Kaman Corporation Form 10-Q for Quarter Ended March 31, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
|
For
The Quarterly Period Ended March
31, 2006
|
OR
o
|
Transition
Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the
Transition
Period From ___ to ___
|
Commission
File No. 0-1093
KAMAN
CORPORATION
(Exact
name of registrant as specified in its charter)
Connecticut
|
|
06-0613548
|
(State
or other jurisdiction
|
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
|
Identification
No.)
|
1332
Blue
Hills Avenue
Bloomfield,
Connecticut 06002
(Address
of principal executive offices)
(860)
243-7100
Registrant's
telephone number, including area code
Indicate
by check mark whether the registrant (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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
|
|
Accelerated
filer x
|
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock
as of May 1, 2006:
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements:
Condensed
Consolidated Balance Sheets
(In
thousands)
(unaudited)
|
|
March
31, 2006
|
|
|
|
December
31, 2005
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
13,709
|
|
|
|
|
|
|
|
$
|
12,998
|
|
Accounts
receivable, net
|
|
|
|
|
|
189,954
|
|
|
|
|
|
|
|
|
176,285
|
|
Inventories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
work
in process
|
|
$
|
85,793
|
|
|
|
|
|
|
|
$
|
81,014
|
|
|
|
|
Finished
goods
|
|
|
14,652
|
|
|
|
|
|
|
|
|
14,764
|
|
|
|
|
Merchandise
for resale
|
|
|
125,347
|
|
|
225,792
|
|
|
|
|
|
124,936
|
|
|
220,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
|
|
|
30,465
|
|
|
|
|
|
|
|
|
31,652
|
|
Other
current assets
|
|
|
|
|
|
18,319
|
|
|
|
|
|
|
|
|
17,159
|
|
Total
current assets
|
|
|
|
|
|
478,239
|
|
|
|
|
|
|
|
|
458,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant & equip., at cost
|
|
|
168,580
|
|
|
|
|
|
|
|
|
167,499
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
amortization
|
|
|
117,959
|
|
|
|
|
|
|
|
|
115,907
|
|
|
|
|
Net
property, plant & equipment
|
|
|
|
|
|
50,621
|
|
|
|
|
|
|
|
|
51,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
54,815
|
|
|
|
|
|
|
|
|
54,693
|
|
Other
intangible assets, net
|
|
|
|
|
|
19,754
|
|
|
|
|
|
|
|
|
19,836
|
|
Deferred
income taxes
|
|
|
|
|
|
8,280
|
|
|
|
|
|
|
|
|
7,908
|
|
Other
assets, net
|
|
|
|
|
|
5,743
|
|
|
|
|
|
|
|
|
5,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
$
|
617,452
|
|
|
|
|
|
|
|
$
|
598,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial statements.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Condensed
Consolidated Balance Sheets (continued)
(In
thousands)
(unaudited)
|
|
|
March
31, 2006
|
|
|
December
31, 2005
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
10,994
|
|
$
|
915
|
|
Current
portion of long-term debt
|
|
|
1,551
|
|
|
1,660
|
|
Accounts
payable - trade
|
|
|
84,250
|
|
|
94,716
|
|
Accrued
contract losses
|
|
|
16,728
|
|
|
19,950
|
|
Accrued
restructuring costs
|
|
|
2,946
|
|
|
3,026
|
|
Other
accrued liabilities
|
|
|
46,500
|
|
|
54,227
|
|
Advances
on contracts
|
|
|
10,971
|
|
|
14,513
|
|
Other
current liabilities
|
|
|
27,132
|
|
|
27,846
|
|
Income
taxes payable
|
|
|
5,788
|
|
|
6,423
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
206,860
|
|
|
223,276
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 10)
|
|
|
-
|
|
|
-
|
|
Long-term
debt, excl. current portion
|
|
|
90,905
|
|
|
62,235
|
|
Other
long-term liabilities
|
|
|
45,664
|
|
|
43,232
|
|
Shareholders'
equity
|
|
|
274,023
|
|
|
269,754
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
617,452
|
|
$
|
598,497
|
|
See
accompanying notes to condensed consolidated financial statements.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Condensed
Consolidated Statements of Operations
(In
thousands except per share amounts)
(unaudited)
|
|
For
the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
296,637
|
|
$
|
263,306
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
215,292
|
|
|
192,411
|
|
Selling,
general and
|
|
|
|
|
|
|
|
administrative
expense
|
|
|
70,074
|
|
|
62,178
|
|
Net
(gain) loss on sale of assets
|
|
|
(13
|
)
|
|
4
|
|
Other
operating income
|
|
|
(371
|
)
|
|
(458
|
)
|
Interest
expense, net
|
|
|
1,258
|
|
|
712
|
|
Other
expense, net
|
|
|
260
|
|
|
234
|
|
|
|
|
286,500
|
|
|
255,081
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
|
|
10,137
|
|
|
8,225
|
|
Income
tax expense
|
|
|
(4,217
|
)
|
|
(3,520
|
)
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
5,920
|
|
$
|
4,705
|
|
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.25
|
|
$
|
.21
|
|
Diluted
|
|
$
|
.24
|
|
$
|
.21
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
23,937
|
|
|
22,778
|
|
Diluted
|
|
|
24,946
|
|
|
23,649
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$
|
.125
|
|
$
|
.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial statements.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Condensed
Consolidated Statements of Cash Flows
(In
thousands)
(unaudited)
|
|
For
the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
5,920
|
|
$
|
4,705
|
|
Depreciation
and amortization
|
|
|
2,533
|
|
|
2,289
|
|
Provision
(recovery) for losses on accounts receivable
|
|
|
(104
|
)
|
|
53
|
|
Net
(gain) loss on sale of assets
|
|
|
(13
|
)
|
|
4
|
|
Deferred
income taxes
|
|
|
814
|
|
|
1,233
|
|
Other,
net
|
|
|
2,923
|
|
|
2,320
|
|
Changes
in current assets and liabilities,
|
|
|
|
|
|
|
|
excluding
effects of acquisitions/divestitures:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(13,531
|
)
|
|
(12,420
|
)
|
Inventory
|
|
|
(5,048
|
)
|
|
(3,431
|
)
|
Accounts
payable
|
|
|
(10,474
|
)
|
|
(4,709
|
)
|
Accrued
contract losses
|
|
|
(3,225
|
)
|
|
(7,005
|
)
|
Accrued
restructuring costs
|
|
|
(80
|
)
|
|
353
|
|
Advances
on contracts
|
|
|
(3,542
|
)
|
|
1,229
|
|
Changes
in other current assets and liabilities
|
|
|
(9,620
|
)
|
|
(4,389
|
)
|
Income
taxes payable
|
|
|
(696
|
)
|
|
1,322
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) operating activities
|
|
|
(34,143
|
)
|
|
(18,446
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of assets
|
|
|
24
|
|
|
162
|
|
Expenditures
for property, plant & equipment
|
|
|
(1,715
|
)
|
|
(1,098
|
)
|
Acquisition
of businesses, less cash acquired
|
|
|
(53
|
)
|
|
(367
|
)
|
Other,
net
|
|
|
(178
|
)
|
|
679
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) investing activities
|
|
|
(1,922
|
)
|
|
(624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Condensed
Consolidated Statements of Cash Flows (continued)
(In
thousands)
(unaudited)
|
|
For
the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in notes payable
|
|
|
10,079
|
|
|
1,456
|
|
Changes
in debt
|
|
|
28,561
|
|
|
19,741
|
|
Proceeds
from exercise of employee stock plans
|
|
|
551
|
|
|
278
|
|
Dividends
paid
|
|
|
(2,988
|
)
|
|
(2,504
|
)
|
Other
|
|
|
476
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) financing activities
|
|
|
36,679
|
|
|
18,971
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
614
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
97
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
12,998
|
|
|
12,369
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
13,709
|
|
$
|
12,136
|
|
Supplemental
Disclosure of Cash Flow Information:
Non-cash
financing activity for the first quarter of 2006 includes the conversion of
114
debentures for a total value of $114,000 into 4,868 shares of common stock,
issued from treasury.
See
accompanying notes to condensed consolidated financial statements.
Notes
to Condensed Consolidated Financial Statements (In thousands)
(Unaudited)
1.
Basis
of Presentation
The
December 31, 2005 condensed consolidated balance sheet amounts have been derived
from the previously audited consolidated balance sheet of Kaman Corporation
and
subsidiaries. In the opinion of management, the balance of the condensed
financial information reflects all adjustments which are necessary for a fair
presentation of the financial position, results of operations and cash flows
for
the interim periods presented and are of a normal recurring nature, unless
otherwise disclosed in this report. Certain amounts in prior period condensed
consolidated financial statements have been reclassified to conform to current
year presentation.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued (In thousands)
(Unaudited)
The
company has a calendar year-end; however, its first three fiscal quarters follow
a 13-week convention, with each quarter ending on a Friday. The first quarter
for 2006 and 2005 ended on March 31, 2006 and April 1, 2005,
respectively.
The
statements should be read in conjunction with the consolidated financial
statements and notes included in the company’s annual report on Form 10-K for
the year ended December 31, 2005. The results of operations for the interim
period presented are not necessarily indicative of trends or of results to
be
expected for the entire year.
Recently
Issued Accounting Pronouncements
In
February 2006, the FASB issued Statement of Financial Accounting Standards
No.
155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB
Statements No. 133 and 140” which is effective for fiscal years beginning after
September 15, 2006. The statement was issued to clarify the application of
FASB
Statement No. 133 to beneficial interests in securitized financial assets and
to
improve the consistency of accounting for similar financial instruments,
regardless of the form of the instruments. Management does not believe that
the
adoption of this standard will have a material impact on our financial results.
