Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the fiscal year ended December 31,
2008
|
Commission
File No. 0-1093
KAMAN
CORPORATION
(Exact
name of registrant as specified in its charter)
Connecticut
|
|
06-0613548
|
(State
or other jurisdiction
|
|
(I.R.S. Employer
|
of
incorporation or organization)
|
|
Identification
No.)
|
1332 Blue
Hills Avenue
Bloomfield,
Connecticut 06002
(Address
of principal executive offices)
Registrant's
telephone number, including area code: (860) 243-7100
Securities
registered pursuant to Section 12(b) of the Act:
|
|
Name
of each exchange on which registered
|
Common
Stock ($1 par value)
|
|
The
NASDAQ Stock Market, Inc.
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes x No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated herein by reference in Part III of
this Form 10-K or any amendment to this Form 10-K o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value on June 27, 2008 (the last business day of the Company’s
most recently completed second quarter) of the voting common stock held by
non-affiliates of the registrant, computed by reference to the closing price of
the stock, was approximately $570,226,767.
At January 30, 2009, there
were 25,479,150 shares of Common Stock outstanding.
Documents
Incorporated Herein By Reference
Portions
of our definitive proxy statement for our 2009 Annual Meeting of Shareholders
are incorporated by reference into Part III of this
Report.
Kaman
Corporation
Index
to Form 10-K
|
|
|
|
Part
I
|
Item
1
|
Business
|
|
3
|
Item
1A
|
Risk
Factors
|
|
8
|
Item
1B
|
Unresolved
Staff Comments
|
|
14
|
Item
2
|
Properties
|
|
15
|
Item
3
|
Legal
Proceedings
|
|
15
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
15
|
|
|
|
|
Part
II
|
Item
5
|
Market
for Registrant’s Common Equity, Related Stockholder
Matters
|
|
|
and
Issuer Purchases of Equity Securities
|
|
16
|
Item
6
|
Selected
Financial Data
|
|
18
|
Item
7
|
Management’s
Discussion and Analysis of Financial Condition
|
|
|
and
Results of Operations
|
|
20
|
Item
7A
|
Quantitative
and Qualitative Disclosures About Market Risk
|
43
|
Item
8
|
Financial
Statements and Supplementary Data
|
|
44
|
Item
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
82
|
Item
9A
|
Controls
and Procedures
|
|
82
|
Item
9B
|
Other
Information
|
|
82
|
|
|
|
|
Part
III
|
Item
10
|
Directors,
Executive Officers and Corporate Governance
|
83
|
Item
11
|
Executive
Compensation
|
|
84
|
Item
12
|
Security
Ownership of Certain Beneficial Owners and Management
|
|
|
and
Related Stockholder Matters
|
|
84
|
Item
13
|
Certain
Relationships and Related Transactions, and Director
Independence
|
84
|
Item
14
|
Principal
Accounting Fees and Services
|
|
84
|
|
Part
IV
|
Item
15
|
Exhibits
and Financial Statement Schedules
|
|
84
|
PART
I
ITEM
1. BUSINESS
GENERAL
Kaman
Corporation, headquartered in Bloomfield, Connecticut, was incorporated in 1945.
We are a diversified company that conducts business in the aerospace and
industrial distribution markets. We report information for ourselves and our
subsidiaries (collectively, the "Company") in five business segments. They are
Industrial Distribution and four reporting segments within the aerospace
industry: Aerostructures, Precision Products, Helicopters, and Specialty
Bearings (collectively, the “Aerospace Segments”).
A
discussion of 2008 developments is included in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, in this Form
10-K.
Aerostructures
Segment
The
Aerostructures segment has been a supplier of commercial and military aircraft
structures and subsystems for over 50 years. Our product portfolio currently
consists of metallic and composite detail parts, minor and major subassemblies,
flight control surfaces, composite interiors and fuselage and wing structures.
We offer a range of services from build-to-print manufacturing, to major
structural assembly, to full production integration, including procurement and
installation of wiring and sub-systems. We currently perform work on many major
commercial and military platforms including the Boeing 767, 777 and 787, the
Boeing C-17 and the Sikorsky UH-60. Other customers include Airbus, Bell
Helicopter and BAE Systems. Operations are conducted at Kaman Aerospace
Corporation’s (“KAC”) Aerostructures Division in Jacksonville, FL, at Plastic
Fabricating Company, Inc. in Wichita, KS (“Aerostructures Wichita”) and at
Brookhouse Holdings Ltd. in Darwen, Lancashire, United Kingdom and Hyde, Greater
Manchester, United Kingdom (“Brookhouse”).
We have
made, and continue to make, strategic investments in composite technology and
machining capabilities. This combined with the expansion of our supply chain and
program management organizations as well as a commitment to achieving
operational excellence allows us to offer our customers an integrated solution
for their aerostructures needs.
Precision Products Segment
(formerly the Fuzing Segment)
The
Precision Products segment manufactures products for military and commercial
markets, primarily related to military safe, arm and fuzing devices for several
missile and bomb programs; as well as precision non-contact measuring systems
for industrial and scientific use; and high reliability memory systems for
airborne, shipboard, and ground-based programs. One of our key programs is the
Joint Programmable Fuze (FMU-152 A/B) used in the MK80 series bombs, BLU-109,
and in conjunction with JDAM and Paveway weapon kits.
Our
capabilities include the design, development, test and manufacture of fuzing
products. Our year round test facility is equipped with projectile velocity
measurement equipment, projectile impact media, high-speed photographic
equipment and lighting for night firing and tests. Principal customers include
the U.S. military, Boeing, Lockheed Martin and Raytheon. Operations are
conducted at KAC’s Precision Products Division in Middletown, CT and Tucson, AZ
and at Kaman Precision Products, Inc. in Orlando, FL (“KPP
Orlando”).
Helicopters
Segment
The
Helicopters segment, with our manufacturing capabilities and highly experienced
people, markets our helicopter engineering expertise and performs subcontract
work for other prime aerospace manufacturers. This includes the designing,
testing, certifying, and delivery of major assemblies, complex components,
subassemblies, and detail parts. We also refurbish, provide upgrades for and
otherwise support Kaman SH-2G maritime helicopters operating with foreign
militaries. Our K-MAX® “aerial truck” helicopter is used to perform repetitive
external lifting and is operated by commercial customers in several countries
for logging, fire fighting and various construction projects. The SH-2G aircraft
is currently in service with the Egyptian Air Force and the New Zealand and
Polish Navies. Operations are primarily conducted at KAC’s Helicopters Division
in Bloomfield, Connecticut.
Specialty Bearings
Segment
The
Specialty Bearings segment manufactures high-performance mechanical products
used primarily in aviation. These products are used as original equipment and/or
specified as replacement parts by the manufacturers of nearly every military and
commercial aircraft manufactured in North and South America and Europe. Our
engineering services are available for unique high performance applications
requiring innovation and advanced technology. We operate highly automated
manufacturing facilities that allow us to produce our products reliably and
efficiently. These products are primarily proprietary self-lubricating ball and
roller bearings for aircraft flight controls, turbine engines, and landing gear;
driveline couplings for helicopters; self-lubricated bearings for hydropower
installations, ships and submarines; and composite “flyer bows” used in the wire
industry. The range of Specialty Bearings’ products includes:
|
·
|
KAron®
Bearings - self-lubricating bearings for aircraft and marine
use;
|
|
·
|
FraSlip®
Bearings - self-lubricating bearings for aircraft and industrial
use;
|
|
·
|
KAron®
Hydropower Bearings - ideally suited for demanding hydropower
applications;
|
|
·
|
KAflex®
Couplings - driveshafts and couplings used in
helicopters;
|
|
·
|
Deep
groove and self lubricating spherical ball and roller bearings for
aircraft and industrial use; and
|
|
·
|
Composite
Flyer Bows - high-strength processing devices for the wire making industry
including the Back Bone® Bow.
|
Operations
for the Specialty Bearings segment are conducted at Kamatics Corporation in
Bloomfield, Connecticut and RWG Frankenjura-Industrie Flugwerklager GmbH in
Dachsbach, Germany.
Industrial Distribution
Segment
Kaman
Industrial Technologies Corporation (“KIT”) brings our commitment to
technological leadership and value-added services to the Industrial Distribution
business. The Industrial Distribution segment is the third largest power
transmission/motion control industrial distributor in North America. We provide
products including bearings, mechanical and electrical power transmission, fluid
power, motion control and materials handling components to a broad spectrum of
industrial markets throughout North America. Locations consist of nearly 200
branches, distribution centers and call centers across the United States
(including Puerto Rico) and in Canada and Mexico. We offer approximately three
million items, as well as value-added services, to a base of approximately
50,000 customers representing a highly diversified cross section of North
American industry. Subsidiaries of KIT include Kaman Industrial
Technologies, Ltd., Delamac de Mexico, S.A. de C.V., Industrial Supply
Corporation & Industrial Rubber and Mechanics, Inc.
Divestiture of the Music
Segment
On
December 31, 2007, we completed the sale of all of the capital stock of our
wholly owned subsidiary, Kaman Music Corporation, to Fender Musical Instruments
Corporation (“FMIC” or “Fender”). Pursuant to the terms of the stock purchase
agreement, as amended, we received $119.5 million in cash.
FINANCIAL
INFORMATION ABOUT OUR SEGMENTS
Financial
information about our segments is included in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, and Note 21,
Segment and Geographic Information, of the Notes to Consolidated Financial
Statements, included in Item 8, Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K.
PRINCIPAL
PRODUCTS AND SERVICES
The
following is information for the three preceding years concerning the percentage
contribution of each business segment's products and services to consolidated
net sales from continuing operations:
|
|
Years
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Aerostructures
|
|
|
11.8 |
% |
|
|
9.4 |
% |
|
|
7.9 |
% |
Precision
Products
|
|
|
9.4 |
% |
|
|
8.1 |
% |
|
|
7.2 |
% |
Helicopters
|
|
|
5.5 |
% |
|
|
6.6 |
% |
|
|
7.1 |
% |
Specialty
Bearings
|
|
|
11.3 |
% |
|
|
11.4 |
% |
|
|
10.7 |
% |
Subtotal
Aerospace
|
|
|
38.0 |
% |
|
|
35.5 |
% |
|
|
32.9 |
% |
Industrial
Distribution
|
|
|
62.0 |
% |
|
|
64.5 |
% |
|
|
67.1 |
% |
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
AVAILABILITY
OF RAW MATERIALS
While we
believe we have sufficient sources for the materials, components, services and
supplies used in our manufacturing, we are highly dependent on the availability
of essential materials, parts and subassemblies from our suppliers and
subcontractors. The most important raw materials required for our aerospace
products are aluminum (sheet, plate, forgings and extrusions), titanium, nickel,
copper and composites. Many major components and product equipment items are
procured or subcontracted on a sole-source basis with a number of domestic and
non-U.S. companies. Although alternative sources generally exist for these raw
materials, qualification of the sources could take a year or more. We are
dependent upon the ability of a large number of suppliers and subcontractors to
meet performance specifications, quality standards and delivery schedules at
anticipated costs. While we maintain an extensive qualification system to
control risk associated with such reliance on third parties, failure of
suppliers or subcontractors to meet commitments could adversely affect
production schedules and contract profitability, while jeopardizing our ability
to fulfill commitments to our customers. Although high prices for some raw
materials important to some of our businesses (steel, copper, aluminum, titanium
and nickel) may cause margin and cost pressures, we do not foresee any near term
unavailability of materials, components or supplies that would have an adverse
effect on our business, or on any of our business segments. For further
discussion of the possible effects of changes in the cost or availability of raw
materials on our business, see Item 1A, Risk Factors, in this Form
10-K.
PATENTS
AND TRADEMARKS
We hold
patents and trademarks reflecting functional, design and technical
accomplishments in a wide range of areas covering both basic production of
certain aerospace products as well as highly specialized devices and advanced
technology products in defense related and commercial fields.
Although
the company's patents and trademarks enhance our competitive position, we
believe that none of such patents or trademarks is singularly or as a group
essential to our business as a whole. We hold or have applied for U.S. and
foreign patents with expiration dates that range through the year
2025.
Registered
trademarks of Kaman Corporation include KAflex, KAron, and K-MAX. In all, we
maintain 26 U.S. and foreign trademarks.
BACKLOG
Our
entire backlog is attributable to the Aerospace Segments. We anticipate that
approximately 63.4% of our backlog at the end of 2008 will be performed in 2009.
Approximately 68.3% of the backlog at the end of 2008 is related to U.S.
Government contracts or subcontracts, which include government orders that are
firm but not yet funded and contracts that are awarded but not yet signed.
Virtually all of these government contracts or subcontracts have been
signed.
Total
backlog, the portion of the backlog we expect to complete in 2009, and the
portion of the backlog represented by U.S. Government contracts for each of the
Aerospace Segments, are as follows:
|
|
Total
Backlog at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount,
in thousands
|
|
|
%
U.S. Government
|
|
|
2008
Backlog to be completed in 2009
|
|
|
Total
Backlog at December 31, 2007
|
|
|
Total
Backlog at December 31, 2006
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Aerostructures
|
|
$ |
260,771 |
|
|
|
77.3 |
% |
|
$ |
138,713 |
|
|
$ |
130,598 |
|
|
$ |
84,178 |
|
Precision
Products
|
|
|
151,552 |
|
|
|
92.8 |
% |
|
|
95,734 |
|
|
|
140,872 |
|
|
|
169,742 |
|
Helicopters
|
|
|
45,416 |
|
|
|
50.1 |
% |
|
|
36,242 |
|
|
|
106,269 |
|
|
|
116,028 |
|
Specialty
Bearings
|
|
|
92,997 |
|
|
|
12.4 |
% |
|
|
78,432 |
|
|
|
96,790 |
|
|
|
80,646 |
|
Total
|
|
$ |
550,736 |
|
|
|
68.3 |
% |
|
$ |
349,121 |
|
|
$ |
474,529 |
|
|
$ |
450,594 |
|
GOVERNMENT
CONTRACTS
During
2008, approximately 94.0% of the work performed by the company directly or
indirectly for the U.S. government was performed on a fixed-price basis and the
balance was performed on a cost-reimbursement basis. Under a fixed-price
contract, the price paid to the contractor is negotiated at the outset of the
contract and is not generally subject to adjustment to reflect the actual costs
incurred by the contractor in the performance of the contract. Cost
reimbursement contracts provide for the reimbursement of allowable costs and an
additional negotiated fee.
The
company's U.S. government contracts and subcontracts contain the usual required
provisions permitting termination at any time for the convenience of the
government with payment for work completed and associated profit at the time of
termination.
COMPETITION
The
Aerospace Segments operate in a competitive environment with many other domestic
and foreign organizations and are affected by the political and economic
circumstances of their potential foreign customers.
The
Aerostructures segment competes for aircraft structures and components business
on the basis of price, product quality, and performance.
The
Precision Products segment competes for its business primarily on the basis of
technical competence, product quality, price, its experience as a developer and
manufacturer of such products for particular applications and the availability
of facilities, equipment and personnel.
The
Helicopters segment competes on the basis of price, performance, its experience
as a manufacturer of helicopters, the quality of its products and services, and
the availability of facilities and equipment to perform subcontract
services.
The
Specialty Bearings segment competes for its specialty aircraft bearing business
based on quality and proprietary knowledge, product endurance, delivery
lead-time, and special performance characteristics.
The
Industrial Distribution segment competes for business with several other
national distributors, two of which are substantially larger, and with many
regional and local organizations. Competitive forces have intensified due to the
increasing importance of large national accounts and the increasing
consolidation in supplier relationships. We compete for business on the basis of
price, performance and value added services that we are able to provide as one
of the largest national distributors in North America.
RESEARCH
AND DEVELOPMENT EXPENDITURES
Government
sponsored research expenditures (which are included in cost of sales) were $6.3
million in 2008, $2.6 million in 2007, and $4.4 million in 2006. Independent
research and development expenditures (which are included in selling, general
and administrative expenses) were $4.2 million in 2008, $3.3 million in 2007,
and $3.3 million in 2006.
COMPLIANCE
WITH ENVIRONMENTAL PROTECTION LAWS
We are
subject to the usual reviews, inspections and enforcement actions by various
federal and state environmental and enforcement agencies and have entered into
agreements and consent decrees at various times in connection with such reviews.
In addition, we engage in various environmental studies and investigations and,
where legally required to do so, undertake appropriate remedial actions at
facilities we own or control, either voluntarily or in connection with the
acquisition, disposal or operation of such facilities.
Such
studies and investigations are ongoing at the company's Bloomfield and Moosup,
Connecticut facilities. Voluntary remediation activities have been
undertaken at the Moosup facility. In connection with the company's 2008
purchase of the Bloomfield facility formerly owned by the federal government, we
continue the process of identifying various remediation activities that we will
undertake in connection with that purchase, which relate principally to items
that are required under the Connecticut Transfer Act (the Act) as a result of
the transfer of ownership of the property. This item is discussed in
more detail in Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Helicopters Segment, and in Item 2,
Properties, in this Form 10-K.
Also, in
preparation for disposition of the Moosup facility, we have sought and obtained
the conditional approval of the State of Connecticut Department of Environmental
Protection (“CTDEP”) to a reclassification of the groundwater in the vicinity to
be consistent with the industrial character of the area. The company has
substantially completed work related to such ground water reclassification
(including connection of certain neighboring properties to public drinking
water) in coordination with CTDEP and local authorities.
In
connection with the sale of the Music segment in 2007, the company assumed
responsibility for meeting certain requirements of the Act that applied to our
transfer of the New Hartford, Connecticut, facility formerly leased by that
segment for guitar manufacturing purposes ("Ovation"). Under the Act, those
responsibilities essentially consist of assessing the site's environmental
conditions and remediating environmental impairments, if any, caused by
Ovation's operations prior to the sale. The site is a multi-tenant industrial
park, in which Ovation and other unrelated entities lease space. The
environmental assessment process began in 2008 and will continue during 2009.
The company's estimate of our portion of the cost to assess the environmental
conditions and remediate this site is $2.2 million, unchanged from previously
reported estimates.
Additionally,
we have accrued $2.4 million for environmental compliance at our recently
acquired Brookhouse facilities. We are in the early stages of assessing the work
that may be required, which may result in a change to this accrual.
With
respect to all other matters that may currently be pending, in the opinion of
management, based on our analysis of relevant facts and circumstances,
compliance with relevant environmental protection laws is not likely to have a
material adverse effect upon our
capital
expenditures, earnings or competitive position. In arriving at this conclusion,
we have taken into consideration site-specific information available regarding
total costs of any work to be performed, and the extent of work previously
performed. Where we have been identified as a “potentially responsible party”
(PRP) by environmental authorities at a particular site, we, using information
available to us, have also reviewed and considered a number of other factors,
including: (i) the financial resources of other PRPs involved in each site, and
their proportionate share of the total volume of waste at the site; (ii) the
existence of insurance, if any, and the financial viability of the insurers; and
(iii) the success others have had in receiving reimbursement for similar costs
under similar insurance policies issued during the periods applicable to each
site. No such matters were outstanding at the end of 2008.
EMPLOYEES
As of
December 31, 2008, the company employed 4,294 individuals throughout its
business segments and corporate headquarters.
FINANCIAL
INFORMATION ABOUT GEOGRAPHIC AREAS
Financial
information about geographic areas is included in Note 21, Segment and
Geographic Information, of the Notes to Consolidated Financial Statements,
included in Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
AVAILABLE
INFORMATION
We are
subject to the reporting requirements of the Exchange Act and its rules and
regulations. The Exchange Act requires us to file reports, proxy statements and
other information with the U.S. Securities and Exchange Commission (“SEC”).
Copies of these reports, proxy statements and other information can be read and
copied at:
SEC
Public Reference Room
100 F
Street NE
Washington,
D.C. 20549
Information
on the operation of the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330.
The SEC
maintains a website that contains reports, proxy statements and other
information regarding issuers that file electronically with the SEC. These
materials may be obtained electronically by accessing the SEC’s website at
http://www.sec.gov.
We make
available, free of charge on our website, our annual report on Form 10-K,
quarterly reports on Form 10-Q, proxy statements, and current reports on Form
8-K as well as amendments to those reports filed or furnished pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, together with
Section 16 insider beneficial stock ownership reports, as soon as reasonably
practicable after we electronically file these documents with, or furnish them
to, the SEC. These documents are posted on our website at www.kaman.com — select
the “Investors & Media” link and then the “SEC Documents” link.
We also
make available, free of charge on our website, the Certificate of Incorporation,
By–Laws, Governance Principles and all Board of Directors' standing Committee
Charters (including Audit, Corporate Governance, Personnel & Compensation
and Finance). These documents are posted on our website at www.kaman.com —
select the “Corporate Governance” link.
The
information contained in our website is not intended to be incorporated into
this Form 10-K.
Item
1A. Risk Factors
Our
business, financial condition, operating results and cash flows can be impacted
by a number of factors, including, but not limited to, those set forth below,
any one of which could cause our actual results to vary materially from recent
results or anticipated future results.
Current economic conditions
may have an impact on our future operating results.
With the
current economic downturn, the Company’s operating results and liquidity may be
impacted in several ways, including:
|
-
|
the
inability to obtain further bank financing, which may limit our ability to
fully execute our strategy in the short
term;
|
|
-
|
higher
interest rates on future borrowings, which would limit our free cash
flow;
|
|
-
|
a
reduction of the value of our pension plan investments and the associated
impact on required contributions and plan
expense;
|
|
-
|
changes
in the relationships between the U.S. Dollar and the Euro, the British
Pound, the Australian Dollar, the Mexican Peso and the Canadian Dollar,
which could positively or negatively impact our financial
results;
|
|
-
|
less
activity relative to capital projects and planned
expansions;
|
|
-
|
increased
bad debt reserves or slower payments from
customers;
|
|
-
|
decreased
order activity from our customers particularly in the Industrial
Distribution and Specialty Bearings segments, which would result in lower
operating profits as well as less absorption of fixed costs due to the
decreased business base; and
|
|
-
|
the
ability of our suppliers to meet our demand requirements, maintain the
pricing of their products, or continue operations, which may require us to
find and qualify new suppliers.
|
To
mitigate these risks, we continually evaluate opportunities for future
financing, monitor current borrowing rates, review our receivables to maximize
collectability and monitor the stability of our supply chain. We recently
executed a term loan credit agreement, as more fully described in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Our financial performance is
significantly influenced by the conditions of the aerospace
industry.
The
combined Aerospace Segments’ results are directly tied to economic conditions in
the commercial aviation and defense industries. As a result, changes in economic
conditions may cause customers to request that firm orders be rescheduled or
canceled, which could put a portion of our backlog at risk. Additionally, a
significant amount of work that we perform under contract tends to be for a few
large customers.
The
commercial aviation industry tends to be cyclical, and capital spending by
airlines and aircraft manufacturers may be influenced by a variety of factors
including current and future traffic levels, aircraft fuel pricing, labor
issues, competition, the retirement of older aircraft, regulatory changes,
terrorism and related safety concerns, general economic conditions, worldwide
airline profits and backlog levels.
The
defense industry is also affected by a changing global political environment,
continued pressure on U.S. and global defense spending, U.S. foreign policy and
the level of activity in military flight operations. Changes to the defense
industry could have a material impact on several of our current aerospace
programs, which would adversely affect our operating results. To mitigate these
risks, we have worked to expand our customer and product base to include both
commercial and military markets.
Furthermore,
because of the lengthy research and development cycle involved in bringing new
products to market, we cannot predict the economic conditions that will exist
when a new product is introduced. A reduction in capital spending in the
aviation or defense industries could have a significant effect on the demand for
our products, which could have an adverse effect on our financial performance or
results of operations.
Our U.S. Government programs
are subject to unique risks.
The
company has several significant long-term contracts either directly with the
U.S. government or where it is the ultimate customer, including the Sikorsky
BLACK HAWK cockpit program, the JPF program, and the Boeing C-17 and A-10
programs. These contracts are subject to unique risks, some of which are beyond
our control. Examples of such risks include:
|
·
|
The
U.S. Government may modify, curtail or terminate its contracts and
subcontracts at its convenience without prior notice, upon payment for
work done and commitments made at the time of termination. Modification,
curtailment or termination of our major programs or contracts could have a
material adverse effect on our future results of operations and financial
condition.
|
|
·
|
Our
U.S. Government business is subject to specific procurement regulations
and other requirements. These requirements, although customary in U.S.
Government contracts, increase our performance and compliance costs. These
costs might increase in the future, reducing our margins, which could have
a negative effect on our financial condition. Although we have procedures
to comply with these regulations and requirements, failure to do so could
lead to suspension or debarment, for cause, from U.S. Government
contracting or subcontracting for a period of time and could have a
negative effect on our reputation and ability to receive other U.S.
Government contract awards in the
future.
|
|
·
|
The
costs we incur on our U.S. Government contracts, including allocated
indirect costs, may be audited by U.S. Government representatives. Any
costs found to be improperly allocated to a specific contract would not be
reimbursed, and such costs already reimbursed would have to be refunded.
We normally negotiate with the U.S. Government representatives before
settling on final adjustments to our contract costs. We have recorded
contract revenues based upon results we expect to realize upon final
audit. However, we do not know the outcome of any future audits and
adjustments and we may be required to reduce our revenues or profits upon
completion and final negotiation of these audits. Although we have
instituted controls intended to assure our compliance, if any audit
reveals the existence of improper or illegal activities, we may be subject
to civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeiture of profits, suspension of payments,
fines and suspension or prohibition from doing business with the U.S.
Government.
|
|
·
|
We
are from time to time subject to certain routine U.S. Government inquiries
and investigations of our business practices due to our participation in
government contracts. Any adverse finding associated with such an inquiry
or investigation could have a material adverse effect on our results of
operations and financial condition. See Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Precision
Products Segment, Warranty and Contract-Related Matters, for discussion of
U.S. Government inquiries and
investigations.
|
Competition from domestic
and foreign manufacturers may result in the loss of potential contracts and
opportunities.
The
aerospace markets in which we participate are highly competitive and we often
compete for work not only with large OEMs but also sometimes with our own
customers and suppliers. Many of our large customers may choose not to outsource
production due to, among other things, their own direct labor and overhead
considerations and capacity utilization at their own facilities. This could
result in these customers supplying their own products or services and competing
directly with us for sales of these products or services, all of which could
significantly reduce our revenues.
Our
competitors may have more extensive or more specialized engineering,
manufacturing and marketing capabilities than we do in some areas and we may not
have the technology, cost structure, or available resources to effectively
compete with them. We believe that developing and maintaining a competitive
advantage will require continued investment in product development, engineering,
supply chain management and sales and marketing, and we may not have enough
resources to make the necessary investments to do so.
Further,
our significant customers have in the past used, and may attempt in the future,
to use their position to negotiate a reduction in price of a particular product
regardless of the terms of an existing contract.
For these
reasons, we may not be able to compete successfully in this market or against
such competitors; however, our strategies for our aerospace segments should
allow us to continue to effectively compete for key contracts and
customers.
We could be negatively
impacted by the loss of key suppliers, lack of product availability, or changes
in supplier programs that could adversely affect our operating
results.
Our
business depends on maintaining sufficient supply of various products to meet
our customers’ demands. We have several long-standing relationships with key
suppliers but these relationships are non-exclusive and could be terminated by
either party. If we lost a key supplier, or were unable to obtain the same
levels of deliveries from these suppliers and were unable to supplement those
purchases with products obtained from other suppliers, it could have a material
adverse effect on our business. Supply interruptions could arise from shortages
of raw materials, labor disputes or weather conditions affecting suppliers’
production, transportation disruptions, or other reasons beyond our control.
Even if we continue with our current supplier relationships, high demand for
certain products may result in us being unable to meet our customers’ demands,
which could put us at a competitive disadvantage. Additionally our key suppliers
could also increase pricing of their products, which would negatively affect our
operating results if we were not able to pass these price increases through to
our customers. We engage in strategic inventory purchases during the year,
negotiate long-term vendor supply agreements and monitor our inventory levels to
ensure that we have the appropriate inventory on hand to meet our customers’
requirements.
The price volatility and
availability of raw materials could increase our operating costs and adversely
impact our profits.
We rely
on foreign and domestic suppliers and commodity markets to secure raw materials
used in many of the products we manufacture within the combined Aerospace
Segments or sell within our Industrial Distribution segment. This exposes us to
volatility in the price and availability of raw materials. In some instances, we
depend upon a single source of supply. A disruption in deliveries from our
suppliers, price increases, or decreased availability of raw materials or
commodities could adversely affect our ability to meet our commitments to
customers. This could also have an impact on our operating costs as well as our
operating income. We base our supply management process on an appropriate
balancing of the foreseeable risks and the costs of alternative practices. We
also try to pass on increases in our costs but our ability to do so depends on
contract terms and market conditions. Raising our prices could result in
decreased sales volume, which could significantly reduce our profitability. All
of these factors may have an adverse effect on our results of operations or
financial condition. To mitigate these risks, we negotiate long-term agreements
for materials, when possible.
Estimates of future costs
for long-term contracts impact our current operating results and
profits.
For
long-term contracts, we generally recognize sales and gross margin based on the
percentage-of-completion method of accounting. This method allows for revenue
recognition as our work progresses on a contract.
The
percentage-of-completion method requires that we estimate future revenues and
costs over the life of a contract. Revenues are estimated based upon the
original contract price, with consideration being given to exercised contract
options, change orders and, in some cases, projected customer requirements.
Contract costs may be incurred over a period of several years, and the
estimation of these costs requires significant judgment based upon the acquired
knowledge and experience of program managers, engineers, and financial
professionals. Estimated costs are based primarily on anticipated purchase
contract terms, historical performance trends, business base and other economic
projections. The complexity of certain programs as well as technical risks and
the availability of materials and labor resources could affect the company’s
ability to estimate future contract costs. Additional factors that could affect
recognition of revenue under the percentage-of-completion method
include:
|
·
|
Accounting
for start-up costs;
|
|
·
|
The
effect of nonrecurring work;
|
|
·
|
Delayed
contract start-up;
|
|
·
|
Transition
of work from the customer or other
vendors;
|
|
·
|
Claims
or unapproved change orders;
|
|
·
|
Product
warranty issues;
|
|
·
|
Delayed
completion of certain programs for which inventory has been built up;
and
|
|
·
|
Accrual
of contract losses.
|
Because
of the significance of the judgments and estimation processes, it is likely that
materially different sales and profit amounts could be recorded if we used
different assumptions or if the underlying circumstances were to change. Changes
in underlying assumptions, circumstances or estimates may adversely affect
future financial performance. We perform quarterly reviews of our long-term
contracts to address and lessen the effects of these risks.
We may make acquisitions or
investments in new businesses, products or technologies that involve additional
risks, which could disrupt our business or harm our financial condition or
results of operations.
As part
of our business strategy, we have made, and expect to continue to make,
acquisitions of businesses or investments in companies that offer complementary
products, services and technologies. Such acquisitions or investments involve a
number of risks, including:
|
·
|
Assimilating
operations and products may be unexpectedly
difficult;
|
|
·
|
Management’s
attention may be diverted from other business
concerns;
|
|
·
|
We
may enter markets in which we have limited or no direct
experience;
|
|
·
|
We
may lose key employees of an acquired
business;
|
|
·
|
We
may not realize the value of the acquired assets relative to the price
paid; and
|
|
·
|
Despite
our due diligence efforts, we may not succeed at quality control or other
customer issues.
|
These
factors could have a material adverse effect on our business, financial
condition and operating results. Consideration paid for any future acquisitions
could include our stock or require that we incur additional debt and contingent
liabilities. As a result, future acquisitions could cause dilution of existing
equity interests and earnings per share. Before we enter into any acquisition,
we perform significant due diligence to ensure the potential acquisition fits
with our strategic objectives. In addition, we try to have adequate resources to
transition the newly acquired company efficiently.
Our results of operations
could be adversely affected by impairment of our goodwill or other intangible
assets.
When we
acquire a business, we record goodwill equal to the excess of the amount we pay
for the business, including liabilities assumed, over the fair value of the
tangible and intangible assets of the business we acquire. The Financial
Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other
Intangible Assets”, which provides that goodwill and other intangible assets
that have indefinite useful lives must be tested at least annually for
impairment. SFAS 142 also provides specific guidance for testing goodwill and
other non-amortized intangible assets for impairment. SFAS 142 requires
management to make certain estimates and assumptions when allocating goodwill to
reporting units and determining the fair value of reporting unit net assets and
liabilities, including, among other things, an assessment of market conditions,
projected cash flows, investment rates, cost of capital and growth rates, which
could significantly impact the reported value of goodwill and other intangible
assets. Fair value is generally determined using a combination of the discounted
cash flow, market multiple and market capitalization valuation approaches.
Absent any impairment indicators, we generally perform our impairment tests
annually as of December 31, using initial annual forecast information.
Impairments, if any, are recognized as operating expenses.
If at any
time we determine an impairment has occurred, we are required to reflect the
reduction in value as an expense within operating income, resulting in a
reduction of earnings in the period such impairment is identified and a
corresponding reduction in our net asset value.
During
the second quarter of 2008, our Aerostructures Wichita, Kansas facility
continued to experience production and quality issues, which, along with
circumstances unique to each contract, resulted in the separate termination of
two long-term contracts with Spirit AeroSystems and Shenyang Aircraft
Corporation. These contracts, which represented significant work for
the facility, were both loss contracts. In accordance with SFAS 142, we test
goodwill for potential impairment annually as of December 31 and between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. Due to the
loss of the two major contracts as well as the continuing production and quality
issues, management performed a goodwill impairment analysis for this reporting
unit as of June 27, 2008. Based upon the results of our analysis, we recorded an
impairment charge of $7.8 million and eliminated the Aerostructures goodwill
from our balance sheet as of the end of the second quarter of 2008.
Although
we have made significant progress on the JPF fuze program, we performed a
similar interim analysis, as of June 27, 2008, with respect to the goodwill
recorded in connection with the acquisition of KPP Orlando. This facility has
experienced a variety of design and production issues associated with the JPF
fuze program, which is forecasted to be its principal source of revenues and
earnings in the near term, and that has led to increased inventory levels. Based
upon the results of that analysis and the annual analysis performed during the
fourth quarter of 2008, we have concluded the goodwill recorded for KPP Orlando
has not been impaired. We will continue to monitor this facility’s performance
in the future.
We rely on the experience
and expertise of our skilled employees, and must continue to attract and retain
qualified technical, marketing and managerial personnel in order to
succeed.
Our
future success will depend largely upon our ability to attract and retain highly
skilled technical, managerial and marketing personnel. There is significant
competition for such personnel in the aerospace and industrial distribution
industries. We try to ensure that we offer competitive compensation and benefits
as well as opportunities for continued development. There can be no assurance
that we will continue to be successful in attracting and retaining the personnel
we require to develop new and enhanced products and to continue to grow and
operate profitably. We continue to work to recruit and train new personnel as
well as maintain our existing employee base.
We are subject to litigation
that could adversely affect our operating results.
Our
financial results may be affected by the outcome of legal proceedings and other
contingencies that cannot be predicted. In accordance with generally accepted
accounting principles, if a liability is deemed probable and reasonably
estimable in light of the facts and circumstances known to us at a particular
point in time, we will make an estimate of material loss contingencies and
establish reserves based on our assessment. Subsequent developments in legal
proceedings may affect our assessment. The estimates of a loss contingency
recorded in our financial statements could adversely affect our results of
operations in the period in which a liability would be recognized. This could
also have an adverse impact on our cash flows in the period during which damages
would be paid. As of December 31, 2008, we do not have any loss accrual recorded
with respect to current litigation matters, as we do not believe that we have
met the criteria to establish such a liability.
We have entered into a Deed
of Settlement with the Commonwealth of Australia, which terminates the Australia
SH-2G (A) program with a mutual release of claims.
