Edgar Filing: KAMAN CORP

form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2008

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ______

Commission File Number: 0-1093

KAMAN CORPORATION

(Exact name of registrant as specified in its charter)

Connecticut	06-0613548

(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1332 Blue Hills Avenue

Bloomfield, Connecticut 06002

(Address of principal executive offices) (Zip Code)

(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.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

At July 25, 2008, there were 25,391,992 shares of Common Stock outstanding

Part I – Financial Information

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets

(In thousands) (Unaudited)

	June 27,2008				December 31, 2007
Assets:
Current assets:
Cash and cash equivalents			$	13,570			$	73,898
Accounts receivable, net				211,577				158,435
Inventories				239,353				210,341
Deferred income taxes				24,460				28,724
Other current assets				24,703				20,231
Total current assets				513,663				491,629

Property, plant & equipment, at cost	$	178,081			$	163,645
Less accumulated depreciation
and amortization		110,581				110,000
Net property, plant & equipment				67,500				53,645
Goodwill & other intangible assets, net				130,292				46,188
Deferred income taxes				3,507				3,594
Overfunded pension				31,276				30,486
Other assets				11,561				9,321
Total assets			$	757,799			$	634,863

Liabilities and Shareholders' Equity:
Current liabilities:
Notes payable			$	1,896			$	1,680
Accounts payable - trade				98,914				74,236
Accrued salaries and wages				22,046				25,328
Accrued pension costs				13,768				14,202
Accrued contract losses				10,780				9,513
Advances on contracts				10,429				9,508
Other accruals and payables				39,360				36,162
Income taxes payable				2,447				12,002
Total current liabilities				199,640				182,631

Long-term debt, excluding current portion				95,400				11,194
Deferred income taxes, long-term				10,825				199
Other long-term liabilities				42,428				46,313
Commitments and contingencies
Shareholders' equity				409,506				394,526
Total liabilities and shareholders’ equity			$	757,799			$	634,863

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Operations

(In thousands except per share amounts)

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007

Net sales	$	316,285		$	272,382		$	602,066		$	538,912

Cost of sales		230,013			197,798			439,203			389,167
Selling, general and administrative expense		63,774			58,781			126,472			117,976
Goodwill impairment		7,810			-			7,810			-
Net (gain)/loss on sale of assets		97			(58	)		207			(15	)
		301,694			256,521			573,692			507,128
Operating income from continuing operations		14,591			15,861			28,374			31,784

Interest expense (income), net		463			1,656			462			3,200
Other expense (income), net		321			258			462			217

Earnings from continuing operations before income taxes		13,807			13,947			27,450			28,367
Income tax expense		(7,717	)		(4,940	)		(12,492	)		(10,287	)
Net earnings from continuing operations		6,090			9,007			14,958			18,080

Earnings from discontinued operations before income taxes		-			1,655			-			3,279
Gain on disposal of discontinued operations		506			-			506			-
Income tax expense		(183	)		(603	)		(183	)		(1,225	)
Net earnings from discontinued operations		323			1,052			323			2,054

Net earnings	$	6,413		$	10,059		$	15,281		$	20,134

Net earnings per share:
Basic net earnings per share from continuing operations		0.24			0.37			0.60			0.74
Basic net earnings per share from discontinued operations		-			0.04			-			0.09
Basic net earnings per share from disposal discontinued operations		0.01			-			0.01			-
Basic net earnings per share	$	0.25		$	0.41		$	0.61		$	0.83

Diluted net earnings per share from continuing operations		0.24			0.36			0.59			0.73
Diluted net earnings per share from discontinued operations		-			0.04			-			0.08
Diluted net earnings per share from disposal discontinued operations		0.01			-			0.01			-
Diluted net earnings per share	$	0.25		$	0.40		$	0.60		$	0.81

Average shares outstanding:
Basic		25,232			24,285			25,166			24,213
Diluted		25,497			25,210			25,444			25,157

Dividends declared per share	$	0.140		$	0.125		$	0.280		$	0.250

See accompanying notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flows

(In thousands except share and per share amounts) (Unaudited)

			For the Six Months Ended
			June 27, 2008	June 29, 2007
Cash flows from operating activities:
Net earnings from continuing operations			$ 14,958	$ 18,080
Adjustments to reconcile net earnings from continuing operations to net cash
	provided by (used in) operating activities of continuing operations:
	Depreciation and amortization		5,435	4,842
	Change in allowance for doubtful accounts		(213)	(36)
	Net (gain) loss on sale of assets		207	(15)
	Goodwill impairment		7,810	-
	Stock compensation expense		1,111	2,157
	Excess tax benefits from share-based compensation arrangements		(205)	(464)
	Deferred income taxes		3,517	(4,998)
	Changes in assets and liabilities, excluding effects of acquisition/divestitures:
		Accounts receivable	(36,991)	(28,851)
		Inventories	(15,929)	(5,531)
		Income taxes receivable	(3,603)	(2,056)
		Other current assets	3,618	412
		Accounts payable	4,547	6,636
		Accrued contract losses	1,270	(65)
		Advances on contracts	921	(251)
		Accrued expenses and payables	(9,964)	(6,819)
		Income taxes payable	(11,100)	(7,240)
		Pension liabilities	(2,871)	2,432
		Other long-term liabilities	(1,557)	3,579
		Net cash provided by (used in) operating activities of continuing operations	(39,039)	(18,188)
		Net cash provided by (used in) operating activities of discontinued operations	(183)	2,637
		Net cash provided by (used in) operating activities	(39,222)	(15,551)
Cash flows from investing activities:
	Proceeds from sale of assets		65	193
	Net proceeds from sale of discontinued operations		447	-
	Expenditures for property, plant & equipment		(6,651)	(6,503)
	Acquisition of businesses and earn out adjustments, net of cash acquired		(100,168)	(1,393)
	Other, net		(2,782)	(2,551)
		Cash provided by (used in) investing activities of continuing operations	(109,089)	(10,254)
		Cash provided by (used in) investing activities of discontinued operations	-	(372)
		Cash provided by (used in) investing activities	(109,089)	(10,626)