In
March
2006, the FASB issued Statement of Financial Accounting Standards No. 156,
“Accounting for Servicing of Financial Assets - an amendment of FASB Statement
No. 140” which is effective for fiscal years beginning after September 15, 2006.
This statement was issued to simplify the accounting for servicing rights and
to
reduce the volatility that results from using different measurement attributes.
We have evaluated the new statement and have determined that it will not have
a
material impact on the determination or reporting of our financial results.
Cash
Flow Items
Cash
payments for interest were $1,435 and $1,166 for the three months ended March
31, 2006 and April 1, 2005, respectively. Cash payments for income taxes, net
of
refunds, for the comparable periods were $3,608 and $1,029,
respectively.
Comprehensive
Income
Comprehensive
income was $5,787 and $5,256 for the three months ended March 31, 2006 and
April
1, 2005, respectively. The changes to net earnings used to determine
comprehensive income are comprised of foreign currency translation
adjustments.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued (In thousands)
(Unaudited)
2.
Accounts
Receivable
Accounts
receivable consist of the following:
|
|
|
March
31, 2006
|
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$
|
106,133
|
|
$
|
96,776
|
|
|
|
|
|
|
|
|
|
U.S.
Government contracts:
|
|
|
|
|
|
|
|
Billed
|
|
|
20,696
|
|
|
16,140
|
|
Costs
and accrued profit - not billed
|
|
|
1,648
|
|
|
956
|
|
|
|
|
|
|
|
|
|
Commercial
and other government contracts:
|
|
|
|
|
|
|
|
Billed
|
|
|
20,013
|
|
|
19,569
|
|
Costs
and accrued profit - not billed
|
|
|
44,760
|
|
|
46,244
|
|
|
|
|
|
|
|
|
|
Less
allowance for doubtful accounts
|
|
|
(3,296
|
)
|
(3,400)
|
|
|
|
|
|
Total
|
|
$
|
189,954
|
|
$
|
176,285
|
|
3.
Shareholders’ Equity
Changes
in shareholders’ equity for the first quarter of 2006 were as
follows:
Balance,
January 1, 2006
|
|
$
|
269,754
|
|
|
|
|
|
|
Net
earnings
|
|
|
5,920
|
|
Foreign
currency translation adjustment
|
|
|
(133
|
)
|
Comprehensive
income
|
|
|
5,787
|
|
|
|
|
|
|
Dividends
declared
|
|
|
(2,997
|
)
|
Employee
stock plans
|
|
|
1,365
|
|
Debentures
|
|
|
114
|
|
|
|
|
|
|
Balance,
March 31, 2006
|
|
$
|
274,023
|
|
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued (In thousands)
(Unaudited)
4.
Restructuring Costs
The
following table displays the activity and balances of the pre-tax charges
relating to the Moosup, CT plant closure as of and for the quarter ended March
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
December
31,
|
|
|
|
|
|
Cash
|
|
|
March
31,
|
|
|
|
|
2005
|
|
|
Additions
|
|
|
Payments
|
|
|
2006
|
|
Restructuring
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
closing
|
|
$
|
3,026
|
|
$
|
-
|
|
$
|
(80
|
)
|
$
|
2,946
|
|
Total
restructuring costs
|
|
$
|
3,026
|
|
$
|
-
|
|
$
|
(80
|
)
|
$
|
2,946
|
|
5.
Warranty
Reserve
The
following table presents the activity and balances of accrued product warranty
costs as of and for the quarter ended March 31, 2006:
Balance
at January 1, 2006
|
|
$
|
4,304
|
|
Product
warranty accrual
|
|
|
55
|
|
Warranty
costs incurred
|
|
|
(186
|
)
|
Release
to income
|
|
|
(44
|
)
|
Balance
at March 31, 2006
|
|
$
|
4,129
|
|
The
following is a summary of significant warranty matters as of March 31,
2006:
The
company continues to work to resolve two warranty-related matters that primarily
impact our FMU-143 program at the Dayron facility. 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 Dayron was acquired by Kaman that have since
been found to contain an incorrect part. The net reserve as of the end of the
first quarter of 2006 related to these two matters is $2,867. This represents
management’s best estimate of the costs, including re-work, transportation costs
and testing, currently expected to be incurred in resolving these matters.
Work
has commenced on these warranty items and it is expected that work will be
completed during 2006.
As
previously disclosed, in March 2005 the U.S. Attorney's Office for the Middle
District of Florida and the Defense Criminal Investigative Service (DCIS)
initiated an investigation into the second warranty matter. Dayron has
cooperated fully with the authorities, working to resolve the matter in a
mutually satisfactory manner. As of the date of this report, the company has
not
received any notification from the authorities regarding conclusion of the
investigation.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued (In thousands)
(Unaudited)
On
June
29, 2005, the company notified its two affected customers of a non-conforming
part that may have an impact on certain aircraft panels manufactured by the
Aerostructures facility in Wichita, Kansas, beginning in September 2002. As
a
result of this matter, the company recorded a warranty accrual of $1,040 during
2005, in anticipation of incurring its estimated share of certain costs to
replace and install the panels on certain aircraft. As of March 31, 2006, $677
is available for the completion of this matter. Management is working with
its
customers to resolve this issue in a mutually satisfactory manner.
6.
Accrued
Contract Losses
The
following is a summary of activity and balances of accrued contract losses
as of
and for the quarter ended March 31, 2006:
Balance
at January 1, 2006
|
|
$
|
19,950
|
|
Additions
to loss accrual
|
|
|
2,953
|
|
Costs
incurred
|
|
|
(5,852
|
)
|
Release
to income
|
|
|
(323
|
)
|
Balance
at March 31, 2006
|
|
$
|
16,728
|
|
During
the first quarter of 2006, the company recorded an additional $2,508 pretax
charge for the SH-2G(A) Helicopter Program for Australia based upon additional
work that is necessary prior to entering the final customer acceptance phase.
This contract has been in a loss position since 2002. The remaining accrued
contract loss as of March 31, 2006 is $14,428. This contract loss accrual
continues to be monitored and adjusted as necessary to reflect the anticipated
cost of the complex integration process and the results of the testing.
7.
Pension Cost
Components
of net pension cost for the Qualified Pension Plan and Supplemental Employees’
Retirement Plan (SERP) are as follows:
|
|
|
Qualified
Pension Plan
|
|
|
SERP
|
|
|
|
|
For
the Three Months Ended
|
|
|
For
the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost for benefits earned
|
|
$
|
3,142
|
|
$
|
2,873
|
|
$
|
528
|
|
$
|
352
|
|
Interest
cost on projected
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
obligation
|
|
|
6,603
|
|
|
6,367
|
|
|
432
|
|
|
332
|
|
Expected
return on plan assets
|
|
|
(7,362
|
)
|
|
(7,119
|
)
|
|
-
|
|
|
-
|
|
Net
amortization and deferral
|
|
|
752
|
|
|
418
|
|
|
389
|
|
|
56
|
|
Net
pension cost
|
|
$
|
3,135
|
|
$
|
2,539
|
|
$
|
1,349
|
|
$
|
740
|
|
The
company expects to contribute $9,810 to the qualified pension plan and $823
to
the SERP in 2006.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued (In thousands)
(Unaudited)
8.
Business Segments
Summarized
financial information by business segment is as follows:
|
|
|
March
31, 2006
|
|
|
December
31, 2005
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
Aerospace
|
|
$
|
273,594
|
|
$
|
266,369
|
|
Industrial
Distribution
|
|
|
185,003
|
|
|
175,725
|
|
Music
|
|
|
117,062
|
|
|
117,347
|
|
Corporate
|
|
|
41,793
|
|
|
39,056
|
|
|
|
$
|
617,452
|
|
$
|
598,497
|
|
|
|
For
the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
|
$
|
73,636
|
|
$
|
65,681
|
|
Industrial
Distribution
|
|
|
170,577
|
|
|
155,993
|
|
Music
|
|
|
52,424
|
|
|
41,632
|
|
|
|
|
|
|
|
|
|
|
|
$
|
296,637
|
|
$
|
263,306
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
Aerospace
|
|
$
|
10,001
|
|
$
|
7,630
|
|
Industrial
Distribution (1)
|
|
|
10,807
|
|
|
8,458
|
|
Music
|
|
|
1,278
|
|
|
2,574
|
|
Net
gain (loss) on sale of assets
|
|
|
13
|
|
|
(4
|
)
|
Corporate
expense
|
|
|
(10,444
|
)
|
|
(9,487
|
)
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
11,655
|
|
|
9,171
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(1,258
|
)
|
|
(712
|
)
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
(260
|
)
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
|
$
|
10,137
|
|
$
|
8,225
|
|
(1) During
the quarter, for our Industrial Distribution segment, it was determined that
in-bound freight costs were not being included in inventory consistent with
our
other businesses. This resulted in an adjustment that increased the first
quarter 2006 earnings by $1,589.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued
(In
thousands except share and per share amounts) (Unaudited)
9.
Share-Based
Arrangements
On
January 1, 2006, we adopted Statement of Financial Accounting Standards No.
123(R) (SFAS 123(R)) related to accounting for share-based payments and,
accordingly, we are now recording compensation expense for share-based awards
based upon an assessment of the grant date fair value for stock options and
restricted stock awards. Prior to 2006, share based compensation was accounted
for in accordance with Accounting Principles Board Opinion No. 25. We are
using
the modified prospective method of adoption, which allows us to apply SFAS
123(R) on a going-forward basis rather than restating prior periods.