Our
agreement to accept the return of the aircraft and other inventory is subject to
a variety of risks and uncertainties including but not limited to:
|
·
|
Proper
valuation of the inventory;
|
|
·
|
The
potential absence of a market for the aircraft and spare
parts;
|
|
·
|
Risk
of the inventory becoming obsolete over time resulting in the company
recording a lower of cost or market
adjustment;
|
|
·
|
The
additional costs that may be necessary to store, maintain and track the
inventory; and
|
|
·
|
The
obligation to make payments to the Commonwealth of Australia in the
future, regardless of aircraft
sales.
|
We
believe there is market potential for these aircraft and we have already begun
to actively market them to interested potential customers.
The cost and effort to start
up new programs could negatively impact our current operating results and
profits.
In recent
years, we have been ramping up several new programs as more fully discussed in
Item 7., Management’s Discussion and Analysis of Financial Condition and Results
of Operations, in this Form 10-K. The time required and cost incurred to ramp up
a new program can be significant and includes nonrecurring costs for tooling,
first article testing, finalizing drawings and engineering specifications and
hiring new employees able to perform the technical work required. New programs
can typically involve greater volume of scrap, higher costs due to
inefficiencies, delays in production, and learning curves that are more extended
than anticipated, all of which can impact current period results. We have been
working with our customers and leveraging our years of experience to effectively
ramp up these new programs.
We rely upon development of
national account relationships for growth in our Industrial Distribution
segment.
Over the
past several years, more companies have begun to consolidate their purchases of
industrial products, resulting in their doing business with only a few major
distributors rather than a large number of vendors. Through our national
accounts strategy we have worked hard to develop the relationships necessary to
be one of those major suppliers. Competition relative to these types of
arrangements is significant. If we are not awarded additional national accounts
in the future, or if existing national account agreements are not renewed, our
sales volume could be negatively impacted which may result in lower gross
margins and weaker operating results. Additionally, national accounts typically
require an increased level of customer service as well as investments in the
form of opening of new branches to meet our customers’ needs. The cost and time
associated with these activities could be significant and if the relationship is
not maintained, we could ultimately not make a return on these investments. One
of our key strategies has been to increase our national account presence. Thus
far, we have been successful with our strategy with the addition of several new
large national accounts since late 2006. We will continue to focus on this
endeavor through 2009 and beyond.
Our revenue and quarterly
results may fluctuate, which could adversely affect our stock
price.
We have
experienced, and may in the future experience, significant fluctuations in our
quarterly operating results that may be caused by many factors. These factors
include but are not limited to:
|
·
|
Changes
in demand for our products;
|
|
·
|
Introduction,
enhancement or announcement of products by us or our
competitors;
|
|
·
|
Market
acceptance of our new products;
|
|
·
|
The
growth rates of certain market segments in which we
compete;
|
|
·
|
Size,
timing and shipment terms of significant
orders;
|
|
·
|
Budgeting
cycles of customers;
|
|
·
|
Mix
of distribution channels;
|
|
·
|
Mix
of products and services sold;
|
|
·
|
Mix
of domestic and international
revenues;
|
|
·
|
Fluctuations
in currency exchange rates;
|
|
·
|
Changes
in the level of operating expenses;
|
|
·
|
Changes
in our sales incentive plans;
|
|
·
|
Inventory
obsolescence;
|
|
·
|
Accrual
of contract losses;
|
|
·
|
Fluctuations
in oil and utility costs;
|
|
·
|
Completion
or announcement of acquisitions by us;
and
|
|
·
|
General
economic conditions in regions in which we conduct
business.
|
Most of
our expenses are relatively fixed, including costs of personnel and facilities,
and are not easily reduced. Thus, an unexpected reduction in our revenue, or
failure to achieve the anticipated rate of growth, could have a material adverse
effect on our profitability. If our operating results do not meet the
expectations of investors, our stock price may decline.
Changes in global economic
and political conditions could adversely affect our domestic and foreign
operations and results of operations.
If our
customers’ buying patterns, including decision-making processes, timing of
expected deliveries and timing of new projects, unfavorably change due to
economic or political conditions, there could be an adverse effect on our
business. Other potential risks inherent in our foreign business
include:
|
·
|
Greater
difficulties in accounts receivable
collection;
|
|
·
|
Unexpected
changes in regulatory requirements;
|
|
·
|
Export
restrictions, tariffs and other trade
barriers;
|
|
·
|
Difficulties
in staffing and managing foreign
operations;
|
|
·
|
Seasonal
reductions in business activity during the summer months in Europe and
certain other parts of the world;
|
|
·
|
Economic
instability in emerging markets;
|
|
·
|
Potentially
adverse tax consequences; and
|
|
·
|
Cultural
and legal differences in the conduct of
business.
|
Any one
or more of such factors could have a material adverse effect on our
international operations, and, consequently, on our business, financial
condition and operating results.
FORWARD-LOOKING
STATEMENTS
This
report may contain forward-looking information relating to the company's
business and prospects, including the Aerospace and Industrial Distribution
businesses, operating cash flow, and other matters that involve a number of
uncertainties that may cause actual results to differ materially from
expectations. Those uncertainties include, but are not limited to: 1) the
successful conclusion of competitions for government programs and thereafter
contract negotiations with government authorities, both foreign and domestic; 2)
political conditions in countries where the company does or intends to do
business; 3) standard government contract provisions permitting renegotiation of
terms and termination for the convenience of the government; 4) domestic and
foreign economic and competitive conditions in markets served by the company,
particularly the defense, commercial aviation and industrial production markets;
5) risks associated with successful implementation and ramp up of significant
new programs; 6) management's success in resolving operational issues at the
Aerostructures Wichita facility, including successful negotiation of the
Sikorsky Canadian MH-92 program; 7) successful resale of the
aircraft, equipment and spare parts obtained in connection with the
Australia SH-2G (A) program termination; 8) receipt and
successful execution of production orders for the JPF U.S. government contract,
including the exercise of all contract options, successful negotiation of price
increases with the U.S. government, and receipt of orders from allied
militaries, as all have been assumed in connection with goodwill impairment
evaluations; 9) satisfactory resolution of the company’s litigation with the
U.S. Army procurement agency relating to the FMU-143 program; 10) continued
support of the existing K-MAX helicopter fleet, including sale of existing K-MAX
spare parts inventory; 11) cost growth in connection with environmental
remediation activities at the Bloomfield, Moosup and New Hartford, CT facilities
and our recently acquired Brookhouse facilities; 12) profitable integration of
acquired businesses into the company's operations; 13) changes in supplier sales
or vendor incentive policies; 14) the effects of price increases or decreases;
15) pension plan assumptions and future contributions; 16) future levels of
indebtedness and capital expenditures; 17) continued availability of raw
materials and other commodities in adequate supplies and the effect of increased
costs therefor; 18) the effects of currency exchange rates and foreign
competition on future operations; 19) changes in laws and regulations, taxes,
interest rates, inflation rates, general business conditions and other
factors; 20) future repurchases and/or issuances of common stock; and
21) other risks and uncertainties set forth in the company's annual, quarterly
and current reports, and proxy statements. Any forward-looking information
provided in this report should be considered with these factors in mind. The
company assumes no obligation to update any forward-looking statements contained
in this report.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our
facilities are generally suitable for, and adequate to serve, their intended
uses. At December 31, 2008, our business segments occupied major facilities at
the following principal locations:
Segment
|
|
Location
|
|
Property
Type
|
Aerostructures
|
|
Jacksonville,
Florida; Wichita, Kansas; Darwen, Lancashire, United Kingdom; Hyde,
Greater Manchester, United Kingdom
|
|
Manufacturing
& Office
|
|
|
|
|
|
Precision
Products
|
|
Middletown,
Connecticut; Orlando, Florida; Tuscon, Arizona
|
|
Manufacturing
& Office
|
|
|
|
|
|
Helicopters
|
|
Bloomfield,
Connecticut
|
|
Manufacturing,
Office & Service Center
|
|
|
|
|
|
Specialty
Bearings
|
|
Bloomfield,
Connecticut; Dachsbach, Germany
|
|
Manufacturing
& Office
|
|
|
|
|
|
Industrial
Distribution (1)
|
|
Windsor,
Connecticut; Ontario, California; Albany, New York; Savannah, Georgia;
Salt Lake City, Utah; Louisville, Kentucky; Gurabo, Puerto Rico; Mexico
City, Mexico; British Columbia, Canada
|
|
Distribution
Centers & Office
|
|
|
|
|
|
Corporate
|
|
Bloomfield,
Connecticut
|
|
Office
|
Square
Feet
|
|
Total
|
|
Aerostructures
segment
|
|
|
622,105 |
|
Precision
Products segment
|
|
|
331,079 |
|
Helicopters
segment
|
|
|
425,933 |
|
Specialty
Bearings segment
|
|
|
201,481 |
|
Subtotal
Aerospace Segments
|
|
|
1,580,598 |
|
Industrial
Distribution segment
|
|
|
1,660,166 |
|
Corporate
(2, 3)
|
|
|
619,556 |
|
Total
|
|
|
3,860,320 |
|
|
(1)
|
Branches
for the Industrial Distribution segment are located across the United
States, Puerto Rico, Canada and
Mexico.
|
|
(2)
|
We
occupy a 40 thousand square foot corporate headquarters building in
Bloomfield, Connecticut and own another 76 thousand square foot mixed use
building that is currently leased to Fender in connection with their
acquisition of the Music segment on December 31, 2007. The maximum lease
term is 2 years from the date of
acquisition.
|
|
(3)
|
Approximately
500 thousand square feet of space included in the corporate square footage
is attributable to a facility located in Moosup, Connecticut, that was
closed in 2003 and is being held for
disposition.
|
ITEM
3. LEGAL
PROCEEDINGS
From time
to time, the company is subject to various claims and suits arising out of the
ordinary course of business, including commercial, employment and environmental
matters. We do not expect that the resolution of these matters would have a
material adverse effect on our consolidated financial position. Although not
material, certain legal proceedings that relate to specific segments of our
company are discussed in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, and Note 18, Commitments
and Contingencies, of the Notes to Consolidated Financial Statements, included
in Item 8, Financial Statements and Supplementary Data, of this Annual Report on
Form 10-K. Other legal proceedings or enforcement actions relating to
environmental matters, if any, are discussed in the section of Item 1 entitled
Compliance with Environmental Protection Laws.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2008.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
MARKET,
DIVIDEND AND SHAREHOLDER INFORMATION
Our
Common Stock is traded on the NASDAQ Global Market under the symbol
"KAMN”. As of January 30, 2009, there were 4,106 registered holders
of our Common Stock. Holders of the company’s Common Stock are eligible to
participate in the Mellon Investor Services Program administered by Mellon Bank,
N.A. The program offers a variety of services including dividend reinvestment. A
booklet describing the program may be obtained by contacting Mellon at (800)
227-0291 or via the web at www.melloninvestor.com.
The
following table sets forth the high, low and closing sale prices per share of
the Company’s Common Stock on the NASDAQ Global Market and the dividends
declared for the periods indicated:
|
|
NASDAQ Market Quotations
(1)
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Close
|
|
|
Dividend
Declared
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$ |
38.56 |
|
|
$ |
22.08 |
|
|
$ |
28.55 |
|
|
$ |
0.140 |
|
Second
|
|
|
30.12 |
|
|
|
22.75 |
|
|
|
22.87 |
|
|
|
0.140 |
|
Third
|
|
|
33.88 |
|
|
|
21.15 |
|
|
|
29.96 |
|
|
|
0.140 |
|
Fourth
|
|
|
29.95 |
|
|
|
16.48 |
|
|
|
18.13 |
|
|
|
0.140 |
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$ |
24.41 |
|
|
$ |
21.38 |
|
|
$ |
23.31 |
|
|
$ |
0.125 |
|
Second
|
|
|
32.59 |
|
|
|
22.89 |
|
|
|
31.19 |
|
|
|
0.125 |
|
Third
|
|
|
37.64 |
|
|
|
29.54 |
|
|
|
34.56 |
|
|
|
0.140 |
|
Fourth
|
|
|
39.31 |
|
|
|
30.08 |
|
|
|
36.81 |
|
|
|
0.140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
NASDAQ
market quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual
transactions.
|
ISSUER
PURCHASES OF EQUITY SECURITIES
In
November 2000, our board of directors approved a replenishment of the company's
stock repurchase program providing for repurchase of an aggregate of 1.4 million
shares of Common Stock for use in the administration of our stock plans and for
general corporate purposes. The following table provides information about
purchases of Common Stock by the company during the three months ended December
31, 2008:
Period
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of a Publically Announced
Plan
|
|
|
Maximum
Number of Shares That May Yet Be Purchased Under the Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
27, 2008 - October 24, 2008
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
1,130,389 |
|
October
25, 2008 - November 21, 2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,130,389 |
|
November
22, 2008 - December 31, 2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,130,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE
GRAPH
Following
is a comparison of our total shareholder return for the period 2003 – 2008
compared to the S&P 600 Small Cap Index, the Russell 2000 Small Cap Index,
and the NASDAQ Non-Financial Composite Index. The performance graph does not
include a published industry or line-of-business index or peer group of similar
issuers because during the performance period the Company was conducting
operations in diverse lines of business and we do not believe a meaningful
industry index or peer group can be reasonably identified. Accordingly, as
permitted by regulation, the graph includes the S&P 600 Small Cap Index, the
Russell 2000 Small Cap Index, both of which are comprised of issuers with
generally similar market capitalizations to that of the company, and the NASDAQ
Non-Financial index calculated by the exchange on which company shares are
traded.
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
Kaman
|
|
|
100.0 |
|
|
|
102.8 |
|
|
|
164.4 |
|
|
|
191.4 |
|
|
|
320.0 |
|
|
|
161.5 |
|
S&P
600
|
|
|
100.0 |
|
|
|
122.7 |
|
|
|
132.1 |
|
|
|
152.0 |
|
|
|
151.6 |
|
|
|
104.5 |
|
Russell
2000
|
|
|
100.0 |
|
|
|
118.3 |
|
|
|
123.7 |
|
|
|
146.4 |
|
|
|
144.2 |
|
|
|
95.4 |
|
NASDAQ
Non-Financial
|
|
|
100.0 |
|
|
|
107.8 |
|
|
|
110.3 |
|
|
|
120.9 |
|
|
|
137.2 |
|
|
|
62.8 |
|
ITEM
6. SELECTED
FINANCIAL DATA
FIVE-YEAR
SELECTED FINANCIAL DATA
(in
thousands except per share amounts, shareholders and employees)
|
|
|
2008
1 |
|
|
|
2007
2,7 |
|
|
|
2006
2 |
|
|
|
2005
2,3,4,5 |
|
|
|
2004
2,6 |
|
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales from continuing operations
|
|
$ |
1,253,595 |
|
|
$ |
1,086,031 |
|
|
$ |
991,422 |
|
|
$ |
909,878 |
|
|
$ |
834,191 |
|
Net
gain (loss) on sale of product lines and other assets
|
|
|
221 |
|
|
|
2,579 |
|
|
|
(52 |
) |
|
|
(27 |
) |
|
|
199 |
|
Operating
income (loss) from continuing operations
|
|
|
65,266 |
|
|
|
64,728 |
|
|
|
47,822 |
|
|
|
19,741 |
|
|
|
(23,615 |
) |
Earnings
(loss) before income taxes from continuing operations
|
|
|
59,166 |
|
|
|
57,527 |
|
|
|
40,660 |
|
|
|
15,817 |
|
|
|
(28,225 |
) |
Income
tax benefit (expense)
|
|
|
(24,059 |
) |
|
|
(21,036 |
) |
|
|
(16,017 |
) |
|
|
(10,743 |
) |
|
|
9,599 |
|
Net
earnings (loss) from continuing operations
|
|
|
35,107 |
|
|
|
36,491 |
|
|
|
24,643 |
|
|
|
5,074 |
|
|
|
(18,626 |
) |
Net
earnings from discontinued operations, net of taxes
|
|
|
- |
|
|
|
7,890 |
|
|
|
7,143 |
|
|
|
7,954 |
|
|
|
6,804 |
|
Gain
on disposal of discontinued operations, net of taxes
|
|
|
492 |
|
|
|
11,538 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
earnings (loss)
|
|
$ |
35,599 |
|
|
$ |
55,919 |
|
|
$ |
31,786 |
|
|
$ |
13,028 |
|
|
$ |
(11,822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL
POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
486,516 |
|
|
$ |
491,629 |
|
|
$ |
513,231 |
|
|
$ |
496,403 |
|
|
$ |
468,406 |
|
Current
liabilities
|
|
|
178,539 |
|
|
|
182,631 |
|
|
|
199,126 |
|
|
|
223,722 |
|
|
|
226,297 |
|
Working
capital
|
|
|
307,977 |
|
|
|
308,998 |
|
|
|
314,105 |
|
|
|
272,681 |
|
|
|
242,109 |
|
Property,
plant and equipment, net
|
|
|
79,476 |
|
|
|
53,645 |
|
|
|
49,954 |
|
|
|
46,895 |
|
|
|
46,538 |
|
Total
assets
|
|
|
762,613 |
|
|
|
634,863 |
|
|
|
630,413 |
|
|
|
598,497 |
|
|
|
562,331 |
|
Long-term
debt
|
|
|
87,924 |
|
|
|
11,194 |
|
|
|
72,872 |
|
|
|
62,235 |
|
|
|
18,522 |
|
Shareholders’
equity
|
|
|
274,271 |
|
|
|
394,526 |
|
|
|
296,561 |
|
|
|
269,754 |
|
|
|
284,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER
SHARE AMOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share – basic from continuing
operations
|
|
|
1.39 |
|
|
|
1.50 |
|
|
|
1.02 |
|
|
|
0.22 |
|
|
|
(0.82 |
) |
Net
earnings (loss) per share – basic from discontinued
operations
|
|
|
- |
|
|
|
0.32 |
|
|
|
0.30 |
|
|
|
0.35 |
|
|
|
0.30 |
|
Net
earnings (loss) per share – basic from disposal of discontinued
operations
|
|
|
0.02 |
|
|
|
0.47 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
earnings (loss) per share – basic
|
|
$ |
1.41 |
|
|
$ |
2.29 |
|
|
$ |
1.32 |
|
|
$ |
0.57 |
|
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share – diluted from continuing
operations
|
|
|
1.38 |
|
|
|
1.46 |
|
|
|
1.01 |
|
|
|
0.22 |
|
|
|
(0.82 |
) |
Net
earnings (loss) per share – diluted from discontinued
operations
|
|
|
- |
|
|
|
0.31 |
|
|
|
0.29 |
|
|
|
0.35 |
|
|
|
0.30 |
|
Net
earnings (loss) per share – diluted from disposal of discontinued
operations
|
|
|
0.02 |
|
|
|
0.46 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
earnings (loss) per share – diluted
|
|
$ |
1.40 |
|
|
$ |
2.23 |
|
|
$ |
1.30 |
|
|
$ |
0.57 |
|
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared
|
|
|
0.560 |
|
|
|
0.530 |
|
|
|
0.500 |
|
|
|
0.485 |
|
|
|
0.440 |
|
Shareholders’
equity
|
|
|
10.77 |
|
|
|
15.69 |
|
|
|
12.28 |
|
|
|
11.28 |
|
|
|
12.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
price range – High
|
|
|
38.56 |
|
|
|
39.31 |
|
|
|
25.69 |
|
|
|
24.48 |
|
|
|
15.49 |
|
Market
price range – Low
|
|
|
16.48 |
|
|
|
21.38 |
|
|
|
15.52 |
|
|
|
10.95 |
|
|
|
10.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE
SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,228 |
|
|
|
24,375 |
|
|
|
24,036 |
|
|
|
23,038 |
|
|
|
22,700 |
|
Diluted
|
|
|
25,512 |
|
|
|
25,261 |
|
|
|
24,869 |
|
|
|
23,969 |
|
|
|
22,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GENERAL
STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
shareholders
|
|
|
4,107 |
|
|
|
4,186 |
|
|
|
4,468 |
|
|
|
4,779 |
|
|
|
5,192 |
|
Employees
|
|
|
4,294 |
|
|
|
3,618 |
|
|
|
3,906 |
|
|
|
3,712 |
|
|
|
3,581 |
|
(Footnotes
on Following Page)
(Footnotes to Information on
Preceding Page)
Included
within certain annual results are a variety of unusual or significant items that
may affect comparability. The most significant of such items are described below
as well as within Management’s Discussion and Analysis of Financial Condition
and Results of Operations and the Notes to Consolidated Financial
Statements.
|
1.
|
Results
for 2008 include $7,810 in non-cash expense related to the impairment of
the goodwill balance related to our Aerostructures Wichita facility,
$2,527 related to the write-off of tooling costs at our Aerostructures
Wichita facility and $1,587 of expense related to the cancellation of
foreign currency hedge contracts originally assumed in connection with the
acquisition of Brookhouse.
|
|
2.
|
Results
for 2007, 2006, 2005 and 2004 include charges for the Australian SH-2G(A)
helicopter program of $6,413, $9,701, $16,810 and $5,474, respectively.
There were no such charges recorded in
2008.
|
|
3.
|
Results
for 2005 include $8,265 of expense for the company’s stock appreciation
rights, $3,339 for legal and financial advisory fees associated with the
recapitalization and $6,754 recovery of previously written off amounts for
MD Helicopters, Inc. (MDHI).
|
|
4.
|
The
effective tax rate for 2005 was 67.9 percent, which was high principally
due to the non-deductibility of expenses associated with stock
appreciation rights and the company’s
recapitalization.
|
|
5.
|
Average
shares outstanding increased principally due to the completion of the
recapitalization in November 2005.
|
|
6.
|
Results
for 2004 include the following adjustments: $20,083 (including $18,211
negative sales adjustments and $1,872 increase in bad debt reserve)
related to the company’s investment in MDHI programs; $7,086 non-cash
adjustment for the Boeing Harbour Pointe program; $3,507 warranty reserve
for two product warranty related issues and $3,471 non-cash adjustment
related to the EODC/University of Arizona contract
litigation.
|
|
7.
|
The company sold Kaman Music
Corporation on December 31, 2007, which resulted in a pre-tax gain on
disposal of discontinued operations of $18,065, and the Precision Products
segment’s 40mm product line assets, which resulted in a pre-tax gain of
$2,570.
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is intended to provide readers of our consolidated financial
statements with the perspectives of management. The MD&A presents in
narrative form information regarding our financial condition, results of
operations, liquidity and certain other factors that may affect our future
results. This will allow our shareholders to obtain a comprehensive
understanding of our businesses, strategies, current trends and future
prospects. Our MD&A should be read in conjunction with the Consolidated
Financial Statements and related Notes included in this Form 10-K. Unless
otherwise noted, this MD&A relates only to results from continuing
operations. All years presented reflect the classification of Kaman Music’s
financial results as discontinued operations.
MANAGEMENT
OVERVIEW
During
the past year our company has experienced a variety of significant developments,
most notably several changes in senior leadership. Neal J. Keating has completed
his first year of service as our Chief Executive Officer; Gregory L. Steiner was
appointed President of Kaman Aerospace Group and given responsibility for the
management of all aerospace operations; and, most recently, William C. Denninger
assumed the role of Senior Vice President and Chief Financial Officer following
the retirement of Robert M. Garneau. From an organizational perspective, recent
acquisitions (including the acquisition of Brookhouse, the largest in our
history) and the settlement of our SH-2G helicopter contract with the
Royal Australian Navy have had a noticeable impact on our
business.
Since his
arrival, Mr. Steiner has established a senior level administrative
team focused exclusively on our aerospace business. We continue
to explore other opportunities to realign the operations of our
Aerospace business in order to better leverage our investments, enhance our
overall profitability, and better position ourselves to achieve our goal of
sustainable growth in the evolving aerospace market. We believe that by aligning
the Aerospace operations for growth and efficiency and eliminating
organizational redundancies we will be able to improve our market focus and
execute our strategies more successfully.
These
changes have caused us to undertake an evaluation of our organizational and
business structures, taking into consideration various internal and external
developments over the past year. We are also evaluating the nature of the
financial data being reviewed by senior corporate management. This has led us to
consider, among other things, the level of detail and volume of such
information, as well as the advantages to be gained by allocating corporate
costs to each of our reporting segments. These ongoing studies may lead to
actions being taken that could result in a change to our segment reporting
information during 2009.
OVERVIEW
OF BUSINESS
Kaman
Corporation is composed of five business segments:
·
|
Aerostructures,
a subcontract supplier for commercial and military
aircraft;
|
·
|
Precision
Products, a producer of fuzing devices and memory and measuring systems
for a variety of applications;
|
·
|
Helicopters,
a provider of upgrades and support for its existing fleet as well as a
subcontractor for other aerospace
manufacturers;
|
·
|
Specialty
Bearings, a manufacturer of high-performance mechanical products used in
aviation, marine, hydropower, and other industrial applications;
and
|
·
|
Industrial
Distribution, the third largest power transmission/motion control
industrial distributor in North
America.
|
The
following is a summary of key events that occurred in 2008:
·
|
Our
net sales from continuing operations increased 15.4% in 2008 compared to
2007.
|
·
|
Our
net earnings from continuing operations decreased 3.8% in 2008 compared to
2007.
|
·
|
Diluted
earnings per share from continuing operations declined to $1.38 in 2008, a
decrease of 5.5% compared to 2007.
|
·
|
Neal
J. Keating became Chief Executive Officer on January 1, 2008 and Chairman
on March 1, 2008.
|
·
|
Gregory
L. Steiner was appointed President of our Aerospace Group on July 7, 2008.
He has responsibility for all four of our aerospace reporting
segments.
|
·
|
William
C. Denninger was appointed Senior Vice President and Chief Financial
Officer on December 1, 2008.
|
·
|
The
Industrial Distribution and Specialty Bearings segments experienced strong
growth in sales and operating
profit.
|
·
|
Our
Helicopters segment reached an agreement with the Commonwealth of
Australia that terminated the SH-2G(A) Super Seasprite program, with a
mutual release of claims.
|
·
|
On
June 12, 2008, we acquired Brookhouse Holdings, Limited (Brookhouse), a
leader in the design and manufacture of composite aerostructures,
aerospace tooling, and repair and overhaul services based in Darwen,
Lancashire, United Kingdom.
|
·
|
In
2008, our Industrial Distribution segment completed the acquisitions of
Industrial Supply Corp. (ISC) of Richmond, Virginia and Industrial Rubber
& Mechanics, Incorporated (INRUMEC) of Puerto
Rico.
|
·
|
We
signed a contract with Boeing for the Air Force’s A-10 re-wing program,
with a potential sales value of approximately $100
million.
|
·
|
In
August 2008, we completed the purchase of the portion of the Bloomfield
campus that Kaman Aerospace Corporation (of which the Helicopters segment
forms a part) had leased from NAVAIR for many
years.
|
·
|
On
October 29, 2008, we entered into a 4-year Term Loan Credit Agreement with
various banks for $50 million.
|
RESULTS
OF CONTINUING OPERATIONS
Consolidated
Results
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Aerostructures
|
|
$ |
147,641 |
|
|
$ |
102,362 |
|
|
$ |
78,742 |
|
Precision
Products
|
|
|
118,009 |
|
|
|
87,455 |
|
|
|
71,068 |
|
Helicopters
|
|
|
69,435 |
|
|
|
72,031 |
|
|
|
69,914 |
|
Specialty
Bearings
|
|
|
141,540 |
|
|
|
124,009 |
|
|
|
106,278 |
|
Subtotal
Aerospace Segments
|
|
$ |
476,625 |
|
|
$ |
385,857 |
|
|
$ |
326,002 |
|
Industrial
Distribution
|
|
|
776,970 |
|
|
|
700,174 |
|
|
|
665,420 |
|
Total
|
|
$ |
1,253,595 |
|
|
$ |
1,086,031 |
|
|
$ |
991,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
change
|
|
$ |
167,564 |
|
|
$ |
94,609 |
|
|
$ |
81,544 |
|
%
change
|
|
|
15.4 |
% |
|
|
9.5 |
% |
|
|
9.0 |
% |
The
increase in net sales for 2008 compared to 2007 was attributable to organic
growth in all reporting segments except the Helicopters segment, as well as
acquisitions in the Aerostructures and Industrial Distribution segments. In the
aerospace businesses net sales increased due to the acquisition of Brookhouse,
as well as organic sales growth resulting mainly from increased shipments for
the Sikorsky BLACKHAWK helicopter cockpit program and the JPF fuze program. In
the Industrial Distribution segment, sales to several new large national
accounts, as well as the acquisition of ISC and INRUMEC, contributed to the
increase for 2008 compared to 2007.
The
growth in consolidated net sales for 2007 compared to 2006 was primarily due to
increased shipments on several key product lines in our Aerostructures,
Precision Products and Specialty Bearing segments, which were driven by the
strong commercial and military aerospace markets. Our Industrial Distribution
segment experienced sales growth during 2007 as a result of several new national
accounts and continued strength in the Central and West regions.
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Gross
Profit
|
|
$ |
332,137 |
|
|
$ |
300,945 |
|
|
$ |
271,423 |
|
$
change
|
|
|
31,192 |
|
|
|
29,522 |
|
|
|
39,972 |
|
%
change
|
|
|
10.4 |
% |
|
|
10.9 |
% |
|
|
17.3 |
% |
%
of net sales
|
|
|
26.5 |
% |
|
|
27.7 |
% |
|
|
27.4 |
% |
Gross
profit for 2008 increased primarily due to the increased sales volume at the
Industrial Distribution and Specialty Bearings segments and the absence of
Australia SH-2G(A) program charges, which amounted to $6.4 million in 2007.
These positive results were partially offset by a less favorable product mix for
the Precision Products segment and the charges, excluding goodwill, recorded by
the Aerostructures segment, as discussed more fully below. Gross profit as a
percentage of sales (gross margin) decreased due to the aforementioned product
mix changes at our Precision Products segment and the impact of the charges
recorded at the Aerostructures Wichita facility.
The
increase in the consolidated gross profit for 2007 was primarily attributable to
sales growth in the Industrial Distribution and Specialty Bearings segments. In
addition, the accrued contract loss charge related to additional anticipated
cost growth on our Helicopters segment’s Australia program was $3.3 million less
in 2007 as compared to 2006. Gross profit as a percentage of sales (gross
margin) improved slightly due to higher sales volume, increased efficiencies and
a growing business base at all of our aerospace reporting segments.
Selling,
General & Administrative Expenses (S,G&A)
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
S,G&A
|
|
$ |
259,282 |
|
|
$ |
238,796 |
|
|
$ |
223,549 |
|
$
change
|
|
|
20,486 |
|
|
|
15,247 |
|
|
|
11,866 |
|
%
change
|
|
|
8.6 |
% |
|
|
6.8 |
% |
|
|
5.6 |
% |
%
of net sales
|
|
|
20.7 |
% |
|
|
22.0 |
% |
|
|
22.5 |
% |
The
increase in S,G&A for 2008 compared to 2007 is primarily due to the three
acquisitions made during 2008, increases related to higher personnel costs
across most of the reporting segments as well as increased bid and proposal
activity in the aerospace segments. These increases were partially offset by
lower expenses related to fringe benefits, incentive compensation and stock
appreciation rights.
The
increase in S,G&A for 2007 compared to 2006 was primarily driven by our
Industrial Distribution segment and Corporate expenses. Our Industrial
Distribution segment experienced higher operating expenses due to additional
costs incurred for new branch openings and overall increased personnel costs.
Corporate expense increased primarily as a result of an increase in stock
compensation expense and higher group insurance expense. Total selling, general
and administrative expenses as a percent of net sales decreased 0.5 percentage
points in 2007 compared to 2006. This was primarily due to greater sales volume
as well as continued cost control efforts.
Goodwill
Impairment
During
the second quarter of 2008, our Aerostructures Wichita, Kansas facility
continued to experience production and quality issues, which, along with
circumstances unique to each contract, resulted in the separate termination of
two long-term contracts with Spirit AeroSystems and Shenyang Aircraft
Corporation. These contracts, which represented significant work for
the facility, were both loss contracts. In accordance with Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”), we test goodwill for potential impairment annually as of December
31 and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. Due to the loss of the two major contracts as well as the
continuing production and quality issues, management performed a goodwill
impairment analysis for this reporting unit as of June 27, 2008.
Although
we believe we are working through the production issues at our Aerostructures
Wichita facility, its carrying value had increased significantly during the
second quarter of 2008. This, combined with our loss of two long-term contracts
and the quality and production issues at the facility, created a situation in
which the estimated fair value of this reporting unit (the legal entity Plastic
Fabricating Company, Inc.) was less than its carrying value. The resulting total
non-cash goodwill impairment charge was $7.8 million, which represented the
entire goodwill balance for this reporting unit prior to the charge. This charge
is not deductible for tax purposes and represents a discrete item in our second
quarter 2008 effective tax rate.
Operating
Income
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Operating
Income
|
|
$ |
65,266 |
|
|
$ |
64,728 |
|
|
$ |
47,822 |
|
$
change
|
|
|
538 |
|
|
|
16,906 |
|
|
|
28,081 |
|
%
change
|
|
|
0.8 |
% |
|
|
35.4 |
% |
|
|
142.2 |
% |
%
of net sales
|
|
|
5.2 |
% |
|
|
6.0 |
% |
|
|
4.8 |
% |
The
increase in operating income in 2008 compared to 2007 was due to increases in
operating income at our Specialty Bearings, Helicopters and Industrial
Distribution segments and a decrease in Corporate expenses. These changes were
partially offset by lower operating income at our Aerostructures and Precision
Products segments. The increase in operating income at our Specialty
Bearings, Helicopters and Industrial Distribution segments was primarily a
result of program developments and national accounts, as discussed further in
the segment sections below, as well as the absence of $6.4 million in charges
related to the Australia SH-2G(A) program recorded in 2007. Please refer to the
individual segment discussions for details on their operating
income.
The
increase in operating income for 2007 was primarily attributable to stronger
operating results in all of our reporting segments within the aerospace industry
as further discussed in the following sections. Our Industrial Distribution
segment's operating income was lower in 2007 compared to 2006 partially as a
result of a variety of expenses incurred for start-up costs relative to several
new national account contracts.
Loss
on Ineffective Hedge Contracts
In
connection with the acquisition of Brookhouse, we assumed two foreign currency
hedge contracts originally intended to hedge forecasted cash flows on a
significant U.S. dollar denominated contract. During the third quarter of 2008,
we determined these hedges were ineffective, due to a significant shift in the
timing of the forecasted cash flows. Therefore, we cancelled the contracts
during the third quarter, resulting in a loss of $1.6 million being included in
non-operating income in our consolidated statements of operations.
Interest
Expense, Net
Net
interest expense generally consists of interest charged on the revolving credit
facility and other borrowings offset by interest income. Net interest expense
for 2008 was $3.0 million as compared to $6.3 million in 2007. The decrease in
net interest expense was primarily due to the repayment of a significant portion
of our revolving credit line as of December 31, 2007, using the proceeds from
the sale of the Music segment, as well as the redemption of all outstanding
convertible debentures in late 2007. In the second quarter of 2008, we borrowed
against our revolving credit line again to fund working capital requirements and
the Brookhouse acquisition.
Net
interest expense for 2007 remained relatively flat compared to 2006 primarily
due to there having been a similar level of borrowings during 2007 as compared
to 2006. Net interest expense in both years generally consisted of interest
charged on the revolving credit facility and the convertible debentures offset
by interest income.
Effective
Income Tax Rate
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
40.7 |
% |
|
|
36.6 |
% |
|
|
39.4 |
% |
The
effective tax rate represents the combined federal, state and foreign tax
effects attributable to pretax earnings for the year. The increase in
the effective tax rate for 2008 compared to 2007 is due to the non-cash goodwill
impairment charge of $7.8 million recorded in the second quarter of 2008 for our
Aerostructures Wichita facility.
The 2007
effective tax rate was favorably impacted by one-time adjustments resulting from
tax law changes in the U.S., as well as internationally, as compared to
2006.
Other
Matters
The
Connecticut Department of Environmental Protection (“CTDEP”) has given us
conditional approval for reclassification of groundwater in the vicinity of the
Moosup, CT facility consistent with the character of the area. This facility is
currently being held for disposal. We have substantially completed the process
of connecting neighboring properties to public drinking water in accordance with
such approval and in coordination with the CTDEP and local authorities. We
anticipate the water connection project will be completed in early
2009. Site characterization of the environmental condition of the
property began in 2008 and is expected to continue during 2009.