Cash flows from financing activities:
	Net borrowings (repayments) under revolving credit agreements		84,458	36,146
	Debt repayment		-	(1,543)
	Net change in book overdraft		7,293	(2,622)
	Proceeds from exercise of employee stock plans		2,519	2,829
	Dividends paid		(7,064)	(6,056)
	Debt issuance costs		-	(150)
	Windfall tax benefit		205	464
	Other		304	96
	Intercompany debt		-	(2,933)
		Cash provided by (used in) financing activities of continuing operations	87,715	26,231
		Cash provided by (used in) financing activities of discontinued operations	-	(282)
		Cash provided by (used in) financing activities	87,715	25,949
Net increase (decrease) in cash and cash equivalents			(60,596)	(228)
Effect of exchange rate changes on cash and cash equivalents			268	410
Cash and cash equivalents at beginning of period			73,898	12,720
Cash and cash equivalents at end of period			$ 13,570	$ 12,902

See accompanying notes to condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts) (Unaudited)

1. Basis of Presentation

The December 31, 2007 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 company’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments 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. The statements should be read in conjunction with the consolidated financial statements and notes included in the company’s Form 10-K for the year ended December 31, 2007. The results of operations for the interim periods presented are not necessarily indicative of trends or of results to be expected for the entire year.

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 second quarter for 2008 and 2007 ended on June 27, 2008 and June 29, 2007, respectively.

In July 2008, the Fuzing segment changed its name to the Precision Products segment.

Recently Issued Accounting Pronouncements

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The company is currently evaluating the potential impact of SFAS 162 but does not anticipate that the impact will be material.

In March 2008, the FASB issued Statement of Financial Accounting Standards No 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (SFAS 161). Under this standard, companies with derivative instruments are required to disclose information that enables financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. The new standard must be applied prospectively for interim periods and fiscal years beginning after November 15, 2008. The company is currently evaluating the potential impact of SFAS 161 but does not anticipate that the impact will be material.

In December 2007, the FASB issued Statement of Financial Accounting Standards No 141(R), “Business Combinations” (SFAS 141(R)). The objective of this Statement is to improve the relevance and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. To accomplish that, SFAS 141(R) establishes principles and requirements for how the acquirer (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The potential impact of SFAS 141(R) on our consolidated financial position, results of operations and cash flows will be dependent upon the terms, conditions and details of such acquisitions.

In December 2007, the FASB issued Statement of Financial Accounting Standards No 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (SFAS 160). The objective of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. Since we currently do not have any minority interest investments, we do not expect SFAS 160 will have an impact on our consolidated financial position, results of operations or cash flows.

Cash Flow Items

Cash payments for interest were $863 and $3,141 for the six months ended June 27, 2008 and June 29, 2007, respectively. Cash payments for income taxes, net of refunds, for the comparable periods were $24,395 and $19,792, respectively. Non-cash financing activity for the first six months 2007 includes the conversion of 975 debentures with a total value of $975 into 41,731 shares of common stock. There were no such conversions during 2008 as the outstanding debentures were fully redeemed in December 2007.

Income Taxes

The effective income tax rate for continuing operations was 55.9% for the second quarter of 2008 as compared to 35.4% for the second quarter of 2007. The effective rate was abnormally high due to the $7,810 non-deductible impairment charge that was recorded during the second quarter of 2008. This matter is described more fully in Note 2.

2. Goodwill Impairment

During the second quarter of 2008, our Aerostructures Wichita, KS facility continued to experience production and quality issues, which resulted in the separate termination of two long-term contracts , which were significant to the facility, with Spirit AeroSystems and Shenyang Aircraft Corporation, which are both currently loss contracts. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we test goodwill for potential impairment annually as of December 31 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Due to the loss of the two major contracts as well as the continuing production and quality issues, management performed a goodwill impairment analysis for this reporting unit as of June 27, 2008.

We evaluated goodwill for impairment using the two-step process prescribed in SFAS 142. The first step is to identify potential impairment by comparing the fair value of a reporting unit to its book value, including goodwill. If the fair value of a reporting unit exceeds its book value, goodwill is not considered impaired. If the book value exceeds the fair value, the second step of the process is performed to measure the amount of impairment. The process of evaluating goodwill for impairment involves the determination of the fair value of the company’s reporting units and is based on several valuation methods including the market approach and income approach. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to the operations of our reporting units.

Although we believe that we will work through the production issues at our Aerostructures Wichita facility, our carrying value has increased significantly since the last quarterly report. This, combined with our loss of two long-term contracts and the quality and production issues at the facility, has created a situation in which the estimated fair value of this reporting unit (the legal entity Plastic Fabricating Company, Inc.) is less than its carrying value. The total non-cash goodwill impairment charge was $7,810, which represents the entire goodwill balance for this reporting unit. This charge is not deductible for tax purposes and represents a discrete item in our second quarter 2008 effective tax rate.

