8% for the nine month period ended September 30, 1999,
compared to the same periods of 1998. Results for the quarter and
nine month periods reflect revenue recorded for the Australia and
New Zealand SH-2 helicopter programs and the aircraft structures
and components business of this segment.
The Aerospace segment's principal programs include the SH-2G
multi-mission naval helicopter, the K-MAX (Registered Trademark)
helicopter, subcontract work involving aircraft 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
under commercial contracts with the governments of Australia and
New Zealand. The program 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. The total contract has an anticipated
value of about $675 million (US). The helicopter production
portion of the work is valued at $557 million and about 46% of that
amount has now been recorded as revenue . The program for New
Zealand involves four (4) aircraft, and support, for New Zealand
defense forces. The contract has an anticipated value of nearly
$165 million (US), of which about 49% has now been recorded as
revenue. Under a contract amendment, the Government of New Zealand
will purchase one (1) additional SH-2G aircraft; this work has an
anticipated value, including spares and support, of approximately
$30 million (US). Work is proceeding on both the Australia and New
Zealand programs and deliveries are expected to begin in the 2000 -
2001 time frame.
The corporation continues to provide on site support in the
Republic of Egypt for ten (10) SH-2G helicopters that were
delivered last year under that country's foreign military sale
agreement with the U.S. Navy.
- 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)
The corporation continues efforts to build and further enhance
familiarization with the SH-2's capabilities among various foreign
governments. This market is highly competitive and naturally
influenced by economic and political conditions. The corporation
is pursuing this potential SH-2 business, including possible
further orders from current customers.
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
Reserve maintains twelve (12) SH-2G aircraft active in its fleet.
Management anticipates that at some point, these 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. The corporation has made an agreement
with the appropriate federal agencies to take a consignment of the
U.S. Navy's inventory of SH-2 spare parts; the initial agreement
has been extended beyond the scheduled September 1999 expiration
date in the expectation that the parties will eventually reach
agreement on a longer term arrangement. The overall objective is
for the corporation to provide further support of U.S. Naval
Reserve requirements while having the ability to utilize certain
inventory for support of the corporation's other SH-2 programs.
The corporation's K-MAX medium to heavy lift "aerial truck"
helicopter program has been experiencing market difficulties for
the past two years, due in significant part to conditions in the
U.S. and Canadian commercial logging industries, the aircraft's
principal market application to date. During that period,
substantial weakness in the logging industry has adversely affected
certain current customers as well as potential customers and
curtailed sales of the aircraft. The corporation's commercial sales
efforts have been refocused on further development of markets for
the aircraft's other applications, which include oil and gas
exploration, power line construction, fire fighting, and movement
of equipment, however management believes that sales development in
these markets and profitability for the entire program will take
some time to achieve. In addition, the aircraft has successfully
demonstrated its capabilities in the non-combat military role of
vertical replenishment in two demonstrations for the U.S. Navy,
Military Sealift Command. The corporation had recently bid on a
new three year charter/lease project involving two aircraft,
however management was notified in late October that a helicopter
operator has been awarded the contract.
This segment also performs subcontract work for certain airframe
manufacturing programs and manufactures various niche market
products, including self-lubricating bearings for use principally
- 8 -
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 aircraft. During the third quarter of 1999, the segment
continued to experience some softness in these businesses due to
conditions in the commercial aviation industry.
In this environment, the Aerospace segment is working to enhance
operating efficiency and reduce costs by implementing "lean
thinking" strategies for improving manufacturing processes.
Industrial Distribution segment sales for the quarter and
nine-month period ended September 30, 1999 were essentially
level with the same periods of last year. The Industrial
Distribution business, which serves nearly every sector of U.S.
industry, continues to experience increasing pricing pressures
as well as weakness in various markets due to the continuing
effects of global economic conditions upon certain of its
customers in North American industry (e.g., lumber, chemicals,
paper products). Additionally, while the industrial distribution
business has traditionally been very competitive, increasing
consolidation in the industry appears to be resulting in even
more intense competition. The segment is continuing its efforts
to increase operational efficiency and reduce costs while
incorporating more value-added technology and providing certain
technical services to support customer needs.
Music Distribution segment sales were up 10.5% for the three months
ended September 30, 1999 compared to the same period of last year
and were level for the first nine months of 1999 compared to 1998.
These results reflect a strong holiday season in the larger
domestic market, offset by continued weakness in international
markets.