The
following table summarizes share-based compensation expense recorded during
each
period presented:
|
|
Three
Months Ended
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
Stock
options
|
|
$
|
232
|
|
$
|
-
|
|
Restricted
stock awards
|
|
|
99
|
|
|
122
|
|
Stock
appreciation rights
|
|
|
1,257
|
|
|
-
|
|
Employee
stock purchase plan
|
|
|
51
|
|
|
-
|
|
Total
share-based compensation expense
|
|
$
|
1,639
|
|
$
|
122
|
|
Stock
compensation expense for stock options and restricted stock awards is recognized
on a straight-line basis over the vesting period of the award. The $1,257
expense recorded for stock appreciation rights includes a cumulative effect
adjustment of $105 recorded as of the beginning of the period as a result
of
adopting SFAS(R) and the effect of changing from intrinsic value to fair
value.
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.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued
(In
thousands except share and per share amounts) (Unaudited)
The
following table reflects pro forma net earnings and earnings per share for
the
quarter ended April 1, 2005 as if we had applied the fair value
method.
|
|
April
1, 2005
|
|
|
|
Net
earnings:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
4,705
|
|
|
|
|
Stock
compensation reported in net
|
|
|
|
|
|
|
|
earnings,
net of tax effect
|
|
|
76
|
|
|
*
|
|
Less
stock compensation expense,
|
|
|
|
|
|
|
|
net
of tax effect
|
|
|
(261
|
)
|
|
**
|
|
Pro
forma net earnings
|
|
$
|
4,520
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic:
|
|
|
|
|
|
|
|
As
reported
|
|
|
.21
|
|
|
|
|
Pro
forma
|
|
|
.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted:
|
|
|
|
|
|
|
|
As
reported
|
|
|
.21
|
|
|
|
|
Pro
forma
|
|
|
.20
|
|
|
|
|
*
includes restricted stock expense of $76, net of tax
**
includes restricted stock expense of $76, stock options expense of $155 and
ESPP
expense of $30, all of which are net of tax.
Stock
Incentive Plan
The
2003
Stock Incentive Plan (the “2003 Plan”) allows for the issuance of 2,000,000
shares of common stock. As did 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 plan (LTIP) awards.
Stock
options are granted with an exercise price equal to the average market price
of
our stock at the date of grant. Options and Stock Appreciation Rights (SARs)
granted under the plan generally expire ten years from the date of grant and
vest 20% each year over a 5 year term on each of the first five anniversaries
from the date of grant. Restricted stock awards (RSA) are generally granted
with
restrictions that lapse at the rate of 20% per year over a 5 year term 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.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued
(In
thousands except share and per share amounts) (Unaudited)
Stock
option activity was as follows:
Stock
options outstanding:
|
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
Price
|
|
Balance
at January 1, 2006
|
|
|
910,243
|
|
$
|
13.13
|
|
Options
granted
|
|
|
158,600
|
|
|
21.38
|
|
Options
exercised
|
|
|
(27,870
|
)
|
|
12.04
|
|
Options
cancelled
|
|
|
(14,360
|
)
|
|
14.00
|
|
Balance
at March 31, 2006
|
|
|
1,026,613
|
|
$
|
14.42
|
|
The
following table presents information regarding options outstanding as of March
31, 2006:
|
|
|
|
|
Weighted
average contractual remaining term
-
options outstanding
|
|
|
7.2
years
|
|
Aggregate
intrinsic value - options outstanding
|
|
$
|
11,106
|
|
|
|
|
|
|
Options
exercisable
|
|
|
464,194
|
|
Weighted
average exercise price - options exercisable
|
|
$
|
14.02
|
|
Aggregate
intrinsic value - options exercisable
|
|
$
|
5,205
|
|
Weighted
average contractual remaining term - options exercisable
|
|
|
5.4
Years
|
|
Intrinsic
value represents the amount by which the market price of the stock on the
measurement date exceeded the exercise price of the option. The aggregate
intrinsic value on the date of exercise of options that were exercised during
the first quarter of 2006 was $283. The company’s policy for issuing shares upon
stock option exercises is to issue those shares from treasury stock. The company
currently has an open stock re-purchase plan which would enable us to
re-purchase shares as needed.
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 for the first quarter end
of
2006 and 2005.
|
|
Three
Months Ended
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
Expected
option term
|
|
|
6.5
years
|
|
|
8
years
|
|
Expected
volatility
|
|
|
41.5
|
%
|
|
39.9
|
%
|
Risk-free
interest rate
|
|
|
4.5
|
%
|
|
4.2
|
%
|
Expected
dividend yield
|
|
|
2.5
|
%
|
|
3.8
|
%
|
Per
share fair value of options granted
|
|
$
|
7.99
|
|
$
|
3.68
|
|
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued
(In
thousands except share and per share amounts) (Unaudited)
The
expected term for options represents an estimate of the period of time the
stock
options are expected to remain outstanding. Our expected term is generally
based
upon an analysis of historical behavior of stock option holders during the
period from 1995 through 2005.
The
volatility assumption is based on the historical daily price data of our stock
over a period equivalent to the weighted average expected term of our options.
Management evaluated 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
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:
Restricted
Stock outstanding:
|
|
|
RSA
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Nonvested
at January 1, 2006
|
|
|
56,580
|
|
$
|
12.79
|
|
RSA
granted
|
|
|
29,475
|
|
|
21.38
|
|
Vested
|
|
|
(30,260
|
)
|
|
13.94
|
|
Cancelled
|
|
|
(625
|
)
|
|
21.38
|
|
Nonvested
at March 31, 2006
|
|
|
55,170
|
|
$
|
16.65
|
|
The
grant
date fair value for restricted stock is the average market price of the
underlying shares on date of grant.
Stock
Appreciation Rights activity is as follows:
SARs
outstanding:
|
|
|
SARs
|
|
|
Weighted-Average
Exercise
Price
|
|
Balance
at January 1, 2006
|
|
|
241,780
|
|
$
|
11.51
|
|
SARs
granted
|
|
|
-
|
|
|
-
|
|
SARs
exercised
|
|
|
(102,720
|
)
|
|
12.67
|
|
SARs
cancelled
|
|
|
-
|
|
|
-
|
|
Balance
at March 31, 2006
|
|
|
139,060
|
|
$
|
10.65
|
|
Total
cash paid to settle stock appreciation rights (at intrinsic value) during
the
first quarter of 2006 was $1,227. There were no exercises of SARs during
the
first quarter of 2005. 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 deduction. During the first quarter of 2006, we recorded a tax benefit
of $70 for these two types of compensation expense.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
1. Financial Statements, Continued:
Notes
to
Condensed Consolidated Financial Statements, Continued
(In
thousands except share and per share amounts) (Unaudited)
The
windfall tax benefit is the tax benefit realized on the exercise of
non-qualified stock options and disqualifying dispositions of incentive stock
options and our Employee Stock Purchase Plan in excess of the deferred tax
asset
originally recorded. The total windfall tax benefit realized in the first
quarter of 2006 was $55.
As
of
March 31, 2006, future compensation costs related to nonvested stock options
and
restricted stock grants is $3,601. Management anticipates that this cost will
be
recognized over a weighted average period of 2.02 years.
Employees
Stock Purchase Plan
The
Kaman
Corporation Employees Stock Purchase Plan (ESPP) 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. Purchases under this Plan are made
on a
monthly basis. The plan provides for the grant of rights to employees to
purchase a maximum of 1,500,000 shares of common stock. Under SFAS 123(R) this
Plan is considered compensatory. Accordingly, we have recorded expense of $51
representing the 15% discount given to employees who purchased shares during
the
first quarter of 2006. As of March 31, 2006, there were 524,509 shares available
for offering under the plan.
10.
Contingencies
The
jury
trial for the company's suit against the University of Arizona began in Arizona
state court on April 11, 2006. The company believes that the Electro-Optics
Development Center (EODC) of its Kaman Aerospace subsidiary has suffered damages
of approximately $6,000 as a result of work it performed beyond the scope of
a
$12,800 contract with the University and which the University refused to address
under the changes clause in the contract. During trial, the court has currently
limited the company's presentation of damages to approximately $3,000; the
company believes that these rulings are incorrect and has preserved its right
to
appeal following trial. The University has filed a counterclaim in the suit
and
through pre-litigation disclosure, the current counterclaim amount appears
to be
approximately $13,800, representing the alleged cost to the University to
complete EODC's part of the project. The company believes that the University
is
not entitled to damages due to the University's breach of the contract.
Management currently estimates that the trial may continue through the end
of
May 2006.
Management
continues its discussions with the U.S. Naval Air Systems Command (NAVAIR)
regarding the potential purchase of a portion of the Bloomfield campus that
the
company currently leases from NAVAIR and has operated for several decades for
the principal purpose of performing U.S. government contracts. Management
believes that ownership of the facility, which is currently utilized for flight
and ground test operations and limited parts manufacturing for the Helicopters
Division, would be beneficial to the company’s future operations. The company
has submitted an offer to NAVAIR and the General Services Administration
detailing
a proposed method that would be used for the purchase of the facility,
which would include as part of the purchase price the company undertaking
certain environmental remediation activities.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. 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 in the form of a narrative
regarding our financial condition, results of operations, liquidity and certain
other factors that may affect our future results. The MD&A is presented in
seven sections:
I.
|
Overview
of Business
|
II.
|
First
Quarter 2006 Highlights
|
III.
|
Results
of Operations
|
IV.
|
Critical
Accounting Estimates
|
V.
|
Liquidity
and Capital Resources
|
VI.
|
Contractual
Obligations and Off-Balance Sheet Arrangements
|
VII.
|
Recent
Accounting Standards
|
Our
MD&A should be read in conjunction with our Annual Report for the year ended
December 31, 2005.