3. Acquisitions

On March 31, 2008, our Industrial Distribution segment acquired the stock of Industrial Supply Corp (ISC), a distributor of power transmission, fluid power, material handling and industrial MRO supply products to such diverse markets as ship building, printing, machinery, transportation, electronics, pharmaceutical, rubber, chemicals and food processing. In addition to its Richmond facility, ISC has five other branches located in Norfolk, Roanoke and Waynesboro, Virginia, and in Wilson and High Point, North Carolina. The purchase price for this entity was $18,243.

On June 12, 2008, we acquired the stock of Brookhouse Holdings, Limited, a leader in the design and manufacture of composite aerostructures, aerospace tooling, and repair and overhaul services based in Darwen, Lancashire, England. The purchase price was 43,000 pounds sterling ($85,086 based on an exchange rate of 1.98) in cash. The acquisition further diversifies our platform positions in both the military and commercial markets, and significantly enhances our position in the higher-growth markets for composite structures. Brookhouse will become part of our Aerostructures segment.

The preliminary allocation of purchase price for each of these acquisitions is summarized below:

		ISC	Brookhouse

Tangible assets		$ 12,637	$ 38,025
Intangible assets		3,500	36,962
Goodwill		9,011	41,939
Liabilities assumed		(6,564)	(30,178)
	Total purchase price	18,584	86,748
Acquisition costs		(341)	(1,662)
	Total consideration paid	$ 18,243	$ 85,086

Both acquisitions were accounted for as purchase transactions. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair value. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill. The purchase accounting for these acquisitions is preliminary, primarily with respect to the identification and valuation of intangibles. The operating results for Brookhouse and ISC have been included in our consolidated financial statements from the date of acquisition.

4. Accounts Receivable, net

Accounts receivable consist of the following:

			June 27, 2008	December 31, 2007

Trade receivables			$ 90,250	$ 74,057

U.S. Government contracts:
	Billed		40,656	20,852
	Costs and accrued profit – not billed		6,654	6,190

Commercial and other government contracts:
	Billed		34,804	17,740
	Costs and accrued profit – not billed		41,089	41,407

Less allowance for doubtful accounts			(1,876)	(1,811)

		Total	$ 211,577	$ 158,435

On March 19, 2008, the company and the Commonwealth of Australia reached an agreement relative to the conclusion of the SH-2G(A) Super Seasprite Program. The unbilled receivables associated with the SH-2G(A) program were $40,750 and $40,789 as of June 27, 2008 and December 31, 2007, respectively, and the balance of amounts received as advances on this contract were $8,107 and $7,511 as of June 27, 2008, and December 31, 2007, respectively. These balances, totaling a net $32,643, as of June 27, 2008, will be eliminated in connection with the transfer of the Australian program inventory and equipment to the company, which transfer is subject to approval by the U.S. Government. Additional detail relative to this agreement is provided in Note 14, Commitments and Contingencies.

5. Inventories

Inventories consist of the following:

			June 27, 2008	December 31, 2007

Merchandise for resale			$ 99,017	$ 93,949
Contracts and other work in process			121,921	103,004
Finished goods
	(including certain general stock materials)		18,415	13,388

		Total	$ 239,353	$ 210,341

We continue to support K-MAX helicopters that are operating with customers. As of June 27, 2008, we maintained $24,288 of K-MAX inventory, which now includes a repurchased K-MAX aircraft as well as spare parts. Total K-MAX inventory as of December 31, 2007 was $19,568.

6. Shareholders’ Equity

Changes in shareholders’ equity for the six months ended June 27, 2008 were as follows:

Balance, January 1, 2008			$ 394,526

	Net earnings		15,281
	Change in pension & post-retirement benefit plans, net		831
	Foreign currency translation adjustment		1,496
		Comprehensive income	17,608

	Dividends declared		(7,094)
	Employee stock plans and related tax benefit		4,466

Balance, June 27, 2008			$ 409,506

Comprehensive income was $17,608 and $22,670 for the six months ended June 27, 2008 and June 29, 2007, respectively. The changes to net earnings used to determine comprehensive income are comprised of foreign currency translation adjustments and net changes in pension & post-retirement benefit plans.

Shareholders’ equity consists of the following:

		June 27, 2008	December 31, 2007

Common stock		$ 25,422	$ 25,182
Additional paid-in capital		83,033	78,783
Retained earnings		270,604	262,417
Treasury stock		(435)	(411)
Other shareholders' equity		30,882	28,555

	Total	$ 409,506	$ 394,526

7. Earnings Per Share

The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share:

(In thousands except per share amounts)	For the Three Months Ended				For the Six Months Ended
	June 27, 2008		June 29, 2007		June 27, 2008		June 29, 2007
Basic:

Net earnings from continuing operations	$	6,090	$	9,007	$	14,958	$	18,080
Net earnings from discontinued operations, net of tax		323		1,052		323		2,054
Net earnings	$	6,413	$	10,059	$	15,281	$	20,134

Weighted average number of
shares outstanding		25,232		24,285		25,166		24,213

Net earnings per share from continuing operations	$	0.24	$	0.37	$	0.60	$	0.74
Net earnings per share from discontinued operations		-		0.04		-		0.09
Net earnings per share from disposal of discontinued operations		0.01		-		0.01		-
Net earnings per share	$	0.25	$	0.41	$	0.61	$	0.83

Diluted:

Net earnings from continuing operations	$	6,090	$	9,007	$	14,958	$	18,080
Elimination of interest expense on 6% subordinated
convertible debentures (net after taxes)		-		139		-		291
Net earnings from continuing operations (as adjusted)		6,090		9,146		14,958		18,371

Net earnings from discontinued operations, net of tax		323		1,052		323		2,054
Net earnings (as adjusted)	$	6,413	$	10,198	$	15,281	$	20,425

Weighted average number of
shares outstanding		25,232		24,285		25,166		24,213
Weighted averages shares issuable
on conversion of 6% subordinated
convertible debentures		-		627		-		657
Weighted average shares issuable
on exercise of dilutive stock options		265		298		278		287
Total		25,497		25,210		25,444		25,157

Net earnings per share from continuing operations - diluted	$	0.24	$	0.36	$	0.59	$	0.73
Net earnings per share from discontinued operations - diluted		-		0.04		-		0.08
Net earnings per share from disposal of discontinued operations - diluted		0.01		-		0.01		-
Net earnings per share -diluted	$	0.25	$	0.40	$	0.60	$	0.81

Excluded from the net earnings per share – diluted calculation for the six months ended June 27, 2008 are 9,000 anti-dilutive shares granted to employees, based on average stock price. There were no anti-dilutive shares for the six months ended June 29, 2007.

8. Exit Activity

The following table displays the activity and balances of various exit activities as of and for the six months ended June 27, 2008:

Balance at January 1, 2008	$	4,705
Additions to accrual		-
Cash payments		(123	)
Release to income		-

Balance at June 27, 2008	$	4,582

Our exit activity accrual consists of estimated ongoing environmental remediation costs for our Moosup, CT facility and environmental remediation costs that we expect to incur at the former Music segment’s New Hartford, Connecticut facility, which arose in connection with the 2007 sale of our Music segment.

These exit activity accruals are included in other current liabilities and other long-term liabilities on the condensed consolidated balance sheets for the periods presented. Ongoing maintenance costs of $228, and $205 for the six months ended June 27, 2008 and June 29, 2007, respectively, related to the idle Moosup facility are included in selling, general and administrative expenses.

9. Product Warranty Costs

The following table presents the activity and balances of accrued product warranty costs included in other accruals and payables on the condensed consolidated balance sheets as of June 27, 2008:

Balance at January 1, 2008	$	1,087
Product warranty accrual		52
Warranty costs incurred		(79	)
Release to income		(4	)

Balance at June 27, 2008	$	1,056

The company has been working to resolve two warranty-related matters at the Precision Products (formally Dayron) Orlando 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 this entity was acquired by the company that have since been found to contain an incorrect part. The net reserve as of June 27, 2008 related to these two matters is $1,032. This matter is more fully discussed in Note 14, Commitments and Contingencies.

The remaining accrual as of June 27, 2008 relates to routine warranty rework at our various segments.

10. Accrued Contract Losses

The following is a summary of activity and balances associated with accrued contract losses as of and for the quarter ended June 27, 2008:

Balance at January 1, 2008	$	9,513
Additions to loss accrual		4,462
Costs incurred		(2,851	)
Release to income		(344	)
Balance at June 27, 2008	$	10,780

Additions to our contract loss accrual relate primarily to cost growth in connection with certain programs in the Aerostructures and Precision Products segments, the majority of which was recorded during the first quarter of 2008. The remaining balance of the contract loss accrual relates primarily to the SH-2G(A) program for Australia. We are in the process of assessing what portion of those expenses will still be incurred if the program is concluded as contemplated by the settlement agreement with the Commonwealth of Australia. When title to the inventory is transferred to the company, effectively concluding the program, we will adjust the accrued contract loss as necessary.

11. Pension Cost

Components of net pension cost for the qualified pension plan and Supplemental Employees’ Retirement Plan (SERP) are as follows:

	Qualified Pension Plan
	For the Three Months Ended						For the Six Months Ended
	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007

Service cost for benefits earned	$	3,069		$	3,330		$	6,138		$	6,659
Interest cost on projected
benefit obligation		7,338			6,930			14,676			13,861
Expected return on plan assets		(8,681	)		(8,074	)		(17,362	)		(16,148	)
Net amortization and deferral		16			226			31			451
Net pension cost	$	1,742		$	2,412		$	3,483		$	4,823

	SERP
	For the Three Months Ended						For the Six Months Ended
	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007

Service cost for benefits earned	$	185		$	116		$	369		$	232
Interest cost on projected
benefit obligation		405			505			789			1,010
Expected return on plan assets		-			-			-			-
Effect of settlement/curtailment		-			-			1,006			-
Net amortization and deferral		298			882			706			1,765
Net pension cost	$	888		$	1,503		$	2,870		$	3,007

For the 2008 plan year, the company expects to contribute $6,966 to the qualified pension plan. We expect to make payments of $13,971 for the SERP during 2008, $4,982 of which was made in the first half, most of which was a lump sum payment to the former CEO. The remaining payment to the former CEO will be made in August 2008. The total of the payout represented a portion of the SERP’s projected benefit obligation sufficient to constitute a plan settlement per SFAS 88, “Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans.” Because the retirement occurred after the company’s pension measurement date of December 31, and in accordance with SFAS 88 settlement accounting, liabilities related to the supplemental plan were remeasured as of February 28, 2008 with the related deferred actuarial losses being recognized in the first half of 2008.