In
connection with the sale of the Music segment in 2007, we assumed responsibility
for meeting certain requirements of the Act that applied to our transfer of the
New Hartford, Connecticut, facility leased by that segment for guitar
manufacturing purposes ("Ovation"). Under the Act, those responsibilities
essentially consist of assessing the site's environmental conditions and
remediating environmental impairments, if any, caused by Ovation's operations
prior to the sale. The site is a multi-tenant industrial park, in which Ovation
and other unrelated entities lease space. The environmental assessment process
began in 2008 and will continue during 2009. The estimate of our portion of the
cost to assess the environmental conditions and remediate this site is $2.2
million, unchanged from previously reported estimates.
In August
2008, we completed the purchase of the portion of the Bloomfield campus that
Kaman Aerospace Corporation (of which the Helicopters segment forms a part) had
leased from NAVAIR for many years. In connection with the purchase, we have
assumed responsibility for environmental remediation at the facility as may be
required under the Connecticut Transfer Act (the “Transfer Act”) and we continue
the effort to define the scope of the remediation that will be required by the
CTDEP. The transaction was recorded by taking the undiscounted remediation
liability of $20,768 and discounting it at a rate of 8% to its present
value. The fair value of the Navy Property asset, which approximates
the discounted present value of the assumed environmental liability of $10,258,
has been included in Property, Plant and Equipment as of December 31, 2008. This
remediation process will take many years to complete.
We have
accrued $2.4 million for environmental compliance at our recently acquired
Brookhouse facilities. We are in the early stages of assessing the work that may
be required, which may result in a change to this accrual.
Combined Aerospace Segment
Results
The
following table presents selected financial data for our combined Aerospace
segments:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
147,641 |
|
|
$ |
102,362 |
|
|
$ |
78,742 |
|
Precision
Products
|
|
|
118,009 |
|
|
|
87,455 |
|
|
|
71,068 |
|
Helicopters
|
|
|
69,435 |
|
|
|
72,031 |
|
|
|
69,914 |
|
Specialty
Bearings
|
|
|
141,540 |
|
|
|
124,009 |
|
|
|
106,278 |
|
Total
Aerospace segments
|
|
$ |
476,625 |
|
|
$ |
385,857 |
|
|
$ |
326,002 |
|
$
change
|
|
|
90,768 |
|
|
|
59,855 |
|
|
|
38,057 |
|
%
change
|
|
|
23.5 |
% |
|
|
18.4 |
% |
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
(loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
(5,925 |
) |
|
$ |
13,219 |
|
|
$ |
11,538 |
|
Precision
Products
|
|
|
7,299 |
|
|
|
10,546 |
|
|
|
7,750 |
|
Helicopters
|
|
|
10,066 |
|
|
|
2,631 |
|
|
|
222 |
|
Specialty
Bearings
|
|
|
50,168 |
|
|
|
41,387 |
|
|
|
28,630 |
|
Total
Aerospace segments
|
|
$ |
61,608 |
|
|
$ |
67,783 |
|
|
$ |
48,140 |
|
$
change
|
|
|
(6,175 |
) |
|
|
19,643 |
|
|
|
14,855 |
|
%
change
|
|
|
-9.1 |
% |
|
|
40.8 |
% |
|
|
44.6 |
% |
The
Market
Both the
commercial and military aerospace markets remained strong during most of 2008.
We believe this positive trend will continue for the military aerospace markets
in 2009; however, as a result of the downturn in the global economy, we do not
foresee the commercial aerospace market continuing to perform at its 2008
levels. We believe the effect of the downturn in the commercial aerospace market
will be somewhat mitigated by our existing military work.
Strategies
Kaman’s
strategies for the Aerospace segments are:
·
|
Aerostructures:
Expand our global market position as a supplier of complex, composite and
metallic structures and integrated subsystems for military and
commercial aircraft.
|
·
|
Precision
Products: Become the established leader in bomb and missile fuzes,
specialized memory products, precision measuring devices and
electro-optic sensor systems for military and commercial
applications.
|
·
|
Helicopters:
Leverage systems knowledge and lean manufacturing to take advantage
of emerging assembly/subcontracting and after-market/retrofit
opportunities as helicopter prime
manufacturers focus on system design, integration, and
final assembly.
|
·
|
Specialty
Bearings: Maintain leadership in product technical performance and
application engineering support while staying ahead of the curve in
product technology enhancement, lean manufacturing techniques and lead
time reduction.
|
Aerostructures
Segment
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Net
Sales
|
|
$ |
147,641 |
|
|
$ |
102,362 |
|
|
$ |
78,742 |
|
$
change
|
|
|
45,279 |
|
|
|
23,620 |
|
|
|
23,759 |
|
%
change
|
|
|
44.2 |
% |
|
|
30.0 |
% |
|
|
43.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss) Income
|
|
$ |
(5,925 |
) |
|
$ |
13,219 |
|
|
$ |
11,538 |
|
$
change
|
|
|
(19,144 |
) |
|
|
1,681 |
|
|
|
7,763 |
|
%
change
|
|
|
-144.8 |
% |
|
|
14.6 |
% |
|
|
205.6 |
% |
%
of net sales
|
|
|
-4.0 |
% |
|
|
12.9 |
% |
|
|
14.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
on contract
|
|
$ |
260,771 |
|
|
$ |
130,598 |
|
|
$ |
84,178 |
|
The
growth in net sales for 2008 compared to 2007 was partially attributable to
$32.3 million of sales by Brookhouse, which was acquired in mid-June 2008. The
remainder of the sales growth was due to higher production levels for the
Sikorsky BLACK HAWK helicopter program at our Jacksonville facility, offset
partially by a decrease in sales at the Aerostructures Wichita facility due to
the production and operational issues discussed below. During 2008, the segment
delivered 125 cockpits under the BLACKHAWK helicopter program compared to 86
cockpits delivered in 2007. The segment’s 2008 operating income was
significantly impacted by charges of $13.0 million related to goodwill
impairment and the write-off of inventory and tooling costs at the
Aerostructures Wichita facility.
The
growth in net sales in 2007 compared to 2006 was primarily due to higher
production levels and increased shipments to Sikorsky for the BLACK HAWK
helicopter program. During 2007, we delivered 30 more cockpits than in 2006.
Additional Sikorsky offload work, Boeing 777 shipments and other Boeing
commercial work also contributed to the increase in sales in 2007. Operating
income increased primarily as a result of greater sales volume for the Sikorsky
BLACK HAWK program. These positive operating results were offset partially by
certain adverse adjustments resulting from a rapid increase in manpower,
production inefficiencies and excess inventory experienced at the Aerostructures
Wichita facility during the ramp up of several programs discussed
below.
Major
Programs
The
Sikorsky BLACK HAWK helicopter cockpit program includes the installation of all
wiring harnesses, hydraulic assemblies, control pedals and sticks, seat tracks,
pneumatic lines, and the composite structure that holds the windscreen for
cockpits on most models of the BLACK HAWK helicopter. In June 2008, Sikorsky
placed an order for an additional 238 cockpits bringing total orders placed to
date to 549 cockpits. The total potential value of this program is at least $250
million, with deliveries on current orders continuing through 2010. Through
December 31, 2008, a total of 283 cockpits had been delivered under this
contract.
In mid
July 2008, the company signed a long-term requirements contract with Boeing for
the production of wing control surfaces (inboard and outboard flaps, slats and
deceleron assemblies) for the U.S. Air Force’s A-10 fleet, with initial
deliveries scheduled to begin in early 2010. Full rate production is
expected to begin in 2011 with an average of approximately 47 shipsets per year
through 2015. This multiyear contract has a potential value in excess
of $100 million; however, annual quantities will vary, as they are dependent
upon the orders Boeing receives from the U.S. Air Force.
The
production of structural wing subassemblies for the Boeing C-17 continues to be
important in maintaining a sufficient business base at the Jacksonville facility
and will remain so until work under the A-10 program ramps up in 2010. During
2008, we received an order for an additional 30 shipsets, which will extend
production under this program through 2010. Additionally, in late
2007 we signed a seven-year follow-on contract with Boeing for the production of
fixed wing trailing edge assemblies for the Boeing 777 and 767 aircraft.
Shipments under this program were delayed during the second half of the year,
due to the International Association of Machinists (IAM) strike at the Boeing
Company. Although Boeing was successful in reaching an agreement with
the striking machinists, shipments remained behind schedule during the fourth
quarter of 2008.
At
Aerostructures Wichita, we continue our efforts to implement corrective actions
to resolve personnel, quality and production process issues. These issues arose
in connection with the facility's rapid expansion to accommodate the ramp up for
three contracts awarded in 2006, Spirit AeroSystems and Shenyang Aircraft
Corporation for the Boeing 787 Dreamliner program and Sikorsky Aircraft
Corporation for the Canadian MH-92 helicopter program. During 2008,
Aerostructures Wichita's lack of certification status for a large portion of the
year adversely affected our ability to fully perform our obligations under
certain contracts. These circumstances, combined with other factors affecting
specific programs, resulted in the termination of two of the contracts awarded
in 2006. We received a notice from Spirit AeroSystems in June 2008 seeking a
default termination of its contract. Management has cooperated with Spirit to
achieve the customer’s production objectives while reserving our legal rights
with respect to the
appropriateness
of the contract termination. In addition, in July 2008 the Shenyang
contract was terminated under a mutually satisfactory arrangement that
essentially waives all potential claims other than warranty items, if
any. This arrangement also provides compensation to Aerostructures
Wichita for its tooling, which was transferred directly to
Boeing. Although both of these terminated programs were loss
contracts, they were considered significant to the overall operating results of
Aerostructures Wichita.
In
addition to the loss of the two contracts, operating issues have led to an
increase in inventories due to delays in shipments, higher obsolete inventory,
continued inefficiencies in the production process, excess costs to perform
additional quality procedures, and an insufficient business base to maintain our
overhead structure at Aerostructures Wichita.
Despite
these issues, Aerostructures Wichita is making progress on the tail rotor pylon
program for Sikorsky's Canadian MH-92 helicopter program. Final
assembly for this program is now being performed at the Jacksonville facility.
This program has undergone numerous design changes directed by the customer,
which have caused costs on this program to grow substantially, and they have
reached the point where they exceed the proposed price for the contract. At
December 31, 2008, negotiation of this contract has not been finalized.
Management believes these incremental costs are recoverable from the customer
and that the upcoming contract negotiations will yield an acceptable overall
price.
We
believe Aerostructures Wichita is an important component of our strategy. The
facility, which is in a key location, provides skilled capability in the
composites industry. In addition, this facility has a structure that
should allow us to become increasingly competitive as we work through our
operational issues. During 2008, management responsibility for
Aerostructures Wichita was consolidated with the management team at our
Jacksonville facility in order to share operational knowledge. We hired key
personnel, including the appointment of Gregory L. Steiner as President of our
Aerospace Group. The customer who had put the facility on "probation" in the
first quarter of 2008 subsequently permitted our resumption of production and
shipments in the third quarter; however, that customer continues to require
source inspections until all aspects of the corrective actions it has identified
are satisfactorily completed. We
have invested significant time, resources and capital into this facility and,
although there is still significant work to be done, we believe the right
management team is in place to meet the challenges ahead.
Brookhouse
Acquisition
Brookhouse,
our U.K. based facility, was acquired in the second quarter of 2008. Brookhouse
designs and manufactures composite aerostructures, aerospace tooling, and
performs repair and overhaul services. This acquisition supports our overall
aerospace strategy and it expands our presence on a number of additional
platforms with solid growth prospects, including the Airbus A320 family, Airbus
A330/340, F-35 (Joint Strike Fighter) and Eurofighter. The tooling business adds
significant capability to our portfolio and further diversifies our customer
base, while the after-market services business increases our capabilities in the
repair and overhaul business.
Precision Products
Segment
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Net
Sales
|
|
$ |
118,009 |
|
|
$ |
87,455 |
|
|
$ |
71,068 |
|
$
change
|
|
|
30,554 |
|
|
|
16,387 |
|
|
|
6,999 |
|
%
change
|
|
|
34.9 |
% |
|
|
23.1 |
% |
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$ |
7,299 |
|
|
$ |
10,546 |
|
|
$ |
7,750 |
|
$
change
|
|
|
(3,247 |
) |
|
|
2,796 |
|
|
|
4,649 |
|
%
change
|
|
|
-30.8 |
% |
|
|
36.1 |
% |
|
|
149.9 |
% |
%
of net sales
|
|
|
6.2 |
% |
|
|
12.1 |
% |
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
on contract
|
|
$ |
151,552 |
|
|
$ |
140,872 |
|
|
$ |
169,742 |
|
The
increase in net sales for 2008 compared to 2007 was primarily due to increased
production and shipments of the JPF to the United States Government (“USG”) as
well as higher shipments on several legacy fuze programs. The
decrease in operating income for 2008 compared to 2007 was primarily due to
lower foreign military sales of the JPF fuze under the current option. The 2007
results also benefited from higher gross margins on the JPF facilitization
program, which was essentially complete in early 2008, and sales of 40mm
products, a product line that was sold on December 31, 2007.
The
increase in sales for 2007 as compared to 2006 was primarily due to the higher
volume of JPF program shipments to both U.S. and foreign militaries as well as
greater shipments of 40mm products. The increase in operating income for 2007
was primarily due to the increased shipments to foreign allied militaries for
the JPF program, greater sales on the JPF facilitization program as well as
higher sales volume on several 40mm contracts.
Major
Programs
The JPF
program continues to be one of the segment’s most important programs and
management believes that it has significant potential for growth. The segment
has been able to steadily ramp up production in 2008. The total value of JPF
contracts awarded by the USG from inception of the program through December 31,
2008 is $194.3 million. This value primarily consists of Options 1 through 5
under the original contract and various contract modifications, including a
two-phase facilitization contract modification and additional foreign military
sales facilitated by the USG, as well as a variety of development and
engineering contracts, along with special tooling and test equipment. We expect
we will continue production under the currently awarded options through 2009 and
are currently working with the USG for follow-on orders.
In 2008,
we achieved our desired production levels of more than 6,000 fuzes per quarter
for the final three quarters of the year and were able to ship JPF fuzes to the
USG in the required lot sizes. This consistent production capability will allow
us to meet our future delivery requirements to the USG and increase
opportunities for sales to foreign customers. Our efforts to sell the JPF to
foreign allied militaries are important to the ultimate success of this program
and will allow us to generate further market penetration, increase sales and
improve profitability. We ship to foreign allied militaries under the USG
contract as well as direct commercial sales. Typically, we cannot
sell any fuzes to our foreign customers until we have met our USG requirements.
To date, we have sold smaller lots of fuzes to several foreign allied
militaries. The segment also has a significant amount of JPF fuze inventory that
does not meet the USG’s specifications. Since these fuzes meet the operational
requirements of non-U.S. militaries, we are actively marketing them and have
received a small number of orders. We also continue to work with the
USG to negotiate further price increases, which will lead to improved
profitability on this program. We believe we have made meaningful progress on
this program and we continue to work to ensure its overall success.
During
2008, we continued to make progress on production improvements and enhancements
of the JPF fuze system. The facilitization program has contributed to our
increased production and has been another important element of our strategy to
improve our quality and efficiency on the JPF program. The facilitization
program provided us an opportunity to review production workflow to create
greater efficiencies, qualify a second Kaman site (Middletown) for full
production of JPF fuzes, and create an enhanced fuze design. The enhanced design
is expected to reduce the number of technical issues so a more steady state of
production can be achieved more efficiently. During the first quarter of 2009,
we passed the final tests necessary to begin production of the fuze under the
enhanced design. We are scheduled to begin production of the enhanced design
fuzes at the Middletown facility during the first quarter of 2009 and KPP
Orlando during the second quarter of 2009. We believe the value of
these initiatives will be more fully realized in 2009 and beyond.
Warranty
and Contract-Related Matters
There
continues to be two warranty-related matters that impact the FMU-143 program at
KPP Orlando. The items involved are an impact switch, embedded in certain bomb
fuzes, that was recalled by a supplier and an incorrect part, called a bellows
motor, found to be contained in bomb fuzes manufactured for the U.S. Army
utilizing systems which originated before KPP Orlando was acquired by Kaman. The
U.S. Army Sustainment Command (USASC), the procurement agency that administers
the FMU-143 contract, had authorized warranty rework for the bellows motor
matter in late 2004/early 2005; however, we were not permitted to finish the
rework due to issues raised by the USASC primarily related to administrative
matters and requests for verification of the accuracy of test equipment (which
accuracy was subsequently verified).
In late
2006, the USASC informed us that it was changing its remedy under the contract
from performance of warranty rework to an "equitable adjustment" of $6.9 million
to the contract price. We responded, explaining our view that we had complied
with contract requirements. In June 2007, the USASC affirmed its position but
rescinded its $6.9 million demand (stating that its full costs had not yet been
determined) and gave instructions for disposition of the subject fuzes,
including both the impact switch and bellows motor related items, to a Navy
facility and we complied with that direction. To date, USASC has not made a
demand for any specific amount.
As
reported previously, a separate contract dispute between KPP Orlando and the
USASC relative to the FMU-143 fuze program is now in litigation. USASC has
basically alleged the existence of latent defects in certain fuzes due to
unauthorized rework during production and has sought to revoke their acceptance.
Management believes that the Precision Products segment has performed in
accordance with the contract and it is the government that has materially
breached its terms; as a result, during the fourth quarter of 2007, we cancelled
the contract and in January 2008, we commenced litigation before the Armed
Services Board of Contract Appeals (the "Board") requesting a declaratory
judgment that our cancellation was proper. At about the same time, the USASC
notified us that it was terminating the contract for default, making the
allegations noted above, and we filed a second complaint with the Board
appealing that termination decision. The litigation process
continues.
Helicopters
Segment
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Net
Sales
|
|
$ |
69,435 |
|
|
$ |
72,031 |
|
|
$ |
69,914 |
|
$
change
|
|
|
(2,596 |
) |
|
|
2,117 |
|
|
|
(6,738 |
) |
%
change
|
|
|
-3.6 |
% |
|
|
3.0 |
% |
|
|
-8.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$ |
10,066 |
|
|
$ |
2,631 |
|
|
$ |
222 |
|
$
change
|
|
|
7,435 |
|
|
|
2,409 |
|
|
|
(1,023 |
) |
%
change
|
|
|
282.6 |
% |
|
|
1085.1 |
% |
|
|
-82.2 |
% |
%
of net sales
|
|
|
14.5 |
% |
|
|
3.7 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
on contract
|
|
$ |
45,416 |
|
|
$ |
106,269 |
|
|
$ |
116,028 |
|
Sales for
the Helicopters segment were comprised primarily of the upgrade and maintenance
program for Egypt, subcontract work for Sikorsky and MDHI and SH-2G program
spare parts. The decrease in sales for 2008 compared to 2007 was primarily due
to the termination of the production and service contract related to the
Australian SH-2G(A) Super Seasprite program, as well as work performed for Egypt
in 2007 that was not repeated during 2008 and lower SH-2 program spare parts
sales. These decreases were partially offset by increased sales for Sikorsky and
MDHI. Operating income increased primarily due to the absence of an accrued
contract loss charge for the Australia program in 2008 as well as higher gross
margins on subcontract sales. Australian program charges were $6.4 million in
2007. The decrease in the backlog on contract is a result of the termination of
the SH-2G(A) Super Seasprite program with the Commonwealth of Australia. See
below for further discussion of the termination of this program.
The
higher sales for our Helicopters segment during 2007 as compared to 2006 were a
result of a greater volume of work on the depot level maintenance and upgrade
program for the Egyptian SH-2G(E) aircraft and the Sikorsky BLACK HAWK
helicopter program. The Sikorsky program involves fuselage joining and
installation tasks along with various mechanical subassemblies. The increase in
operating income for 2007 was primarily driven by lower charges on the
Australian program during 2007 as compared to 2006 as well as increased sales
volume. Total charges on the Australian program in 2006 were $9.7
million.
Major
Programs
The company and
the Commonwealth of Australia entered a settlement agreement during the first
quarter of 2008 that terminated the SH-2G(A) Super Seasprite program on mutually
agreed terms. The agreement provided for a transfer of ownership to the company
of the 11 SH-2G(A) Super Seasprite helicopters (along with spare parts and
associated equipment), after which proceeds from the sale of these items would
be shared on a predetermined basis. This transfer of ownership occurred on
February 12, 2009 (the Transfer Date).
In connection
with sharing sale proceeds, we have agreed that total payments of at least $39.5
million (AUS) will be made to the Commonwealth regardless of sales, with at
least $26.7 million (AUS) to be paid by March 2011, and, to the extent
cumulative payments have not yet reached $39.5 million (AUS), additional
payments of $6.4 million (AUS) each in March of 2012 and 2013. During the fourth
quarter of 2008, we entered into forward contracts for the purpose of hedging
these required payments. These contracts cover $36.5 million (AUS) of the $39.5
million (AUS) in required payments and have been accounted for in accordance
with Statement of Financial Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities, as amended by Statement of
Financial Accounting Standards No. 137 and Statement of Financial
Accounting Standards No. 138” (“SFAS 133”). See Note 6,
Derivative Financial Instruments, in the Notes to Consolidated Financial
Statements for further discussion.
To secure
these payments, the company provided the Commonwealth with a $39.5 million (AUS)
unconditional letter of credit on the Transfer Date. This letter of credit will
be reduced as such payments are made. Additionally, under the settlement
agreement, the company forgave payment of approximately $32 million in net
unbilled receivables in exchange for the helicopters, spare parts and equipment,
which will be recorded as inventory on the Transfer Date, at a value
representing the net unbilled receivables and the
guaranteed
payments, described above. Management has determined that the value of this
transferred inventory exceeds the amount of the net unbilled receivables and the
guaranteed payments. We do not currently expect the transfer to have a material
impact on our statement of operations. The termination of the contract, combined
with the return of inventory, will result in our inability to claim look-back
interest from the IRS, previously expected to exceed $6 million pretax.
Additionally, sales relative to the service center, which had been a meaningful
portion of Helicopters segment net sales in recent years, ended at the
conclusion of the support center ramp down period, which occurred during the
fourth quarter of 2008.
In
anticipation of the successful transfer of the helicopters, segment management
has attended trade events, obtained marketing licenses required by the USG and
has begun discussions with many potential foreign government buyers of the
helicopters.
We
continue our work under a program for depot level maintenance and upgrades for
nine SH-2G(E) helicopters delivered to the Egyptian government during the 1990s.
Through December 31, 2008, we are on contract for approximately $50 million of
work related to maintenance and upgrades. This program has a potential total
contract value of approximately $92 million. The segment also continues to
perform subcontract work for Sikorsky involving fuselage joining and
installation tasks and the production of certain mechanical subassemblies and
for MDHI in regard to Rotor Blade System deliveries. These programs have been
important elements of our business base over the recent past.
During
2008, we continued to work under a contract from the Army Material Research
Development and Engineering Command for follow-on work associated with
development of the BURRO Unmanned Resupply Helicopter, utilizing the K-MAX
helicopter. In January 2008, the segment and Lockheed, under our previously
disclosed agreement, jointly acquired three K-MAX helicopters from a U.S.
Government General Services Administration auction for an average cost of $4.3
million. Two of the aircraft were purchased by Lockheed and the third is owned
by the company. The aircraft are being used to further develop the BURRO
program.
In August
2008, the company completed its purchase of the portion of the Bloomfield campus
Kaman Aerospace Corporation (of which the Helicopters segment forms a part) had
leased from NAVAIR for many years. In connection with the purchase, we have
assumed responsibility for environmental remediation at the facility as may be
required under the Connecticut Transfer Act (the “Act”) and we continue the
effort to define the scope of the remediation that will be required by the
Connecticut Department of Environmental Protection (“CTDEP”). Management
believes the fair value of the property of $10.3 million approximated the
discounted present value of the cost of the environmental remediation at the
date of purchase. This remediation process will take many years to
complete.
Specialty Bearings
Segment
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Net
Sales
|
|
$ |
141,540 |
|
|
$ |
124,009 |
|
|
$ |
106,278 |
|
$
change
|
|
|
17,531 |
|
|
|
17,731 |
|
|
|
14,037 |
|
%
change
|
|
|
14.1 |
% |
|
|
16.7 |
% |
|
|
15.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$ |
50,168 |
|
|
$ |
41,387 |
|
|
$ |
28,630 |
|
$
change
|
|
|
8,781 |
|
|
|
12,757 |
|
|
|
3,466 |
|
%
change
|
|
|
21.2 |
% |
|
|
44.6 |
% |
|
|
13.8 |
% |
%
of net sales
|
|
|
35.4 |
% |
|
|
33.4 |
% |
|
|
26.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
on contract
|
|
$ |
92,997 |
|
|
$ |
96,790 |
|
|
$ |
80,646 |
|
The
increase in net sales for 2008 as compared to 2007 was a result of higher
shipments in the commercial jet liner market (including the aftermarket),
regional jet market and helicopter market, our KAflex product line and a
favorable foreign currency rate change. The Euro exchange rate in 2008 had a
favorable impact on net sales of approximately 2% compared to
2007. Operating income for 2008 increased primarily due to the
increased sales volume, which allows us to leverage our fixed costs, and
continued lean manufacturing improvements on the production line.
The
increase in net sales during 2007 as compared to 2006 was primarily attributable
to higher shipments to customers principally in the regional jet market and
military aircraft market, as well as, strong growth in the commercial
aftermarket and engine market. To a lesser extent, the increase in sales was
also attributable to the currency translation effect on the Euro, which
positively affected the U.S. dollar value of sales reported by our Germany
facility. Operating income increased primarily due to the increased sales
volume, continued lean improvements on the production line and higher absorption
of S,G&A expenses during 2007 as compared to 2006.
Major
Programs
The
aerospace market continued to be strong through the fourth quarter of 2008
although our results were slightly impacted by the Boeing strike that was
settled in the fourth quarter of 2008. There was a delay of
approximately one month in the 2008 production schedule for Boeing programs due
to the impact of the strike. The current economy creates an uncertain
environment for our customers and many have already been, and will continue to
be, impacted. We anticipate the business jet market will decline in
2009 as well as work for the Commercial Aftermarket as air travel
lessens. Although we are watchful of the current economic situation,
our diverse customer mix provides us some degree of stability in the changing
economy. Our backlog remains strong although we believe many customers are being
more cautious with long lead orders.
We
continue to focus on our strategy to provide a high quality product with shorter
lead times than our competitors, to customers in both the commercial and
military markets. Although there is increasing competition, we believe the
technological enhancements we make to our current products, as well as the
development of new products, will preserve our competitive advantages, increase
our customer base, and lead to further penetration of both domestic and foreign
markets.
Industrial Distribution
Segment
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Net
Sales
|
|
$ |
776,970 |
|
|
$ |
700,174 |
|
|
$ |
665,420 |
|
$
change
|
|
|
76,796 |
|
|
|
34,754 |
|
|
|
43,487 |
|
%
change
|
|
|
11.0 |
% |
|
|
5.2 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
$ |
35,397 |
|
|
$ |
33,038 |
|
|
$ |
35,160 |
|
$
change
|
|
|
2,359 |
|
|
|
(2,122 |
) |
|
|
5,745 |
|
%
change
|
|
|
7.1 |
% |
|
|
-6.0 |
% |
|
|
19.5 |
% |
%
of net sales
|
|
|
4.6 |
% |
|
|
4.7 |
% |
|
|
5.3 |
% |
The
increase in net sales during 2008 as compared to 2007 was due to a balance of
organic growth and the contribution of the two acquisitions during the year,
representing approximately $43.4 million in sales. The remaining increase was
due to higher sales to new national accounts, some of which were ramping up
during 2007. This sales growth was partially offset by the slowing industrial
market and uncertain economy, particularly in the latter half of the fourth
quarter of 2008. During the year, we continued to make investments in
infrastructure and opened three new branches and one new distribution center in
the United States. As previously disclosed, these investments in infrastructure
and personnel have had an impact on our operating income and it will take
several years for the benefits of these investments to be fully realized.
Operating income increased for 2008 compared to 2007 primarily due to the
increase in organic sales volume primarily in the first nine months of the
year. Results for the fourth quarter of 2008 were significantly
impacted by the rapid decline in sales to OEMs and a deterioration in capital
spending by Maintenance, Repair and Overhaul (“MRO”) organizations.
The
increase in net sales during 2007 as compared to 2006 was primarily due to the
ramp up of national account business, as well as continued strength in the
energy and power generation, mining and oil exploration and food processing
industries. During 2007, despite the increase in sales volume and the associated
increase in gross margin, we experienced a decrease in operating income compared
to 2006. The decrease was partially attributable to additional start up costs
for new branch openings and other implementation costs we incurred to support
several new national account contracts awarded in 2007 and late 2006.
Additionally, during 2007 we experienced an increase in overall operating
expenses and higher personnel costs primarily driven by increased headcount
necessary to support our growing business base.
Industrial
Distribution Trends
The
Market
Because
of our diverse customer base, our performance tends to track the U.S. Industrial
Production Index. We are therefore affected, to a large extent, by the overall
business climate for our customer industries and their plant capacity
utilization levels, and the effect of pricing spikes and/or supply interruptions
for basic commodities such as steel and oil. The strength of certain markets
varied considerably by industry type during 2008. While certain markets and
products, such as paper manufacturing and food and beverage processing, remain
steady, other industries have experienced a decline, including metal and
machinery manufacturing, and more recently mining. Our business has been
adversely impacted by the downturn in these industries; however, we are taking
action to mitigate these negative trends through measured and appropriate cost
cutting activities, continued focus on our acquisition strategy and initiatives
aimed at improving both our gross and operating margins.
Our
Strategy
The
primary strategy for the Industrial Distribution segment is to:
1.
|
Expand
our geographic footprint in major industrial markets to enhance our
position in the competition for regional and national
accounts.
|
In order
to increase our geographic footprint, we continue to explore potential
acquisition candidates as well as establish branches in locations that are
consistent with our strategic objectives. By so doing, we will more clearly
establish our business as one that can provide comprehensive services to our
customers who are continually looking to streamline their procurement operations
and consolidate supplier relationships. During 2008, we made two strategic
acquisitions of ISC, in March, and INRUMEC, in October. Both of these
acquisitions will allow us to compete in new markets and offer new products to
our current customers. They also increase our size and therefore our
ability to take advantage of strategic buying and rebates.
2.
|
Broaden
our product offerings to gain additional business from existing customers
and new opportunities from a wider slice of the
market.
|
In recent
years, we have worked to increase market share in several growing markets
including the mining, energy and food and beverage industries. We are also
expanding our presence in the energy and utilities markets, two other less
cyclical industries. We believe we have been successful in this
endeavor, as evidenced by our national account wins, and continue to target
these industries. We also continued to build our government business group to
service our recently awarded 5-year contract with the General Services
Administration Center for Facilities Maintenance and Hardware (“GSA”) which
allows us to supply government agencies with MRO products from our major product
categories.
LIQUIDITY
AND CAPITAL RESOURCES
Discussion and Analysis of
Cash Flows
We assess
the company's liquidity in terms of our ability to generate cash to fund working
capital, investing and financing activities. Significant factors affecting
liquidity include: cash flows generated from or used by operating activities,
capital expenditures, investments in our business segments and their programs,
acquisitions, divestitures, dividends, adequacy of available bank lines of
credit, and factors that might otherwise affect the company's business and
operations generally, as described under the heading “Risk Factors”
and “Forward-Looking Statements” in Item 1A of Part I of this Form
10-K.
We
continue to rely upon bank financing as an important source of support for our
business activities including several recent acquisitions. We believe this, when
combined with cash generated from operating activities, will be sufficient to
support our anticipated liquidity requirements for the foreseeable future. We
anticipate a variety of items will have an impact on our liquidity during the
next 12 months, aside from our normal working capital requirements. These may
include the resolution of any of the matters described in Management’s
Discussion and Analysis, including the FMU-143 contract litigation, the letter
of credit to guarantee payments to the Commonwealth, the cost of environmental
remediation associated with the purchase of the NAVAIR property, the operational
issues at the Aerostructures Wichita facility, and future Supplemental
Employees’ Retirement Plan (“SERP”) payments and required pension contributions.
However, we do not believe any of these matters will lead to a shortage of
capital resources or liquidity that would prevent us from continuing with our
business operations as expected.
We are
watchful of the recent developments in the credit markets and are assessing the
impact the current economic downturn may have on the
company. Although we had recent success in executing a Term Loan
Credit Agreement, the current market may restrict or prohibit us from securing
the additional financing necessary to continue with our growth strategy and
finance working capital requirements. The trends in the market may
have an impact on the company through lower customer spending as well as higher
interest rates on borrowings going forward. Additionally, with the
significant downturn in the current financial markets, our pension plan assets
have significantly decreased, resulting in higher pension plan contributions and
the expectation of a significant increase in pension expense in 2009. See Note
16, Pension Plans, in the Notes to Consolidated Financial Statements, for
further information.
A summary
of our consolidated cash flows from continuing operations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
08
vs. 07
|
|
|
07
vs. 06
|
|
|
|
(in
thousands)
|
|
Total
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
(13,705 |
) |
|
$ |
25,581 |
|
|
$ |
(769 |
) |
|
$ |
(39,286 |
) |
|
$ |
26,350 |
|
Investing
activities
|
|
|
(125,776 |
) |
|
|
95,661 |
|
|
|
(15,307 |
) |
|
|
(221,437 |
) |
|
|
110,968 |
|
Financing
activities
|
|
|
75,055 |
|
|
|
(56,452 |
) |
|
|
12,350 |
|
|
|
131,507 |
|
|
|
(68,802 |
) |
Net cash
used in operating activities increased $39.3 million in 2008 compared to 2007.
This increase in cash used is primarily attributable to increased cash
requirements to fund working capital needs in 2008 as compared to 2007 as
specifically discussed below:
|
·
|
Inventory
levels increased in the Helicopters segment, primarily due to the
acquisition of a K-MAX aircraft, and in the Aerostructures segment,
primarily due to higher amounts of inventory at the Aerostructures Wichita
facility.
|
|
·
|
Inventory
has also increased at our Precision Products segment, although it is
anticipated that the JPF inventory, the largest driver of this increase,
will decrease in 2009 as additional progress payments are billed and as
more fuzes are shipped.
|
|
·
|
Higher
payments of prior year accrued fringe benefits and incentive compensation
during 2008.
|
|
·
|
Total
cash payments for income taxes increased significantly, primarily due to
the taxes paid on the gain resulting from the Music segment
sale.
|
|
·
|
The
company paid out a significant amount of SERP payments in 2008 compared to
2007 primarily attributable to the retirement of the former Chief
Executive Officer and Chief Financial
Officer.
|
Net cash
used in investing activities increased $221.4 million in 2008 compared to 2007.
The increase is primarily attributable to the acquisitions of Brookhouse and ISC
during the second quarter of 2008 and the acquisition of INRUMEC during the
fourth quarter of 2008, the absence of cash inflows from the sale of our former
Music segment in 2007, and the increase in capital expenditures at the Specialty
Bearings, Aerostructures and Industrial Distribution segments.
Net cash
provided by financing activities increased $131.5 million in 2008 compared to
2007. We had net borrowings under the Revolving Credit Agreement of $31.6
million for 2008 as compared to repayments of $45.3 million for 2007. The
significant change was driven by the issuance of long-term debt in 2008 and
proceeds from the exercise of employee stock options, offset partially by the
payment of dividends.
Net cash
provided by operating activities increased in 2007 compared to 2006 due to
changes in accounts receivable and inventory. We generated a significant amount
of cash from accounts receivable in 2007 compared to 2006, primarily due to
considerable cash collections in our Aerostructures and Helicopters segments for
several key programs. This was partially offset by an increase in accounts
receivable at our Precision Products and Industrial Distribution segments,
primarily due to increased sales volume in the latter portion of the year.
Inventory increased significantly, most notably in our Aerostructures segment as
it ramped up for new programs.