I. OVERVIEW
OF BUSINESS
Kaman
Corporation is composed of three business segments: Aerospace, Industrial
Distribution, and Music.
AEROSPACE
SEGMENT
This
segment has four primary operating units: Aerostructures, Fuzing, Helicopters
and Kamatics.
The
Aerostructures Division produces aircraft subassemblies and other parts for
commercial and military airliners and helicopters. 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 company’s Wichita, Kansas (Plastic Fabricating Company)
facility.
The
Fuzing Division 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, General Dynamics, Raytheon, Lockheed Martin and Boeing. This
division’s operations are conducted at the Middletown, Connecticut and Orlando,
Florida (Dayron) facilities.
The
Helicopters Division supports and markets Kaman SH-2G maritime helicopters
operating with foreign militaries as well as K-MAX “aerial truck” helicopters
operating with government and commercial customers in several countries. The
SH-2G helicopter program generally consists of remanufacture of the division’s
SH-2F helicopters to the SH-2G configuration or refurbishment, upgrades and
ongoing support of existing SH-2G helicopters. The SH-2, including its F and
G
configurations, was originally manufactured for the U.S. Navy. The SH-2G
aircraft is currently in service with the Egyptian Air Force and the New Zealand
and Polish navies. Upon completion of the Australia SH-2G (A) program, the
aircraft will also be in service with the Royal Australian Navy
(RAN). The division also has other small manufacturing programs and markets
its
helicopter engineering expertise on a subcontract basis. This division’s
operations are primarily conducted at the Bloomfield, Connecticut
facility.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations -Continued
Kamatics
primarily manufactures proprietary self-lubricating bearings used in aircraft
flight controls, turbine engines and landing gear. These bearings are currently
used in almost all military and commercial aircraft in production in North
and
South America and Europe. Kamatics also manufactures driveline couplings for
helicopters. These are market-leading
products for applications requiring a highly sophisticated level of engineering
and specialization in the airframe bearing market. Operations are conducted
at
the Bloomfield, Connecticut and Dachsbach, Germany (RWG)
facilities.
INDUSTRIAL
DISTRIBUTION SEGMENT
The
Industrial Distribution segment is the third largest power transmission/motion
control industrial distributor in North America. We provide products and
services to the bearings, electrical/mechanical power transmission, fluid power,
motion control and materials handling markets. Our locations consist of nearly
200 branches, distribution centers and call centers across the United States
and
in Canada and Mexico. The breadth of our footprint allows us to offer almost
2
million items, as well as value-added services, to more than 50,000 companies
in
70 of the top 100 industrial markets in the United States.
MUSIC
SEGMENT
The
Music
segment is the largest independent distributor of musical instruments and
accessories in the United States, offering more than 20,000 products for
amateurs and professionals. Our premium branded products, many of which are
brought to the market on an exclusive basis, and our market-leading
business-to-business systems for our customer base of over 10,000 retailers
nationwide, contribute to the performance of the business. Our array of fretted
instruments includes premier and proprietary products, such as the Ovation® and
Hamer® guitars, and Takamine® guitars which is under an exclusive distribution
agreement. We have also significantly extended our line of percussion products
and accessories over the past few years, by acquiring Latin Percussion® (the
leading supplier of hand percussion instruments) and enhancing the CB®, Toca®
and Gibraltar® lines to include an exclusive distribution agreement with
Gretsch® drums. The segment also became the exclusive U.S. distributor of Sabian
Cymbals® effective April 1, 2006.
While
the
vast majority of the segment’s sales are to North American customers, we
continue to build our presence in key international markets including Europe,
Asia and Australia. Music segment operations are headquartered in Bloomfield,
Connecticut and conducted from manufacturing plants in New Hartford, Connecticut
and Scottsdale, Arizona, and strategically placed warehouse facilities that
primarily cover the North American market.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations -Continued
II. FIRST
QUARTER 2006 HIGHLIGHTS
The
following is a summary of key events that occurred during the first quarter
of
2006:
· |
Our
net sales increased 12.7 percent in the first quarter of 2006 compared
to
the first quarter of 2005.
|
· |
Our
net earnings increased 25.8 percent in the first quarter of 2006
compared
to the first quarter of 2005.
|
· |
Earnings
per share diluted increased 14.3 percent in the first quarter of
2006
compared to the first quarter of 2005. The 2006 earnings per share
diluted
reflects the effect of the 3.6 percent additional dilution resulting
from
the recapitalization completed in November 2005.
|
·
|
We
recorded an additional $2.5 million charge related to the increase
in
anticipated costs to complete the SH-2G(A) program for the RAN based
upon
additional information obtained during the first quarter of
2006.
|
· |
In
March 2006, the Air Force released production for Option 3 for the
Joint
Programmable Fuze (JPF) program that is scheduled to begin assembly
in
late 2006.
|
· |
The
Industrial Distribution segment and the Kamatics subsidiary continued
to
experience strong sales during the first quarter of
2006.
|
· |
The
Music segment produced mixed results which management believes is
partially a result of lower discretionary spending within our current
primary consumer base as well as retailers selling their overstock
of
inventory during the first quarter of
2006.
|
Subsequent
Events
The
company held its 61st
Annual
Meeting on April 18, 2006 where three Directors, two of whom are new to the
company, were elected for a three-year term. Please refer to Part
II, Item 4 on Form 10-Q for additional information.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations -Continued
III. RESULTS
OF OPERATIONS
CONSOLIDATED
RESULTS -
The
following table presents selected financial data of the company for the first
quarter of 2006 compared to the first quarter of 2005:
Selected
Consolidated Financial Information
|
(In
millions)
|
|
|
For
the Three Months Ended
|
|
|
|
|
|
|
|
|
In
millions, except per share data
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
296.6
|
|
$
|
263.3
|
|
%
change
|
|
|
12.7
|
%
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$
|
81.3
|
|
$
|
71.0
|
|
%
of net sales
|
|
|
27.4
|
%
|
|
26.9
|
%
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expenses (S,G&A)
|
|
$
|
70.1
|
|
$
|
62.2
|
|
%
of net sales
|
|
|
23.6
|
%
|
|
23.6
|
%
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
11.7
|
|
$
|
9.2
|
|
%
of net sales
|
|
|
3.9
|
%
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(1.3
|
)
|
|
(.7
|
)
|
Other
expense, net
|
|
|
(.3
|
)
|
|
(.3
|
)
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
5.9
|
|
$
|
4.7
|
|
|
|
|
|
|
|
|
|
Net
earnings per share - basic
|
|
$
|
.25
|
|
$
|
.21
|
|
Net
earnings per share - diluted
|
|
|
.24
|
|
|
.21
|
|
|
|
|
|
|
|
|
|
Note
-
all percentages in the MD&A are calculated based upon financial information
in thousands.
Results
of Operations - Consolidated
NET
SALES
Total
consolidated sales increased $33.3 million in the first quarter of 2006 compared
to the first quarter of 2005. Each of the company’s three business segments
experienced growth in sales during the first quarter of 2006 as compared to
the
same period in 2005. The increase was mainly attributable to $21.1 million
in
organic sales growth. The organic growth in sales is the result of a variety
of
factors including an improving economic environment in the Aerospace industry
as
well as continued stability in most of the markets in which the Industrial
Distribution segment participates. The Music segment’s recent acquisition of
Musicorp, which had first quarter sales of $12.2 million, accounted for the
remainder of the total increase. Without Musicorp’s sales, the Music segment’s
sales would have decreased slightly during the first quarter of 2006 compared
to
the first quarter of 2005.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
GROSS
PROFIT
Total
gross profit increased $10.5 million or 14.7 percent for the first quarter
of
2006 compared to the first quarter of 2005. The increase in gross profit is
primarily due to sales growth in all of our reporting segments during the
quarter. The Industrial Distribution segment provided the largest portion of
this increase primarily driven by higher sales volume with the Music segment
also experiencing significant growth, all of which was due to the addition
of
Musicorp.
SELLING,
GENERAL & ADMINISTRATIVE EXPENSES
S,G&A
expenses increased $7.9 million or 12.7 percent during the first quarter of
2006
compared to the first quarter of 2005 primarily attributable to the following
items:
· |
Music
segment S,G&A expense increased $3.2 million substantially all of
which relates to additional expense for
Musicorp.
|
· |
Industrial
Distribution segment S,G&A expense increased $2.9 million primarily
due to higher employee compensation costs as well as further sales
volume.
|
· |
The
Aerospace segment S,G&A increased $0.8 million partially due to
increased sales activity for most operating units. There was also
an
increase in Bid and Proposal/Independent Research and Development
costs
for two of the operating units.
|
· |
Corporate
expense increased $1.0 million, which related principally to $1.3
million
in stock appreciation rights (SAR) expense which are offset to some extent
by a decrease in other employee related costs.
|
OPERATING
INCOME
Operating
income increased $2.5 million or 27.1 percent for the first quarter of 2006
compared to the first quarter of 2005. The Aerospace segment operating income
increased $2.4 million for the first quarter of 2006 compared to the first
quarter of 2005. Industrial Distribution segment operating income increased
$2.3
million for the first quarter of 2006 compared to the same period in 2005 while
the Music segment operating income decreased $1.3 million for the first quarter
of 2006 compared to the first quarter of 2005. Corporate expenses increased
$1.0
million as described above.