12. Business Segments

Summarized financial information by business segment is as follows:

	For the Three Months Ended						For the Six Months Ended
	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007
Net sales:
Aerostructures	$	30,944		$	23,322		$	59,737		$	48,501
Precision Products		27,236			23,962			51,366			42,462
Helicopters		18,105			19,025			32,719			36,483
Specialty Bearings		36,667			31,471			72,746			63,450
Subtotal Aerospace Segments		112,952			97,780			216,568			190,896
Industrial Distribution		203,333			174,602			385,498			348,016
Net sales from continuing operations	$	316,285		$	272,382		$	602,066		$	538,912

Operating income (loss):
Aerostructures*	$	(6,248	)	$	3,680		$	(7,263	)	$	8,231
Precision Products		880			4,015			2,685			6,545
Helicopters		2,866			(244	)		3,724			(1,269	)
Specialty Bearings		13,941			10,204			26,909			20,763
Subtotal Aerospace Segments		11,439			17,655			26,055			34,270
Industrial Distribution		9,735			8,304			18,808			16,998
Net gain (loss) on sale of assets		(97	)		58			(207	)		15
Corporate expense		(6,486	)		(10,156	)		(16,282	)		(19,499	)
Operating income from continuing operations		14,591			15,861			28,374			31,784

Interest expense (income), net		463			1,656			462			3,200
Other expense (income), net		321			258			462			217

Earnings from cont. operations before income taxes		13,807			13,947			27,450			28,367
Income tax expense		(7,717	)		(4,940	)		(12,492	)		(10,287	)
Net earnings from continuing operations		6,090			9,007			14,958			18,080

Net earnings from discontinued operations		323			1,052			323			2,054

Total net earnings	$	6,413		$	10,059		$	15,281		$	20,134
* Includes a non cash impairment charge of $7,810

13. Share-Based Arrangements

The following table summarizes share-based compensation expense recorded during each period presented:

	Three Months Ended					Six Months Ended
	June 27, 2008			June 29, 2007		June 27, 2008			June 29, 2007
Stock options	$	361		$	217	$	810		$	434
Restricted stock awards		678			530		1,035			630
Stock appreciation rights		(309	)		815		(837	)		985
Employee stock purchase plan		49			56		103			108

Total share-based compensation expense	$	779		$	1,618	$	1,111		$	2,157

Stock option activity was as follows:

				Weighted-
				Average
Stock options outstanding:	Options			Exercise Price
Balance at January 1, 2008		724,790		$	16.02
Options granted		185,245			26.04
Options exercised		(145,708	)		15.14
Options forfeited or expired		(7,330	)		17.29
Balance at June 27, 2008		756,997		$	18.63

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 three months and six months ended June 27, 2008 and June 29, 2007.

	Three Months Ended						Six Months Ended
	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007
Expected option term	6.5 years			6.5 years			6.5 years			6.5 years
Expected volatility		44.4	%		36.2	%		42.5	%		36.2	%
Risk-free interest rate		3.4	%		4.6	%		3.3	%		4.6	%
Expected dividend yield		1.9	%		2.5	%		1.8	%		2.5	%
Per share fair value of options granted	$	8.81		$	8.04		$	9.29		$	8.04

Restricted Stock Awards (RSA) activity is as follows:

			Weighted-
			Average
			Grant Date
Restricted Stock outstanding:			Fair Value
Nonvested at January 1, 2008	89,009		$	24.04
RSA granted	85,545			25.97
Vested	(37,228	)		22.73
Forfeited or expired	(3,203	)		24.14
Nonvested at June 27, 2008	134,123		$	25.63

Stock Appreciation Rights (SARs) activity is as follows:

			Average
SARs outstanding:			Exercise Price
Balance at January 1, 2008	66,120		$	10.14
SARs granted	-			-
SARs exercised	(10,200	)		9.90
SARs forfeited or expired	-			-
Balance at June 27, 2008	55,920		$	10.18

Total cash paid to settle SARs (at intrinsic value) during the second quarter of 2008 and 2007 was $189 and $572, respectively. Total cash paid to settle SARs (at intrinsic value) for the first six months of 2008 and 2007 was $189 and $1,042, respectively.

14. Commitments and Contingencies

Australian SH-2G(A) Program - During the second quarter, Helicopters segment management and the Commonwealth of Australia continued implementation of the March 2008 settlement agreement between the parties to mutually conclude the SH-2G(A) Super Seasprite program. As previously disclosed, the agreement provides that ownership of the 11 SH-2G(A) Super Seasprite helicopters will be transferred to the company along with spare parts and associated equipment. The Commonwealth is responsible for obtaining U.S. government approval of the transfer and has submitted its request. The parties anticipate a response in the next several months. In the meantime, Helicopters management has obtained U.S. government-required marketing licenses that enable it to begin discussions with many potential foreign government customers.

Proceeds from each helicopter sale will be shared with the Commonwealth under a pre-established formula. We have agreed that total payments of at least $37,000 will be made to the Commonwealth regardless of sales, with at least $25,000 to be paid by March 2011, and, to the extent cumulative payments have not yet reached $37,000, additional payments of $6,000 each in March of 2012 and 2013. To secure these payments, the company will provide the Commonwealth with a $37,000 unconditional letter of credit which will be reduced as such payments are made. Additionally, under the agreement, we will forego payment of approximately $33,000 in net unbilled receivables in exchange for the helicopters, spare parts and equipment, which will be recorded as inventory. Transfer of title to the helicopters, spare parts and equipment will not take place until the Commonwealth has obtained the appropriate approvals from the U.S. Government. We currently expect that the value of this transferred inventory will exceed the amount of the net unbilled receivables and the $37,000 guaranteed payments described above. Upon transfer of title, the company will issue the letter of credit and record the transaction. Currently we do not expect that this transaction will have a material impact on the statement of operations. The termination of the contract, combined with the return of inventory, will result in our inability to claim look-back interest from the IRS, previously expected to exceed $6,000 pretax. Additionally, future sales relative to the service center, which have been a meaningful portion of our net sales for the Helicopters segment in recent years, will cease at the conclusion of the support center ramp down period, scheduled for September 2008.