The segments' total operating profit for the quarter and nine months
ended September 30, 1999 were down 3.2% and 3.8% respectively,
compared to the same periods of 1998. Operating profit for the
Aerospace segment was down 6.6% for the quarter and up 4.2% for the
first nine months of this year, compared to the prior year. The
SH-2G helicopter programs and aircraft structures and components
business contributed significantly to operating profit for the
referenced periods of 1999. This profit was partially offset by
losses in the K-MAX program reflecting technical and market
development costs associated with the aircraft. Also included in
operating profit for the nine month period was the second quarter
reversal of a reserve in the amount of $2.5 million established in
1994 associated with Raymond Engineering, Inc., a subsidiary of the
corporation and now part of Kaman Aerospace Corp. Industrial
Distribution segment operating profit was flat for the quarter and
down 22.9% for the nine months ended September 30, 1999 compared to
- 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)
the same periods of 1998, due primarily to the effects of the
global economic difficulties upon the company's customers and to
price pressures associated with increasing competition. Music
Distribution segment operating profit was up 14% and 3.3% for the
third quarter and nine months ended September 30, 1999,
respectively, compared to the same periods of 1998, reflecting a
strong holiday season in the larger domestic market, offset by
continuing weakness in international markets.
Net earnings for the third quarter of 1999 were 34 cents per common
share on a diluted basis compared to 31 cents for the third quarter
of 1998 on the same basis. Net earnings for the nine months ended
September 30, 1999 were 97 cents per common share on a diluted
basis, compared to 91 cents per common share diluted a year ago.
Net earnings for the nine months were affected by a gain in the
second quarter of approximately six cents per common share as a
result of reversing the reserve associated with the Aerospace
segment, referred to above.
For the nine months ended September 30, 1999, interest income
earned from investment of surplus cash more than offset interest
expense.
The consolidated effective income tax rate was 38.4% for the first
nine months of 1999 compared to 40.6% 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. The project has generally proceeded on
schedule and as of September 30, 1999, the corporation has achieved
substantial overall Y2K compliance, including testing.
Contingency plans are being developed, where appropriate. The
corporation and each operating subsidiary are continuing to work
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
- 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)
headquarters to monitor the progress of each subsidiary's
compliance work. Senior management has provided 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 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 nine months of 1999, operating activities
generated cash. In the Aerospace segment this is primarily a
result of the receipt of additional payments on accounts receivable
in the segment, offset to some degree by growth in K-MAX
inventories, payments on accounts payable, and reductions in the
advances on the SH-2G contracts. In the Industrial Distribution
segment, this result reflects reductions in inventory and increases
in accounts payable that more than offset increases in accounts
receivable. During the nine month period, 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 $83.6 million in surplus cash at
September 30, 1999, with an average of $77.7 million for the nine
month period. The quarter end figure continues to be somewhat more
than expected because certain higher than expected payments were
- 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)
made by customers under the current SH-2G programs. These funds
have been invested in high quality, short term instruments.
At September 30, 1999, the corporation had $28.2 million of its 6%
convertible subordinated debentures outstanding. The debentures
are convertible into shares of Class A common stock at any time on
or before March 15, 2012 at a conversion price of $23.36 per share,
generally at the option of the holder. Pursuant to a sinking fund
requirement that began March 15, 1997, the corporation redeems
approximately $1.7 million of the outstanding principal of the
debentures each year.
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. Under the revolving credit agreement, the corporation has
the ability to borrow funds on both a short-term and long-term
basis. As of September 30, 1999, the corporation had no
outstanding borrowings under this agreement.
Letters of credit are generally considered borrowings for purposes
of the revolving credit 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. At present, the face amount of these letters of
credit has been reduced to $47.2 million, in accordance with the
terms of the relevant contracts. Further reductions are
anticipated as certain contract milestones are achieved.
Average bank borrowings were $3.4 million and $3.8 million for the
nine months ended September 30, 1999 and 1998, respectively.
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.
- 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; 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 5. Other Information
Each of the corporation and certain of its subsidiaries
have executed employment agreements and change in control
agreements with certain of their employees who are
executive officers of the Corporation. These agreements
are attached as Exhibit 10 to this report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits to Form 10-Q:
(10) Material Contracts
a) Employment Agreements with certain
Executive Officers
b) Change in Control Agreements with certain
Executive Officers
(11) Earnings per common share computation
(27) Financial Data Schedule
(b) Reports on Form 8-K filed in the third quarter
of 1999:
(1) A report on Form 8-K was filed on July 20,
1999 announcing that the Board of Directors
has chosen Mr. Paul R. Kuhn to succeed Mr.
Charles H. Kaman as president and CEO of
Kaman Corporation, effective August 2, 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: November 12, 1999 By Paul R. Kuhn
President and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 12, 1999 By Robert M. Garneau
Executive Vice President and
Chief Financial Officer
- 14 -
KAMAN CORPORATION AND SUBSIDIARIES
Index to Exhibits
Exhibit 10 Material Contracts Attached
Exhibit 11 Earnings Per Common Share
Computation Attached
Exhibit 27 Financial Data Schedule Attached
- 15 -