ADDITIONAL
CONSOLIDATED RESULTS
Interest
expense, net, increased 76.6
percent to $1.3 million for the first quarter of 2006 compared to $0.7 million
for the first quarter of 2005. Interest expense, net generally consists of
interest charged on the revolving credit facility offset by interest income.
The
increase is primarily due to higher borrowings, partially attributable to the
Musicorp acquisition and the recapitalization, both of which occurred during
the
second half of 2005, as well as higher interest rates charged on borrowings
during the first quarter of 2006 as compared to the same period of 2005.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations -Continued
For
the
first quarter of 2006, the effective income tax rate was 41.6 percent as
compared to the effective tax rate of 42.8 percent for the first quarter of
2005. The effective tax rate represents the combined estimated federal, state
and foreign tax effects attributable to the pretax earnings for the
year.
Net
earnings for the first quarter of 2006 were $5.9 million, or $0.24 per share
diluted, on the basis of 24.9 million post-recapitalization diluted shares
outstanding, compared to $4.7 million, or $0.21 per share diluted, based on
23.6
million pre-recapitalization diluted shares outstanding in the first quarter
of
2005. The recapitalization had a 3.6 percent dilution effect on earnings per
share.
AEROSPACE
SEGMENT RESULTS
The
following table presents selected financial data for the Aerospace
segment:
In
millions
|
|
For
the three months ended
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
Net
sales
|
|
$
|
73.6
|
|
$
|
65.7
|
|
%
change
|
|
|
12.1
|
%
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
10.0
|
|
$
|
7.6
|
|
%
of net sales
|
|
|
13.6
|
%
|
|
11.6
|
%
|
AEROSPACE
SEGMENT
NET
SALES
Net
sales
for the Aerospace segment represent 24.8 percent of total consolidated sales
for
the first quarter of 2006. This segment has four primary operating units:
Aerostructures, Fuzing, Helicopters and the Kamatics subsidiary. In the
paragraphs that follow, you will find further information with respect to sales
growth and significant programs for these four operating units.
AEROSTRUCTURES
DIVISION
Net
sales
for first quarter of 2006 for the Aerostructures Division increased $4.0 million
or 30.8 percent to $16.9 million compared to $12.9 million for the first quarter
of 2005. The largest driver of the increase in sales is the production of the
cockpit for the Sikorsky BLACK HAWK helicopter as further discussed below.
This
program, the Boeing 777 program, as well as the wing structure assembly for
the
C-17, which is under contract through mid-2007, comprise Aerostructures’ most
significant programs.
2006
AEROSTRUCTURES TRENDS
The
multi-year contract with Sikorsky, under which the division manufactures the
cockpit for several models of the BLACK
HAWK helicopter continues to be an important element of the business base at
the
Jacksonville facility. The contract currently has a value of $29.4 million,
covers 90 units and includes installation of all wiring harnesses, hydraulic
assemblies, control pedals and sticks, seat tracks, pneumatic lines, and the
composite structure that holds the windscreen. During the first quarter of
2006,
we delivered 12 cockpits to the customer, bringing the total deliveries since
the inception of the contract to 28 cockpits. The original multi-year contract
has follow-on options that, if fully exercised, could include the fabrication
of
up to a total of 349 units and
bring
the total potential value to approximately $100.0 million or more depending
upon
the models that are ultimately ordered.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
The
division continues to focus on improving operational efficiencies and increasing
our business base at both the Jacksonville facility and our Plastic Fabricating
Company (Plasticfab) facility in Wichita, KS. Furthermore, we are continuing
to
work to attract and retain qualified personnel in order to be able to
effectively carry out the new work that we have been awarded.
As
previously reported, in January 2006 Plasticfab received a $20.5 million,
multi-year contract from the Shenyang Aircraft Corporation of Shenyang, China.
Plasticfab will manufacture metal and composite bonded panels for the Vertical
Fin Leading Edge, which will be part of the Shenyang Aircraft Corporation
supplied Vertical Fin on the new Boeing 787 Dreamliner. Initial deliveries
are
scheduled to begin in the third quarter of 2006. Also in January 2006,
Plasticfab received a $6.7 million award from Sikorsky Aircraft Corporation
to
manufacture and assemble composite tail rotor pylons for its MH-92 helicopters
which will be operated by the Canadian Maritime Defence Forces as CH-148
Cyclones. Initial deliveries of developmental test units for this program are
also expected to begin in the third quarter of 2006. On April 1, 2006, Spirit
AeroSystems awarded Plasticfab a multi-year contract for production of the
composite flight deck floor for the Boeing 787 Dreamliner that is expected
to
reach approximately $15.0 million.
FUZING
DIVISION
Net
sales
for first quarter of 2006 for the Fuzing Division increased $5.5 million or
42.9
percent to $18.2 million compared to $12.8 million for the first quarter of
2005. The increase in sales is due to increased production and shipments at
both
the Middletown, CT facility for both fuzing and memory programs and at the
Dayron, Orlando facility, specifically related to the JPF program.
As
previously reported, Dayron has a contract with the U.S. Air Force for the
advanced FMU-152A/B Joint Programmable Fuze. The original contract had a
potential value of $168.7 million, if all options for future years’ production
are exercised. In March 2006, the Air Force released production for Option
3 for
the JPF program. This option is valued at $19.3 million and is scheduled to
begin production in late 2006. In April 2006, the government signed an $8.6
million contract with the division for a Phase 2 facilitization project that,
among other things, will result in increased production efficiencies and a
second site JPF production line at the division’s Middletown, CT facility.
These
two
new agreements bring the total program value from inception to date to $67.0
million including the current contract, plus development and engineering
activity, along with special tooling and test equipment.
2006
FUZING TRENDS
Although
the division has experienced and is working to resolve certain issues related
to
the manufacturing and the supply chain on the JPF program, we were able to
successfully deliver a significant number of fuze systems during the first
quarter of 2006. The facilitization program we plan to undertake during 2006
should allow us to improve the quality and efficiency of this program going
forward.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
We
also
continue to work on material flow from vendors and manpower ramp-up to meet
production requirements for the JPF program. To further ensure the success
of
the program, the company is actively marketing
the JPF to foreign militaries. Through the first quarter of 2006, the division
had received four small orders from foreign militaries. While the early part
of
the program results have been marginally unprofitable, management is confident
that the improvements that have, and are, being made will result in the JPF
developing into an attractive program as operating efficiencies improve,
deliveries to the U.S. military increase under the contract and as further
orders are received from foreign militaries.
Also,
as
a result of the warranty matters on certain Dayron fuze programs previously
disclosed and slower than anticipated progress related to establishing operating
efficiencies and improving upon certain issues within the supply chain at the
Dayron facility, deliveries have been delayed and thus inventory levels have
increased. Specifically, the FMU-139 program has been delayed for over a year
while our customer works out its technical issue with its customer, the U.S.
Government. Management expects that this issue will be resolved in 2006 with
deliveries on this program extending into 2008. We continue to monitor the
program to ensure proper inventory valuation.
HELICOPTERS
DIVISION
Net
sales
for the first quarter of 2006 for the Helicopters Division decreased $3.7
million or 24.3 percent to $11.5 million compared to $15.2 million in the same
period in 2005. This is primarily due to a K-MAX aircraft sale that occurred
in
the prior year quarter.
2006
HELICOPTERS TRENDS
Work
continues on the SH-2G(A) program for Australia, which involves the
remanufacture of
eleven
helicopters with support, including a support services facility, for the RAN.
The total contract has a current anticipated value of $760.4 million. The
helicopter production portion of the program is valued at $611.0 million,
essentially all of which has been recorded as sales through the first quarter
of
2006. The associated in-service support center program has a current anticipated
value of $149.4 million of which 39.2 percent has been recorded as sales through
the first quarter of 2006.
Production
of the eleven SH-2G(A) aircraft for the program is essentially complete, with
the exception of the Integrated Tactical Avionics System (ITAS) software. The
division's subcontractors, Northrop Grumman and Computer Sciences Corporation,
continue to make progress toward completing the software integration and in
August 2005 commenced software testing procedures in preparation for final
quality acceptance. During the first quarter, the Royal Australian Navy
encountered an anomalous flight condition on one of its training aircraft that
it attributed to the ship’s airspeed sensor. As a result, the Australian Navy’s
Operational Airworthiness Authority has suspended routine
flying operations pending resolution and has indicated that the final
acceptance of the aircraft will not occur until this issue is resolved. While
this issue is being resolved and final testing of the ITAS software is being
completed, final acceptance procedures are moving forward with delivery of
the
first fully operational aircraft to follow the conclusion of the final
acceptance process. Delivery of the first fully operational aircraft complete
with the ITAS software is currently targeted for the third quarter of
2006.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
During
the first quarter of 2006, the division
recorded an additional $2.5 million of accrued contract loss based upon a
re-assessment of the level of work to be completed prior to entering a final
qualification phase that will conclude the complex acceptance process. This
contract has been in a loss position since 2002. The remaining accrued
contract loss as of March 31, 2006 is $14.4 million. This contract loss accrual
continues to be monitored
and adjusted as necessary to reflect the anticipated cost of the complex
integration process and the results of the testing.
The
division continues to maintain a consignment of the U.S. Navy's inventory of
SH-2 spare parts under a multi-year agreement that provides the division the
ability to utilize certain inventory for support of its SH-2G programs. Also,
the division continues to pursue opportunities to refurbish and reactivate
the
U.S. Navy’s remaining small inventory of SH-2G helicopters on an international
basis.