Navy Property - In December 2007, the company and the U.S. Navy Air Systems Command (NAVAIR) agreed upon the terms for our purchase of the portion of the Bloomfield campus that Kaman Aerospace Corporation (of which the Helicopters segment forms a part) currently leases from NAVAIR and has operated for several decades. It is expected that by September 30, 2008 various government-required processes for approval of the transaction will be completed, and the transfer of title will have occurred. Our lease of the facility has been extended through September 30, 2008 as the process continues. Upon transfer of the property and as part of the purchase price, we will assume responsibility for environmental remediation at the facility as may be required under the Connecticut Transfer Act (the “Transfer Act”). In anticipation of the transfer, we continue our efforts to define the scope of the remediation that will be required by the Connecticut Department of Environmental Protection (CTDEP). Management believes that the discounted present value of the cost of the environmental remediation, which is estimated at $9,000, approximates the fair value of the property. This remediation process will take many years to complete.

Moosup - The CTDEP has given the company conditional approval for reclassification of groundwater in the vicinity of the Moosup, CT facility consistent with the character of the area. This facility is currently being held for disposal. The company has substantially completed the process of connecting neighboring properties to public drinking water in accordance with such approval and in coordination with the CTDEP and local authorities. The company anticipates that the water connection project will be completed in 2008. A site assessment to characterize the environmental condition of the property has also commenced.

Ovation - In connection with our sale of the Music segment, we assumed responsibility for meeting certain requirements of the Transfer Act that apply to the leased guitar manufacturing facility ("Ovation") located in New Hartford, Connecticut, which was transferred as part of the sale. Under the Transfer Act, we are required to assess the environmental conditions of the site and remediate environmental impairments, if any, caused by Ovation's operations. The site consists of a multi-tenant industrial park, in which Ovation and other unrelated entities lease space. We are in the process of assessing the environmental conditions at the site and determining our share of the cost of environmental remediation that may be required. Our current estimate of our portion of the cost to assess the environmental conditions and remediate this property is $2,219.

Legal Matters - There continue to be two warranty-related matters that impact the FMU-143 program at our Precision Products Orlando operation. The items involved are an impact switch embedded in certain bomb fuzes that was recalled by a supplier and an incorrect part, called a bellows motor, found to be contained in bomb fuzes manufactured for the U.S. Army utilizing systems which originated before the Orlando operation was acquired by Kaman. The U.S. Army Sustainment Command (USASC), the procurement agency that administers the FMU-143 contract, had authorized warranty rework for the bellows motor matter in late 2004/early 2005; however, we were not permitted to finish the rework due to issues raised by the USASC primarily related to administrative matters and requests for verification of the accuracy of test equipment (which accuracy was subsequently verified).

In late 2006, the USASC informed us that it was changing its remedy under the contract from performance of warranty rework to an "equitable adjustment" of $6,900 to the contract price. We responded, explaining our view that we had complied with contract requirements. In June 2007 the USASC affirmed its position but rescinded its $6,900 demand (stating that its full costs had not yet been determined) and gave instructions for disposition of the subject fuzes, including both the impact switch and bellows motor related items, to a Navy facility and we complied with that direction. To date, USASC has not made a demand for any specific amount.

As reported previously, a separate contract dispute between our Precision Products Orlando operation and the USASC relative to the FMU-143 fuze program is now in litigation. USASC has basically alleged the existence of latent defects in certain fuzes due to unauthorized rework during production and has sought to revoke their acceptance. Management believes that the Precision Products segment has performed in accordance with the contract and it is the government that has materially breached its terms; as a result, during the fourth quarter of 2007, we cancelled the contract and in January 2008, we commenced litigation before the Armed Services Board of Contract Appeals (the "Board") requesting a declaratory judgment that our cancellation was proper. At about the same time, the USASC notified us that it was terminating the contract for default, making the allegations noted above. We have filed a second complaint with the Board appealing the USASC’s termination decision. The litigation process is ongoing.

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.	Recent Business and Financial 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 Form 10-K for the year ended December 31, 2007.

I. OVERVIEW OF BUSINESS

Kaman Corporation is composed of five business segments:

·	Aerostructures, a provider of subassemblies for commercial and military aircraft;

·	Precision Products, a producer of fuzing devices and memory and measuring systems for a variety of applications;

·	Helicopters, a provider of upgrades and support for its existing fleet as well as a subcontractor for other aerospace manufacturers;

·	Specialty Bearings, a manufacturer of high-performance mechanical products used primarily in aviation applications as well as marine, hydropower, and other industrial applications; and

·	Industrial Distribution, the third largest power transmission/motion control industrial distributor in North America.

There are specific long-term strategies for each segment. For our aerospace businesses, we seek to maintain leadership in product technical performance, take advantage of opportunities arising from the prime and Tier 1 producers as they outsource aircraft production tasks, and build on our strengths in areas targeted for growth through internal product development and acquisitions. For our industrial distribution business, our long-term strategy involves acquisitions and internal means to expand our geographical footprint in major industrial markets and broaden our product lines to enhance our competitive position for national accounts.