Total
investing activity for 2007 included cash proceeds from the divestiture of our
Music segment of $119.5 million as well as cash proceeds from the sale of the
40mm assets of $5.5 million. Cash outflows for investing activities related
primarily to capital expenditures within all the reporting segments. Each
segment’s capital expenditures were considered essential to continue to ramp up
for new programs, have the tools necessary to effectively compete in the
marketplace and have the capacity necessary to meet our customers’ expectations.
Additionally, the Industrial Distribution segment purchased the final 9.2%
interest in Delamac de Mexico S.A. de C.V. in the first quarter of 2007 for $0.5
million.
We used a
portion of the cash proceeds from the Music transaction to pay down all of the
balance owed under our revolving credit agreement, except for our Euro note, at
the end of 2007. Other financing cash outflows related primarily to payment of
the quarterly dividend.
Financing
Arrangements
We
maintain a $200 million revolving credit facility (Revolving Credit Agreement)
expiring August 4, 2010. The facility includes the availability of funding in
foreign currencies as well as an “accordion” feature that provides the company
the opportunity to request, subject to bank approval, an expansion of up to $50
million in the overall size of the facility. A significant amount of this
facility was used to fund the acquisition of Brookhouse in the second quarter of
2008. On October 29, 2008, we executed a Term Loan Credit Agreement (“Term Loan
Agreement) with The Bank of Nova Scotia, Bank of America, N.A., Fifth Third
Bank, and RBS Citizens, N.A. (collectively the “Banks”). The Term
Loan Agreement, which is in addition to our current Revolving Credit Agreement,
is a $50 million facility with a four-year term, including quarterly payments of
principal at the rate of 2.5% with 62.5% of the initial aggregate principal
payable in the final quarter. We may increase the term loan, up to an
aggregate of $50 million with additional commitments from Banks or new
commitments from acceptable financial institutions. Additionally, the
covenants required are the same as those in place under the Revolving Credit
Agreement. In conjunction with this agreement, the current Revolving
Credit Agreement was amended to acknowledge the existence of the Term Loan
Credit Agreement and adopt certain provisions of the Term Loan Credit
Agreement.
Total
average bank borrowings for 2008 were $62.8 million compared to $82.9 million
for 2007. As of December 31, 2008, there was $129.4 million available for
borrowing under the Revolving Credit Agreement, net of letters of credit.
Letters of credit are generally considered borrowings for purposes of the
Revolving Credit Agreement. A total of $27.7 million in letters of credit were
outstanding under the Revolving Credit Agreement at December 31, 2008, $20.4
million of which was related to the Australia SH-2G(A) program. In connection
with the ownership transfer that occurred on February 12, 2009, we cancelled
these letters of credit and issued a new letter of credit for the previously
described guaranteed minimum payment of $39.5 million (AUS).
Facility
fees and interest rates under the Revolving Credit Agreement are determined on
the basis of the company's credit rating from Standard & Poor's. In June
2008, Standard & Poor's re-affirmed the company’s rating as investment grade
BBB- with an outlook of stable. We believe this is a favorable rating for a
company of our size. Under the terms of the Revolving Credit Agreement, if this
rating should decrease, the effect would be to increase facility fees as well as
the interest rates charged. The financial covenants related to the Revolving
Credit Agreement and Term Loan Agreement include a requirement that the company
have i) EBITDA, at least equal to 300 percent of net interest expense, on the
basis of a rolling four quarters and ii) a ratio of consolidated total
indebtedness to total capitalization of not more than 55 percent. The agreement
also incorporates a financial covenant which provides that if the company's
EBITDA to net interest expense ratio is less than 6 to 1, the ratio of i)
accounts receivable and inventory for certain Kaman subsidiaries to ii) the
company's consolidated total indebtedness cannot be less than 1.6 to 1. We
remained in compliance with those financial covenants as of and for the year
ended December 31, 2008.
Other Sources/Uses of
Capital
For 2009,
we will make a contribution of approximately $10.9 million to our tax-qualified
defined benefit pension plan, and approximately $5.7 million in SERP payments.
For the 2008 plan year, we made cash contributions of approximately $7.0 million
to our tax-qualified defined benefit pension plan. Additionally during 2008, we
paid approximately $18.0 million in SERP payments, a large portion of which were
made in February and August 2008 to our former Chief Executive Officer for his
final lump sum SERP payment and in November to our former Chief Financial
Officer. For the 2007 plan year, we made a cash contribution of $10.0 million to
our tax-qualified defined benefit pension plan and $2.4 million in payments for
our SERP.
In
November 2000, the company's board of directors approved a replenishment of the
Company's stock repurchase program, providing for repurchase of an aggregate of
1.4 million common shares for use in administration of the Company's stock plans
and for general corporate purposes. There were no shares repurchased during
2008. At December 31, 2008, approximately 1.1 million shares were authorized for
purchase under this program.
CONTRACTUAL
OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual
Obligations
The
following table summarizes certain of the company’s contractual obligations as
of December 31, 2008:
|
|
|
|
|
|
Payments
due by period (in millions)
|
|
Contractual
Obligations
|
|
Total
|
|
|
Within
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5 years
|
|
Long-term
debt
|
|
$ |
94.1 |
|
|
$ |
6.2 |
|
|
$ |
52.9 |
|
|
$ |
35.0 |
|
|
$ |
- |
|
Interest
payments on debt (A)
|
|
|
15.9 |
|
|
|
3.9 |
|
|
|
8.5 |
|
|
|
3.5 |
|
|
|
- |
|
Operating
leases
|
|
|
41.9 |
|
|
|
16.7 |
|
|
|
18.2 |
|
|
|
5.9 |
|
|
|
1.1 |
|
Purchase
obligations (B)
|
|
|
179.9 |
|
|
|
147.9 |
|
|
|
31.5 |
|
|
|
0.5 |
|
|
|
- |
|
Other
long-term obligations (C)
|
|
|
30.6 |
|
|
|
5.1 |
|
|
|
7.9 |
|
|
|
6.6 |
|
|
|
11.0 |
|
Planned
funding of pension and SERP (D)
|
|
|
33.5 |
|
|
|
15.6 |
|
|
|
4.5 |
|
|
|
7.2 |
|
|
|
6.2 |
|
Total
|
|
$ |
395.9 |
|
|
$ |
195.4 |
|
|
$ |
123.5 |
|
|
$ |
58.7 |
|
|
$ |
18.3 |
|
Note: For
more information refer to Note 12, Credit Arrangements – Short-Term Borrowing
and Long-Term Debt; Note 18, Commitments and Contingencies; Note 17, Other
Long-Term Liabilities; Note 16, Pension Plans, and Note 15, Income Taxes in the
Notes to Consolidated Financial Statements included in Item 8 of this Form
10-K.
(A)
|
Interest
payments on debt within one year are based upon the long-term debt that
existed at December 31, 2008. After one year interest payments are based
upon average estimated long-term debt balances outstanding each
year.
|
(B)
|
This
category includes purchase commitments with suppliers for materials and
supplies as part of the ordinary course of business, consulting
arrangements and support services. Only obligations in the amount of at
least fifty thousand dollars are
included.
|
(C)
|
This
category includes obligations under the company's long-term incentive
plan, deferred compensation plan, a supplemental disability income
arrangement for one former company officer and unrecognized tax benefits
under FIN 48.
|
(D)
|
This
category includes planned funding of the company’s SERP and qualified
defined benefit pension plan. Projected funding for the qualified defined
benefit pension plan beyond one year has not been included as there are
several significant factors, such as the future market value of plan
assets and projected investment return rates, which could cause actual
funding requirements to differ materially from projected
funding.
|
Off-Balance
Sheet Arrangements
The
following table summarizes the company’s off-balance sheet
arrangements:
|
|
|
|
|
|
Payments
due by period (in millions)
|
|
Off-Balance
Sheet Arrangements
|
|
Total
|
|
|
Within
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5 years
|
|
Acquisition
earn-out (1)
|
|
$ |
6.6 |
|
|
$ |
0.4 |
|
|
$ |
1.5 |
|
|
$ |
3.1 |
|
|
$ |
1.6 |
|
Total
|
|
$ |
6.6 |
|
|
$ |
0.4 |
|
|
$ |
1.5 |
|
|
$ |
3.1 |
|
|
$ |
1.6 |
|
|
1)
|
The
obligation to pay earn-out amounts depends upon the attainment of specific
milestones for KPP Orlando, an operation acquired in
2002.
|
The
company currently maintains $27.7 million in outstanding standby letters of
credit under the Revolving Credit Agreement. Of this amount, $20.4 million is
related to the Australia SH-2G(A) Super Seasprite program. In connection with
the transfer of the inventory that occurred on February 12, 2009, we cancelled
these letters of credit and issued a new letter of credit for the previously
described guaranteed minimum payment of $39.5 million (AUS).
CRITICAL
ACCOUNTING ESTIMATES
Our
significant accounting policies are outlined in Note 1 to the Consolidated
Financial Statements. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses and related disclosures based upon
historical experience, current trends and other factors that management believes
to be relevant. We are also responsible for evaluating the propriety of our
estimates, judgments, and accounting methods as new events occur. Actual results
could differ from those estimates. Management periodically reviews the company’s
critical accounting policies, estimates, and judgments with the Audit Committee
of our Board of Directors. The most significant areas currently involving
management judgments and estimates are described below.
Long-Term
Contracts
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
For
long-term aerospace contracts, we generally recognize sales and income
based on the percentage-of-completion method of accounting, which allows
for recognition of revenue as work on a contract progresses. We recognize
sales and profit based upon either (1) the cost-to-cost method, in which
profit is recorded based upon the ratio of costs incurred to estimated
total costs to complete the contract, or (2) the units-of-delivery method,
in which sales are recognized as deliveries are made and cost of sales is
computed on the basis of the estimated ratio of total cost to total
sales.
Management
performs detailed quarterly reviews of all of our long-term contracts.
Based upon these reviews, we record the effects of adjustments in profit
estimates each period. If at any time management determines that in the
case of a particular contract total costs will exceed total contract
revenue, we record a provision for the entire anticipated contract loss at
that time.
|
The
percentage-of-completion method requires that we estimate future revenues
and costs over the life of a contract. Revenues are estimated based upon
the original contract price, with consideration being given to exercised
contract options, change orders and in some cases projected customer
requirements. Contract costs may be incurred over a period of several
years, and the estimation of these costs requires significant judgment
based upon the acquired knowledge and experience of program managers,
engineers, and financial professionals. Estimated costs are based
primarily on anticipated purchase contract terms, historical performance
trends, business base and other economic projections. The complexity of
certain programs as well as technical risks and the future availability of
materials and labor resources could affect the company’s ability to
estimate future contract costs.
|
While
we do not believe there is a reasonable likelihood there will be a
material change in estimates or assumptions used to calculate our
long-term revenues and costs, estimating the percentage of work complete
on certain programs is a complex task. As a result, changes to these
programs could have a significant impact on our results of operations.
These programs include the Sikorsky Canadian MH-92 program, the Sikorsky
BLACK HAWK program, the JPF program, and several other programs including
the Boeing A-10 program. Estimating the ultimate total cost of these
programs has been challenging partially due to the complexity of the
programs, the ramping up of the new programs, the nature of the materials
needed to complete these programs, change orders related to the programs
and the need to manage our customers’ expectations. These programs are an
important element in our continuing strategy to increase operating
efficiencies and profitability as well as broaden our business base.
Management continues to monitor and update program cost estimates
quarterly for these contracts. A significant change in an estimate on one
or more programs could have a material effect on our financial position or
results of operations.
|
Allowance for Doubtful
Accounts
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
The
allowance for doubtful accounts represents management’s best estimate of
probable losses inherent in the receivable balance. These estimates are
based on known past due amounts and historical write-off experience, as
well as trends and factors impacting the credit risk associated with
specific customers. In an effort to identify adverse trends for trade
receivables, we perform ongoing reviews of account balances and the aging
of receivables. Amounts are considered past due when payment has not been
received within a pre-determined time frame based upon the credit terms
extended. For our government and commercial contracts, we evaluate, on an
ongoing basis, the amount of recoverable costs. The recoverability of
costs is evaluated on a contract-by-contract basis based upon historical
trends of payments, program viability and the customer’s
credit-worthiness.
|
Write-offs
are charged against the allowance for doubtful accounts only after we have
exhausted all collection efforts. Actual write-offs and adjustments could
differ from the allowance estimates due to unanticipated changes in the
business environment as well as factors and risks associated with specific
customers.
As
of December 31, 2008 and 2007, our allowance for doubtful accounts was 1.2
percent and 1.1 percent of gross receivables, respectively. Receivables
written off, net of recoveries, in 2008 and 2007 were $0.8 and $0.7
million, respectively.
|
Currently
we do not believe that we have a significant amount of risk relative to
the allowance for doubtful accounts. A 10% increase in the allowance would
have a $0.2 million effect on pre-tax earnings.
|
Inventory
Valuation
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
We
have four types of inventory (a) merchandise for resale, (b) contracts in
process, (c) other work in process, and (d) finished goods. Merchandise
for resale is stated at the lower of the cost of the inventory or its fair
market value. Contracts in process, other work in process and finished
goods are valued at production cost comprised of material, labor and
overhead, including general and administrative expenses on certain
government contracts. Contracts in process, other work in process, and
finished goods are reported at the lower of cost or net realizable value.
We include raw material amounts in the contracts in process and other work
in process balances. Raw material includes certain general stock materials
but primarily relates to purchases that were made in anticipation of
specific programs that have not been started as of the balance sheet date.
The total amount of raw material included in these in process amounts is
less than 10.0% of the total inventory balance for 2008 and
2007.
|
The
process for evaluating inventory obsolescence or market value issues often
requires the company to make subjective judgments and estimates concerning
future sales levels, quantities and prices at which such inventory will be
sold in the normal course of business. We adjust our inventory by the
difference between the estimated market value and the actual cost of our
inventory to arrive at net realizable value. Changes in estimates of
future sales volume may necessitate future write-downs of inventory value.
Based upon a market evaluation performed in 2002 we wrote down our K-MAX
inventory by $46.7 million in that year. The K-MAX inventory balance,
consisting of work in process and finished goods, was $23.6 million as of
December 31, 2008. We believe that it is stated at net realizable value,
although lack of demand for spare parts in the future could result in
additional write-downs of the inventory value. Overall, management
believes that our inventory is appropriately valued and not subject to
further obsolescence in the near term.
|
Inventory
valuation at our Industrial Distribution segment generally requires less
subjective management judgment than the valuation of certain inventory in
the four reporting segments that comprise the Aerospace businesses.
Management reviews the K-MAX inventory balance on an annual basis to
determine whether any additional write-downs are necessary. If such a
write down were to occur, this could have a significant impact on our
operating results. A 10% write down in this inventory at December 31,
2008, would have affected pre-tax earnings by approximately $2.4 million
in 2008.
|
Vendor
Incentives
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
Our
Industrial Distribution segment enters into agreements with certain
vendors providing for inventory purchase rebates that are generally earned
upon achieving specified volume purchasing. The rebate percentages may
increase or decrease based upon the amount of inventory purchased or sold
annually. Each program is analyzed and reviewed each quarter to determine
the appropriateness of the projected annual rebate. Historically,
differences between our estimates and actual rebates subsequently received
have not been material.
We
recognize rebate income relative to specific rebate programs as a
reduction of the cost of inventory based on a systematic and rational
allocation of the cash consideration offered to each of the underlying
transactions that results in progress toward earning the rebate, provided
that the amounts are probable and reasonably estimable.
|
Our
participation in these types of programs is an important element of our
Industrial Distribution segment business. These types of programs are
common in distribution businesses. Although we believe we will continue to
receive vendor incentives, there is no assurance that our vendors will
continue to provide comparable amounts of rebates in the future. Also, we
cannot estimate whether we will continue to utilize the vendor programs at
the same level as in prior periods.
|
If
we were to reduce our participation in vendor incentive programs, this
could have a significant impact on our operating results.
|
Goodwill and Other
Intangible Assets
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
Goodwill
and certain intangible assets that have indefinite lives are evaluated at
least annually for impairment. All intangible assets are also reviewed for
possible impairment whenever changes in conditions indicate that their
carrying value may not be recoverable. The annual evaluation is generally
performed during the fourth quarter, based on the initial annual forecast
information. The identification and measurement of goodwill impairment
involves the estimation of fair value of the reporting unit as compared to
its carrying value.
The
carrying value of goodwill and other intangible assets having indefinite
lives was $111.8 million and $46.2 million as of December 31, 2008 and
2007, respectively. See Note 9, Goodwill and Other Intangible Assets, Net,
in the Notes to Consolidated Financial Statements for discussion of $7.8
million of goodwill impairment recorded during the year ended December 31,
2008. Based upon its annual evaluation, management has determined that
there has been no further impairment of its goodwill
balances.
|
We
determine fair value using widely accepted valuation techniques, including
discounted cash flow. Management’s estimates of fair value are based upon
factors such as projected sales and growth rates, discount rates and other
elements requiring significant judgments. The discount rates we utilize
reflect the risk and uncertainty in the financial markets and specifically
in our internally developed earnings projections. We utilize currently
available information regarding present industry and economic conditions
and future expectations to prepare our estimates and perform impairment
evaluations.
|
We
do not currently believe there is a reasonable likelihood that there will
be a material change in estimates or assumptions used to test for
impairment losses on goodwill and other intangible assets. However, if
actual results are not consistent with our estimates or assumptions or if
current economic conditions persist, we may be exposed to an impairment
charge that could be material.
Based
upon our analysis, a 1.0 percentage point increase in the discount rate
used would not have resulted in any goodwill impairment. Additionally, a
10.0 percent decrease in the fair value of our reporting units also would
not have resulted in any goodwill
impairment.
|
Self-Insured
Retentions Liabilities
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
We
have varying levels of deductibles for losses related to health, workers’
compensation, auto and product/general liability claims. To limit our
exposure to these claims we obtain third party insurance coverage. Our
total liability/deductible for workers’ compensation is limited to $0.4
million per claim and for general liability and auto liability, we are
limited to $0.3 million per claim. The cost of such benefits is recognized
as expense based on claims filed in each reporting period and an estimate
of claims incurred but not reported (“IBNR”) during such period. The
estimates for the cost of the claims are based upon information provided
to us by the claims administrators and are periodically revised to reflect
changes in loss trends. Our IBNR estimate is based upon historical
trends.
|
Liabilities
associated with these claims are estimated in part by considering
historical claims experience, severity factors and other actuarial
assumptions. Projections of future losses are inherently uncertain because
of the random nature of insurance claims occurrences and the possibility
that actuarial assumptions could change. Such self-insurance accruals
likely include claims for which the losses will be settled over a period
of years.
|
The
financial results of the company could be significantly affected if future
claims and assumptions differ from those used in determining these
liabilities. If more claims are made than were estimated or if the costs
of actual claims increases beyond what was anticipated, reserves recorded
may not be sufficient and additional accruals may be required in future
periods. We do not believe there is a reasonable likelihood that there
will be a material change in the estimates or assumptions we use to
calculate our self-insured liabilities. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to losses
or gains that could be material. A 10% change in our self-insurance
reserve would affect our 2008 pre-tax earnings by $0.5
million.
|
Long-Term Incentive
Programs
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
The
company maintains a Stock Incentive Plan, which provides for share-based
payment awards, including non-statutory stock options, restricted stock,
stock appreciation rights, and long-term incentive program (LTIP) awards.
We determine the fair value of our non-qualified stock option awards at
the date of grant using a Black-Scholes model. We determine the fair value
of our restricted share awards at the date of grant using an average of
the high and low market price of our stock.
LTIP
awards provide certain senior executives an opportunity to receive award
payments, generally in cash. For each performance cycle, the company’s
financial results are compared to the Russell 2000 indices for the same
periods based upon the following: (a) average return on total capital, (b)
earnings per share growth and (c) total return to shareholders. No awards
will be payable unless the company’s performance is at least in the 25th
percentile of the designated indices. The maximum award is payable if
performance reaches the 75th
percentile of the designated indices. Awards for performance between the
25th and 75th percentiles are determined by straight-line interpolation.
Awards will be paid out at 100% at the 50th
percentile.
In
order to estimate the liability associated with LTIP awards, management
must make assumptions as to how our current performance compares to
current Russell 2000 data based upon the Russell 2000’s historical
results. This analysis is performed on a quarterly basis. When sufficient
Russell 2000 data for a year is available, which typically will not be
until April or May of the following year, management will adjust the
liability to reflect its best estimate of the total award. Actual results
could differ significantly from management’s estimates. The total
liability as of December 31, 2008 was $4.3 million.
|
Option-pricing
models and generally accepted valuation techniques require management to
make assumptions and to apply judgment to determine the fair value of our
awards. These assumptions and judgments include estimating the future
volatility of our stock price, expected dividend yield, future employee
turnover rates and future employee stock option exercise behaviors.
Changes in these assumptions can materially affect the fair value
estimate.
Our
long-term incentive plan requires management to make assumptions regarding
the likelihood of achieving long-term company goals as well as estimate
the impact the Russell 2000 results may have on our accrual.
|
We
do not currently believe there is a reasonable likelihood that there will
be a material change in the estimates or assumptions we use to determine
stock-based compensation expense. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to changes
in stock-based compensation expense that could be material.
If
actual results are not consistent with the assumptions used, the
stock-based compensation expense reported in our financial statements may
not be representative of the actual economic cost of the stock-based
compensation. A 10% change in our stock-based compensation expense for the
year ended December 31, 2008, would have affected net earnings by
approximately $0.2 million in 2008. Due to the timing of availability of
the Russell data, there is a risk that the amount we have recorded as LTIP
expense could be different from the actual payout. A 10.0 percentage point
increase in the total performance factor earned for our LTIP would result
in a reduction of 2008 pretax earnings of $0.2 million.
|
Pension
Plans
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
We
maintain a qualified defined benefit pension plan for our full-time U.S.
employees (with the exception of certain acquired companies that have not
adopted the plan) as well as a non-qualified Supplemental Employees
Retirement Plan (SERP) for certain key executives. Expenses and
liabilities associated with each of these plans are determined based upon
actuarial valuations. Integral to these actuarial valuations are a variety
of assumptions including expected return on plan assets, discount rate and
rate of increase in compensation levels. We regularly review these
assumptions, which are updated at the measurement date, December 31st,
and disclosed in Note 16, Pension Plans, in the Notes to Consolidated
Financial Statements included in this Form 10-K. In accordance with
generally accepted accounting principles, the impact of differences
between actual results and the assumptions are accumulated and generally
amortized over future periods, which will affect expense recognized in
future periods.
We
believe that two assumptions, the discount rate and the expected rate of
return on plan assets, are important elements of expense and/or liability
measurement.
|
The
discount rate represents the interest rate used to determine the present
value of future cash flows currently expected to be required to settle the
pension obligation. For 2008, management reviewed the Citigroup Pension
Discount Curve and Liability Index to determine the continued
appropriateness of our discount rate assumptions. This index was designed
to provide a market average discount rate to assist plan sponsors in
valuing the liabilities associated with postretirement obligations.
Additionally, we reviewed the change in the general level of interest
rates since the last measurement date noting that overall rates had
decreased since 2007.
Based
upon this information, we used a 6.15 percent discount rate as of December
31, 2008 for the qualified benefit pension plan. This rate takes into
consideration the participants in our pension plan and the anticipated
payment stream as compared to the Citigroup index and rounds the results
to the nearest fifth basis point. For the SERP, we used the same
methodology as the pension plan and derived a discount rate of 6.15
percent in 2008 for the benefit obligation. The qualified defined benefit
pension plan and SERP used discount rates of 6.4 percent and 5.9 percent,
respectively at December 31, 2007 for purposes of calculating the benefit
obligation. The difference in the discount rates is primarily due to the
expected duration of SERP payments, which is shorter than the anticipated
duration of benefit payments to be made to the average participant in the
pension plan.
The
expected long-term rate of return on plan assets represents the average
rate of earnings expected on the funds invested to provide for anticipated
benefit payments. The expected return on assets assumption is developed
based upon several factors. Such factors include current and expected
target asset allocation, our historical experience of returns by asset
class type, a risk premium and an inflation estimate.
|
A
lower discount rate increases the present value of benefit obligations and
increases pension expense. A one percentage point decrease in the assumed
discount rate would have increased pension expense in 2008 by $3.4
million. A one percentage point increase in the assumed discount rate
would have decreased pension expense in 2008 by $1.3 million.
A
lower expected rate of return on pension plan assets would increase
pension expense. The expected return on plan assets was 8.0 percent for
December 31, 2008. A one-percentage point increase/decrease in the assumed
return on pension plan assets assumption would have changed pension
expense in 2008 by approximately $4.3 million.
|
Income
Taxes
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
Tax
laws in certain of our operating jurisdictions require items to be
reported for tax purposes at different times than the items are reflected
in our financial statements. One example of such temporary differences is
depreciation expense. Other differences are permanent, such as expenses
that are never deductible on our tax returns, an example being a charge
related to the impairment of goodwill. Temporary differences create
deferred tax assets and liabilities. Deferred tax assets generally
represent items that can be used as a tax deduction or credit in our tax
returns in future years for which we have already recorded the tax benefit
in our financial statements. Deferred tax liabilities generally represent
tax expense recognized in our financial statements for which payment is
not yet due or the realized tax benefit of expenses we have already
reported in our tax returns, but have not yet recognized as expense in our
financial statements.
As
of December 31, 2008, we had recognized $87.9 million of net deferred tax
assets, net of valuation allowances. The realization of these benefits is
dependent in part on future taxable income. For those foreign countries or
U.S. states where the expiration of tax loss or credit carry forwards or
the projected operating results indicates that realization is not likely,
a valuation allowance is provided.
|
Management
believes that sufficient income will be earned in the future to realize
deferred income tax assets, net of valuation allowances recorded. The
realization of these deferred tax assets can be impacted by changes to tax
laws or statutory tax rates and future taxable income levels.
Our
effective tax rate on earnings from continuing operations was 40.7 percent
for 2008. Our effective tax rate is based on expected or reported income
or loss, statutory tax rates, and tax planning opportunities available to
us in the various jurisdictions in which we operate. Significant judgment
is required in determining our effective tax rate and in evaluating our
tax positions. We establish reserves when, despite our belief that our tax
return positions are valid and defensible, we believe that certain
positions may not prevail if challenged. We adjust these reserves in light
of changing facts and circumstances, such as the progress of a tax audit
or changes in tax legislation. Our effective tax rate includes the impact
of reserve provisions and changes to reserves that we consider
appropriate. This rate is then applied to our quarterly operating results.
In the event that there is a significant unusual or one-time item
recognized in our operating results, the tax attributable to that item
would be separately calculated and recorded at the same time as the
unusual or one-time item.
|
The
Company anticipates that total unrecognized tax benefits will decrease by
$0.8 million due to settlements of tax examinations within the next twelve
months. We file tax returns in numerous U.S. and foreign jurisdictions,
with returns subject to examination for varying periods, but generally
back to and including 2005. It is our policy to record interest and
penalties on unrecognized tax benefits as income taxes. A one
percent change to our tax rate would affect our 2008 earnings by $0.6
million.
|
Derivatives and
Hedging
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
We
use derivatives to manage risks related to foreign exchange and our net
investment in certain foreign subsidiaries. Accounting for derivatives as
hedges requires that, at inception and over the term of the arrangement,
the hedged item and related derivative meet the requirements for hedge
accounting. The rules and interpretations related to derivative accounting
are complex. If a derivative does not meet the complex requirements
established as a prerequisite for hedge accounting, changes in the fair
value of the derivative must be reported in earnings rather than as a
component of other comprehensive income, without regard to the offsetting
changes in the fair value of the hedged item.
|
In
evaluating whether a particular relationship qualifies for hedge
accounting, we first determine whether the relationship meets the strict
criteria to qualify for exemption from ongoing effectiveness testing. For
a relationship that does not meet these criteria, we test effectiveness at
inception and quarterly thereafter by determining whether changes in the
fair value of the derivative offset, within a specified range, changes in
the fair value of the hedged item. This test is conducted each reporting
period. If fair value changes fail this test, we discontinue applying
hedge accounting to that relationship prospectively. Fair values of both
the derivative instrument and the hedged item are calculated using
internal valuation models incorporating market-based
assumptions.
|
At
December 31, 2008, derivative assets were $1.0 million and we had
recorded $0.8 million, net of tax, in other comprehensive income. The
amount recorded to other comprehensive income would have been recorded in
the Consolidated Statement of Operations for the year ended December 31,
2008 had the criteria for hedge accounting not been met. Changes in the
fair value of these instruments will be recorded to other comprehensive
income until the point where either the Company stops utilizing the
derivative instruments as a hedge or the derivative instruments no longer
provide an effective hedge against the impact of foreign currency changes
on the underlying transaction. Further information about our use of
derivatives is provided in Note 6, Derivative Financial Instruments, in
the Notes to Consolidated Financial Statements.
|
Environmental
Costs
|
Methodology
|
Judgment
and Uncertainties
|
Effect
if Actual Results Differ From Assumptions
|
Our
operations are subject to environmental regulation by federal, state and
local authorities in the United States and regulatory authorities with
jurisdiction over our foreign operations. As a result, we have established
and update, as necessary, policies relating to environmental standards of
performance for our operations worldwide.
When
we become aware of an environmental risk, we perform a site study to
ascertain the potential magnitude of contamination and the estimated cost
of remediation. This cost is accrued using a reasonable discount factor
based on the estimated future cost of remediation.
In
2008, the primary accrual for remediation related to our purchase of the
Navy property as more fully discussed in Note 11, Environmental Costs, and
Note 18, Commitments and Contingencies, in the Notes to Consolidated
Financial Statements.
We
continually evaluate the identified environmental issues to ensure the
time to complete the remediation and the total cost of remediation are
consistent with our initial estimate. If there is any change in the cost
and/or timing of remediation, the accrual is adjusted
accordingly.
|
Environmental
costs are accrued when it is probable that a liability has been incurred
and the amount can be reasonably estimated. The most likely cost to be
incurred is accrued based on an evaluation of currently available facts
with respect to each individual site, including existing technology,
current laws and regulations and prior remediation experience. Liabilities
with fixed or readily determinable payment dates are
discounted.
|
At
December 31, 2008, amounts accrued for known environmental
remediation costs were $16.1 million. A 10% change in this accrual could
have impacted pre-tax earnings by $1.6 million. Further information about
our environmental costs is provided in Note 11, Environmental Costs, in
the Notes to Consolidated Financial Statements.
We
believe that expenditures necessary to comply with the present regulations
governing environmental protection will not have a material effect upon
our competitive position, consolidated financial position, results of
operations or cash flows.
|
RECENT
ACCOUNTING STANDARDS
A summary
of recent accounting standards is included in Note 1, Summary of Significant
Accounting Policies, of the Notes to Consolidated Financial Statements, included
in Item 8, Financial Statements and Supplementary Data, of this Form
10-K.
SELECTED
QUARTERLY FINANCIAL DATA
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
2008
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
|
|
Net
Sales
|
|
$ |
285,781 |
|
|
$ |
316,285 |
|
|
$ |
335,133 |
|
|
$ |
316,396 |
|
|
$ |
1,253,595 |
|
Gross
Profit
|
|
$ |
76,591 |
|
|
$ |
86,272 |
|
|
$ |
88,873 |
|
|
$ |
80,401 |
|
|
$ |
332,137 |
|
Net
Earnings from Continuing Operations
|
|
$ |
8,868 |
|
|
$ |
6,090 |
|
|
$ |
13,530 |
|
|
$ |
6,619 |
|
|
$ |
35,107 |
|
Gain
on Disposal of Discontinued Operations, net of tax
|
|
$ |
- |
|
|
$ |
323 |
|
|
$ |
- |
|
|
$ |
169 |
|
|
$ |
492 |
|
Net
Earnings
|
|
$ |
8,868 |
|
|
$ |
6,413 |
|
|
$ |
13,530 |
|
|
$ |
6,788 |
|
|
$ |
35,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per
Share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
from Continuing Operations
|
|
$ |
0.35 |
|
|
$ |
0.24 |
|
|
$ |
0.54 |
|
|
$ |
0.26 |
|
|
$ |
1.39 |
|
Basic
from Disposal of Discontinued Operations
|
|
$ |
- |
|
|
$ |
0.01 |
|
|
$ |
- |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
Basic
|
|
$ |
0.35 |
|
|
$ |
0.25 |
|
|
$ |
0.54 |
|
|
$ |
0.27 |
|
|
$ |
1.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per
Share - Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
from Continuing Operations
|
|
$ |
0.35 |
|
|
$ |
0.24 |
|
|
$ |
0.53 |
|
|
$ |
0.26 |
|
|
$ |
1.38 |
|
Diluted
from Disposal of Discontinued Operations
|
|
$ |
- |
|
|
$ |
0.01 |
|
|
$ |
- |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
Diluted
|
|
$ |
0.35 |
|
|
$ |
0.25 |
|
|
$ |
0.53 |
|
|
$ |
0.27 |
|
|
$ |
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
2007
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
|
|
|
Net
Sales
|
|
$ |
266,530 |
|
|
$ |
272,382 |
|
|
$ |
274,856 |
|
|
$ |
272,263 |
|
|
$ |
1,086,031 |
|
Gross
Profit
|
|
$ |
75,161 |
|
|
$ |
74,584 |
|
|
$ |
76,457 |
|
|
$ |
74,743 |
|
|
$ |
300,945 |
|
Net
Earnings from Continuing Operations
|
|
$ |
9,073 |
|
|
$ |
9,007 |
|
|
$ |
9,437 |
|
|
$ |
8,974 |
|
|
$ |
36,491 |
|
Net
Earnings from Discontinued Operations
|
|
$ |
1,002 |
|
|
$ |
1,052 |
|
|
$ |
2,300 |
|
|
$ |
3,536 |
|
|
$ |
7,890 |
|
Gain
on Disposal of Discontinued Operations, net of tax
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
11,538 |
|
|
$ |
11,538 |
|
Net
Earnings
|
|
$ |
10,075 |
|
|
$ |
10,059 |
|
|
$ |
11,737 |
|
|
$ |
24,048 |
|
|
$ |
55,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per
Share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
from Continuing Operations
|
|
$ |
0.37 |
|
|
$ |
0.37 |
|
|
$ |
0.39 |
|
|
$ |
0.37 |
|
|
$ |
1.50 |
|
Basic
from Discontinued Operations
|
|
$ |
0.05 |
|
|
$ |
0.04 |
|
|
$ |
0.09 |
|
|
$ |
0.14 |
|
|
$ |
0.32 |
|
Basic
from Disposal of Discontinued Operations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.47 |
|
|
$ |
0.47 |
|
Basic
|
|
$ |
0.42 |
|
|
$ |
0.41 |
|
|
$ |
0.48 |
|
|
$ |
0.98 |
|
|
$ |
2.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per
Share - Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
from Continuing Operations
|
|
$ |
0.37 |
|
|
$ |
0.36 |
|
|
$ |
0.38 |
|
|
$ |
0.35 |
|
|
$ |
1.46 |
|
Diluted
from Discontinued Operations
|
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.09 |
|
|
$ |
0.14 |
|
|
$ |
0.31 |
|
Diluted
from Disposal of Discontinued Operations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.46 |
|
|
$ |
0.46 |
|
Diluted
|
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
$ |
0.47 |
|
|
$ |
0.95 |
|
|
$ |
2.23 |
|
Included
within certain annual results are a variety of unusual or significant
adjustments that may affect comparability. The most significant of such
adjustments are described below as well as within Management’s Discussion and
Analysis of Financial Condition and Results of Operations and the Notes to
Consolidated Financial Statements.
One-time
charges within the 2008 quarterly results are as follows: first quarter, $2,527
in charges related to the write-off of tooling costs at our Aerostructures
Wichita facility; second quarter, $7,810 in non-cash expense related to the
impairment of the goodwill balance at our Aerostructures Wichita facility; third
quarter, $1,587 of expense related to the cancellation of foreign currency hedge
contracts originally assumed in connection with the acquisition of
Brookhouse.