As
previously reported, the division is currently performing a standard depot
level
maintenance program for aircraft in operation with the government of Egypt.
Work
on the first two of nine aircraft has been completed, and work on the third
aircraft is now underway at the Bloomfield facility under a $5.3 million
contract that includes an as yet unexercised option covering the fourth
aircraft. Contract modifications have been signed providing $1.5 million in
additional funds for this program.
The
division continues to support K-MAX helicopters that are operating with
customers. At the end of the first quarter of 2006, the division maintained
$22.5 million of K-MAX inventory, which consisted primarily of spare parts
and
one aircraft. This inventory was written down based upon a market evaluation
during 2002 and continues to be re-evaluated on a quarterly basis for any
additional impairment. While the K-MAX helicopter production line remains
inactive, the division may consider producing additional aircraft upon receipt
of a substantial firm order by a customer.
KAMATICS
Kamatics
(which includes RWG Frankenjura-Industrie Flugwerklager GmbH, the company's
German aircraft bearing manufacturer) experienced record sales during the first
quarter of 2006. Net sales increased $3.2 million or 14.0 percent to $26.2
million compared to $23.0 million for the first quarter of 2005. The increase
in
sales was primarily attributable to a higher volume of shipments to our
commercial and military customers and distributors.
2006
KAMATICS TRENDS
The
outlook for the aerospace industry both in the commercial and military market
continues to remain strong for 2006. Orders,
shipments and backlogs were all at record levels for the quarter, with Boeing,
Airbus, the militaries and several other customers all increasingly active
during the quarter. In response to customer demand, Kamatics has continued
to
increase production levels and establish operating efficiencies to manage the
additional order activity and backlog. This has led to maintaining delivery
schedules, additional sales opportunities and further market penetration.
Kamatics is in the process of adding additional capacity at the Bloomfield
facility to accommodate this growth.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
OPERATING
INCOME
The
Aerospace segment operating income increased 31.1 percent for the first quarter
of 2006 compared to the first quarter of 2005. Each operating unit within
the
Aerospace segment generated positive income with the exception of the
Helicopters Division that had an operating loss due to the additional $2.5
million charge recorded for the Australian SH-2G(A) program. Kamatics
contributed the majority of the segment’s operating income
while both the Aerostructures and Fuzing Divisions experienced a significant
increase in operating income during the first quarter of 2006 compared to
the
same period of 2005. The Aerostructures Division’s Jacksonville facility has
continued its progress and generated stronger operating income for 2006.
A
broader business base principally as a result of the Sikorsky cockpit program
helped provide this increase. Although both locations in the Fuzing Division
have contributed additional operating income during the first quarter of
2006,
the Middletown location was the primary driver in the increased operating
results, specifically related to a higher volume of shipments of both fuzing
and
memory programs. For both the first quarter of 2006 and 2005, results included
$0.9 million and $0.7 million respectively, in idle facility costs.
WARRANTY
MATTERS
The
company continues to work to resolve two warranty-related matters that primarily
impact our FMU-143 program at the Dayron facility. 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 Dayron was acquired by Kaman that have since
been found to contain an incorrect part. The net reserve as of the end of the
first quarter of 2006 related to these two matters is $2.9 million. This
represents management’s best estimate of the costs, including re-work,
transportation costs and testing, currently expected to be incurred in resolving
these matters. Work has commenced on these warranty items and it is expected
that work will be completed during 2006.
As
previously disclosed, in March 2005 the U.S. Attorney's Office for the Middle
District of Florida and the Defense Criminal Investigative Service (DCIS)
initiated an investigation into the second warranty matter. Dayron has
cooperated fully with the authorities, working to resolve the matter in a
mutually satisfactory manner. As of the date of this report, the company has
not
received any notification from the authorities regarding conclusion of the
investigation.
OTHER
AEROSPACE MATTERS
The
jury
trial for the company's suit against the University of Arizona began in Arizona
state court on April 11, 2006. The company believes that the Electro-Optics
Development Center (EODC) of its Kaman Aerospace subsidiary has suffered damages
of approximately $6.0 million as a result of work it performed beyond the scope
of a $12.8 million contract with the University and which the University refused
to address under the changes clause in the contract. During trial, the court
has
currently limited the company's presentation of damages to approximately $3.0
million. The company believes that these rulings are incorrect and has preserved
its right to appeal following trial. The University has filed a counterclaim
in
the suit and through pre-litigation disclosure, the current counterclaim amount
appears to be approximately $13.8 million, representing the alleged cost to
the
University to complete EODC's part of the project. The company believes that
the
University is not entitled to damages due to the University's breach of the
contract. Management currently estimates that the trial may continue through
the
end of May 2006.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
Management
continues its discussions with the U.S. Naval Air Systems Command (NAVAIR)
regarding the potential purchase of a portion of the Bloomfield campus that
the
company currently leases from NAVAIR and has operated for several decades
for
the principal purpose of performing U.S. government contracts. Management
believes that ownership of the facility, which is currently utilized for
flight
and ground test operations
and limited parts manufacturing by the Helicopters Division, would be beneficial
to the company’s future operations. The company has submitted an offer to NAVAIR
and the General Services Administration detailing a proposed method that
would
be used for the purchase of the facility, which would include as part of
the
purchase price the company undertaking certain environmental remediation
activities.
Also,
in
preparation for the disposal of the Moosup facility, the company has made a
voluntary application to the Connecticut Department of Environmental Protection
(DEP) requesting that the DEP reclassify the groundwater in the vicinity of
the
facility to permit industrial usage consistent with the character of the area.
The DEP has indicated its preliminary agreement to do so, and the company is
cooperating with the DEP in completing this effort.
INDUSTRIAL
DISTRIBUTION SEGMENT RESULTS
The
following table presents selected financial data for the Industrial Distribution
segment:
In
millions
|
|
For
the three months ended
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
Net
sales
|
|
$
|
170.6
|
|
$
|
156.0
|
|
%
change
|
|
|
9.3
|
%
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
10.8
|
|
$
|
8.5
|
|
%
of net sales
|
|
|
6.3
|
%
|
|
5.4
|
%
|
NET
SALES
The
Industrial Distribution segment represents 57.5 percent of total company first
quarter 2006 sales. The segment experienced records sales for the first quarter
for 2006. The increase in net sales in the first quarter of 2006 represents
steady growth specifically in the East and West regions. This related to
stronger sales in the original equipment manufacturing (OEM) sectors,
specifically in the East, and in the building materials, mining, chemical and
hi-tech industries in the West. The segment’s growth, which was entirely
organic, surpassed the increase in overall industrial production both nationally
and regionally.
OPERATING
INCOME
The
Industrial Distribution segment’s operating income increased 27.8 percent for
the first quarter of 2006 compared to the first quarter of 2005. This $2.3
million increase is partially driven by the 9.3 percent increase in sales
volume. Further focus on controlling operating costs and increasing operational
performance through a variety of programs has also created better results for
the 2006 quarter. Additionally, after a detailed review of our cost accounting
policies during
the
first quarter of 2006, the segment recorded a $1.6 million adjustment that
increased earnings to properly capitalize in-bound freight charges to inventory.
Generally, our distribution businesses include in inventory direct and indirect
cost, specifically inbound freight and warehousing costs, to bring our products
to market.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
2006
TRENDS
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 of our customer industries, which includes plant capacity
utilization levels, and the effect of pricing spikes and/or supply interruptions
for basic commodities such as steel and oil. The
industrial production index continued in a positive trend during the first
quarter of 2006 although we continue to closely track the outstanding inventory
related to new home sales.
Global
demand for basic materials such as scrap steel, coal, cement and copper
continues to outpace supply which has resulted in longer lead times in the
production of certain products for our customers. We continue to focus on
maintaining the appropriate inventory levels and meeting customer needs through
strategic purchasing and inventory control practices. This allows us to maximize
inventory turns and minimize excess inventory and thus the risk of inventory
obsolescence.
Many
businesses are centralizing their purchasing and focusing on suppliers that
can
service all of their plant locations across a wide geographic area. To meet
these requirements, we have expanded our geographic presence through the
selective opening of new branches and acquisitions in key markets of the upper
midwest, the south, Mexico and Canada. Our strategy is to grow the segment
by
expanding into additional areas that enhance our ability to compete for large
regional and national customer accounts. In 2006, the segment has opened new
locations to expand its customer service footprint, including Austin, Texas;
Greenville, South Carolina; LaGrange, Georgia; and Topeka, Kansas.
Additionally,
success in our markets requires a combination of competitive pricing (with
pricing pressures more pronounced with respect to larger customers) and
value-added services that save customers money while helping them become more
efficient and productive. We accomplish this by offering strategies for
inventory management, control procedures, process improvements, e-commerce
capabilities or production enhancements. We believe that we have the appropriate
platforms, including technology, systems management and customer and supplier
relationships, to compete effectively in our portion of the evolving and highly
diversified industrial distribution industry.
MUSIC
SEGMENT RESULTS
The
following table presents selected financial data for the Music
segment:
In
millions
|
|
For
the three months ended
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
Net
sales
|
|
$
|
52.4
|
|
$
|
41.6
|
|
%
change
|
|
|
25.9
|
%
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
1.3
|
|
$
|
2.6
|
|
%
of net sales
|
|
|
2.4
|
%
|
|
6.2
|
%
|
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
NET
SALES
The
Music
segment represents 17.7 percent of total company sales. The increase in net
sales is overall attributable to Musicorp, which had sales of $12.2 million
during the first quarter of 2006. Without
the acquisition, sales for the Music segment would have decreased slightly
for
the first quarter of 2006 compared to the same period in 2005. Results for
the
first quarter of 2006 have been affected by lower sales to both large national
retailers as well as the mid to smaller sized retailers. Management believes
that this is partially a result of
lower
discretionary spending within the 18 to 28 year-old age demographic that
represents our current primary consumer base because of higher gas prices and
interest rates. Additionally there has been lower demand during the first
quarter while retailers sell their overstock of inventory, attributable to
lower
than anticipated holiday sales. The segment, which is strongly affected by
consumer sentiment, was able to slightly offset these developments by stronger
export sales during the first quarter of 2006.