In July 2008, we changed the name of our Fuzing segment to the Precision Products segment.

II. RECENT BUSINESS AND FINANCIAL HIGHLIGHTS

The following is a summary of key events that occurred during the second quarter of 2008:

·	Our net sales from continuing operations increased 16.1 percent in the second quarter of 2008 compared to the second quarter of 2007.

·	Our net earnings from continuing operations decreased 32.4 percent in the second quarter of 2008 compared to the second quarter of 2007 due to a non-cash, non-deductible $7.8 million goodwill impairment charge recorded at the Aerostructures segment’s Wichita facility.

·	Earnings per share diluted from continuing operations decreased 33.3 percent to $0.24 per share diluted in the second quarter of 2008 compared to the second quarter of 2007 due to the goodwill impairment charge.

·	Our Wichita Aerostructures facility continued to experience production difficulties which resulted in the termination of its contracts with Spirit AeroSystems and Shenyang Aircraft Corporation.

On June 12, 2008, we acquired Brookhouse Holdings, Limited (Brookhouse), a leader in the design and manufacture of composite aerostructures, aerospace tooling, and repair and overhaul services based in Darwen, Lancashire, England. This subsidiary will be reported as part of our Aerostructures segment.

·	Early in the second quarter, we completed our acquisition of Industrial Supply Corp. (ISC) of Richmond, Virginia, which contributed approximately half of our sales growth in the Industrial Distribution segment for the second quarter.

·	Greg L. Steiner was appointed President of our Aerospace Group on July 7, 2008. He will have responsibility for all four of our aerospace reporting segments.

·	We recently signed a contract with Boeing for the production of flight controls for the Air Force’s A-10 fleet. This work will be performed at our Jacksonville, FL Aerostructures and Bloomfield, CT Helicopters facilities.

·	Our Specialty Bearings segment experienced record sales and operating profit for the quarter.

·	Our Precision Products segment continued to ramp up on the JPF program and produced and shipped record levels during the quarter.

III. RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - CONSOLIDATED

The following table presents selected financial data from continuing operations of the company for the second quarter of 2008 compared to the second quarter of 2007:

Net Sales

	For the Three Months Ended						For the Six Months Ended
In thousands	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007
Net sales	$	316,285		$	272,382		$	602,066		$	538,912
$ change		43,903			27,508			63,154			49,825
% change		16.1	%		11.2	%		11.7	%		10.2	%

The increase in consolidated net sales for the second quarter and first half of 2008 was primarily attributable to strong organic growth in all reporting segments except for the Helicopters segment as well as the recent acquisitions in the Aerostructures and Industrial Distribution segments. For the aerospace businesses, organic sales growth resulted from increased shipments for major programs and customers, specifically the Sikorsky cockpit program, the JPF fuze program and commercial aircraft programs including Boeing and Airbus. For the Industrial Distribution segment, sales to several new large national accounts, as well as the acquisition of ISC, contributed to the increase for 2008 compared to 2007.

Gross Profit

	For the Three Months Ended						For the Six Months Ended
In thousands	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007
Gross profit	$	86,272		$	74,584		$	162,863		$	149,745
$ change		11,688			7,590			13,118			15,586
% change		15.7	%		11.3	%		8.8	%		11.6	%
% of net sales		27.3	%		27.4	%		27.1	%		27.8	%

The change in consolidated gross profit for the second quarter of 2008 was attributable to several factors. Gross profit increases in the Industrial Distribution and Specialty Bearings segments resulted from higher sales volume. Gross profit also increased for the Helicopters segment primarily due to there being no requirement for Australian SH-2G(A) program charges in 2008, in contrast with the $2.4 million charge in the prior year second quarter. Despite the increase in sales volume at both the Aerostructures and Precision Products segments, gross profit decreased as a result of $2.4 million in charges (excluding the goodwill impairment charge) recorded at the Aerostructures Wichita facility and lower margin sales of JPF fuzes during the quarter.

Gross profit for the first half of 2008 increased primarily due to the increased sales volume at the Industrial Distribution and Specialty Bearings segments and the absence of Australia SH-2G(A) program charges compared to the $4.9 million in charges recorded in the first half of 2007. These positive results were partially offset by the less favorable product mix for the Precision Products segment and the charges that were recorded at the Aerostructures Wichita facility as discussed more fully in the reporting segment discussion that follows.

Selling, General & Administrative Expenses (S,G&A)

	For the Three Months Ended						For the Six Months Ended
In thousands	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007
Selling, general and
administrative expenses (S,G&A)	$	63,774		$	58,781		$	126,472		$	117,976
$ change		4,993			4,112			8,496			6,506
% change		8.5	%		7.5	%		7.2	%		5.8	%
% of net sales		20.2	%		21.6	%		21.0	%		21.9	%

Although all of the reporting segments experienced an increase in S,G&A for the second quarter and first half of 2008, the largest increase related to the Industrial Distribution segment. These increases were partially offset by a decrease in Corporate expenses. The Industrial Distribution segment increase is partially attributable to ISC, with the remaining increase being primarily due to higher personnel costs due to an increase in headcount as well an increase in vehicle expense driven mostly by rising fuel costs. The increase in S,G&A for the aerospace businesses was a result of higher personnel costs as well as increased bid and proposal activity. Overall, Corporate expenses decreased significantly primarily due to lower fringe benefit, incentive compensation and stock appreciation rights expense as well as lower group insurance expenses for both the quarter and first half of 2008.