Included
within the 2007 quarterly gross profit are charges related to the Australian
SH-2G(A) program as follows: first quarter, $2,466; second quarter,
$2,383; third quarter, $768; fourth quarter, $797.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have
various market risk exposures that arise from our ongoing business operations.
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. Our financial results would be
impacted by changes in interest rates, certain foreign currency exchange rates
and commodity prices.
Foreign
Currencies
We have
manufacturing, sales, and distribution facilities in various locations
throughout the world. As a result, we make investments and conduct business
transactions denominated in various currencies, including the U.S. dollar, the
British Pound, the European Euro, the Canadian dollar, the Mexican peso, and the
Australian dollar. We manage foreign currency exposures that are associated with
committed foreign currency purchases and sales and other assets and liabilities
created in the normal course of business at the subsidiary operations level.
Sometimes we may, through the use of forward contracts, hedge the price risk
associated with committed and forecasted foreign denominated payments and rates.
Historically the use of these forward contracts has been minimal. We do not use
derivatives for speculative or trading purposes.
During
the first quarter of 2008, we entered a settlement agreement with the
Commonwealth of Australia that terminated the SH-2G(A) Super Seasprite program
on mutually agreed terms. The agreement provided for a transfer of ownership of
the 11 SH-2G(A) Super Seasprite helicopters (along with spare parts and
associated equipment), after which proceeds from the sale of these items would
be shared on a predetermined basis. This transfer of ownership occurred on
February 12, 2009 (the Transfer Date).
In
connection with sharing sale proceeds, we have agreed that total payments of at
least $39.5 million (AUS) will be made to the Commonwealth regardless of sales,
with at least $26.7 million (AUS) to be paid by March 2011, and, to the extent
cumulative payments have not yet reached $39.5 million (AUS), additional
payments of $6.4 million (AUS) each in March of 2012 and 2013. During the fourth
quarter of 2008, we entered into forward contracts for the purpose of hedging
these required payments. These contracts cover $36.5 million (AUS) of the $39.5
million (AUS) in required payments and have been accounted for in accordance
with Statement of Financial Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities, as amended by Statement of
Financial Accounting Standards No. 137 and Statement of Financial
Accounting Standards No. 138” (“SFAS 133”). See Note 6,
Derivative Financial Instruments, in the Notes to Consolidated Financial
Statements for further discussion.
Additionally
we maintain a euro note, which is part of our revolving credit facility, which
qualifies and has been designated as an effective hedge against the investment
in our German subsidiary (RWG). The euro note acts as an effective hedge against
currency gains or losses.
Total
annual foreign sales, including foreign export sales, averaged approximately
$158 million over the last three years. More than half of our foreign sales are
to Europe or Canada. Foreign sales represented 14.9 percent of consolidated net
sales in 2008. The increasing strength of the Euro has resulted in additional
pricing pressures for our German subsidiary since most of the products it sells
are priced in Euros. Overall, management believes that any near term changes in
currency exchange rates would not have a material effect on the company’s
financial position.
Interest
Rates
Our
primary exposure to interest rate risk relates to our financial instruments.
These financial instruments primarily consist of our revolving credit facilities
with interest at current market rates. The level of fees and interest charged on
revolving credit commitments and borrowings are based upon borrowing levels,
market interest rates, and the company's credit rating.
Our
interest rate risk is derived primarily from our outstanding variable rate
revolving credit facilities. The principal facilities are a $200.0 million
revolving credit agreement that expires August 4, 2010 and a $50 million term
loan agreement entered into on October 29, 2008 with a four-year term. The other
facilities, established for foreign operations, are comparatively insignificant
in amount. Changes in market interest rates or the company's credit rating would
impact the interest rates on these facilities. As of December 31, 2008, we have
$94.2 million in outstanding indebtedness, inclusive of a euro note, which is
part of our revolving credit facility, for $7.1 million. This euro note is being
used as an effective hedge against our investment in RWG. We will continue to
borrow strategically to limit interest rate risk in the future.
Commodity
Prices
We are
exposed to volatility in the price of raw materials used in certain
manufacturing operations as well as a variety of items procured by our
distribution business. These raw materials include, but are not limited to,
aluminum, titanium, nickel, copper and other specialty metals. We manage our
exposure related to these price changes through strategic procurement and sales
practices.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S
REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
KAMAN
CORPORATION AND SUBSIDIARIES
Management
of Kaman Corporation and subsidiaries is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Securities Exchange Act Rule 13a–15(f). Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America. Internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the company’s assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America, and that the company’s receipts and
expenditures are being made only in accordance with authorizations of the
company’s management and directors; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
consolidated financial statements.
Because
of its inherent limitations, internal control over financial reporting and
procedures may not prevent or detect misstatements. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.
Under the
supervision of and with the participation of our management, including the
undersigned, the company has assessed its internal controls over financial
reporting as of December 31, 2008, based on criteria for effective internal
control over financial reporting described in “Internal Control – Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, the company concluded that the company
maintained effective internal control over financial reporting as of December
31, 2008, based on the specified criteria. During our assessment, management did
not identify any material weaknesses in our internal control over financial
reporting. KPMG LLP, an independent registered accounting firm that also audited
our consolidated financial statements included in this report, audited the
effectiveness of internal control over financial reporting and issued their
report thereon which is included herein.
February
26, 2009
/s/
Neal J. Keating |
|
/s/
William C. Denninger
|
Neal
J. Keating
|
|
William
C. Denninger
|
President
and
|
|
Senior
Vice President
|
Chief
Executive Officer
|
|
and
Chief Financial Officer
|
REPORT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
Kaman
Corporation
We have
audited the accompanying consolidated balance sheets of Kaman Corporation and
its subsidiaries (Kaman Corporation) as of December 31, 2008 and 2007, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2008. We
also have audited Kaman Corporation’s internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Kaman Corporation’s management is responsible for
these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Controls Over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company's internal control over financial
reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Kaman
Corporation acquired Brookhouse Holdings, Limited, Industrial Supply Corp. (ISC)
and Industrial Rubber and Mechanics, Inc. (INRUMEC) during 2008, and management
excluded from its assessment of the effectiveness of Kaman Corporation’s
internal control over financial reporting as of December 31, 2008, Brookhouse’s,
ISC’s, and INRUMEC’s internal control over financial reporting associated with
total assets of $123.1 million and total net sales of $75.8 million included in
the consolidated financial statements of Kaman Corporation as of and for the
year ended December 31, 2008. Our audit of internal control over financial
reporting of Kaman Corporation also excluded an evaluation of the internal
control over financial reporting of Brookhouse, ISC, and INRUMEC.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Kaman Corporation as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, Kaman Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/ KPMG
LLP
Hartford,
Connecticut
February
26, 2009
CONSOLIDATED
BALANCE SHEETS
KAMAN
CORPORATION AND SUBSIDIARIES
(In
thousands, except share and per share amounts)
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
8,161 |
|
|
$ |
73,898 |
|
Accounts
receivable, net
|
|
|
173,847 |
|
|
|
158,435 |
|
Inventories
|
|
|
255,817 |
|
|
|
210,341 |
|
Deferred
income taxes
|
|
|
23,851 |
|
|
|
28,724 |
|
Other
current assets
|
|
|
24,840 |
|
|
|
20,231 |
|
Total
current assets
|
|
|
486,516 |
|
|
|
491,629 |
|
Property,
plant and equipment, net
|
|
|
79,476 |
|
|
|
53,645 |
|
Goodwill
|
|
|
83,594 |
|
|
|
45,993 |
|
Other
intangibles assets, net
|
|
|
28,211 |
|
|
|
195 |
|
Deferred
income taxes
|
|
|
71,926 |
|
|
|
3,594 |
|
Overfunded
pension
|
|
|
- |
|
|
|
30,486 |
|
Other
assets
|
|
|
12,890 |
|
|
|
9,321 |
|
Total
assets
|
|
$ |
762,613 |
|
|
$ |
634,863 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
1,241 |
|
|
$ |
1,680 |
|
Current
portion of long-term debt
|
|
|
5,000 |
|
|
|
- |
|
Accounts
payable – trade
|
|
|
84,059 |
|
|
|
74,236 |
|
Accrued
salaries and wages
|
|
|
21,104 |
|
|
|
25,328 |
|
Accrued
pension costs
|
|
|
5,878 |
|
|
|
14,202 |
|
Accrued
contract losses
|
|
|
9,714 |
|
|
|
9,513 |
|
Advances
on contracts
|
|
|
10,612 |
|
|
|
9,508 |
|
Other
accruals and payables
|
|
|
39,467 |
|
|
|
36,162 |
|
Income
taxes payable
|
|
|
1,464 |
|
|
|
12,002 |
|
Total
current liabilities
|
|
|
178,539 |
|
|
|
182,631 |
|
Long-term
debt, excluding current portion
|
|
|
87,924 |
|
|
|
11,194 |
|
Deferred
income taxes
|
|
|
7,926 |
|
|
|
199 |
|
Underfunded
pension
|
|
|
168,148 |
|
|
|
- |
|
Other
long-term liabilities
|
|
|
45,805 |
|
|
|
46,313 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Capital
stock, $1 par value per share:
|
|
|
|
|
|
|
|
|
Preferred
stock, 200,000 shares authorized; none outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock, 50,000,000 shares authorized, voting, 25,514,525 shares issued in
2008 and 25,181,894 shares issued in 2007
|
|
|
25,515 |
|
|
|
25,182 |
|
Additional
paid-in capital
|
|
|
85,073 |
|
|
|
78,783 |
|
Retained
earnings
|
|
|
283,789 |
|
|
|
262,417 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(119,658 |
) |
|
|
28,555 |
|
Less
43,907 shares and 38,471 shares of common stock in 2008 and 2007,
respectively, held in treasury, at cost
|
|
|
(448 |
) |
|
|
(411 |
) |
Total
shareholders’ equity
|
|
|
274,271 |
|
|
|
394,526 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
762,613 |
|
|
$ |
634,863 |
|
See
accompanying notes to consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
KAMAN
CORPORATION AND SUBSIDIARIES
(In
thousands, except per share amounts)
|
|
For
the Year Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,253,595 |
|
|
$ |
1,086,031 |
|
|
$ |
991,422 |
|
Cost
of sales
|
|
|
921,458 |
|
|
|
785,086 |
|
|
|
719,999 |
|
|
|
|
332,137 |
|
|
|
300,945 |
|
|
|
271,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
259,282 |
|
|
|
238,796 |
|
|
|
223,549 |
|
Goodwill
impairment
|
|
|
7,810 |
|
|
|
- |
|
|
|
- |
|
Net
(gain)/loss on sale of assets
|
|
|
(221 |
) |
|
|
(2,579 |
) |
|
|
52 |
|
Operating
income from continuing operations
|
|
|
65,266 |
|
|
|
64,728 |
|
|
|
47,822 |
|
Interest
expense, net
|
|
|
3,012 |
|
|
|
6,336 |
|
|
|
6,244 |
|
Loss
on ineffective derivative contracts
|
|
|
1,893 |
|
|
|
- |
|
|
|
- |
|
Other
expense, net
|
|
|
1,195 |
|
|
|
865 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before income taxes
|
|
|
59,166 |
|
|
|
57,527 |
|
|
|
40,660 |
|
Income
tax expense
|
|
|
24,059 |
|
|
|
21,036 |
|
|
|
16,017 |
|
Net
earnings from continuing operations
|
|
|
35,107 |
|
|
|
36,491 |
|
|
|
24,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from discontinued operations, net of taxes
|
|
|
- |
|
|
|
7,890 |
|
|
|
7,143 |
|
Gain
on disposal of discontinued operations, net of taxes
|
|
|
492 |
|
|
|
11,538 |
|
|
|
- |
|
Net
earnings from discontinued operations
|
|
|
492 |
|
|
|
19,428 |
|
|
|
7,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
35,599 |
|
|
$ |
55,919 |
|
|
$ |
31,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share from continuing operations
|
|
$ |
1.39 |
|
|
$ |
1.50 |
|
|
$ |
1.02 |
|
Basic
net earnings per share from discontinued operations
|
|
|
- |
|
|
|
0.32 |
|
|
|
0.30 |
|
Basic
net earnings per share from disposal of discontinued
operations
|
|
|
0.02 |
|
|
|
0.47 |
|
|
|
- |
|
Basic
net earnings per share
|
|
$ |
1.41 |
|
|
$ |
2.29 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings per share from continuing operations
|
|
$ |
1.38 |
|
|
$ |
1.46 |
|
|
$ |
1.01 |
|
Diluted
net earnings per share from discontinued operations
|
|
|
- |
|
|
|
0.31 |
|
|
|
0.29 |
|
Diluted
net earnings per share from disposal of discontinued
operations
|
|
|
0.02 |
|
|
|
0.46 |
|
|
|
- |
|
Diluted
net earnings per share
|
|
$ |
1.40 |
|
|
$ |
2.23 |
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,228 |
|
|
|
24,375 |
|
|
|
24,036 |
|
Diluted
|
|
|
25,512 |
|
|
|
25,261 |
|
|
|
24,869 |
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
KAMAN
CORPORATION AND SUBSIDIARIES
(In
thousands, except share amounts)
|
|
Common
Stock
|
|
|
Additional
Paid-In Capital
|
|
|
Retained
Earnings
|
|
|
Restricted
Stock
Awards
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Treasury
Stock
|
|
|
Total
Shareholders'
Equity
|
|
|
|
Shares
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
$
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
24,565,111 |
|
|
$ |
24,565 |
|
|
$ |
58,637 |
|
|
$ |
199,383 |
|
|
$ |
(454 |
) |
|
$ |
(4,145 |
) |
|
|
660,382 |
|
|
$ |
(8,232 |
) |
|
$ |
269,754 |
|
Net
earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
31,786 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
31,786 |
|
Foreign
currency translation adjustments,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax benefit of $840
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,268 |
|
|
|
- |
|
|
|
- |
|
|
|
1,268 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,054 |
|
Dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,032 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,032 |
) |
Stock
awards issued,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax benefit of $381
|
|
|
- |
|
|
|
- |
|
|
|
1,005 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(182,296 |
) |
|
|
2,233 |
|
|
|
3,238 |
|
Share-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
1,300 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(43,375 |
) |
|
|
531 |
|
|
|
1,831 |
|
Conversion
of debentures
|
|
|
- |
|
|
|
- |
|
|
|
143 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,871 |
) |
|
|
158 |
|
|
|
301 |
|
Adoption
of SFAS 123(R)
|
|
|
- |
|
|
|
- |
|
|
|
(454 |
) |
|
|
- |
|
|
|
454 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Adoption
of SFAS 158,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax expense of $255
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
415 |
|
|
|
- |
|
|
|
- |
|
|
|
415 |
|
Balance
at December 31, 2006
|
|
|
24,565,111 |
|
|
|
24,565 |
|
|
|
60,631 |
|
|
|
219,137 |
|
|
|
- |
|
|
|
(2,462 |
) |
|
|
421,840 |
|
|
|
(5,310 |
) |
|
|
296,561 |
|
Net
earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
55,919 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
55,919 |
|
Foreign
currency translation adjustments,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax benefit of $441
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,128 |
|
|
|
- |
|
|
|
- |
|
|
|
3,128 |
|
Pension
plan adjustments,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax expense of $17,102
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
27,889 |
|
|
|
- |
|
|
|
- |
|
|
|
27,889 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,936 |
|
Dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13,054 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13,054 |
) |
Stock
awards issued,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax benefit of $1,211
|
|
|
36,066 |
|
|
|
36 |
|
|
|
1,939 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(252,409 |
) |
|
|
3,281 |
|
|
|
5,256 |
|
Share-based
compensation expense
|
|
|
20,000 |
|
|
|
20 |
|
|
|
2,935 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(63,804 |
) |
|
|
789 |
|
|
|
3,744 |
|
Conversion
of debentures
|
|
|
560,717 |
|
|
|
561 |
|
|
|
13,278 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(67,156 |
) |
|
|
829 |
|
|
|
14,668 |
|
Adoption
of FIN 48
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
415 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
415 |
|
Balance
at December 31, 2007
|
|
|
25,181,894 |
|
|
|
25,182 |
|
|
|
78,783 |
|
|
|
262,417 |
|
|
|
- |
|
|
|
28,555 |
|
|
|
38,471 |
|
|
|
(411 |
) |
|
|
394,526 |
|
Net
earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
35,599 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
35,599 |
|
Foreign
currency translation adjustments,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax expense of $224
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27,782 |
) |
|
|
- |
|
|
|
- |
|
|
|
(27,782 |
) |
Unrealized
gain on derivative instruments,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax expense of $493
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
804 |
|
|
|
- |
|
|
|
- |
|
|
|
804 |
|
Pension
plan adjustments,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax benefit of $74,279
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(121,235 |
) |
|
|
- |
|
|
|
- |
|
|
|
(121,235 |
) |
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,614 |
) |
Dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,227 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,227 |
) |
Stock
awards issued,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax benefit of $349
|
|
|
209,586 |
|
|
|
210 |
|
|
|
3,406 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,616 |
|
Share-based
compensation expense
|
|
|
123,045 |
|
|
|
123 |
|
|
|
2,884 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,436 |
|
|
|
(37 |
) |
|
|
2,970 |
|
Balance
at December 31, 2008
|
|
|
25,514,525 |
|
|
$ |
25,515 |
|
|
$ |
85,073 |
|
|
$ |
283,789 |
|
|
$ |
- |
|
|
$ |
(119,658 |
) |
|
|
43,907 |
|
|
$ |
(448 |
) |
|
$ |
274,271 |
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
KAMAN
CORPORATION AND SUBSIDIARIES
(In
thousands)
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
35,107 |
|
|
$ |
36,491 |
|
|
$ |
24,643 |
|
Adjustments
to reconcile net earnings from continuing operations to
|
|
|
|
|
|
|
|
|
|
|
|
|
net
cash (used in) provided by operating activities of continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
12,842 |
|
|
|
9,893 |
|
|
|
8,754 |
|
Change
in allowance for doubtful accounts
|
|
|
217 |
|
|
|
(3 |
) |
|
|
(511 |
) |
Net
(gain) loss on sale of assets
|
|
|
(221 |
) |
|
|
(2,579 |
) |
|
|
56 |
|
Goodwill
impairment
|
|
|
7,810 |
|
|
|
- |
|
|
|
- |
|
Non-cash
loss on derivative instruments
|
|
|
306 |
|
|
|
- |
|
|
|
- |
|
Stock
compensation expense
|
|
|
2,109 |
|
|
|
3,827 |
|
|
|
2,867 |
|
Excess
tax benefits from share-based compensation arrangements
|
|
|
(349 |
) |
|
|
(1,171 |
) |
|
|
(378 |
) |
Deferred
income taxes
|
|
|
10,108 |
|
|
|
(7,780 |
) |
|
|
(1,243 |
) |
Changes
in assets and liabilities, excluding effects of
acquisitions/divestures:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(3,610 |
) |
|
|
4,255 |
|
|
|
(10,783 |
) |
Inventories
|
|
|
(35,453 |
) |
|
|
(23,765 |
) |
|
|
(14,204 |
) |
Income
tax receivable
|
|
|
(3,450 |
) |
|
|
- |
|
|
|
- |
|
Other
current assets
|
|
|
3,540 |
|
|
|
(3,373 |
) |
|
|
(1,432 |
) |
Accounts
payable
|
|
|
(5,317 |
) |
|
|
931 |
|
|
|
(5,295 |
) |
Accrued
contract losses
|
|
|
206 |
|
|
|
(2,033 |
) |
|
|
(8,429 |
) |
Advances
on contracts
|
|
|
1,103 |
|
|
|
(706 |
) |
|
|
(4,298 |
) |
Accrued
expenses and payables
|
|
|
(11,999 |
) |
|
|
(2,871 |
) |
|
|
(3,128 |
) |
Income
taxes payable
|
|
|
(11,591 |
) |
|
|
4,275 |
|
|
|
2,199 |
|
Pension
liabilities
|
|
|
(12,790 |
) |
|
|
3,312 |
|
|
|
8,560 |
|
Other
long-term liabilities
|
|
|
(2,273 |
) |
|
|
6,878 |
|
|
|
1,853 |
|
Net
cash provided by (used in) operating activities of continuing
operations
|
|
|
(13,705 |
) |
|
|
25,581 |
|
|
|
(769 |
) |
Net
cash provided by (used in) operating activities of discontinued
operations
|
|
|
(14 |
) |
|
|
209 |
|
|
|
7,588 |
|
Net
cash provided by (used in) operating activities
|
|
|
(13,719 |
) |
|
|
25,790 |
|
|
|
6,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of assets
|
|
|
210 |
|
|
|
5,741 |
|
|
|
541 |
|
Net
proceeds from sale of discontinued operations
|
|
|
447 |
|
|
|
112,302 |
|
|
|
- |
|
Expenditures
for property, plant & equipment
|
|
|
(16,000 |
) |
|
|
(14,226 |
) |
|
|
(12,099 |
) |
Acquisition
of businesses including earn out adjustment, net of cash
|
|
|
(106,131 |
) |
|
|
(3,238 |
) |
|
|
(1,752 |
) |
Other,
net
|
|
|
(4,302 |
) |
|
|
(4,918 |
) |
|
|
(1,997 |
) |
Cash
provided by (used in) investing activities of continuing
operations
|
|
|
(125,776 |
) |
|
|
95,661 |
|
|
|
(15,307 |
) |
Cash
provided by (used in) investing activities of discontinued
operations
|
|
|
- |
|
|
|
301 |
|
|
|
(383 |
) |
Cash
provided by (used in) investing activities
|
|
|
(125,776 |
) |
|
|
95,962 |
|
|
|
(15,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings (repayments) under revolving credit agreements
|
|
|
31,636 |
|
|
|
(45,286 |
) |
|
|
11,735 |
|
Proceeds
from issuance of long-term debt
|
|
|
50,000 |
|
|
|
- |
|
|
|
- |
|
Debt
repayment
|
|
|
- |
|
|
|
(1,722 |
) |
|
|
(1,821 |
) |
Net
change in book overdraft
|
|
|
5,003 |
|
|
|
(4,613 |
) |
|
|
4,872 |
|
Proceeds
from exercise of employee stock plans
|
|
|
3,616 |
|
|
|
5,256 |
|
|
|
3,238 |
|
Dividends
paid
|
|
|
(14,181 |
) |
|
|
(12,552 |
) |
|
|
(12,002 |
) |
Debt
issuance costs
|
|
|
(645 |
) |
|
|
(150 |
) |
|
|
- |
|
Windfall
tax benefit
|
|
|
349 |
|
|
|
1,171 |
|
|
|
378 |
|
Other
|
|
|
(723 |
) |
|
|
1,444 |
|
|
|
5,950 |
|
Cash
provided by (used in) financing activities of continuing
operations
|
|
|
75,055 |
|
|
|
(56,452 |
) |
|
|
12,350 |
|
Cash
provided by (used in) financing activities of discontinued
operations
|
|
|
- |
|
|
|
(4,744 |
) |
|
|
(3,954 |
) |
Cash
provided by (used in) financing activities
|
|
|
75,055 |
|
|
|
(61,196 |
) |
|
|
8,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(64,440 |
) |
|
|
60,556 |
|
|
|
(475 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,297 |
) |
|
|
622 |
|
|
|
197 |
|
Cash
and cash equivalents at beginning of period
|
|
|
73,898 |
|
|
|
12,720 |
|
|
|
12,998 |
|
Cash
and cash equivalents at end of period
|
|
$ |
8,161 |
|
|
$ |
73,898 |
|
|
$ |
12,720 |
|
See
accompanying notes to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of the
company and its subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation. Certain amounts in prior year financial
statements and notes thereto have been reclassified to conform to current year
presentation.
Use
of Estimates
The
preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Significant items subject to such estimates and assumptions include the carrying
amount of property, plant and equipment, intangibles and goodwill; valuation
allowances for receivables, inventories and deferred income tax assets;
valuation of share-based compensation and vendor incentives; and assets and
obligations related to employee benefits, estimates of environmental remediation
costs and accounting for long-term contracts. Actual results could differ from
those estimates.
Foreign
Currency Translation
The
company has certain operations outside the United States that prepare financial
statements in currencies other than the U.S. dollar. For these operations,
results of operations and cash flows are translated using the average exchange
rate throughout the period. Assets and liabilities are generally translated at
end of period rates. The gains and losses associated with these translation
adjustments are included as a component of accumulated other comprehensive
income (loss) in shareholders’ equity.
Concentration
of Credit Risk
Financial
instruments that potentially subject the company to concentrations of credit
risk consist principally of trade accounts receivable. The carrying amounts of
these items as well as trade accounts payable and notes payable approximate fair
value due to the short-term maturity of these instruments. The Helicopters
segment had one customer, the Commonwealth of Australia, which accounted for
23.3% and 25.8% of the consolidated accounts receivable balance as of December
31, 2008 and 2007, respectively. During 2008, the Company and the Commonwealth
of Australia terminated the SH-2G(A) Super Seasprite program on mutually agreed
terms. As part of this termination agreement the accounts receivable balance,
totaling $40,572 as of December 31, 2008, will be eliminated in connection with
the transfer of the Australian program inventory and equipment to the Company.
See Note 18, Commitments and Contingencies, for further discussion. No
individual customer accounted for more than 10% of consolidated net sales.
Foreign sales were approximately 14.9%, 14.0% and 13.6% of the company’s net
sales in 2008, 2007 and 2006, respectively, and are concentrated in the United
Kingdom, Canada, Australia, Germany, Mexico, and Asia.
Additional
Cash Flow Information
Non-cash
investing activities in 2008 include $2,360 in costs related to the acquisitions
made by the Company’s Industrial Distribution segment as well as the purchase of
the NAVAIR property for $10,258, which represents the assumption of the
associated environmental remediation costs. See Note 11, Environmental Costs,
for further discussion. There were no non-cash investing activities in
2007.
Non-cash
financing activities in 2008 include an adjustment to other comprehensive income
related to the under funding of the pension and SERP plans. The total adjustment
was $121,235, net of tax of $74,279. Non-cash financing activities in 2007 and
2006 include the conversion of 14,668 debentures in 2007 and 301 debentures in
2006 into 627,873 and 12,781 shares of common stock, respectively. In 2007, we
recorded an adjustment to other comprehensive income related to the overfunding
of our pension plan, offset to some extent by an underfunding of our
SERP. The total adjustment to other comprehensive income in 2007 was
$27,889, net of tax of $17,163. For 2006, we had an underfunding of our pension
and SERP of $415, net of tax of $255. We describe our pension
obligations in more detail in Note 16, Pension Plans.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
Recognition
Sales and
estimated profits under long-term contracts are principally recognized using the
percentage-of-completion method of accounting, generally using as a measurement
basis either a ratio that costs incurred bear to estimated total costs (after
giving effect to estimates of costs to complete based upon most recent
information for each contract) or units-of-delivery. Reviews of contracts are
made routinely throughout their lives and the impact of revisions in profit
estimates are recorded in the accounting period in which the revisions are made.
Any anticipated contract losses are charged to operations when first indicated.
In cases where we have multiple contracts with a single customer, each contract
is generally treated as a separate obligation and accounted for as
such.
Revenue
is recognized on bill and hold arrangements only when the following criteria are
met: risk of ownership has passed to the buyer; a fixed written commitment has
been provided by the buyer; the goods are complete and ready for shipment; the
goods are segregated from inventory; no performance obligations remain; and a
schedule for delivery of the goods has been established.
Other
types of sales contracts are initially reviewed to ascertain if there is a
multiple element arrangement. If such an arrangement exists and there is no
evidence of stand-alone value for each element of the undelivered items,
recognition of sales for the arrangement is deferred until all elements of the
arrangement are delivered and risk of loss and title have passed. For elements
that do have stand-alone value or contracts that are not considered multiple
element arrangements, sales and related costs of sales are recognized when
services have been completed or the product has been shipped or delivered
depending upon when title and risk of loss have passed.
As of
December 31, 2008 and 2007, approximately $1,785 and $518 of pre-contract costs
were included in inventory, which represented 0.7% and 0.2% of total inventory,
respectively. Pre-contract costs incurred for items such as materials or tooling
for anticipated contracts are included in inventory if recovery of such costs is
considered probable. Thereafter, if the Company determines it will not be
awarded an anticipated contract and the associated pre-contract costs cannot be
applied to another program the costs are expensed immediately. Learning or
start-up costs incurred in connection with existing or anticipated follow-on
contracts are charged to the existing contract unless the terms of the contract
permit recovery of these costs over a specific contractual term and provide for
reimbursement if the contract is cancelled.
If it is
probable that a claim with respect to unapproved change orders will result in
additional contract revenue and the amount of such additional revenue can be
reliably estimated, then the additional contract revenue is considered in our
accounting for the program, but only if the contract provides a legal basis for
the claim, the additional costs were unforeseen and not caused by deficiencies
in our performance, the costs are identifiable and reasonable in view of the
work performed and the evidence supporting the claim is objective and
verifiable. If these requirements are met, the claim portion of the program is
accounted for separately to ensure revenue from the claim is recorded only to
the extent claim related costs have been incurred; accordingly, no profit with
respect to such costs is recorded until the change order is formally approved.
If these requirements are not met, the forecast of total contract cost at
completion (which is used to calculate the gross margin rate) for the basic
contract is increased to include all incurred and anticipated claim related
costs.
The
Company includes freight costs charged to customers in net sales and the
correlating expense as a cost of sales.
Cost
of Sales and Selling, General and Administrative Expenses
Cost of
sales includes costs of products and services sold (i.e., purchased product, raw
material, direct labor, engineering labor, outbound freight charges and indirect
and overhead charges). Selling expenses primarily consist of advertising,
promotion, bid and proposal, employee payroll and corresponding benefits and
commissions paid to sales and marketing personnel. General and administrative
expenses primarily consist of employee payroll including executive,
administrative and financial personnel and corresponding benefits, incentive
compensation, independent research and development, consulting expenses,
warehousing costs, depreciation and amortization. The Helicopters, Precision
Products and Aerostructures segments include general and administrative expenses
as an element of program cost and inventory for certain government
contracts.
Certain
inventory related costs, including purchasing costs, receiving costs and
inspection costs, for the Industrial Distribution segment are not included in
the cost of sales line item. For the years ended December 31, 2008, 2007 and
2006, $2,669, $2,877 and $2,746, respectively, of such costs are included in
general and administrative expenses.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash
and Cash Equivalents
Cash and
cash equivalents include cash on hand, demand deposits and short-term cash
investments. These investments are liquid in nature and have original maturities
of three months or less. Book overdraft positions, which occur when total
outstanding issued checks exceed available cash balances at a single financial
institution at the end of each reporting period, are reclassified to accounts
payable within the consolidated balance sheets. At December 31, 2008 and 2007,
the Company had book overdrafts of $13,694 and $8,045, respectively, classified
in accounts payable.
Accounts
Receivable
The
Company has three types of accounts receivable: (a) Trade receivables, which
consist of amounts billed and currently due from customers; (b) U.S. Government
contracts, which consist of (1) amounts billed, and (2) costs and accrued profit
– not billed; and (c) Commercial and other government contracts, which consist
of (1) amounts billed, and (2) costs and accrued profit – not
billed.
The
allowance for doubtful accounts reflects management’s best estimate of probable
losses inherent in the trade accounts receivable and billed contracts balance.
Management determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence.
Inventories
Inventory
of merchandise for resale is stated at cost (using the average costing method)
or market, whichever is lower. Contracts and other work in process and finished
goods are valued at production cost represented by raw material, labor and
overhead. Initial tooling and startup costs may be included, where applicable.
Contracts and other work in process and finished goods are not reported at
amounts in excess of net realizable values. The Company includes raw material
amounts in the contracts in process and other work in process balances. Raw
material includes certain general stock materials but primarily relates to
purchases that were made in anticipation of specific programs for which
production has not been started as of the balance sheet date. The total amount
of raw material included in these work in process amounts is less than 5% of the
total inventory balance.
Property,
Plant and Equipment
Property,
plant and equipment is recorded at cost. Depreciation is computed primarily on a
straight-line basis over the estimated useful lives of the assets. The estimated
useful lives for buildings range from 15 to 30 years and for leasehold
improvements range from 5 to 20 years, whereas machinery, office furniture and
equipment generally have useful lives ranging from 3 to 10 years. At the time of
retirement or disposal, the acquisition cost of the asset and related
accumulated depreciation are eliminated and any gain or loss is credited to or
charged against income.
In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”, (“SFAS 144”), long-lived
assets, such as property, plant, and equipment, and purchased intangible assets
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be
recoverable. If circumstances require a long-lived asset be tested for possible
impairment, the company first compares undiscounted cash flows expected to be
generated by an asset to the carrying value of the asset. If the carrying value
of the long-lived asset is not recoverable on an undiscounted cash flow basis,
an impairment is recognized to the extent that the carrying value exceeds its
fair value. Fair value is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary.
Maintenance
and repair items are charged against income as incurred, whereas renewals and
betterments are capitalized and depreciated.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in a purchase business combination. Goodwill is reviewed for
impairment at least annually in accordance with the provisions of Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”,
(“SFAS 142”). The goodwill impairment test is a two-step test. Under the first
step, the fair value of the reporting unit is compared with its carrying value
(including goodwill). If the fair value of the reporting unit is less than its
carrying value, an indication of goodwill impairment exists for the reporting
unit and the enterprise must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess
of the carrying amount of the reporting unit’s goodwill over the implied fair
value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation, in accordance with Statement of Financial Accounting
Standards No. 141, “Business Combinations”, (“SFAS 141”). The residual fair
value after this allocation is the implied fair value of the reporting unit
goodwill. Fair value of the reporting unit is determined using a discounted cash
flow analysis. If the fair value of the reporting unit exceeds its carrying
value, step two does not need to be performed. Goodwill and intangible assets
with indefinite lives are evaluated for impairment in the fourth quarter, based
on initial annual forecast information. Intangible assets with finite lives are
amortized using the straight-line method over their estimated period of benefit,
which generally ranges from 10 to 20 years. The goodwill and other intangible
assets are also reviewed for possible impairment whenever changes in conditions
indicate that the fair value of a reporting unit is below its carrying value.
See Note 9, Goodwill and Other Intangible Assets, Net, for discussion of the
goodwill impairment charge taken during the second quarter of 2008. Based upon
the annual impairment assessment, there were no additional goodwill or
intangible asset impairments at December 31, 2008, 2007 or 2006.
Product
Warranty Costs
Reserves
are recorded on the consolidated balance sheet in other accruals and payables to
reflect the Company’s contractual liabilities related to warranty commitments to
customers. Warranty coverage of various lengths and terms is provided to
customers based upon standard terms and conditions or negotiated contractual
agreements. An estimated warranty expense is recorded at the time of the sale
based upon historical warranty return rates and repair costs, or at the point in
time when a specific warranty related expense is considered probable and can be
estimated.
Vendor
Incentives
The
Company’s Industrial Distribution segment enters into agreements with certain
vendors providing for inventory purchase incentives that are generally earned
and recognized upon achieving specified volume-purchasing levels. The company
recognizes rebate income relative to specific rebate programs as a reduction of
the cost of inventory based on a systematic and rational allocation of the cash
consideration offered to each of the underlying transactions that results in
progress toward earning the rebate, provided that the amounts are probable and
reasonably estimable. As of December 31, 2008 and 2007, total vendor incentive
receivables, included in other current assets, was approximately $9,200 and
$9,400, respectively.
Self-Insured
Retentions
The
Company is self-insured for certain losses related to health, workers’
compensation, auto and product general liability claims. However, the Company
obtains third-party insurance coverage to limit its exposure to these claims.
The total liability for workers’ compensation is limited to $350 per claim and
for product/general liability and auto liability the limit is $250 per claim.
The cost of such benefits is recognized as expense based on claims filed in each
reporting period and an estimate of claims incurred but not reported (“IBNR”)
during such period. The estimates for the cost of the claims are based upon
information provided to us by the claims administrators and are periodically
revised to reflect changes in loss trends. The IBNR estimate is based upon
historical trends. These amounts are included in other accruals and payables on
the consolidated balance sheets.