OPERATING
INCOME
Operating
income for the Music segment decreased 50.3 percent for the first quarter of
2006 compared to the first quarter of 2005. The incremental gross margin as
a
result of the higher sales generated for the first quarter of 2006 was
not
as significant as the incremental expenses resulting from the acquisition of
Musicorp in August 2005. As a result, total segment operating income has
decreased for the first quarter of 2006 compared to the first quarter of 2005.
Additionally, organic sales and operating profit were lower primarily due to
an
overall softness in the market. As the segment continues with the transition
of
Musicorp, management is strategically eliminating certain redundant costs in
accordance with our plan to take advantage of logistical and operating
efficiencies.
2006
TRENDS
Our
Music
segment is affected considerably by consumer sentiment, by actual consumer
spending levels as well as by seasonality. We tend to experience higher sales
volume during the third and fourth quarters as retailers gauge how aggressively
to stock for the holiday selling season. We are also affected by changes in
consumers’ musical tastes and interests. New large competitors, who are not
music instrument specific retailers, are beginning to enter the industry
including several large retail chains, which may have a negative impact on
future sales for our normal musical instrument retailers.
A
principal strategy of the segment over the past several years has been to add
popular premier branded products that can be brought to market exclusively
by us
which will enhance our market position. The segment became the exclusive U.S.
distributor of Sabian Cymbals effective April 1, 2006. Additionally, new product
introductions may also have a positive impact on our future sales.
During
the first quarter, the integration of the Musicorp acquisition continued with
the closure of Musicorp’s Charleston, South Carolina and Reno, Nevada warehouses
and the consolidation of their inventories into other Musicorp and Kaman Music
warehouses. The task of merging Musicorp’s information system into the Music
segment’s system is expected to be completed in the second quarter of 2006.
Other integration processes will continue throughout 2006.
During
the quarter, Kaman Music was named “Company of the Year” by the industry
journal, Music Trades, which cited the effective integration of acquired
companies into the Kaman Music family as a principal reason for their selection.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
IV. CRITICAL
ACCOUNTING ESTIMATES
Preparation
of the company’s financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Management believes the most complex and sensitive judgments,
because of their significance to the consolidated financial statements, result
primarily from the need to make estimates about the effects of matters that
are
inherently uncertain. Management’s Discussion and Analysis and the Notes to the
Consolidated Financial Statements in the company’s Annual Report on Form 10-K
for the year ended December 31, 2005, describe the significant accounting
estimates and policies used in preparation of the Consolidated Financial
Statements. Actual results in these areas could differ from management’s
estimates. There have been no significant changes in the company's critical
accounting policies and significant estimates in the first quarter of 2006,
except for the adoption of SFAS 123(R) related to accounting for share-based
arrangements. For additional information regarding our adoption of this
principal, see Note 9, “Share-Based Arrangements”, of Notes to Condensed
Consolidated Financial Statements in this Quarterly Report on Form
10-Q.
V. LIQUIDITY
AND CAPITAL RESOURCES
Management
assesses the company’s liquidity in terms of its ability to generate cash to
fund operating, investing and financing activities. Cash flow generation is
a
key performance indicator reviewed by management in evaluating business segment
performance. Significant factors affecting the management of liquidity include
cash flows generated from or used by operating activities, capital expenditures,
investments in the business segments and their programs, acquisitions,
dividends, adequacy of available bank lines of credit, and factors which might
otherwise affect the company’s business and operations generally, as described
below under the heading “Forward-Looking Statements”.
During
the first quarter of 2006, the company relied significantly upon borrowings
under its revolving credit agreement in order to assist with its operating,
investing and financing activities, which includes the regular payment of
quarterly dividends.
It is
anticipated that cash flows from operations will improve in late 2006 as
borrowing are expected to decrease. In the first quarter, we typically
tend
to
borrow more for working capital requirements. Additionally, although debt levels
should be reduced upon successful completion of the Australia SH-2G(A) program,
management expects that bank borrowings will continue to provide an important
source of support for the company’s activities. We believe that our current
credit agreement, along with cash generated from operating activities, will
be
sufficient to support our anticipated future liquidity requirements.
In
millions
|
|
For
the three months ended
|
|
|
|
March
31, 2006
|
|
|
April
1, 2005
|
|
Total
cash provided by (used in)
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(34.1
|
)
|
$
|
(18.5
|
)
|
Investing
activities
|
|
|
(1.9
|
)
|
|
(.6
|
)
|
Financing
activities
|
|
|
36.6
|
|
|
19.0
|
|
Increase
(decrease) in cash
|
|
$
|
0.6
|
|
$
|
(.1
|
)
|
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OPERATING
ACTIVITIES
Net
cash
used in operating activities increased $15.6 million for the first quarter
of
2006 compared to the first quarter of 2005. This increase is primarily
attributable to the funding of additional working capital requirements as
specifically discussed below:
· |
Increase
in cash outflow related to higher purchases in order to meet customer
demand primarily in the Industrial Distribution segment as well as
a
significant paydown of accounts payable in that segment.
|
· |
The
Aerospace segment experienced a significant cash outflow related
to the
payments of expenses associated with loss contracts, specifically
for the
subcontract labor for the SH-2G(A) program, during the first quarter
of
2006.
|
· |
Cash
outflow during the first quarter of 2006 related to a larger payment
of
incentive compensation.
|
INVESTING
ACTIVITIES
Net
cash
used in investing activities increased $1.3 million for the first quarter of
2006 compared to the same period of 2005. The primary contributor to this
increase was capital expenditures, which were $1.7 million during the first
quarter of 2006 compared to $1.1 million in the same period of 2005.
FINANCING
ACTIVITIES
Net
cash
provided by financing activities increased $17.3 million for the first quarter
of 2006 compared to the same period of 2005. The company borrowed $38.6 million
in long-term debt and notes payable primarily to assist in funding working
capital requirements. Additionally,
the company increased its annual dividend to $0.50 per share during the second
quarter of 2005. This resulted in total dividends paid in the amount of $3.0
million in the first quarter of 2006 as compared to $2.5 million during the
first quarter of 2005.
FINANCING
ARRANGEMENTS
The
company currently has a $150 million revolving credit facility (Revolving Credit
Agreement) expiring August 4, 2010. The facility includes an “accordion” feature
that provides the company the opportunity to request an expansion of up to
$50
million, subject to bank approval, in the size of the facility, as well as
a
foreign currency feature. The facility is expected to be sufficient to support
the company’s anticipated working capital needs.
Total
average bank borrowings for the first quarter of 2006 were $69.9 million
compared to $40.0 million for the same period in 2005. As of March 31, 2006,
there was $33.7 million available for borrowing under the Revolving Credit
Agreement. Letters of credit are generally considered borrowings for purposes
of
the Revolving Credit Agreement.
Facility
fees under the new Revolving Credit Agreement are charged on the basis of the
company's credit rating from Standard & Poor's. Standard & Poor’s
currently assigned the company with an investment grade rating of BBB- with
an
outlook of stable. Management believes that this is a favorable rating for
a
company of our size. Under the terms of the current 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 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. The
company remained in compliance with those financial covenants as of and for
the
quarter ended March 31, 2006.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
A
total
of $31.3 million in letters of credit were outstanding at March 31, 2006, a
significant portion of which is related to the Australia SH-2G(A) program.
The
letter of credit for the production portion of the Australia program has a
balance of $16.0 million, the majority of which is expected to remain in place
until that portion of the program is completed.
OTHER
SOURCES/USES OF CAPITAL
At
March
31, 2006, the company had $16.6 million of its 6% convertible subordinated
debentures outstanding. The debentures are convertible into shares of common
stock at any time on or before March 15, 2012 at a conversion price of $23.36
per share, generally at the option of the holder. Pursuant to a sinking fund
requirement that began March 15, 1997, the company redeems $1.7 million of
the
outstanding principal of the debentures each year. During
the first quarter of 2006, several debenture holders elected to convert their
bonds to shares of common stock. The company issued 4,868 shares of common
stock
for the conversion of 114 debentures. Due to the conversion of these debentures
into common stock, the total current liability related to the redemption of
debentures as of March 31, 2006 was $1.6 million
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. As of March 31, 2006, a total of 269,611
shares had been repurchased since inception of this replenishment program.
There
were no shares repurchased during the first quarter of 2006. For a discussion
of
share repurchase activity, please refer to Part II, Item 2 of this
report.
We
plan
to expense approximately $12.5 million and make a contribution of $9.8 million
to our tax-qualified defined benefit pension plan for the 2006 year. This is
based upon the asset value of the pension trust fund as of December 31, 2005.
During the 2005 year, we expensed approximately $10.2 million and made a
contribution of $4.7 million to our tax-qualified defined benefit pension plan.
This was based upon the asset value of the pension trust fund as of December
31,
2004.