Liabilities
associated with these claims are estimated in part by considering historical
claims experience, severity factors and other actuarial assumptions. Projections
of future losses are inherently uncertain because of the random nature of
insurance claim occurrences and changes that could occur in actuarial
assumptions. Such self-insurance accruals will likely include claims for which
the ultimate losses will be settled over a period of years.
Research
and Development
Research
and development costs not specifically covered by contracts are charged against
income as incurred and included in selling, general and administrative expenses.
Such costs amounted to $4,194, $3,303 and $3,279 in 2008, 2007 and 2006,
respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Share-Based
Payment Arrangements
In 2006,
the Company adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, (“SFAS 123(R)”). In accordance with SFAS 123(R), the
Company records compensation expense for share-based awards based upon an
assessment of the grant date fair value of the awards. The fair value of each
option award is estimated on the date of grant using the Black-Scholes option
valuation model. A number of assumptions are used to determine the fair value of
options granted. These include expected term, dividend yield, volatility of the
options and the risk free interest rate. The Company used the modified
prospective method of adoption, which allowed it to apply SFAS 123(R) on a
going-forward basis rather than restating prior periods.
Derivative
Financial Instruments
The
Company uses derivative financial instruments to manage the economic impact of
fluctuations in currency exchange rates. To account for its derivative financial
instruments, the Company follows the provisions of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities, as amended by
Statement of Financial Accounting Standards No. 137 and Statement of
Financial Accounting Standards No. 138” (“SFAS 133”). Derivative
financial instruments are recognized on the consolidated balance sheets as
either assets or liabilities and are measured at fair value. Changes in fair
value of derivatives are recorded each period in earnings or accumulated other
comprehensive income, depending on whether a derivative is effective as part of
a hedge transaction. Gains and losses on derivative instruments reported in
accumulated other comprehensive income are subsequently included in earnings in
the periods in which earnings are affected by the hedged item.
Pension
Accounting
The
Company accounts for its defined benefit plans under Statement of Financial
Accounting Standards No. 158, “Employer's Accounting for Defined Benefit Pension
and Other Postretirement Plans - an amendment of FASB Statements Nos. 87, 88,
106, and 132(R)” (“SFAS 158”). SFAS 158 requires companies to recognize the
overfunded or underfunded status of their defined benefit plans, calculated as
the difference between the plan assets and the projected benefit obligation, as
an asset or liability in their balance sheet, with changes in the funded status
recognized through comprehensive income in the year in which they
occur.
Recent
Accounting Standards
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities—an amendment of
FASB Statement No. 133” (“SFAS 161”). Under this standard, companies with
derivative instruments are required to disclose information that enables
financial statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS 133, and how derivative instruments and related hedged items
affect a company’s financial position, financial performance, and cash flows.
The new standard must be applied prospectively for interim periods and fiscal
years beginning after November 15, 2008. The company does not anticipate that
the adoption of this standard will have a material impact on our financial
results.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Standards (continued)
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (“SFAS
141(R)”).
The objective of this Statement is to improve the relevance and comparability of
the information that a reporting entity provides in its financial reports about
a business combination and its effects. To accomplish that, SFAS 141(R)
establishes principles and requirements for how the acquirer (a) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; (b)
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and (c) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The potential impact of SFAS 141(R) on our consolidated financial
position, results of operations and cash flows will be dependent upon the terms,
conditions and details of such acquisitions.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“SFAS 160”). The objective of SFAS 160 is to improve
the relevance, comparability, and transparency of the financial information that
a reporting entity provides in its consolidated financial statements. This
Statement amends ARB No. 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. Since we currently do not
have any minority interest investments, we do not expect SFAS 160 will have an
impact on our consolidated financial position, results of operations or cash
flows.
2.
DISCONTINUED OPERATIONS
In
December 2007, the Company completed its sale of all of the capital stock of its
wholly owned subsidiary, Kaman Music Corporation, to Fender Musical Instruments
Corporation (“FMIC” or “Fender”). Pursuant to the terms of the stock purchase
agreement, as amended, Kaman received $119,500 in cash, which includes the
purchase price of $117,000 and certain working capital and cash adjustments made
at closing as set forth in the stock purchase agreement. The purchase price was
subject to additional specified post-closing purchase price adjustments. The
total pre-tax gain net of transaction costs was $18,571. The company used a
portion of the proceeds to pay down the majority of its outstanding indebtedness
and the remainder to further its long-term strategies.
This
segment qualified as an asset group to be disposed of under the provisions of
SFAS No. 144. As a result, the company has reported the results of operations
and consolidated financial position of this segment as discontinued operations
within the consolidated financial statements for all periods
presented.
The
following tables provide information regarding the results of discontinued
operations:
|
|
For
the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales of discontinued operations
|
|
$ |
- |
|
|
$ |
214,091 |
|
|
$ |
214,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
- |
|
|
|
12,465 |
|
|
|
11,555 |
|
Other
income (expense) from discontinued operations
|
|
|
- |
|
|
|
98 |
|
|
|
63 |
|
Earnings
from discontinued operations before income taxes
|
|
|
- |
|
|
|
12,563 |
|
|
|
11,618 |
|
Provision
for income taxes
|
|
|
- |
|
|
|
(4,673 |
) |
|
|
(4,475 |
) |
Net
earnings from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
before
gain on disposal
|
|
$ |
- |
|
|
$ |
7,890 |
|
|
$ |
7,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of discontinued operations
|
|
|
506 |
|
|
|
18,065 |
|
|
|
- |
|
Provision
for income taxes on gain
|
|
|
(14 |
) |
|
|
(6,527 |
) |
|
|
- |
|
Net
gain on disposal
|
|
|
492 |
|
|
|
11,538 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from discontinued operations
|
|
$ |
492 |
|
|
$ |
19,428 |
|
|
$ |
7,143 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
3.
ACQUISITIONS AND DIVESTITURES
During
2008, the Company acquired three businesses, which were accounted for as
purchase transactions. Accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on estimates of fair value. The
excess of the purchase price over the fair value of the net assets acquired,
including intangible assets, has been allocated to goodwill. The purchase
accounting for these acquisitions is preliminary. The operating results for
Brookhouse, Industrial Supply Corp (“ISC”) and Industrial Rubber & Mechanics
Inc. (“INRUMEC”) have been included in our consolidated financial statements
from the date of acquisition. Below is a discussion of the each of the
acquisitions:
|
·
|
On
March 31, 2008, the Company’s Industrial Distribution segment acquired the
stock of ISC, a distributor of power transmission, fluid power, material
handling and industrial MRO supply products to such diverse markets as
ship building, printing, machinery, transportation, electronics,
pharmaceutical, rubber, chemicals and food processing. In addition to its
Richmond facility, ISC consisted of five other branches located in
Norfolk, Roanoke and Waynesboro, Virginia, and in Wilson and High Point,
North Carolina.
|
|
·
|
On
June 12, 2008, the Company’s Aerostructures segment acquired the stock of
Brookhouse Holdings Limited, a leader in the design and manufacture of
composite aerostructures, aerospace tooling, and repair and overhaul
services based in Darwen, Lancashire, United Kingdom. The acquisition
further diversifies our platform positions in both the military and
commercial markets, and significantly enhances our position in the
higher-growth markets for composite
structures.
|
|
·
|
On
October 7, 2008, the Company’s Industrial Distribution segment acquired
the stock of INRUMEC of Puerto Rico. INRUMEC is a distributor of fluid
power products; industrial and hydraulic hoses; belting and conveyer
systems; pipe, tube, fittings and valves; and packaging machinery to such
diverse markets as food, beverage, pharmaceutical, cement and aggregate.
INRUMEC is also a manufacturer of hydraulic hose assemblies for the same
end markets. INRUMEC has a branch and regional distribution facility in
Gurabo as well as branches located in Bayamón, Ponce and
Mayaguez.
|
During
2007 the Company purchased the remaining minority interest in Delamac de Mexico
S.A. de C.V. (“Delamac”) for $462. In addition, the Company sold the Precision
Products segment’s 40mm assets, comprised principally of equipment and
inventory. These assets were sold to DSE, Inc., former owner of the Precision
Products, Inc. - Orlando operation (“KPP Orlando”), previously Dayron. The total
sales price was $7,018, consisting of cash of $5,504 and offsets of acquisition
earn out liabilities associated with the Company’s purchase of KPP Orlando in
2002, a portion of which was being withheld pending the resolution of the
warranty matter relative to the FMU-143 program. (See Note 18, Commitment and
Contingencies, for further discussion.) In 2007, the Company recorded a gain on
the sale of the assets of $2,570. In 2008, additional consideration of $472 was
received in the form of offsets against earn out payments due to DSE, Inc. as a
result of Precision Products, Inc. achieving certain milestones and therefore in
2008 Precision Products recorded an additional $472 gain on the sale of the 40mm
assets.
In 2007,
the Company completed its sale of all of the capital stock of its wholly owned
subsidiary, Kaman Music Corporation, to FMIC. See Note 2, Discontinued
Operations, for discussion of Kaman Music Corporation sale.
The
Company incurred costs of $106,131, $3,238 and $1,752 for the acquisition of
businesses during 2008, 2007 and 2006, respectively. Included in these
acquisition costs are contingency payments to the former owners of KPP Orlando.
These payments are based on the attainment of certain milestones, and over the
term of the agreement could total $25,000. These contingency payments are
recorded as additional goodwill and totaled $944, $2,776 and $1,751 during 2008,
2007 and 2006, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
4.
ACCOUNTS RECEIVABLE, NET
Accounts
receivable consist of the following:
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$ |
77,071 |
|
|
$ |
74,057 |
|
U.S. Government
contracts:
|
|
|
|
|
|
|
|
|
Billed
|
|
|
29,088 |
|
|
|
20,852 |
|
Costs
and accrued profit – not billed
|
|
|
2,450 |
|
|
|
6,190 |
|
Commercial
and other government contracts:
|
|
|
|
|
|
|
|
|
Billed
|
|
|
26,845 |
|
|
|
17,740 |
|
Costs
and accrued profit – not billed
|
|
|
40,565 |
|
|
|
41,407 |
|
Less
allowance for doubtful accounts
|
|
|
(2,172 |
) |
|
|
(1,811 |
) |
Total
|
|
$ |
173,847 |
|
|
$ |
158,435 |
|
|
|
|
|
|
|
|
|
|
On March
19, 2008, the Company and the Commonwealth of Australia reached an agreement
relative to the termination of the SH-2G(A) Super Seasprite Program. The
unbilled receivables associated with the SH-2G(A) program were $40,572 and
$40,789 as of December 31, 2008 and 2007, respectively, and the balance of
amounts received as advances on this contract were $8,531 and $7,511 as of
December 31, 2008 and 2007, respectively. These balances, totaling a net
$32,041, as of December 31, 2008, will be eliminated in connection with the
transfer of the Australian program inventory and equipment to the Company.
Additional detail relative to this agreement is provided in Note 18, Commitments
and Contingencies.
5.
FAIR VALUE MEASUREMENTS
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS 157”), which defines
fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants at the measurement date. The Company’s adoption of SFAS
No. 157 did not have a material impact on its consolidated financial
statements. FASB Staff Position (“FSP”) SFAS No. 157-2 delayed the
effective date of SFAS 157 for all nonfinancial assets and liabilities until
January 1, 2009, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis.
SFAS
No. 157 establishes a three-level fair value hierarchy that prioritizes the
inputs used to measure fair value. This hierarchy requires entities to maximize
the use of observable inputs and minimize the use of unobservable inputs. The
three levels of inputs used to measure fair value are as follows:
|
•
|
|
Level 1 —
Quoted prices in active markets for identical assets or
liabilities.
|
|
•
|
|
Level 2 —
Observable inputs other than quoted prices included in Level 1, such
as quoted prices for markets that are not active or other inputs that are
observable or can be corroborated by observable market
data.
|
|
•
|
|
Level 3 —
Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. This
includes certain pricing models, discounted cash flow methodologies and
similar techniques that use significant unobservable
inputs.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
5.
FAIR VALUE MEASUREMENTS (CONTINUED)
The table
below segregates all financial assets and liabilities that are measured at fair
value on a recurring basis (at least annually) into the most appropriate level
within the fair value hierarchy based on the inputs used to determine the fair
value at the measurement date.
|
|
Total Carrying
|
|
|
|
Significant other
|
|
Significant
|
|
|
Value
at
|
|
Quoted prices in
|
|
observable
|
|
unobservable
|
|
|
December
31,
|
|
active
markets
|
|
inputs
|
|
inputs
|
|
|
2008
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
Derivative
instruments.
|
|
$ 991
|
|
$ -
|
|
$ 991
|
|
$ -
|
The
Company’s derivative instruments are limited to foreign exchange contracts that
are measured at fair value using observable market inputs such as forward rates
and our counterparties’ credit risks. Based on these inputs, the derivative
instruments are classified within Level 2 of the valuation hierarchy and have
been included in other current assets and other assets on the Consolidated
Balance Sheet at December 31, 2008. Based on the continued ability to trade
securities and enter into forward contracts, we consider the markets for our
fair value instruments to be active.
The
Company undertook an evaluation of the credit risk associated with the
counterparties to these derivative instruments and determined that as of
December 31, 2008, such credit risks have not had an adverse impact on the fair
value of these instruments.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS
159”), which is effective for fiscal years beginning after November 15,
2007. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses on items
for which the fair value option is elected would be reported in earnings. We
have adopted SFAS 159, but have elected not to measure any additional financial
instruments and other items at fair value.
6.
DERIVATIVE FINANCIAL INSTRUMENTS
Cash
Flow Hedges
During
2008, the Company entered into forward exchange contracts for the purpose of
hedging two forecasted transactions denominated in foreign currencies. The
larger of these transactions is related to the future payment to the
Commonwealth of Australia upon the sale of the 11 SH-2G(A) Super Seasprite
helicopters (along with spare parts and associated equipment), which will be
returned to the Company as a result of the termination of the Australia SH-2G(A)
Program. See Note 18, Commitments and Contingencies, and Note 22, Subsequent
Events, for further discussion of the termination of this program.
At
December 31, 2008, the fair value of derivative instruments recorded as
assets was $991, and $1,297 in unrealized gains had been recorded to accumulated
other comprehensive income. Of the amount recorded in accumulated other
comprehensive income, a $159 pre-tax gain is expected to be reclassified into
cost of goods sold to reflect the fixed prices obtained from hedging within the
next 12 months. Losses recognized in earnings related to the ineffectiveness of
cash flow hedges during 2008 were $306 and have been included in non-operating
income in the consolidated statements of operations. All open derivative
contracts accounted for as cash flow hedges mature by March 14,
2013.
In
connection with the acquisition of Brookhouse, the Company assumed foreign
currency hedge contracts originally intended to hedge forecasted cash flows on a
significant U.S. dollar denominated contract. During the third quarter of 2008,
the Company determined that these hedges were ineffective due to a significant
shift in the timing of the forecasted cash flows. Therefore, the Company
cancelled the contracts, resulting in a loss of $1,587. This loss has been
included in non-operating income in the consolidated statements of
operations.
Hedges
of the Net Investment in Foreign Operations
The
Company also maintains a euro note, which is part of the revolving credit
facility, which qualifies and has been designated as an effective hedge against
the Company’s investment in its German subsidiary (RWG). The Company
has recorded a gain in its cumulative translation adjustment of $605 for the
year ended December 31, 2008, and a loss in its cumulative translation
adjustment of $1,161 and $1,094 for the years ended December 31, 2007 and 2006,
respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
7.
INVENTORIES
Inventories
consist of the following:
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Merchandise
for resale
|
|
$ |
106,757 |
|
|
$ |
93,949 |
|
Contracts
in process:
|
|
|
|
|
|
|
|
|
U.S.
Government, net of progress payments of $28,029
|
|
|
|
|
|
|
|
|
and
$29,758 in 2008 and 2007, respectively
|
|
|
65,424 |
|
|
|
62,116 |
|
Commercial
and other government contracts
|
|
|
34,587 |
|
|
|
19,344 |
|
Other
work in process (including certain general stock
materials)
|
|
|
30,288 |
|
|
|
21,544 |
|
Finished
goods (including certain general stock materials)
|
|
|
18,761 |
|
|
|
13,388 |
|
Total
|
|
$ |
255,817 |
|
|
$ |
210,341 |
|
K-MAX®
inventory of $23,593 and $19,568 is included in other work in process and
finished goods as of December 31, 2008 and 2007, respectively. The increase in
the inventory balance was due to the purchase of a used aircraft for $4,664
during the first quarter of 2008. Management believes that a significant portion
of this K-MAX inventory will be sold after one year, based upon the anticipation
of supporting the fleet for the foreseeable future.
The
aggregate amounts of general and administrative costs charged to inventory for
the Aerostructures, Precision Products and Helicopters segments during 2008,
2007 and 2006 were $41,257, $35,500, and $32,997, respectively. The estimated
amounts of general and administrative costs remaining in contracts in process at
December 31, 2008 and 2007 are $6,324 and $6,680, respectively, and are based on
the ratio of such costs to total costs of production.
The
company had Industrial Distribution segment inventory of $5,457 and $3,313 as of
December 31, 2008 and 2007, respectively, on consignment at customer
locations.
8.
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net is summarized as follows:
|
|
|
At
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
$ |
9,448 |
|
|
$ |
4,457 |
|
Buildings
|
|
|
40,115 |
|
|
|
34,007 |
|
Leasehold
improvements
|
|
|
14,889 |
|
|
|
14,311 |
|
Machinery,
office furniture and equipment
|
|
|
124,382 |
|
|
|
110,870 |
|
Total
|
|
|
188,834 |
|
|
|
163,645 |
|
Less
accumulated depreciation
|
|
|
(109,358 |
) |
|
|
(110,000 |
) |
Property,
plant and equipment, net
|
|
$ |
79,476 |
|
|
$ |
53,645 |
|
Excess
capacity and related costs, attributable to the Helicopters segment, of $961,
$1,284 and $2,424 for 2008, 2007 and 2006, respectively, were included in cost
of sales.
Depreciation
expense was $11,375, $9,510 and $8,497 for 2008, 2007 and 2006,
respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
9.
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The
following table sets forth the change in the carrying amount of goodwill for
each reportable segment and for the Company for the year ended December 31,
2008:
|
|
Balance
at December 31, 2007
|
|
|
Additions (1)
|
|
|
Impairments
|
|
|
Foreign
Currency Adjustments
|
|
|
Balance
at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
7,810 |
|
|
$ |
44,860 |
|
|
$ |
(7,810 |
) |
|
$ |
(10,615 |
) |
|
$ |
34,245 |
|
Precision
Products
|
|
|
25,865 |
|
|
|
944 |
|
|
|
- |
|
|
|
- |
|
|
|
26,809 |
|
Helicopters
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Specialty
Bearings
|
|
|
8,013 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,088 |
) |
|
|
6,925 |
|
Subtotal
Aerospace
|
|
|
41,688 |
|
|
|
45,804 |
|
|
|
(7,810 |
) |
|
|
(11,703 |
) |
|
|
67,979 |
|
Industrial
Distribution
|
|
|
4,305 |
|
|
|
11,310 |
|
|
|
- |
|
|
|
- |
|
|
|
15,615 |
|
Total
|
|
$ |
45,993 |
|
|
$ |
57,114 |
|
|
$ |
(7,810 |
) |
|
$ |
(11,703 |
) |
|
$ |
83,594 |
|
(1)
See Note 3, Acquisitions and Divestitures, for discussion of acquisitions
during
2008.
|
During
the second quarter of 2008, our Aerostructures Wichita, Kansas facility
continued to experience production and quality issues, which, along with
circumstances unique to each contract, resulted in the separate termination of
two long-term contracts with Spirit AeroSystems and Shenyang Aircraft
Corporation. These contracts, which represented significant work for
the facility, were both loss contracts. In accordance with SFAS 142, the Company
tests goodwill for potential impairment annually as of December 31 and between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
Due to the loss of the two major contracts as well as the continuing production
and quality issues, the Company performed a goodwill impairment analysis for
this reporting unit as of June 27, 2008.
The
Company evaluated goodwill for impairment using the two-step process prescribed
in SFAS 142. The process of evaluating goodwill for impairment involves the
determination of the fair value of the reporting unit and is based on several
valuation methods including the market approach and income approach. Inherent in
such fair value determinations are certain judgments and estimates relating to
future cash flows, including our interpretation of current economic indicators
and market valuations, and assumptions about our strategic plans with regard to
the operations of our reporting units.
Although
the Company believes it is working through the production issues at the
Aerostructures Wichita facility, its carrying value had increased significantly
during the second quarter of 2008. This, combined with the loss of two long-term
contracts and the quality and production issues at the facility, created a
situation in which the estimated fair value of this reporting unit (the legal
entity Plastic Fabricating Company, Inc.) was less than its carrying value. The
resulting total non-cash goodwill impairment charge was $7,810, which
represented the entire goodwill balance for this reporting unit prior to the
charge. This charge is not deductible for tax purposes and represents a discrete
item impacting our 2008 effective tax rate.
Other
Intangible Assets
Other
intangible assets consisted of:
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
lists/relationships
|
|
$ |
28,099 |
|
|
$ |
(809 |
) |
|
$ |
- |
|
|
$ |
- |
|
Trademarks
/ trade names
|
|
|
924 |
|
|
|
(201 |
) |
|
|
- |
|
|
|
- |
|
Patents
|
|
|
828 |
|
|
|
(630 |
) |
|
|
813 |
|
|
|
(618 |
) |
Total
|
|
$ |
29,851 |
|
|
$ |
(1,640 |
) |
|
$ |
813 |
|
|
$ |
(618 |
) |
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
9.
GOODWILL AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)
Other
Intangible Assets (continued)
Amortization
periods for intangible assets range from 2 to 21 years.
Intangible
asset amortization expense was $1,142, $39 and $64 in 2008, 2007 and 2006,
respectively. Amortization expense for each of the next five years is expected
to approximate $1,740 per year.
10.
ACCRUED CONTRACT LOSSES
The
following is a summary of activity and balances associated with accrued contract
losses:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$ |
9,513 |
|
|
$ |
11,542 |
|
Additions
to loss accrual
|
|
|
7,950 |
|
|
|
9,561 |
|
Costs
incurred
|
|
|
(7,400 |
) |
|
|
(11,236 |
) |
Release
to income
|
|
|
(349 |
) |
|
|
(354 |
) |
Balance
at December 31
|
|
$ |
9,714 |
|
|
$ |
9,513 |
|
The
additions in 2008 related primarily to several programs that were awarded to the
Aerostructures segment over the past few years. The largest amount
related to additional costs for tooling on the Sikorsky TRP program.
Additionally, the Precisions Products segment incurred contract losses on some
of the JPF work performed for the United States Government
(“USG”). This program is expected to become more profitable as we
continue to sell to foreign allied militaries.
During
2008, the Company recorded no additional pretax charges for the Helicopters
segment’s SH-2G(A) Super Seasprite program compared to additions of $6,414 in
2007. During 2008, the Company and the Commonwealth of Australia
terminated the SH-2G(A) Super Seasprite program on mutually agreed terms. As a
result of this termination agreement, the remaining accrued contract loss at
December 31, 2008, of $6,719 will be eliminated in connection with the transfer
of the Australian program inventory and equipment to the Company. This matter is
discussed more fully in Note 18, Commitments and Contingencies.
11.
ENVIRONMENTAL COSTS
The
following table displays the activity and balances associated with accruals
related to environmental costs included in other accruals and payables and other
long-term liabilities:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$ |
4,705 |
|
|
$ |
2,698 |
|
Additions
to accrual
|
|
|
12,982 |
|
|
|
2,568 |
|
Payments
|
|
|
(1,551 |
) |
|
|
(561 |
) |
Balance
at December 31
|
|
$ |
16,136 |
|
|
$ |
4,705 |
|
In August
2008, the Company completed its purchase of the portion of the Bloomfield campus
that Kaman Aerospace Corporation (of which the Helicopters segment forms a part)
had leased from NAVAIR for many years. In connection with the purchase, the
Company has assumed responsibility for environmental remediation at the facility
as may be required under the Connecticut Transfer Act (the “Transfer Act”) and
it continues the effort to define the scope of the remediation that will be
required by the Connecticut Department of Environmental Protection (CTDEP). The
transaction was recorded by taking the undiscounted remediation liability of
$20,768 and discounting it at a rate of 8% to its present value. The
fair value of the Navy Property asset, which approximates the discounted present
value of the assumed environmental liability of $10,258, has been included in
Property, Plant and Equipment as of December 31, 2008. This remediation process
will take many years to complete.
The
accrual also includes estimated ongoing environmental remediation costs for the
idle Moosup, CT facility and environmental remediation costs that we expect to
incur at the former Music segment’s New Hartford, Connecticut facility.
Additionally, the Company accrued $2,399 for environmental compliance at our
recently acquired Brookhouse facilities. This accrual may change as the results
from our environmental audits are completed.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
12.
CREDIT ARRANGEMENTS – SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Revolving
Credit Agreement
As of
December 31, 2008, the Company had a $200,000 revolving credit facility
(Revolving Credit Agreement), expiring August 4, 2010. The facility includes the
availability of funding in foreign currencies as well as an “accordion” feature
that provides the Company the opportunity to request, subject to bank approval,
an expansion of up to $50,000 in the overall size of the facility. As of
December 31, 2008, there was $129,371 available for borrowing under the
Revolving Credit Agreement. Letters of credit are generally considered
borrowings for purposes of the Revolving Credit Agreement.
The
financial covenants associated with the current credit facility include a
requirement that the company have i) EBITDA at least equal to 300% of net
interest expense on the basis of a rolling four quarters and ii) a ratio of
consolidated total indebtedness to total capitalization of not more than 55%.
The agreement also incorporates a financial covenant which provides that if the
Company's EBITDA to net interest expense ratio is less than 6 to 1, the ratio of
i) accounts receivable and inventory for certain Kaman subsidiaries to ii) the
Company's consolidated total indebtedness cannot be less than 1.6 to 1. For each
outstanding credit facility as of December 31, 2008, 2007 and 2006, the Company
was in compliance with its debt covenants.
In 2008
and 2007, the Company incurred $645 and $150, respectively, in debt issuance
costs. These costs have been capitalized and are being amortized on a
straight-line basis over the term of the facility. Total amortization expense
for 2008, 2007 and 2006 was $235, $204 and $165, respectively.
Term
Loan
On
October 29, 2008, the Company and The Bank of Nova Scotia, Bank of America,
N.A., Fifth Third Bank, and RBS Citizens, N.A. (collectively the “Banks”)
executed a Term Loan Credit Agreement (Term Loan Agreement). The Term
Loan Agreement, which is in addition to the Revolving Credit Agreement, is a
$50,000 facility with a four-year term, including quarterly payments of
principal at the rate of 2.5% with 62.5% of the initial aggregate principal
payable in the final quarter. The Company may increase the term loan,
up to an aggregate of $50,000 with additional commitments from Banks or new
commitments from acceptable financial institutions. Additionally, the
covenants required of the Company are the same as those in place under the
Revolving Credit Agreement. In conjunction with this agreement, the
current Revolving Credit Agreement was amended to acknowledge the existence of
the Term Loan Credit Agreement and adopt certain provisions of the Term Loan
Credit Agreement. As of December 31, 2008, $50,000 was outstanding under the
Term Loan Agreement.
Short-Term
Borrowings
In
addition to the Revolving Credit Agreement and the Term Loan Agreement, the
Company also has certain other credit arrangements to borrow funds on a
short-term basis with interest at current market rates. Short-term borrowings
outstanding under such other credit arrangements as of December 31, 2008 and
2007 were $1,241 and $1,680, respectively. The weighted average interest rate on
short-term borrowings for 2008 and 2007 was 4.82% and 6.10%,
respectively.
Long-Term
Debt
The
company has long-term debt as follows:
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Revolving
credit agreement
|
|
$ |
42,924 |
|
|
$ |
11,194 |
|
Term
loan
|
|
|
50,000 |
|
|
|
- |
|
Total
|
|
|
92,924 |
|
|
|
11,194 |
|
Less
current portion
|
|
|
5,000 |
|
|
|
- |
|
Total
excluding current portion
|
|
$ |
87,924 |
|
|
$ |
11,194 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
12.
CREDIT ARRANGEMENTS – SHORT-TERM BORROWINGS AND LONG-TERM DEBT
(CONTINUED)
Long-Term
Debt (continued)
The
weighted average interest rate on long-term borrowings outstanding as of
December 31, 2008 and 2007 was 4.15% and 6.19%, respectively.
The
aggregate amounts of annual maturities of long-term debt for each of the next
five years are approximately as follows:
|
|
|
|
2009
|
|
$ |
5,000 |
|
2010
|
|
|
47,924 |
|
2011
|
|
|
5,000 |
|
2012
|
|
|
35,000 |
|
2013
|
|
|
- |
|
Certain
Letters of Credit
The face
amounts of irrevocable letters of credit issued under the Revolving Credit
Agreement totaled $27,705 and $26,916 at December 31, 2008 and 2007,
respectively. Of those amounts, $20,436 at December 31, 2008 and 2007 is
attributable to the Australian SH-2G(A) Super Seasprite program.
Convertible
Subordinated Debentures
The
company issued its 6% Convertible Subordinated Debentures during 1987. The
debentures were convertible into shares of the common stock of Kaman Corporation
at any time on or before March 15, 2012 at a conversion price of $23.36 per
share at the option of the holder unless previously redeemed by the company. The
debentures were subordinated to the claims of senior debt holders and general
creditors.
On
November 26, 2007, the Company issued a redemption notice calling for full
redemption on December 20, 2007 of all $11,164 of its remaining outstanding 6%
Convertible Subordinated Debentures due 2012 at a redemption price of 100% of
principal amount plus accrued interest to December 20, 2007. From the date of
the announcement to the date prior to the redemption, holders converted 10,985
debentures, with a value of $10,985, into an aggregate of 470,226 shares of the
Company’s common stock. There were additional conversions during 2007 prior to
the redemption announcement of 3,683 debentures for 157,647 shares of common
stock. On December 20, 2007, the Company paid $179 for the redemption of 179
debentures. Additionally, as a result of this redemption, the company expensed
the remaining deferred debenture related charges of $116. There were no
debentures outstanding at anytime during 2008.
Interest
Payments
Cash
payments for interest were $3,429, $6,929 and $6,584 for 2008, 2007 and 2006,
respectively.
13.
ADVANCES ON CONTRACTS
Advances
on contracts include customer advances together with customer payments and
billings associated with the achievement of certain contract milestones in
excess of costs incurred, primarily for the Australian SH-2G(A) helicopter
contract. During 2008, the Company and the Commonwealth of Australia terminated
the SH-2G(A) Super Seasprite program on mutually agreed terms. As part of this
termination agreement, these balances, totaling a net $8,531 as of December 31,
2008, will be eliminated in connection with the transfer of the Australian
program inventory and equipment to the Company. See Note 18, Commitments and
Contingencies, for further discussion of this termination
agreement.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
14.
PRODUCT WARRANTY COSTS
Changes
in the carrying amount of accrued product warranty costs, included in Other
Accruals and Payables, for 2008 and 2007 are summarized as follows:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$ |
1,087 |
|
|
$ |
2,028 |
|
Warranty
costs incurred
|
|
|
(86 |
) |
|
|
(282 |
) |
Product
warranty accrual
|
|
|
127 |
|
|
|
105 |
|
Release
to income
|
|
|
(55 |
) |
|
|
(764 |
) |
Balance
at December 31
|
|
$ |
1,073 |
|
|
$ |
1,087 |
|
The
Company has been working to resolve two warranty-related matters at KPP Orlando.
The first issue involves a supplier's recall of a switch embedded in certain
bomb fuzes. The second warranty issue involves bomb fuzes manufactured for the
U. S. Army utilizing systems which originated before this entity was acquired by
the Company that have since been found to contain an incorrect part. The net
reserve as of December 31, 2008 related to these two matters is $1,032. This
matter is more fully discussed in Note 18, Commitments and
Contingencies.
The
remainder of the accrual as of December 31, 2008 relates to routine warranty
rework at our various segments.
In
December 2007, the Company reversed the remaining warranty accrual, $677,
established in anticipation of costs to be incurred in connection with the
replacement of certain non-conforming aircraft panels manufactured by our
Aerostructures Wichita facility. Management believes it is unlikely that the
Company will incur any additional costs for this warranty matter.
15.
INCOME TAXES
The
components of income tax expense (benefit) associated with earnings from
continuing operations are as follows:
|
|
|
For
the year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
10,628 |
|
|
$ |
20,062 |
|
|
$ |
12,773 |
|
State
|
|
|
1,287 |
|
|
|
1,956 |
|
|
|
1,700 |
|
Foreign
|
|
|
2,083 |
|
|
|
2,261 |
|
|
|
2,510 |
|
|
|
|
|
13,998 |
|
|
|
24,279 |
|
|
|
16,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
9,087 |
|
|
|
(2,730 |
) |
|
|
(757 |
) |
State
|
|
|
1,092 |
|
|
|
(656 |
) |
|
|
(102 |
) |
Foreign
|
|
|
(118 |
) |
|
|
143 |
|
|
|
(107 |
) |
|
|
|
|
10,061 |
|
|
|
(3,243 |
) |
|
|
(966 |
) |
Total
|
|
|
$ |
24,059 |
|
|
$ |
21,036 |
|
|
$ |
16,017 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
15.
INCOME TAXES (CONTINUED)
The tax
effects of temporary differences that give rise to deferred tax assets and
liabilities are presented below:
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Long-term
contracts
|
|
$ |
3,643 |
|
|
$ |
3,839 |
|
Deferred
employee benefits
|
|
|
81,227 |
|
|
|
13,534 |
|
Inventory
|
|
|
9,728 |
|
|
|
9,357 |
|
Environmental
|
|
|
5,844 |
|
|
|
1,714 |
|
Tax
loss and credit carry-forwards
|
|
|
9,407 |
|
|
|
9,018 |
|
Accrued
liabilities and other taxes
|
|
|
4,061 |
|
|
|
4,811 |
|
Total
deferred tax assets
|
|
|
113,910 |
|
|
|
42,273 |
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
(8,624 |
) |
|
|
(2,824 |
) |
Intangibles
|
|
|
(11,714 |
) |
|
|
(3,125 |
) |
Other
items
|
|
|
(721 |
) |
|
|
(259 |
) |
Total
deferred tax liabilities
|
|
|
(21,059 |
) |
|
|
(6,208 |
) |
Net
deferred tax assets before valuation allowance
|
|
|
92,851 |
|
|
|
36,065 |
|
Valuation
allowance
|
|
|
(5,000 |
) |
|
|
(3,946 |
) |
Net
deferred tax assets after valuation allowance
|
|
$ |
87,851 |
|
|
$ |
32,119 |
|
|
|
|
|
|
|
|
|
|
Valuation
allowances of $5,000 and $3,946 at December 31, 2008 and 2007, respectively,
reduced the deferred tax asset attributable to foreign loss and state loss and
credit carry-forwards to an amount that, based upon all available information,
is more likely than not to be realized. Reversal of the valuation allowance is
contingent upon the recognition of future taxable income in the respective
jurisdictions or changes in circumstances which cause the realization of the
benefits of the loss carry-forwards to become more likely than not. The net
increase in the valuation allowance of $1,054 is due to the generation of $1,734
in U.S. state and Canadian loss and tax credit carry-forwards, offset by
utilization of $68 of state carry-forwards, expiration of $358 of state and
Canadian carry-forwards, and a reduction of $254 due to tax rate reductions and
foreign exchange differences.
Canadian
tax loss carry-forwards are approximately $1,565, with $894 expiring between
2009 and 2010 and the balance in 2028. State carry-forwards are in numerous
jurisdictions with varying lives. U.S. foreign tax credit carry-forwards of
$3,794 expire between 2014 and 2018.