VI. CONTRACTUAL
OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
CONTRACTUAL
OBLIGATIONS
There
has
been no material change outside the ordinary course of business in the company's
contractual obligations during the first quarter of 2006. Please see the
company's Annual Report for the year ended December 31, 2005 for a discussion
of
its contractual obligations.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
OFF-BALANCE
SHEET ARRANGEMENTS
There
has
been no material change in the company's off-balance sheet arrangements as
of
the first quarter of 2006. Please
see the company's Annual Report for the year ended December 31, 2005 for a
discussion of such arrangements.
RECENT
ACCOUNTING STANDARDS
In
February 2006, the FASB issued Statement of Financial Accounting Standards
No.
155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB
Statements No. 133 and 140” which is effective for fiscal years beginning after
September 15, 2006. The statement was issued to clarify the application of
FASB
Statement No. 133 to beneficial interests in securitized financial assets and
to
improve the consistency of accounting for similar financial instruments,
regardless of the form of the instruments. Management does not believe that
the
adoption of this standard will have a material impact on our financial results.
In
March
2006, the FASB issued Statement of Financial Accounting Standards No. 156,
“Accounting for Servicing of Financial Assets - an amendment of FASB Statement
No. 140” which is effective for fiscal years beginning after September 15, 2006.
This statement was issued to simplify the accounting for servicing rights and
to
reduce the volatility that results from using different measurement attributes.
We have evaluated the new statement and have determined that it will not have
a
material impact on the determination or reporting of our financial results.
Forward-Looking
Statements
This
report may contain forward-looking information relating to the company's
business and prospects, including the Aerospace, Industrial Distribution and
Music businesses, operating cash flow, and other matters that involve a number
of uncertainties that may cause actual results to differ materially from
expectations. Those uncertainties include, but are not limited to: 1) the
successful conclusion of competitions 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 defense, commercial aviation, industrial production and consumer
market for music products; 5) satisfactory completion of the Australian
SH-2G(A)program, including but not limited to successful completion and
integration of the full ITAS software; 6) receipt and successful execution
of
production orders for the JPF U.S. government contract including the exercise
of
all contract options and receipt of orders from foreign militaries, as both
have
been assumed in connection with goodwill impairment evaluations; 7) a
satisfactory result in the EODC/University of Arizona litigation; 8)
satisfactory resolution of i)warranty issues and the DCIS investigation related
to the FMU-143 program and ii) supplier-related issues hindering the FMU-139
program, at Dayron; 9) achievement of enhanced business base in the Aerospace
segment in order to better absorb overhead and general and administrative
expenses; 10) satisfactory results of negotiations with NAVAIR concerning
purchase of the company's leased facility in Bloomfield, Connecticut.; 11)
continued support of the existing K-MAX helicopter fleet, including sale of
existing K-MAX spare parts inventory and in 2007, availability of a redesigned
clutch assembly system; 12) cost growth in connection with environmental
remediation activities at the Moosup facility and such potential activities
at
the Bloomfield facility; 13) profitable integration of acquired businesses
into
the company's operations; 14) changes in supplier sales or vendor incentive
policies; 15) the effect of price increases or decreases; 16) pension plan
assumptions and future contributions; 17) continued availability of raw
materials in adequate supplies; 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; and 20) 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.
Kaman
Corporation and Subsidiaries
Part
I - Financial Information
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
There
has
been no significant change in the company’s exposure to market risk during the
quarter ended March 31, 2006. Please see the company’s annual report on Form
10-K for the year ended December 31, 2005 for discussion of the company’s
exposure to market risk.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Management
has carried out an evaluation, under the supervision and with the participation
of our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2006. 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. Based upon our evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of March 31, 2006, the disclosure
controls and procedures were effective to provide reasonable assurance that
information required to be disclosed in the reports that we file and submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.
Changes
in Internal Controls
On
August
5, 2005, Kaman Music Corporation acquired the business of MBT Holdings Corp.
and
its subsidiaries (now known as “Musicorp”) in an asset purchase. For the year
2005, the company did not include Musicorp in its assessment of the
effectiveness of the company’s internal controls over financial reporting as of
December 31, 2005. Effective January 2, 2006, the company integrated most of
Musicorp’s operations into its internal controls and procedures over financial
reporting.
There
were no other changes in internal controls over financial reporting at the
company that occurred that have materially affected, or are reasonably likely
to
materially affect, our internal controls over financial reporting.
Kaman
Corporation and Subsidiaries
Part
II - Other Information
Item
1A. Risk Factors
Information
regarding risk factors appears in Part I - Item 1A of our Report on Form 10-K
for the fiscal year ended December 31, 2005 (SEC Accession No.
0000054381-06-000036). There have been no material changes in our risk factors
from those disclosed in our Annual Report on Form 10-K for 2005.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Sales
of Equity Securities; Conversion of Convertible Debentures
During
the quarter ended March 31, 2006, holders of the company’s 6% Convertible
Subordinated Debentures Due 2012 converted a total of 114 such debentures into
an aggregate of 4,868 shares of the company’s common stock. The company received
no cash consideration for the issued shares which were issued pursuant to an
exemption from registration under the Securities Act of 1933, as amended,
contained in Section 3(a)(9) of such Act.
(c)
Purchases of Equity Securities
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.
The
following table provides information about purchases of common shares by the
company during the three months ended March 31, 2006:
|
|
|
|
|
|
Total
Number
|
|
|
|
|
|
|
|
|
of
Shares
|
|
Maximum
|
|
|
|
|
|
|
Purchased
as
|
|
Number
of
|
|
|
Total
|
|
|
|
Part
of
|
|
Shares
That
|
|
|
Number
|
|
Average
|
|
Publicly
|
|
May
Yet Be
|
|
|
of
Shares
|
|
Price
Paid
|
|
Announced
|
|
Purchased
Under
|
Period
|
|
Purchased
|
|
per
Share
|
|
Plan
|
|
the
Plan
|
|
|
|
|
|
|
|
|
|
01/01/06-
|
|
|
|
|
|
|
|
|
01/27/06
|
|
-
|
|
-
|
|
269,611
|
|
1,130,389
|
|
|
|
|
|
|
|
|
|
01/28/06-
|
|
|
|
|
|
|
|
|
02/24/06
|
|
-
|
|
-
|
|
269,611
|
|
1,130,389
|
|
|
|
|
|
|
|
|
|
02/25/06-
|
|
|
|
|
|
|
|
|
03/31/06
|
|
-
|
|
-
|
|
269,611
|
|
1,130,389
|
Item
4. Submission
of Matters to Vote of Security Holders
The
annual meeting of the company's shareholders was held at the company's
Bloomfield headquarters on April 18, 2006. Following is a brief description
of
each matter voted upon at the meeting:
Kaman
Corporation and Subsidiaries
Part
II - Other Information
1. Election
of Directors
The
Board
of Directors has authorized nine directors divided into three classes. Each
year
one class is elected for a three-year term. At this meeting, three individuals
were elected Class 1 directors to serve for a term of three years and until
their successors have been elected and qualify. Opposite each person's name
is
the number of shares voted in favor and the number of shares withheld. There
were no broker non-votes.
Name
|
In
Favor
|
Vote
Withheld
|
|
|
|
Robert
Alvine
|
21,050,233
|
115,356
|
E.
Reeves Callaway III
|
20,899,634
|
265,955
|
Karen
M. Garrison
|
21,046,458
|
119,131
|
The
Class
2 and Class 3 Directors whose terms of office as directors continued after
the
meeting are Brian E. Barents, John A. DiBiaggio, Edwin A. Huston, Eileen S.
Kraus, Paul R. Kuhn, and Richard J. Swift.
2. Ratification
of KPMG LLP Appointment
A
proposal to ratify the appointment of KPMG LLP as the company's auditors during
the ensuing year was adopted by shareholders who voted 21,020,233 shares in
favor, 100,515 against, with 44,841 abstentions and no broker
non-votes.
A
precatory shareholder proposal concerning a majority voting standard for the
election of directors which was included in the proxy statement for the annual
meeting was not submitted to a shareholder vote because neither the shareholder
nor his representative appeared at the meeting to present the proposal.
Item
6. Exhibits
10.1
|
Form
of Long-Term Performance Award Agreement
|
11
|
Earnings
Per Share Computation
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14 under the Securities
and Exchange Act of 1934
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14 under the Securities
and Exchange Act of 1934
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
Kaman
Corporation and Subsidiaries
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
KAMAN
CORPORATION
|
|
Registrant
|
|
|
|
|
|
|
|
|
|
Date:
May 2, 2006
|
By:
/s/ Paul R. Kuhn
|
|
|
Paul
R. Kuhn
|
|
|
Chairman,
President and
|
|
|
Chief
Executive Officer
|
|
|
(Duly
Authorized Officer)
|
Date:
May 2, 2006
|
By:
/s/ Robert M. Garneau
|
|
|
Robert
M. Garneau
|
|
|
Executive
Vice President and
|
|
|
Chief
Financial Officer
|
Kaman
Corporation and Subsidiaries
Index
to
Exhibits
Exhibit
10.1
|
Form
of Long-Term Performance Award Agreement
|
Attached
|
|
|
|
Exhibit
11
|
Earnings
Per Share Computation
|
Attached
|
|
|
|
Exhibit
31.1
|
Certification
of Chief Executive Officer
Pursuant
to Rule 13a-14 under the Securities and Exchange Act of
1934
|
Attached
|
|
|
|
Exhibit
31.2
|
Certification
of Chief Financial Officer
Pursuant
to Rule 13a-14 under the Securities and Exchange Act of 1934
|
Attached
|
|
|
|
Exhibit
32.1
|
Certification
of Chief Executive Officer
Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002
|
Attached
|
|
|
|
Exhibit
32.2
|
Certification
of Chief Financial Officer
Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002
|
Attached
|