No
valuation allowance has been recorded against the other deferred tax assets
because the company believes that these deferred tax assets will, more likely
than not, be realized. This determination is based largely upon the company’s
earnings history, anticipated future taxable income, foreign-source income, and
its ability to carry-back reversing items within two years to offset taxes paid.
In addition, the company has the ability to offset deferred tax assets against
deferred tax liabilities created for such items as depreciation and
amortization.
Pre-tax
income from foreign operations amounted to $5,375, $4,978 and $4,656 in 2008,
2007 and 2006, respectively. Income taxes have not been provided on
undistributed earnings of $14,846 from foreign subsidiaries since it is the
Company’s intention to permanently reinvest such earnings or to distribute them
only when it is tax efficient to do so. It is impracticable to estimate the
total tax liability, if any, which would be created by the future distribution
of these earnings.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
15.
INCOME TAXES (CONTINUED)
The
provision for income taxes associated with earnings from continuing operations
differs from that computed at the federal statutory corporate tax rate as
follows:
|
|
For
the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Federal
tax at 35% statutory rate
|
|
$ |
20,708 |
|
|
$ |
20,134 |
|
|
$ |
14,231 |
|
State
income taxes, net of federal benefit
|
|
|
1,547 |
|
|
|
744 |
|
|
|
1,118 |
|
Tax
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
- |
|
|
|
191 |
|
|
|
1,311 |
|
Goodwill
impairment
|
|
|
2,733 |
|
|
|
- |
|
|
|
- |
|
Other,
net
|
|
|
(929 |
) |
|
|
(33 |
) |
|
|
(643 |
) |
Income
taxes
|
|
$ |
24,059 |
|
|
$ |
21,036 |
|
|
$ |
16,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes. On December 31, 2008 and 2007, the total
liability for unrecognized tax benefits was $2,585 and $3,645, respectively
(including interest and penalties of $286 and $561,
respectively). The change in the liability for 2008 and 2007 is
explained as follows:
|
|
2008
|
|
|
2007
|
|
Balance
at January 1
|
|
$ |
3,645 |
|
|
$ |
5,118 |
|
Additions
based on current year tax positions
|
|
|
133 |
|
|
|
80 |
|
Changes
for tax positions of prior years
|
|
|
56 |
|
|
|
(235 |
) |
Settlements
|
|
|
(1,103 |
) |
|
|
(392 |
) |
Reductions
due to lapses in statutes of limitation
|
|
|
(146 |
) |
|
|
(926 |
) |
Balance
at December 31
|
|
$ |
2,585 |
|
|
$ |
3,645 |
|
Included
in unrecognized tax benefits at December 31, 2008 were items approximating
$1,102 that, if recognized, would favorably affect
the Company’s effective tax rate in future periods. The Company anticipates that
total unrecognized tax benefits will decrease approximately $784 due to
settlements of tax examinations within the next twelve months. The
Company files tax returns in numerous U.S. and foreign jurisdictions, with
returns subject to examination for varying periods, but generally back to and
including 2005. During 2008 and 2007, $69 and $202 of interest and
penalties, respectively, were recognized as a component of income tax expense.
It is the Company’s policy to record interest and penalties on unrecognized tax
benefits as income taxes.
Cash
payments for income taxes, net of refunds, were $30,423, $30,325, and $15,666 in
2008, 2007 and 2006, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
16.
PENSION PLANS
The
Company has a non-contributory qualified defined benefit pension plan covering
the full-time U.S. employees of all U.S. subsidiaries (with the exception of
certain acquired companies that have not adopted the plan). Employees become
participants in the plan upon their completion of hours of service requirements.
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. The Company also has a Supplemental Employees’ Retirement
Plan (“SERP”), which is considered a non-qualified pension plan. The SERP
provides certain key executives, whose compensation is in excess of the
limitations imposed by federal law on the qualified defined benefit pension
plan, with supplemental benefits based upon eligible earnings, years of service
and age at retirement. The measurement date for both these plans is December
31.
Obligations
and Funded Status
The
changes in actuarial present value of the projected benefit obligation and fair
value of plan assets are as follows:
|
|
At
December 31,
|
|
|
|
Qualified
Pension Plan
|
|
|
SERP
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation at beginning of year
|
|
$ |
468,291 |
|
|
$ |
481,960 |
|
|
$ |
37,053 |
|
|
$ |
34,609 |
|
Service
cost
|
|
|
12,277 |
|
|
|
13,318 |
|
|
|
698 |
|
|
|
464 |
|
Interest
cost
|
|
|
29,352 |
|
|
|
27,723 |
|
|
|
1,591 |
|
|
|
2,019 |
|
Plan
amendments (A)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,220 |
|
Actuarial
liability (gain) loss (B)
|
|
|
15,128 |
|
|
|
(32,558 |
) |
|
|
(562 |
) |
|
|
1,137 |
|
Benefit
payments
|
|
|
(22,779 |
) |
|
|
(22,152 |
) |
|
|
(18,048 |
) |
|
|
(2,396 |
) |
Projected
benefit obligation at end of year
|
|
$ |
502,269 |
|
|
$ |
468,291 |
|
|
$ |
20,732 |
|
|
$ |
37,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$ |
498,778 |
|
|
$ |
468,155 |
|
|
$ |
- |
|
|
$ |
- |
|
Actual
return on plan assets (C)
|
|
|
(149,602 |
) |
|
|
42,822 |
|
|
|
- |
|
|
|
- |
|
Employer
contribution
|
|
|
7,724 |
|
|
|
9,952 |
|
|
|
18,048 |
|
|
|
2,396 |
|
Benefit
payments
|
|
|
(22,779 |
) |
|
|
(22,152 |
) |
|
|
(18,048 |
) |
|
|
(2,396 |
) |
Fair
value of plan assets at end of year
|
|
$ |
334,121 |
|
|
$ |
498,777 |
|
|
$ |
- |
|
|
$ |
- |
|
Funded
status at end of year
|
|
$ |
168,148 |
|
|
$ |
(30,486 |
) |
|
$ |
20,732 |
|
|
$ |
37,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
$ |
455,381 |
|
|
$ |
422,879 |
|
|
$ |
20,515 |
|
|
$ |
36,333 |
|
(A)
During 2007, the SERP was amended to redefine average final salary from the
highest consecutive 5 of the last 10 years to the highest 5 of the last 10 years
prior to separation from service. The result of this amendment, which was
effective beginning on January 1, 2005, increased the SERP liability by
$1,220.
(B) The
actuarial liability loss amount for the qualified pension plan for 2008 is
principally due to the decrease in net assets. The decrease in net assets was
due to the effect of changes in the discount rate. The actuarial
liability gain amount for the qualified pension plan for 2007 is principally due
to the effect of changes in the discount rate.
(C) The
decrease in the actual return on plan assets in 2008 was due to the significant
downturn in the U.S financial markets.
The
Company has recorded assets and liabilities related to our qualified pension
plan and SERP as follows:
|
|
At
December 31,
|
|
|
|
Qualified
Pension Plan
|
|
|
SERP
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
assets
|
|
$ |
- |
|
|
$ |
30,486 |
|
|
$ |
- |
|
|
$ |
- |
|
Current
liabilities (A)
|
|
|
- |
|
|
|
- |
|
|
|
(5,678 |
) |
|
|
(13,971 |
) |
Noncurrent
liabilities (B)
|
|
|
(168,148 |
) |
|
|
- |
|
|
|
(15,054 |
) |
|
|
(23,082 |
) |
Total
|
|
$ |
(168,148 |
) |
|
$ |
30,486 |
|
|
$ |
(20,732 |
) |
|
$ |
(37,053 |
) |
(A) The
current liabilities are included in other accruals and payables on the
Consolidated Balance Sheets.
(B) The
noncurrent liabilities are included in other long-term liabilities on the
Consolidated Balance Sheets.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
16.
PENSION PLANS (CONTINUED)
Obligations
and Funded Status (continued)
Certain
amounts included in accumulated other comprehensive income on the consolidated
balance sheets represent costs that will be recognized as components of pension
costs in future periods. These consist of:
|
|
At
December 31,
|
|
|
|
Qualified
Pension Plan
|
|
|
SERP
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net gain or loss
|
|
$ |
153,109 |
|
|
$ |
(46,345 |
) |
|
$ |
3,326 |
|
|
$ |
8,306 |
|
Amortization
of prior service cost (credit)
|
|
|
388 |
|
|
|
449 |
|
|
|
(1,155 |
) |
|
|
(1,846 |
) |
Amount
included in accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive income (loss)
|
|
$ |
153,497 |
|
|
$ |
(45,896 |
) |
|
$ |
2,171 |
|
|
$ |
6,460 |
|
The
estimated net loss and prior service cost (credit) for the qualified pension
plan and the SERP that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next year will be $3,002 and
($635), respectively.
The
pension plan net periodic benefit costs on the consolidated statements of
operations and other amounts recognized in other comprehensive income on the
statements of changes in shareholders’ equity were computed using the projected
unit credit actuarial cost method and included the following
components:
|
|
For
the year ended December 31,
|
|
|
|
Qualified
Pension Plan
|
|
|
SERP
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost for benefits earned during the year
|
|
$ |
12,277 |
|
|
$ |
13,318 |
|
|
$ |
12,570 |
|
|
$ |
698 |
|
|
$ |
464 |
|
|
$ |
2,113 |
|
Interest
cost on projected benefit obligation
|
|
|
29,352 |
|
|
|
27,723 |
|
|
|
26,411 |
|
|
|
1,591 |
|
|
|
2,019 |
|
|
|
1,727 |
|
Expected
return on plan assets
|
|
|
(34,724 |
) |
|
|
(32,297 |
) |
|
|
(29,448 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost
|
|
|
61 |
|
|
|
61 |
|
|
|
48 |
|
|
|
(691 |
) |
|
|
(371 |
) |
|
|
(1,074 |
) |
Recognized
net loss
|
|
|
- |
|
|
|
841 |
|
|
|
2,960 |
|
|
|
1,586 |
|
|
|
3,902 |
|
|
|
2,632 |
|
Additional
amount recognized due to settlement
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,833 |
|
|
|
- |
|
|
|
- |
|
Net
pension benefit cost
|
|
$ |
6,966 |
|
|
$ |
9,646 |
|
|
$ |
12,541 |
|
|
$ |
6,017 |
|
|
$ |
6,014 |
|
|
$ |
5,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in prior service cost
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
511 |
|
|
$ |
- |
|
|
$ |
1,220 |
|
|
$ |
(3,436 |
) |
Change
in net gain or loss
|
|
|
199,454 |
|
|
|
(43,084 |
) |
|
|
(2,421 |
) |
|
|
(3,394 |
) |
|
|
1,137 |
|
|
|
11,070 |
|
Amortization
of prior service cost (credit)
|
|
|
(61 |
) |
|
|
(61 |
) |
|
|
- |
|
|
|
691 |
|
|
|
371 |
|
|
|
- |
|
Amortization
of net gain (loss)
|
|
|
- |
|
|
|
(841 |
) |
|
|
- |
|
|
|
(1,586 |
) |
|
|
(3,902 |
) |
|
|
- |
|
Additional
minimum liability
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,394 |
) |
Total
recognized in other comprehensive income
|
|
$ |
199,393 |
|
|
$ |
(43,986 |
) |
|
$ |
(1,910 |
) |
|
$ |
(4,289 |
) |
|
$ |
(1,174 |
) |
|
$ |
1,240 |
|
Total
recognized in net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other comprehensive income
|
|
$ |
206,359 |
|
|
$ |
(34,340 |
) |
|
$ |
10,631 |
|
|
$ |
1,728 |
|
|
$ |
4,840 |
|
|
$ |
6,638 |
|
The
Company expects to contribute $10,900 to the qualified pension plan and $5,678
to the SERP for the 2009 plan year. For the 2008 plan year, the Company made a
contribution of $6,966 to the qualified plan, of which the final payment of
$1,741 was made in January 2009. The company made contributions to
the SERP of $18,048 for the 2008 plan year.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
16.
PENSION PLANS (CONTINUED)
Obligations
and Funded Status (continued)
Expected
future benefit payments, which reflect expected future service, are as
follows:
|
|
Qualified
Pension Plan
|
|
|
SERP
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
25,952 |
|
|
$ |
5,678 |
|
2010
|
|
|
26,879 |
|
|
|
881 |
|
2011
|
|
|
27,506 |
|
|
|
872 |
|
2012
|
|
|
28,054 |
|
|
|
861 |
|
2013
|
|
|
28,773 |
|
|
|
6,310 |
|
2014-2018
|
|
|
164,434 |
|
|
|
6,670 |
|
The
actuarial assumptions used in determining benefit obligations of the pension
plans are as follows:
|
|
At
December 31,
|
|
|
|
Qualified
Pension Plan
|
|
|
SERP
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
6.15 |
% |
|
|
6.40 |
% |
|
|
6.15 |
% |
|
|
5.90 |
% |
Average
rate of increase in compensation levels
|
|
|
3.50 |
% |
|
|
3.50 |
% |
|
|
3.50 |
% |
|
|
3.50 |
% |
The
discount rates take into consideration the populations of our pension plans and
the anticipated payment streams as compared to the Citigroup Discount Yield
Curve index and rounds the results to the nearest fifth basis
point.
The
actuarial assumptions used in determining the net periodic benefit cost of the
pension plans are as follows:
|
|
At
December 31,
|
|
|
|
Qualified
Pension Plan
|
|
|
SERP
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
6.40 |
% |
|
|
5.85 |
% |
|
|
5.90 |
% |
|
|
5.60 |
% |
Expected
return on plan assets
|
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
Average
rate of increase in compensation levels
|
|
|
3.50 |
% |
|
|
3.50 |
% |
|
|
3.50 |
% |
|
|
3.50 |
% |
Plan
Assets for Qualified Pension Plan
The
expected return on plan assets rate was determined based upon historical returns
adjusted for estimated future market fluctuations.
Plan
assets are invested in a diversified portfolio consisting of equity and fixed
income securities (including $13,932 of common stock of Kaman Corporation at
December 31, 2008). The investment policies and goals for pension plan assets
are (a) to place assets with investment managers approved by the Finance
Committee of the Board of Directors, (b) to diversify across traditional equity
and fixed income asset classes to minimize the risk of large losses, and (c) to
seek the highest total return (through a combination of income and asset
appreciation) consistent with prudent investment practice, and on a five-year
moving average basis, not less than the actuarial earnings
assumption.
The
target equity/fixed income asset allocation ratio is 60%/40% over the long term.
If the ratio for any asset class moves outside permitted ranges, the pension
plan’s Administrative Committee (the management committee that is responsible
for plan administration) will act through an immediate or gradual process, as
appropriate, to reallocate assets.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
16.
PENSION PLANS (CONTINUED)
Plan
Assets for Qualified Pension Plan (continued)
The asset
allocations by asset category, which are within the permitted ranges, are as
follows:
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Equity
securities
|
|
|
56 |
% |
|
|
64 |
% |
Fixed
income securities
|
|
|
44 |
% |
|
|
36 |
% |
Total
|
|
|
100 |
% |
|
|
100 |
% |
Under the
current investment policy no investment is made in commodities, nor are short
sales, margin buying hedges, covered or uncovered call options, puts, straddles
or other speculative trading devices permitted. No manager may invest in
international securities, inflation linked treasuries, real estate, private
equities, or securities of Kaman Corporation without authorization from the
company. In addition, with the exception of U.S. Government securities,
managers’ holdings in the securities of any one issuer, at the time of purchase,
may not exceed 7.5% of the total market value of that manager’s
account.
Investment
manager performance is evaluated over various time periods in relation to peers
and the following indexes: Domestic Equity Investments, S&P 500;
International Equity Investments, Morgan Stanley EAFE; Fixed Income Investments,
and Lehman Brothers’ Aggregate.
Other
Plans
The
Company also maintains a defined contribution plan that has been adopted by most
of its U.S. subsidiaries. Employees of the adopting employers who meet the
eligibility requirements of the plan may participate. Employer matching
contributions are currently made to the plan based on a percentage of each
participant’s pre-tax contribution. For each dollar that a participant
contributes up to 5% of compensation, participating subsidiaries make employer
contributions of fifty cents ($0.50). Employer contributions to the plan totaled
$3,320, $3,174 and $3,259 in 2008, 2007and 2006, respectively.
One of
the Company’s acquired U.S. subsidiaries maintains a defined contribution plan
for its eligible employees. Employer matching contributions are made on a
discretionary basis. Additionally, two of our foreign subsidiaries each maintain
a defined benefit plan of their own for their local employees. The pension
liabilities of $200 associated with these plans are included in accrued pension
costs on the consolidated balance sheets for the periods presented.
17.
OTHER LONG-TERM LIABILITIES
Other
long-term liabilities consist of the following:
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Supplemental
employees' retirement plan (SERP)
|
|
$ |
15,054 |
|
|
$ |
23,082 |
|
Deferred
compensation
|
|
|
11,305 |
|
|
|
10,549 |
|
Long-term
incentive plan
|
|
|
1,991 |
|
|
|
3,020 |
|
Long-term
income taxes payable
|
|
|
1,801 |
|
|
|
3,680 |
|
Environmental
remediation liability
|
|
|
11,749 |
|
|
|
3,541 |
|
Other
|
|
|
3,905 |
|
|
|
2,441 |
|
Total
|
|
$ |
45,805 |
|
|
$ |
46,313 |
|
Disclosures
regarding the assumptions used in the determination of the SERP liabilities are
included in Note 16, Pension Plans. Discussions of our environmental remediation
liability and our long-term incentive plan are in Note 11, Environmental Costs,
and Note 18, Commitments and Contingencies, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
17.
OTHER LONG-TERM LIABILITIES (CONTINUED)
The
Company maintains a non-qualified deferred compensation plan for certain of its
employees as well as a non-qualified deferred compensation plan for its Board of
Directors. Generally, participants in these plans have the ability to defer a
certain amount of their compensation, as defined in the agreement. The deferred
compensation liability will be paid out either upon retirement or as requested
based upon certain terms in the agreements.
18.
COMMITMENTS AND CONTINGENCIES
Leases
Rent
commitments under various leases for office space, warehouses, land and
buildings expire at varying dates from January 2009 to December 2015. The
standard term for most leases ranges from 3 to 5 years. Some of the Company’s
leases have rent escalations, rent holidays or contingent rent that are
generally recognized on a straight-line basis over the entire lease term.
Material leasehold improvements and other landlord incentives are amortized over
the shorter of their economic lives or the lease term, including renewal
periods, if reasonably assured. Certain annual rentals are subject to
renegotiation, with certain leases renewable for varying periods. The company
recognizes rent expense for leases on a straight-line basis over the entire
lease term.
Lease
periods for machinery and equipment range from 1 to 5 years.
Substantially
all real estate taxes, insurance and maintenance expenses are obligations of the
Company. It is expected that in the normal course of business leases that expire
will be renewed or replaced by leases on other similar property.
The
following future minimum rental payments are required under operating leases
that have initial or remaining non-cancelable lease terms in excess of one year
as of December 31, 2008:
2009
|
|
$ |
16,731 |
|
2010
|
|
|
10,966 |
|
2011
|
|
|
7,188 |
|
2012
|
|
|
3,814 |
|
2013
|
|
|
2,079 |
|
Thereafter
|
|
|
1,165 |
|
Total
|
|
$ |
41,943 |
|
Lease
expense for all operating leases, including leases with terms of less than one
year, amounted to $17,917, $14,739 and $13,676 for 2008, 2007 and 2006,
respectively.
Asset
Retirement Obligations
The
Company currently leases various properties under leases that give the lessor
the right to make the determination as to whether the lessee must return the
premises to their original condition, except for normal wear and tear. The
company does not normally make substantial modifications to leased property, and
many of the company's leases either require lessor approval of planned
improvements or transfer ownership of such improvements to the lessor at the
termination of the lease. Historically we have not incurred significant costs to
return leased premises to their original condition.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
18.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Asset
Retirement Obligations (continued)
The
Company also has unrecorded Asset Retirement Obligation’s (“ARO’s”) that are
conditional upon certain events. These ARO’s generally include the removal and
disposition of non-friable asbestos. The Company has not recorded a liability
for these conditional ARO’s at December 31, 2008 because the Company does not
currently believe there is a reasonable basis for estimating a date or range of
dates for major renovation or demolition of these facilities. In reaching this
conclusion, the Company considered the historical performance of each facility
and has taken into account factors such as planned maintenance, asset
replacement and upgrades, which, if conducted as in the past, can extend the
physical lives of the facilities indefinitely. The Company also considered the
possibility of changes in technology and risk of obsolescence in arriving at its
conclusion.
Legal Matters
There
continue to be two warranty-related matters that impact the FMU-143 program at
KPP Orlando. The items involved are an impact switch embedded in certain bomb
fuzes that was recalled by a supplier and an incorrect part, called a bellows
motor, found to be contained in bomb fuzes manufactured for the U.S. Army
utilizing systems which originated before KPP Orlando was acquired by Kaman. The
U.S. Army Sustainment Command (“USASC”), the procurement agency that administers
the FMU-143 contract, had authorized warranty rework for the bellows motor
matter in late 2004/early 2005; however, the Company was not permitted to finish
the rework due to issues raised by the USASC primarily related to administrative
matters and requests for verification of the accuracy of test equipment (which
accuracy was subsequently verified).
In late
2006, the USASC informed us that it was changing its remedy under the contract
from performance of warranty rework to an "equitable adjustment" of $6.9 million
to the contract price. The Company responded, explaining its view that it had
complied with contract requirements. In June 2007, the USASC affirmed its
position but rescinded its $6.9 million demand (stating that its full costs had
not yet been determined) and gave instructions for disposition of the subject
fuzes, including both the impact switch and bellows motor related items, to a
Navy facility and the Company complied with that direction. To date, USASC has
not made a demand for any specific amount.
As reported previously, a
separate contract dispute between KPP Orlando and the USASC relative to the
FMU-143 fuze program is now in litigation. The USASC has basically alleged the
existence of latent defects in certain fuzes due to unauthorized rework during
production and has sought to revoke their acceptance. Management believes that
the Precision Products segment has performed in accordance with the contract and
it is the government that has materially breached its terms; as a result, during
the fourth quarter of 2007, the Company cancelled the contract and in January
2008, commenced litigation before the Armed Services Board of Contract Appeals
(the "Board") requesting a declaratory judgment that the cancellation was
proper. At about the same time, the USASC notified the Company that it was
terminating the contract for default, making the allegations noted above and the
Company filed a second complaint with the Board appealing that termination
decision. The litigation process
continues.
Other
Matters
Termination of Australia
SH-2G(A) Program
The
Company and the Commonwealth of Australia entered a settlement agreement during
the first quarter of 2008 that terminated the SH-2G(A) Super Seasprite program
on mutually agreed terms. The agreement provided for a transfer to the Company
of ownership of the 11 SH-2G(A) Super Seasprite helicopters (along with spare
parts and associated equipment), after which proceeds from the sale of these
items would be shared on a predetermined basis. This transfer of ownership
occurred on February 12, 2009 (the “Transfer Date”).
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
18.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other
Matters (continued)
Termination of Australia
SH-2G(A) Program (continued)
In
connection with sharing sale proceeds, the Company has agreed that total
payments of at least $39.5 million (AUS) will be made to the Commonwealth
regardless of sales, with at least $26.7 million (AUS) to be paid by March 2011,
and, to the extent cumulative payments have not yet reached $39.5 million (AUS),
additional payments of $6.4 million (AUS) each in March of 2012 and 2013. During
the fourth quarter of 2008, the Company entered into forward contracts for the
purpose of hedging these required payments. These contracts represent $36.5
million (AUS) of the $39.5 million (AUS) required payments and have been
accounted for in accordance with SFAS 133. See Note 6, Derivative
Financial Instruments, for further discussion.
To secure
these payments, the Company provided the Commonwealth with a $39.5 million (AUS)
unconditional letter of credit on the Transfer Date. This letter of credit will
be reduced as such payments are made. Additionally, under the settlement
agreement, the Company forgave payments of approximately $32 million in net
unbilled receivables in exchange for the helicopters, spare parts and equipment,
which will be recorded as inventory on the Transfer Date, at a value
representing the net unbilled receivables and the guaranteed payments, described
above. Management has determined that the value of this transferred inventory
exceeds the amount of the net unbilled receivables and the guaranteed payments.
The Company does not currently expect the transfer to have a material impact on
the statement of operations.
The
termination of the contract, combined with the return of the inventory, will
result in the inability to claim look-back interest from the IRS, previously
expected to exceed $6 million pretax. Additionally, sales relative to the
service center, which had been a meaningful portion of Helicopters segment net
sales in recent years, ended at the conclusion of the support center ramp down
period, which occurred during the fourth quarter of 2008.
Moosup
The CTDEP
has given the Company conditional approval for reclassification of groundwater
in the vicinity of the Moosup, CT facility consistent with the character of the
area. This facility is currently being held for disposal. The Company has
substantially completed the process of connecting neighboring properties to
public drinking water in accordance with such approval and in coordination with
the CTDEP and local authorities. The Company anticipates that the water
connection project will be completed during the first quarter of
2009. Site characterization of the environmental condition of the
property began in 2008 and is expected to continue during 2009.
Ovation
In
connection with sale of the Music segment in 2007, the Company assumed
responsibility for meeting certain requirements of the Transfer Act that applied
to our transfer of the New Hartford, Connecticut, facility leased by that
segment for guitar manufacturing purposes ("Ovation"). Under the Transfer Act,
those responsibilities essentially consist of assessing the site's environmental
conditions and remediating environmental impairments, if any, caused by
Ovation's operations prior to the sale. The site is a multi-tenant industrial
park, in which Ovation and other unrelated entities lease space. The
environmental assessment process began in 2008 and will continue during 2009.
The Company's estimate of its portion of the cost to assess the environmental
conditions and remediate this site is $2.2 million, unchanged from previously
reported estimates.
Brookhouse
The
Company has accrued $2.4 million for environmental compliance at our recently
acquired Brookhouse facilities. The Company is in the early stages of assessing
the work that may be required, which may result in a change to this
accrual.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
19.
COMPUTATION OF EARNINGS PER SHARE
The
computation of basic earnings per share is based on net earnings divided by the
weighted average number of shares of common stock outstanding for each
year.
The
computation of diluted earnings per share includes the common stock equivalency
of dilutive options granted to employees under the Stock Incentive Plan.
Excluded from the diluted earnings per share calculation for the years ended
December 31, 2008 and 2006 are 242,259 options and 73,700 options granted to
employees that are anti-dilutive based on the average stock price. There were no
anti-dilutive options in 2007.The diluted earnings per share computation for
2007 and 2006 assumes that at the beginning of the year the 6% convertible
subordinated debentures were converted into common stock with a resultant
reduction in interest costs net of tax.
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
35,107 |
|
|
$ |
36,491 |
|
|
$ |
24,643 |
|
Net
earnings from discontinued operations, net of tax
|
|
|
- |
|
|
|
7,890 |
|
|
|
7,143 |
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
492 |
|
|
|
11,538 |
|
|
|
- |
|
Net
earnings
|
|
$ |
35,599 |
|
|
$ |
55,919 |
|
|
$ |
31,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
25,228 |
|
|
|
24,375 |
|
|
|
24,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share from continuing operations
|
|
$ |
1.39 |
|
|
$ |
1.50 |
|
|
$ |
1.02 |
|
Net
earnings per share from discontinued operations
|
|
|
- |
|
|
|
0.32 |
|
|
|
0.30 |
|
Net
earnings per share from disposal of discontinued
operations
|
|
|
0.02 |
|
|
|
0.47 |
|
|
|
- |
|
Net
earnings per share
|
|
$ |
1.41 |
|
|
$ |
2.29 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
35,107 |
|
|
$ |
36,491 |
|
|
$ |
24,643 |
|
Elimination
of interest expense on 6% subordinated
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debentures (net after taxes)
|
|
|
- |
|
|
|
507 |
|
|
|
609 |
|
Net
earnings from continuing operations (as adjusted)
|
|
|
35,107 |
|
|
|
36,998 |
|
|
|
25,252 |
|
Net
earnings from discontinued operations, net of tax
|
|
|
- |
|
|
|
7,890 |
|
|
|
7,143 |
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
492 |
|
|
|
11,538 |
|
|
|
- |
|
Net
earnings (as adjusted)
|
|
$ |
35,599 |
|
|
$ |
56,426 |
|
|
$ |
32,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
25,228 |
|
|
|
24,375 |
|
|
|
24,036 |
|
Weighted
averages shares issuable
|
|
|
|
|
|
|
|
|
|
|
|
|
on
conversion of 6% subordinated
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debentures
|
|
|
- |
|
|
|
573 |
|
|
|
719 |
|
Weighted
average shares issuable
|
|
|
|
|
|
|
|
|
|
|
|
|
on
exercise of dilutive stock options
|
|
|
284 |
|
|
|
313 |
|
|
|
114 |
|
Total
|
|
|
25,512 |
|
|
|
25,261 |
|
|
|
24,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share from continuing operations
|
|
$ |
1.38 |
|
|
$ |
1.46 |
|
|
$ |
1.01 |
|
Net
earnings per share from discontinued operations
|
|
|
- |
|
|
|
0.31 |
|
|
|
0.29 |
|
Net
earnings per share from disposal of discontinued
operations
|
|
|
0.02 |
|
|
|
0.46 |
|
|
|
- |
|
Diluted
net earnings per share
|
|
$ |
1.40 |
|
|
$ |
2.23 |
|
|
$ |
1.30 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
20.
SHARE-BASED ARRANGEMENTS
General
The
Company accounts for stock options and restricted stock as equity awards whereas
the stock appreciation rights and employee stock purchase plan are accounted for
as liability awards.
The
following table summarizes share-based compensation expense recorded during each
period presented:
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
1,268 |
|
|
$ |
1,316 |
|
|
$ |
893 |
|
Restricted
stock awards
|
|
|
1,503 |
|
|
|
925 |
|
|
|
729 |
|
Stock
appreciation rights
|
|
|
(862 |
) |
|
|
1,374 |
|
|
|
1,036 |
|
Employee
stock purchase plan
|
|
|
200 |
|
|
|
212 |
|
|
|
209 |
|
Total
share-based compensation
|
|
$ |
2,109 |
|
|
$ |
3,827 |
|
|
$ |
2,867 |
|
Compensation
expense for stock options and restricted stock awards is recorded in general and
administrative expenses and is recognized on a straight-line basis over the
vesting period of the awards. The 2006 expense recorded for stock appreciation
rights includes a cumulative effect adjustment of $105 recorded as a result of
adopting SFAS 123(R). This reflects the effect of changing our valuation
methodology to record compensation expense from intrinsic value to fair value
for these types of awards.
In
conjunction with the sale of the Music segment, the Company accelerated vesting
for all outstanding options and restricted shares that were issued to employees
of the Music segment. This resulted in additional expense of $1,289 in 2007 that
was included in the determination of the net gain on the sale.
Stock
Incentive Plan
The 2003
Stock Incentive Plan provides for the issuance of 2,000,000 shares of common
stock and includes a continuation and extension of the predecessor plan. As with
the predecessor plan, the 2003 Plan provides for equity compensation awards,
including principally incentive and non-statutory stock options, restricted
stock, stock appreciation rights, and long-term incentive program (LTIP) awards.
In addition, the 2003 Plan contains provisions intended to qualify the LTIP
under Section 162(m) of the Internal Revenue Code of 1986, as amended. As of
December 31, 2008, there were 1,148,099 shares available for grant under the
plan.
LTIP
awards provide certain senior executives an opportunity to receive award
payments in either stock or cash as determined by the Personnel and Compensation
Committee of the Board of Directors in accordance with the Plan, at the end of a
three-year performance cycle. For the performance cycle, the company’s financial
results are compared to the Russell 2000 indices for the same periods based upon
the following: (a) average return on total capital, (b) earnings per share
growth and (c) total return to shareholders. No awards will be payable unless
the company’s performance is at least in the 25th percentile of the designated
indices. The maximum award is payable if performance reaches the 75th percentile
of the designated indices. Awards for performance between the 25th and 75th
percentiles are determined by straight-line interpolation. Through 2008, all of
the LTIP awards have been paid in cash.
Stock
options are granted with an exercise price equal to the average market price of
our stock at the date of grant. Stock options and Stock Appreciation Rights
(“SAR”s) granted under the plan generally expire ten years from the date of
grant and vest 20% each year over a 5-year period on each of the first five
anniversaries from the date of grant. Restricted stock awards (“RSA”s) are
generally granted with restrictions that lapse at the rate of 20% per year over
a 5-year period on each of the first five anniversaries from the date of grant.
Generally, these awards are subject to forfeiture if a recipient separates from
service with the Company.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
20.
SHARE-BASED ARRANGEMENTS (CONTINUED)
Stock
Incentive Plan (continued)
Stock
option activity is as follows:
|
|
|
|
|
Weighted
average
|
|
|
|
Options
|
|
|
exercise
price
|
|
Options
outstanding at December 31, 2007
|
|
|
724,790 |
|
|
$ |
16.02 |
|
Granted
|
|
|
215,245 |
|
|
|
25.40 |
|
Exercised
|
|
|
(178,468 |
) |
|
|
15.31 |
|
Forfeited
or expired
|
|
|
(17,888 |
) |
|
|
19.88 |
|
Options
outstanding at December 31, 2008
|
|
|
743,679 |
|
|
$ |
18.81 |
|
The
following table presents information regarding options outstanding as of
December 31, 2008:
Weighted-average
remaining contractual term - options outstanding
|
|
6.26
years
|
|
Aggregate
intrinsic value - options outstanding
|
|
$ |
1,884 |
|
Weighted-average
exercise price - options outstanding
|
|
$ |
18.81 |
|
Options
exercisable
|
|
|
284,379 |
|
Aggregate
intrinsic value - options exercisable
|
|
$ |
1,193 |
|
Weighted-average
remaining contractual term - options exercisable
|
|
3.89
years
|
|
The
intrinsic value represents the amount by which the market price of the stock on
the measurement date exceeds the exercise price of the option. The intrinsic
value of options exercised in 2008 and 2007 was $2,314 and $3,905, respectively.
The Company currently has an open stock repurchase plan, which would enable the
Company to repurchase shares as needed. Historically the Company has issued
shares related to option exercises and RSAs from treasury stock; however, in
2007 the Company began to issue shares from its authorized pool of available
common stock.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model. The following table indicates the
weighted-average assumptions used in estimating fair value:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Expected
option term
|
|
6.5
years
|
|
|
6.5
years
|
|
|
6.5
years
|
|
Expected
volatility
|
|
|
41.2 |
% |
|
|
36.2 |
% |
|
|
41.5 |
% |
Risk-free
interest rate
|
|
|
3.2 |
% |
|
|
4.6 |
% |
|
|
4.5 |
% |
Expected
dividend yield
|
|
|
1.8 |
% |
|
|
2.5 |
% |
|
|
2.5 |
% |
Per
share fair value of options granted
|
|
$ |
9.64 |
|
|
$ |
8.04 |
|
|
$ |
7.96 |
|
The
expected term of options granted represents the period of time that option
grants are expected to be outstanding. In predicting the life of option grants,
all stock options meet the definition of “plain vanilla” options under Staff
Accounting Bulletin No. 107 and therefore, the “simplified” method was used to
calculate the term for grants.
Forfeitures
of options are estimated based upon historical data and are adjusted based upon
actual occurrences. The cumulative effect of restricted stock forfeitures was
immaterial.
The
volatility assumption is based on the historical daily price data of the
Company’s stock over a period equivalent to the weighted-average expected term
of the options. Management evaluates whether there were factors during that
period which were unusual and which would distort the volatility figure if used
to estimate future volatility and concluded that there were no such factors. The
Company relies only on historical volatility since future volatility is expected
to be consistent with historical volatility.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
20.
SHARE-BASED ARRANGEMENTS (CONTINUED)
Stock
Incentive Plan (continued)
The
risk-free interest rate assumption is based upon the interpolation of various
U.S. Treasury rates determined at the date of option grant. Expected dividends
are based upon a historical analysis of our dividend yield over the past
year.
Restricted
Stock activity is as follows:
|
|
Resticted
Stock Awards
|
|
|
Weighted-average
grant date fair value
|
|
Restricted
Stock outstanding at December 31, 2007
|
|
|
89,009 |
|
|
$ |
24.04 |
|
Granted
|
|
|
123,045 |
|
|
|
26.76 |
|
Vested
|
|
|
(56,824 |
) |
|
|
22.40 |
|
Forfeited
or expired
|
|
|
(5,436 |
) |
|
|
24.35 |
|
Restricted
Stock outstanding at December 31, 2008
|
|
|
149,794 |
|
|
$ |
26.39 |
|
The grant
date fair value for restricted stock is the average market price of the
unrestricted shares on the date of grant. Prior to adopting SFAS 123(R), the
fair value of nonvested awards (restricted stock and deferred stock units) was
recorded to additional paid-in capital with the offsetting entry posted to
unamortized restricted stock awards, also an equity account. The unearned
compensation was then amortized to compensation expense related to equity awards
over the vesting period using the straight-line method. With the adoption of
SFAS 123(R) in 2006, $454 of unearned compensation was offset against additional
paid-in capital.
Stock
Appreciation Rights activity is as follows:
|
|
Stock
Appreciation Rights
|
|
|
Weighted-average
grant date fair value
|
|
SARs
outstanding at December 31, 2007
|
|
|
66,120 |
|
|
$ |
10.14 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Vested
|
|
|
(26,420 |
) |
|
|
9.90 |
|
Forfeited
or expired
|
|
|
- |
|
|
|
- |
|
SARs
outstanding at December 31, 2008
|
|
|
39,700 |
|
|
$ |
10.32 |
|
Total
cash paid to settle stock appreciation rights (at intrinsic value) for 2008 and
2007 was $533 and $1,212, respectively. SARs are re-evaluated on a quarterly
basis using the Black-Scholes valuation model.
We record
a tax benefit and associated deferred tax asset for compensation expense
recognized on non-qualified stock options and restricted stock for which we are
allowed a tax deduction. For 2008 and 2007, we recorded a tax benefit of $1,049
and $1,304 for these two types of compensation expense.
The
windfall tax benefit is the tax benefit realized on the exercise of
non-qualified stock options and disqualifying dispositions of stock acquired by
exercise of incentive stock options and Employee Stock Purchase Plan stock
purchases in excess of the deferred tax asset originally recorded. The total
windfall tax benefit realized in 2008 and 2007 was $349 and $1,171,
respectively.
As of
December 31, 2008, future compensation costs related to non-vested stock options
and restricted stock grants is $5,763. The Company anticipates that this cost
will be recognized over a weighted-average period of 2.93 years.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
20.
SHARE-BASED ARRANGEMENTS (CONTINUED)
Stock
Incentive Plan (continued)
Employee
Stock Purchase Plan
The Kaman
Corporation Employees Stock Purchase Plan allows employees to purchase common
stock of the company, through payroll deductions, at 85% of the market value of
shares at the time of purchase. The plan provides for the grant of rights to
employees to purchase a maximum of 1,500,000 shares of common stock. During
2008, 51,664 shares were issued to employees at prices ranging from $17.02 to
$32.07. During 2007, 50,126 shares were issued to employees at prices ranging
from $19.26 to $31.26, and during 2006, 68,930 shares were issued at prices
ranging from $16.86 to $24.59. At December 31, 2008, there were 369,613 shares
available for purchase under the plan.
21.
SEGMENT AND GEOGRAPHIC INFORMATION
The
Company is composed of five business segments, Industrial Distribution and four
reporting segments within the aerospace industry: Aerostructures, Precision
Products, Helicopters, and Specialty Bearings (collectively, the “Aerospace
Segments”). These segments are consistent with the organization and
responsibilities of management reporting to the chief operating decision-maker
for the purpose of assessing performance. The reportable segments are strategic
business units offering different products and services and are managed
separately as each business requires different technology and marketing
strategies.
The
Aerostructures segment produces aircraft subassemblies and other parts for
commercial and military aircraft. Its principal customers are Boeing and
Sikorsky. Operations involving the use of metals are conducted principally at
the company's Jacksonville, Florida facility, while operations involving
composite materials are conducted principally at the Wichita, Kansas facility
and Darwen, Lancashire, United Kingdom facility.
The
Precision Products segment manufactures products for military and commercial
markets, primarily related to military safe, arm and fuzing devices for several
missile and bomb programs; as well as precision non-contact measuring systems
for industrial and scientific use; and high reliability memory systems for
airborne, shipboard, and ground-based programs. Principal customers include the
U.S. military, Boeing, Lockheed Martin and Raytheon. Operations are conducted at
the Middletown, Connecticut; Orlando, Florida; and Tucson, Arizona
facilities.
The
Helicopters segment markets its helicopter engineering expertise and performs
subcontract work for other manufacturers. It also refurbishes, provides upgrades
and supports Kaman SH-2G maritime helicopters operating with foreign militaries
as well as K-MAX® “aerial truck” helicopters operated by commercial customers in
several countries. The SH-2G aircraft is currently in service with the Egyptian
Air Force and the New Zealand and Polish Navies. Operations are conducted at the
Bloomfield, Connecticut facility.
The
Specialty Bearings segment primarily manufactures proprietary self-lubricating
bearings used in aircraft flight controls, turbine engines and landing gear.
These bearings are currently used in nearly all military and commercial aircraft
produced in North and South America and Europe and are market-leading products
for applications requiring a highly sophisticated level of engineering and
specialization in the airframe bearing market. The Specialty Bearings segment
also manufactures proprietary power transmission couplings for helicopters and
other applications and custom designed and manufactured rolling element and
self-lubricating bearings for aerospace applications. Operations for the
Specialty Bearings segment are conducted at the Bloomfield, Connecticut and
Dachsbach, Germany facilities.
The
Industrial Distribution segment is the third largest power transmission/motion
control industrial distributor in North America. The segment provides products
including bearings, electrical/mechanical power transmission, fluid power,
motion control and materials handling components to a broad spectrum of
industrial markets throughout North America. Locations consist of nearly 200
branches, distribution centers and call centers across the United States
(including Puerto Rico) and in Canada and Mexico. The segment offers
approximately three million items, as well as value-added services, to a base of
more than 50,000 customers representing a highly diversified cross-section of
North American industry.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
21.
SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Summarized
financial information by business segment is as follows:
|
|
For
the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
147,641 |
|
|
$ |
102,362 |
|
|
$ |
78,742 |
|
Precision
Products
|
|
|
118,009 |
|
|
|
87,455 |
|
|
|
71,068 |
|
Helicopters
|
|
|
69,435 |
|
|
|
72,031 |
|
|
|
69,914 |
|
Specialty
Bearings
|
|
|
141,540 |
|
|
|
124,009 |
|
|
|
106,278 |
|
Subtotal
Aerospace Segments
|
|
|
476,625 |
|
|
|
385,857 |
|
|
|
326,002 |
|
Industrial
Distribution
|
|
|
776,970 |
|
|
|
700,174 |
|
|
|
665,420 |
|
Net
sales from continuing operations
|
|
$ |
1,253,595 |
|
|
$ |
1,086,031 |
|
|
$ |
991,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
(5,925 |
) |
|
$ |
13,219 |
|
|
$ |
11,538 |
|
Precision
Products
|
|
|
7,299 |
|
|
|
10,546 |
|
|
|
7,750 |
|
Helicopters
|
|
|
10,066 |
|
|
|
2,631 |
|
|
|
222 |
|
Specialty
Bearings
|
|
|
50,168 |
|
|
|
41,387 |
|
|
|
28,630 |
|
Subtotal
Aerospace Segments
|
|
|
61,608 |
|
|
|
67,783 |
|
|
|
48,140 |
|
Industrial
Distribution
|
|
|
35,397 |
|
|
|
33,038 |
|
|
|
35,160 |
|
Net
gain (loss) on sale of assets
|
|
|
221 |
|
|
|
2,579 |
|
|
|
(52 |
) |
Corporate
expense
|
|
|
(31,960 |
) |
|
|
(38,672 |
) |
|
|
(35,426 |
) |
Operating
income from continuing operations
|
|
|
65,266 |
|
|
|
64,728 |
|
|
|
47,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
3,012 |
|
|
|
6,336 |
|
|
|
6,244 |
|
Loss
on derivative contracts
|
|
|
1,893 |
|
|
|
- |
|
|
|
- |
|
Other
expense, net
|
|
|
1,195 |
|
|
|
865 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before income taxes
|
|
|
59,166 |
|
|
|
57,527 |
|
|
|
40,660 |
|
Income
tax expense
|
|
|
24,059 |
|
|
|
21,036 |
|
|
|
16,017 |
|
Net
earnings from continuing operations
|
|
|
35,107 |
|
|
|
36,491 |
|
|
|
24,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from discontinued operations before gain
|
|
|
- |
|
|
|
7,890 |
|
|
|
7,143 |
|
Gain
on disposal of discontinued operations, net of taxes
|
|
|
492 |
|
|
|
11,538 |
|
|
|
- |
|
Net
earnings from discontinued operations
|
|
|
492 |
|
|
|
19,428 |
|
|
|
7,143 |
|
Total
net earnings
|
|
$ |
35,599 |
|
|
$ |
55,919 |
|
|
$ |
31,786 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
21.
SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
162,721 |
|
|
$ |
64,812 |
|
|
$ |
58,533 |
|
Precision
Products
|
|
|
87,647 |
|
|
|
86,980 |
|
|
|
77,946 |
|
Helicopters
|
|
|
116,540 |
|
|
|
95,042 |
|
|
|
100,353 |
|
Specialty
Bearings
|
|
|
54,742 |
|
|
|
57,767 |
|
|
|
48,774 |
|
Subtotal
Aerospace Segments
|
|
|
421,650 |
|
|
|
304,601 |
|
|
|
285,606 |
|
Industrial
Distribution
|
|
|
229,460 |
|
|
|
195,518 |
|
|
|
188,672 |
|
Corporate
|
|
|
111,503 |
|
|
|
134,744 |
|
|
|
44,274 |
|
Total
assets
|
|
$ |
762,613 |
|
|
$ |
634,863 |
|
|
$ |
518,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
2,998 |
|
|
$ |
2,740 |
|
|
$ |
1,698 |
|
Precision
Products
|
|
|
967 |
|
|
|
2,310 |
|
|
|
1,555 |
|
Helicopters
(1)
|
|
|
1,401 |
|
|
|
1,052 |
|
|
|
1,042 |
|
Specialty
Bearings
|
|
|
4,506 |
|
|
|
4,658 |
|
|
|
4,572 |
|
Subtotal
Aerospace Segments
|
|
|
9,872 |
|
|
|
10,760 |
|
|
|
8,867 |
|
Industrial
Distribution
|
|
|
4,216 |
|
|
|
2,650 |
|
|
|
2,930 |
|
Corporate
|
|
|
1,912 |
|
|
|
816 |
|
|
|
302 |
|
Total
capital expenditures
|
|
$ |
16,000 |
|
|
$ |
14,226 |
|
|
$ |
12,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerostructures
|
|
$ |
3,811 |
|
|
$ |
2,149 |
|
|
$ |
1,943 |
|
Precision
Products
|
|
|
1,085 |
|
|
|
1,012 |
|
|
|
936 |
|
Helicopters
|
|
|
1,081 |
|
|
|
1,120 |
|
|
|
1,137 |
|
Specialty
Bearings
|
|
|
2,856 |
|
|
|
2,262 |
|
|
|
1,818 |
|
Subtotal
Aerospace Segments
|
|
|
8,833 |
|
|
|
6,543 |
|
|
|
5,834 |
|
Industrial
Distribution
|
|
|
3,096 |
|
|
|
2,507 |
|
|
|
2,285 |
|
Corporate
|
|
|
913 |
|
|
|
843 |
|
|
|
635 |
|
Total
depreciation and amortization
|
|
$ |
12,842 |
|
|
$ |
9,893 |
|
|
$ |
8,754 |
|
|
(1)
|
During
2008, the Helicopters Segment completed the non-cash purchase of the
NAVAIR property for $10,258, which represents the assumption of the
associated environmental remediation costs. See Note 11, Environmental
Costs, for further discussion.
|
Operating
income is total revenues less cost of sales and selling, general and
administrative expenses including corporate expense. Operating income includes
net gain (loss) on sale of assets. Operating loss for the
Aerostructures segment includes a non-cash goodwill impairment charge of
$7,810.
During
2008, there were no Helicopters segment charges to increase the accrued contract
loss on the SH-2G(A) program. During 2007 and 2006, the Helicopters segment
recorded charges of $6,414 and $9,701, respectively, to increase the accrued
contract loss on the SH-2G(A) program.
Identifiable
assets are year-end assets at their respective net carrying values segregated as
to segment and corporate use.
For the
periods presented, the corporate identifiable assets are principally comprised
of cash, short-term and long-term deferred income tax assets, cash surrender
value of life insurance policies and fixed assets. Corporate assets decreased in
2008 primarily due to the acquisitions of business during the year. The increase
in corporate assets in 2007 is primarily due to the cash proceeds from the sale
of the Music segment.
Net sales
by the Aerospace Segments under contracts with U.S. Government agencies
(including sales to foreign governments through foreign military sales contracts
with U.S. Government agencies) totaled $254,640, $199,971 and $156,060 in 2008,
2007 and 2006, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands except share and per share
amounts)
21.
SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Sales are
attributed to geographic regions based on their location of origin. Geographic
distribution of sales from continuing operations is as follows:
|
|
For
the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
1,067,080 |
|
|
$ |
934,113 |
|
|
$ |
856,772 |
|
United
Kingdom
|
|
|
41,884 |
|
|
|
10,962 |
|
|
|
7,673 |
|
Canada
|
|
|
36,026 |
|
|
|
35,058 |
|
|
|
32,793 |
|
Australia/New
Zealand
|
|
|
20,980 |
|
|
|
25,953 |
|
|
|
27,736 |
|
Mexico
|
|
|
20,271 |
|
|
|
21,201 |
|
|
|
18,456 |
|
Germany
|
|
|
15,597 |
|
|
|
15,188 |
|
|
|
14,368 |
|
Other
|
|
|
51,757 |
|
|
|
43,556 |
|
|
|
33,624 |
|
Total
|
|
$ |
1,253,595 |
|
|
$ |
1,086,031 |
|
|
$ |
991,422 |
|
22.
SUBSEQUENT EVENTS
On
February 12, 2009, the Company and the Commonwealth of Australia closed on the
transfer of ownership of the 11 SH-2G(A) Super Seasprite helicopters (along with
spare parts and associated equipment). See Note 18, Commitments and
Contingencies, for further discussion.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
The
company has carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of the
company’s disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer have concluded that, as
of December 31, 2008, the disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in the
reports the company files and submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported as and when
required.
Internal
Control Over Financial Reporting
The
company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Management has assessed the effectiveness of the company’s
internal control over financial reporting as of December 31, 2008, with the
exception of ISC, Brookhouse and INRUMEC. During 2008, the company acquired ISC,
Brookhouse and INRUMEC. While the company has begun the process of incorporating
its controls and procedures into ISC, Brookhouse and INRUMEC, management did not
complete the documentation, evaluation and testing of internal controls over the
financial reporting of ISC, Brookhouse and INRUMEC as of December 31, 2008.
Therefore, the company did not include ISC, Brookhouse and INRUMEC in its
assessment of the effectiveness of the company’s internal controls over
financial reporting as of December 31, 2008.
In making
its assessment, management has utilized the criteria set forth by the Committee
of Sponsoring Organizations (COSO) of the Treadway Commission in Internal
Control—Integrated Framework. Management concluded that based on its assessment,
the company’s internal control over financial reporting was effective as of
December 31, 2008. The effectiveness of internal control over financial
reporting as of December 31, 2008 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report, which is included
in this Form 10-K.
Changes
in Internal Control Over Financial Reporting
Management
of the company has evaluated, with the participation of the company’s Chief
Executive Officer and Chief Financial Officer, changes in the company’s internal
controls over financial reporting during 2008.
During
the fourth quarter ended December 31, 2008, management made no changes to the
internal controls over financial reporting that materially affected, nor are
they reasonably likely to have a material effect on, our internal controls over
financial reporting.
Inherent
Limitations of Disclosure Controls and Procedures and Inherent Control over
Financial Reporting
The
company’s evaluation described in this item was undertaken acknowledging that
there are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
ITEM
9B. OTHER
INFORMATION
None.
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
All
information under this caption, except for the list of executive officers of the
company set forth below, may be found in the company’s proxy statement to be
delivered to stockholders in connection with the Annual Meeting of Shareholders,
which is scheduled for April 15, 2009 (the “Proxy Statement”) and such
information is incorporated in this report by reference.
Executive
Officers
|
The
company’s executive officers as of the date of this report are as
follows: |
|
T.
Jack Cahill
|
Mr.
Cahill, 60, has been President of Kaman Industrial Technologies
Corporation, a subsidiary of the company, since 1993. He has held various
positions with the company since 1975.
|
|
Candace
A. Clark
|
Ms.
Clark, 54, has been Senior Vice President, Chief Legal Officer and
Secretary since 1996. Ms. Clark has held various positions with the
company since 1985.
|
|
William
C. Denninger
|
Mr.
Denninger, 58, joined the company as Senior Vice
President – Finance on November 17, 2008 and was elected Senior
Vice President and Chief Financial Officer effective December 1, 2008,
upon the retirement of Robert M. Garneau. Mr. Denninger most recently
served for eight years as Senior Vice President and Chief Financial
Officer of Barnes Group, Inc., a $1.5 billion global industrial products
manufacturer and distributor. He also served on that company's board of
directors.
|
|
Ronald
M. Galla
|
Mr.
Galla, 57, has been Senior Vice President and Chief Information Officer
since 1995. Mr. Galla has been director of the company's
Management Information Systems since 1984.
|
|
Neal
J. Keating
|
Mr.
Keating, 53, was elected President and Chief Operating Officer as well as
a Director of the company effective September 17,
2007. Effective January 1, 2008, he was elected to the offices
of President and Chief Executive Officer. Prior to joining the company,
Mr. Keating served as Chief Operating Officer at Hughes Supply, a $5.4
billion industrial distributor that was acquired by Home Depot in 2006.
Prior to that, from August 2002 to June 2004, he served as Managing
Director/Chief Executive Officer of GKN Aerospace, a $1 billion aerospace
subsidiary of GKN, plc, serving also as Executive Director on the Main
Board of GKN plc and as a member of the Board of Directors of
Agusta-Westland. From 1978 to July 2002, Mr. Keating served in
increasingly senior positions at Rockwell International and as Executive
Vice President and Chief Operating Officer of Rockwell Collins, Commercial
Systems, a $1.7 billion commercial aerospace business from 2001 through
2002.
|
|
John
C. Kornegay
|
Dr.
Kornegay, 59, has been President of Kamatics Corporation, a subsidiary of
the company, since 1999. He has held various positions with Kamatics
Corporation since 1988.
|
|
Gregory
L. Steiner
|
Mr.
Steiner, 51, was elected President of Kaman Aerospace Group, Inc., with
overall responsibility for the company's Aerospace segments, effective
July 7, 2008. Since 2005, Mr. Steiner was employed at GE Aviation-Systems,
serving first as Vice President and General Manager, Military Mission
Systems and then as Vice President, Systems for GE Aviation-Systems,
responsible for systems integration. From 2004 to 2005, he served as Group
Vice President at Curtiss-Wright Controls, Inc., with responsibility for
four aerospace and industrial electronics businesses located in the U.S.
and United Kingdom. Prior to that, Mr. Steiner had a seventeen-year career
with Rockwell Collins, Inc., serving in a number of progressively
responsible positions, and departing as Vice President and General Manager
of Passenger Systems.
|
|
John
J. Tedone
|
Mr.
Tedone, 44, has been Vice President, Finance and Chief
Accounting Officer of the Company since April 2007. From April
2006 to April 2007, he served as Vice President, Internal Audit and from
November 2004 to April 2006 as Assistant Vice President, Internal Audit.
Prior to joining the company, from December 2002 to November 2004 he
served as Director, Finance at Diageo, N.A., a consumer products
company.
|
Each
executive officer holds office for a term of one year and until his or her
successor is duly appointed and qualified, in accordance with the company’s
Bylaws.
ITEM
11. EXECUTIVE
COMPENSATION
The
information under this caption in the Proxy Statement is incorporated in this
report by reference.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information under this caption in the Proxy Statement is incorporated in this
report by reference.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
information under this caption in the Proxy Statement is incorporated in this
report by reference.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information under this caption in the Proxy Statement is incorporated in this
report by reference.
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
|
FINANCIAL
STATEMENTS.See Item 8
of this Form 10-K setting forth our Consolidated Financial
Statements.
|
(a)(2)
|
FINANCIAL
STATEMENT SCHEDULES.An index to
the financial statement schedules immediately precedes such
schedules.
|
(a)(3)
|
EXHIBITS.An index to
the exhibits filed or incorporated by reference immediately precedes such
exhibits.
|
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Bloomfield, State of
Connecticut, on this 26th day of
February 2009.
|
|
KAMAN
CORPORATION
(Registrant)
|
|
By:
|
/s/ Neal
J. Keating
|
|
Neal
J. Keating
|
|
President
and
|
|
Chief
Executive Officer
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature
|
|
Title:
|
|
Date:
|
/s/ Neal
J. Keating
|
|
|
|
|
Neal
J. Keating
|
|
President
and
Chief Executive Officer
|
|
February
26, 2009
|
|
|
|
|
|
|
|
|
|
|
/s/ William
C. Denninger
|
|
|
|
|
William
C. Denninger
|
|
Senior
Vice President
and
Chief Financial Officer
(Principal
Financial Officer)
|
|
February
26, 2009
|
|
|
|
|
|
|
|
|
|
|
/s/ John
J. Tedone
|
|
|
|
|
John
J. Tedone
|
|
Vice
President – Finance and
Chief
Accounting Officer
|
|
February
26, 2009
|
|
|
|
|
|
|
|
|
|
|
/s/ Neal
J. Keating
|
|
|
|
|
Neal
J. Keating
|
|
|
|
February
26, 2009
|
Attorney-in-Fact
for:
|
|
|
|
|
|
|
|
|
|
Robert
Alvine
|
|
Director
|
|
|
Brian
E. Barents
|
|
Director
|
|
|
E.
Reeves Callaway III
|
|
Director
|
|
|
Karen
M. Garrison
|
|
Director
|
|
|
Edwin
A. Huston
|
|
Director
|
|
|
Eileen
S. Kraus
|
|
Director
|
|
|
Thomas
W. Rabaut
|
|
Director
|
|
|
Richard
J. Swift
|
|
Director
|
|
|
KAMAN
CORPORATION AND SUBSIDIARIES
Index to
Financial Statement Schedules
Report of
Independent Registered Public Accounting Firm
Financial
Statement Schedules:
Schedule V - Valuation
and Qualifying Accounts
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders
Kaman
Corporation:
Under
date of February 26, 2009, we reported on the consolidated balance sheets of
Kaman Corporation and subsidiaries as of December 31, 2008 and 2007, 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,
2008, and the effectiveness of internal controls over financial reporting as of
December 31, 2008, as contained in the 2008 annual report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index. The financial statement
schedule is the responsibility of the company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG
LLP
Hartford,
Connecticut
February
26, 2009
KAMAN
CORPORATION AND SUBSIDIARIES
SCHEDULE
V - VALUATION AND QUALIFYING ACCOUNTS
YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
DESCRIPTION
|
|
Balance
Beginning of Period
|
|
|
Charged
to Costs and Expenses
|
|
|
Others
(A)
|
|
|
Deductions
(B)
|
|
|
Balance
End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
1,811 |
|
|
$ |
910 |
|
|
$ |
266 |
|
|
$ |
815 |
|
|
$ |
2,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
1,796 |
|
|
$ |
725 |
|
|
$ |
0 |
|
|
$ |
710 |
|
|
$ |
1,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
2,308 |
|
|
$ |
164 |
|
|
$ |
0 |
|
|
$ |
676 |
|
|
$ |
1,796 |
|
(A) Additions
to allowance for doubtful accounts attributable to acquisitions.
(B) Write-off
of bad debts, net of recoveries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
Balance
Beginning of Period
|
|
|
Current
Year Provision (Benefit)
|
|
|
Others
|
|
|
Balance
End
of
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance on deferred tax assets
|
|
$ |
3,946 |
|
|
$ |
1,308 |
|
|
$ |
(254 |
) |
|
$ |
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance on deferred tax assets
|
|
$ |
3,710 |
|
|
$ |
159 |
|
|
$ |
77 |
|
|
$ |
3,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance on deferred tax assets
|
|
$ |
2,855 |
|
|
$ |
877 |
|
|
$ |
(22 |
) |
|
$ |
3,710 |
|
KAMAN
CORPORATION
INDEX TO
EXHIBITS
Exhibit
3a
|
The
Amended and Restated Certificate of Incorporation of the company, was
filed as Exhibit 3.1 to Form 8-K on November 4, 2005, Document No.
0001341004-05-000188.
|
by
reference
|
|
|
|
Exhibit
3b
|
The
Amended and Restated Bylaws of the company dated February 26, 2008 were
filed as Exhibit 3.1 to Form 8-K on February 28, 2008, Document No.
0000054381-08-000011.
|
by
reference
|
|
|
|
Exhibit
4a(i)
|
Revolving
Credit Agreement between the company and The Bank of Nova Scotia and Fleet
National Bank as Co-Administrative Agents and Bank One, N.A. as the
Documentation Agent and The Bank of Nova Scotia and Fleet Securities, Inc.
as the Co-Lead Arrangers and Various Financial Institutions dated as of
August 5, 2005 was filed as Exhibit 1 to Form 8-K with the Securities and
Exchange Commission on August 8, 2005, Document No. 0000054381-05-000051,
and Amendment No. 1 dated January 31, 2007 was filed as Exhibit 1 to
Form 8-K on January 31, 2007, Document No.
0000054381-07-000006
|
by
reference
|
|
|
|
Exhibit
4a(ii)
|
Amendment
No. 2 to Revolving Credit Agreement dated April 28, 2008.
|
attached
|
|
|
|
Exhibit
4a(iii)
|
Amendment
No. 3 to Revolving Credit Agreement dated October 29, 2008 was filed as
Exhibit 10.2 to Form 8-K on October 30, 2008, Document No.
0000054382-08-000069.
|
by
reference
|
|
|
|
Exhibit
4b
|
Credit
Agreement between the company, RWG Frankenjura-Industrie Flugwerklager
GmbH, and Wachovia Bank, N.A., dated July 29, 2002 was filed as Exhibit 4c
to Form 10-K filed with the Securities and Exchange Commission on March
26, 2003, Document No. 0000054381-03-000079. Amendments to the Agreement
were filed as Exhibit 4.2 to Form 10-Q with the Securities and Exchange
Commission on November 5, 2003, Document No. 0000054381-03-000124, Exhibit
4b to Form 8-K filed with the Securities and Exchange Commission on
October 21, 2004, Document No. 0000054381-04-000070. Schedules and
Exhibits to the Credit Agreement, which are listed in its Table of
Contents, are omitted but will be provided to the Commission upon
request.
|
by
reference
|
|
|
|
Exhibit
4c
|
Term
Credit Agreement dated October 29, 2008 among Kaman Corporation, the banks
listed therein, The Bank of Nova Scotia and Bank of America, N.A., as the
Co-Administrative Agents for the Banks filed as Exhibit 10.1 to Form 8-K
on October 30, 2008, Document No. 0000054381-08-000069.
|
by
reference
|
|
|
|
Exhibit
10a
|
Kaman
Corporation 2003 Stock Incentive Plan effective November 1, 2003, as
amended effective September 23, 2008 filed as Exhibit 10a(i) on Form 10-Q
on October 30, 2008, Document No. 0000054381-08-000070.
|
by
reference
|
|
|
|
Exhibit
10b
|
Kaman
Corporation Employees Stock Purchase Plan as amended effective September
23, 2008 was filed as Exhibit 10b(i) to Form 10-Q on October 30, 2008,
Document No. 0000054381-08-000070.
|
by
reference
|
Exhibit
10c
|
Kaman
Corporation Supplemental Employees' Retirement Plan was filed as Exhibit
10c to Form 10-K on March 15, 2001, Document No. 0000054381-02-000005, and
the Plan as amended was filed as Exhibit 10c to Form 10-K on March 5,
2004, Document No. 0000054381-04-000032 and as Exhibit 10.10 to Form 8-K
on February 26, 2007, Document No. 0000054381-07-000015.
|
by
reference
|
|
|
|
Exhibit
10c(i)
|
Post-2004
Supplemental Employees’ Retirement Plan was filed as Exhibit 10.11 to Form
8-K on February 26, 2007, Document No.
000054381-07-000015.
|
by
reference
|
|
|
|
Exhibit
10c(ii)
|
First
Amendment to Kaman Corporation Post-2004 Supplemental Employees’
Retirement Plan effective January 1, 2005 filed as Exhibit 10.1 to Form
8-K on February 28, 2008, Document No.
0000054381-08-000011.
|
by
reference
|
|
|
|
Exhibit
10d
|
Kaman
Corporation Amended and Restated Deferred Compensation Plan (Effective as
of November 12, 2002, except where otherwise indicated) was filed as
Exhibit 10d to Form 10-K, Document No. 0000054381-03-000079, filed with
the Securities and Exchange Commission on March 26, 2003. Amendments to
the Plan were filed as Exhibit 10d to Form 10-K, Document No.
0000054381-04-000032, filed with the Securities and Exchange Commission on
March 5, 2004, and Exhibit 10(a) on Form 10-Q, Document No.
0000054381-04-000059, filed with the Securities and Exchange Commission on
August 3, 2004.
|
by
reference
|
|
|
|
Exhibit
10d(i)
|
Kaman
Corporation Post-2004 Deferred Compensation Plan effective January 1, 2008
filed as Exhibit 10.2 to Form 8-K on February 28, 2008, Document No.
0000054381-08-000011.
|
by
reference
|
|
|
|
Exhibit
10e(i)
|
Kaman
Corporation Cash Bonus Plan effective as of January 1, 2008 filed as
Exhibit 10e(i) to Form 10-K on February 28, 2008, Document No.
0001193125-08-041841.
|
by
reference
|
|
|
|
Exhibit
10g(iv)
|
Executive
Employment Agreement between Candace A. Clark and Kaman Corporation, dated
as of January 1, 2007, as amended and restated November 11,
2008.
|
attached
|
|
|
|
Exhibit
10g (v)
|
Executive
Employment Agreement between Ronald M. Galla and Kaman Corporation, dated
as of January 1, 2007, as amended and restated November 11,
2008.
|
attached
|
|
|
|
Exhibit
10g (vii)
|
Executive
Employment Agreement between T. Jack Cahill and Kaman Industrial
Technologies Corporation, dated as of January 1, 2007, as amended and
restated November 11, 2008.
|
attached
|
|
|
|
Exhibit
10g (x)
|
Amended
and Restated Change in Control Agreement between Candace A. Clark and
Kaman Corporation, dated as of January 1, 2007, as amended and restated
November 11, 2008.
|
attached
|
|
|
|
Exhibit
10g (xi)
|
Amended
and Restated Change in Control Agreement between Ronald M. Galla and Kaman
Corporation, dated as of January 1, 2007, as amended and restated November
11, 2008.
|
attached
|
|
|
|
Exhibit
10g (xiii)
|
Amended
and Restated Change in Control Agreement between T. Jack Cahill and Kaman
Industrial Technologies Corporation, dated as of January 1, 2007, as
amended and restated November 11, 2008.
|
attached
|
Exhibit
10g (xviii)
|
Executive
Employment Agreement between Kaman Corporation and Neal J. Keating dated
August 7, 2007, as amended and restated November 11, 2008.
|
attached
|
|
|
|
Exhibit
10g (xix)
|
Change
in Control Agreement between Kaman Corporation and Neal J. Keating dated
August 7, 2007, as amended and restated November 11, 2008.
|
attached
|
|
|
|
Exhibit
10g (xx)
|
Executive
Employment Agreement dated June 3, 2008 between Kaman Aerospace
Group, Inc. and Gregory L. Steiner, as amended and restated November 11,
2008.
|
|
|
|
|
Exhibit
10g (xxi)
|
Change
in Control Agreement dated dated June 4, 2008 between Kaman
Aerospace Group, Inc. and Gregory L. Steiner, as amended and restated
November 11, 2008.
|
|
|
|
|
Exhibit
10g (xxii)
|
Executive
Employment Agreement dated November 17, 2008 between Kaman
Corporation and William C. Denninger and Offer Letter dated November 11,
2008 was filed as Exhibit 10.1 to Form 8-K on November 13, 2008, Document
No. 0000054381-08-000072.
|
by
reference
|
|
|
|
Exhibit
10g (xxiii)
|
Change
in Control Agreement dated November 17, 2008 between Kaman
Corporation and William C. Denninger dated November 12, 2008 was filed as
Exhibit 10.2 to Form 8-K on November 13, 2008, Document No.
0000054381-08-000072.
|
by
reference
|
|
|
|
Exhibit
10g (xxiv)
|
Retirement
and Consulting Letter Agreement between Robert M. Garneau and the Company
dated November 13, 2008 was filed as Exhibit 10.3 on Form 8-K on November
13, 2008, Document No. 0000054381-08-000072.
|
by
reference
|
|
|
|
Exhibit
10g (xxv)
|
Relocation
Management Agreement between Kaman Corporation and Cartus Corporation
dated April 7, 2008 was filed as Exhibit 10.1 to Form 8-K on April 14,
2008, Document No. 0000054381-08-0000029.
|
by
reference
|
|
|
|
Exhibit
10h (i)
|
Form
of Incentive Stock Option Agreement under the Kaman Corporation 2003 Stock
Incentive Plan.
|
|
|
|
|
Exhibit
10h (ii)
|
Form
of Non-Statutory Stock Option Agreement under the Kaman Corporation 2003
Stock Incentive Plan.
|
|
|
|
|
Exhibit
10h (iii)
|
Form
of Stock Appreciation Rights Agreement under the Kaman Corporation 2003
Stock Incentive Plan.
|
|
|
|
|
Exhibit
10h (iv)
|
Form
of Restricted Stock Agreement under the Kaman Corporation 2003 Stock
Incentive Plan was filed as Exhibit 10h(iv) to Form 10-Q on August 2,
2007, Document No. 0000054381-07-000092.
|
by
reference
|
Exhibit
10h(v)
|
Form
of Long Term Performance Award Agreement (Under the Kaman Corporation 2003
Stock Incentive Plan) was filed as Exhibit 10.2 to Form 8-K filed on
November 10, 2005, Document No. 0000054381-05-000090.
|
by
reference
|
|
|
|
Exhibit
10h(vii)
|
Deferred
Compensation Agreement between Kaman Corporation and Eileen S. Kraus dated
August 8, 1995 and First Amendment dated December 8, 2005 was filed as
Exhibit 10h(vii) to Form 10-K on February 27, 2006, Document No.
0000054381-06-000036.
|
by
reference
|
|
|
|
Exhibit
10h(viii)
|
Deferred
Compensation Agreement between Kaman Corporation and Robert Alvine dated
December 16, 2006 was filed as Exhibit 10h(viii) to Form 10-K on March 1,
2007, Document No. 0000054381-07-000022.
|
by
reference
|
|
|
|
Exhibit
14
|
Kaman
Corporation Code of Business Conduct dated November 11,
2008.
|
attached
|
|
|
|
Exhibit
21
|
List
of Subsidiaries
|
attached
|
|
|
|
Exhibit
23
|
Consent
of Independent Registered Public Accounting Firm
|
attached
|
|
|
|
Exhibit
24
|
Power
of attorney under which this report was signed on behalf of certain
directors
|
attached
|
|
|
|
Exhibit
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities
and Exchange Act of 1934.
|
attached
|
|
|
|
Exhibit
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14 under the Securities
and Exchange Act of 1934.
|
attached
|
|
|
|
Exhibit
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
attached
|
|
|
|
Exhibit
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
attached
|