Goodwill Impairment

Our Aerostructures Wichita, KS facility continued to experience production and quality issues which resulted in the separate termination of two long-term contracts, which were significant to the facility, with Spirit AeroSystems and Shenyang Aircraft Corporation, which both were currently loss contracts. These production issues are more fully discussed under the segment discussion of this MD&A. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we test goodwill for potential impairment annually as of December 31 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Due to the loss of the two major contracts as well as the production and quality issues we have experienced, management performed an impairment analysis on this reporting unit as of June 27, 2008.

Although we believe that we will work through the production issues at our Aerostructures Wichita facility, our carrying value has increased significantly since the last quarterly report. This, combined with our loss of two long-term contracts, and the quality and production issues at the facility, has created a situation in which the estimated fair value of this reporting unit (the legal entity Plastic Fabricating Company, Inc.) is less than its carrying value. The total non-cash goodwill impairment charge was $7.8 million, which represents the entire goodwill balance for this reporting unit. This charge is not deductible for tax purposes and represents a discrete item in our second quarter 2008 effective tax rate.

Additionally, although we have made significant progress on the JPF fuze program recently, we performed a similar interim analysis with respect to the goodwill recorded in connection with the acquisition of our Precision Products Orlando facility since this facility has experienced a variety of design and production issues associated with the JPF fuze program, which is forecasted to be its principal source of revenues and earnings in the near term, as well as increased inventory levels. Based upon the results of our analysis we have concluded the goodwill recorded by the Precision Products segment has not been impaired as of June 27, 2008. We will continue to monitor this facility’s performance in the future.

Operating Income

	For the Three Months Ended						For the Six Months Ended
In thousands	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007
Operating income	$	14,591		$	15,861		$	28,374		$	31,784
$ change		(1,270	)		3,494			(3,410	)		9,040
% change		(8.0	)%		28.3	%		(10.7	)%		39.7	%
% of net sales		4.6	%		5.8	%		4.7	%		5.9	%

Our reporting segments produced mixed operating income results for the second quarter and first half of 2008 compared to the same periods in 2007. The Specialty Bearings, Helicopters and Industrial Distribution segments experienced an increase in operating income in 2008 compared to 2007 as a result of the program developments discussed in the segment sections that follow. Corporate expenses were also significantly lower in both the second quarter and first half of 2008 compared to the second quarter and first half of 2007. These positive impacts were offset by decreases in our Aerostructures and Precision Products segments. Please refer to the individual segment discussions for additional detail.

Additional Consolidated Results

Net interest expense generally consists of interest charged on the revolving credit facility and the convertible debentures offset by interest income. Total net interest expense for the second quarter of 2008 was $0.5 million compared to $1.7 million for the second quarter of 2007. Total net interest expense for the first half of 2008 was $0.5 million as compared to $3.2 million expense in the first half of 2007. The significant difference for both periods was a result of our pay down of a significant portion of our revolving credit line as of December 31, 2007, using the proceeds from the sale of the Music segment, as well as the redemption of the remaining convertible debentures in late 2007. In the second quarter of 2008, the company began to borrow against its revolving credit line again to fund working capital requirements and a significant portion of debt was incurred in June to fund the Brookhouse acquisition.

The effective income tax rate was 55.9% for the second quarter of 2008 as compared to 35.4% for the second quarter of 2007. The effective rate was abnormally high due to the $7.8 million non-deductible impairment charge that was recorded during the second quarter of 2008. The effective rate for the entire year is estimated to be 40% for 2008, which includes certain discrete quarterly items including the goodwill impairment charge, compared to 36.6% for 2007. The effective tax rate represents the combined estimated federal, state and international tax effects attributable to pretax earnings for the year.

Other Matters

In connection with our sale of the Music segment, we assumed responsibility for meeting certain requirements of the Transfer Act that apply to the leased guitar manufacturing facility ("Ovation") located in New Hartford, Connecticut, which was transferred as part of the sale. Under the Transfer Act, we are required to assess the environmental conditions of the site and remediate environmental impairments, if any, caused by Ovation's operations. The site consists of a multi-tenant industrial park, in which Ovation and other unrelated entities lease space. We are in the process of assessing the environmental conditions at the site and determining our share of the cost of environmental remediation that may be required. Our current estimate of our portion of the cost to assess the environmental conditions and remediate this property is $2.2 million.

The CTDEP has given the company conditional approval for reclassification of groundwater in the vicinity of the Moosup, CT facility consistent with the character of the area. This facility is currently being held for disposal. The company has substantially completed the process of connecting neighboring properties to public drinking water in accordance with such approval and in coordination with the CTDEP and local authorities. The company anticipates that the water connection project will be completed in 2008. A site assessment to characterize the environmental condition of the property has also commenced.

COMBINED AEROSPACE SEGMENT RESULTS

The following table presents selected financial data for our combined Aerospace Segments:

	For the Three Months Ended						For the Six Months Ended
	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007
Net sales:
Aerostructures	$	30,944		$	23,322		$	59,737		$	48,501
Precision Products		27,236			23,962			51,366			42,462
Helicopters		18,105			19,025			32,719			36,483
Specialty Bearings		36,667			31,471			72,746			63,450
Total Aerospace Segments	$	112,952		$	97,780		$	216,568		$	190,896
$ change		15,172			23,382			25,672			42,862
% change		15.5	%		31.4	%		13.4	%		29.0	%

Operating income:
Aerostructures	$	(6,248	)	$	3,680		$	(7,263	)	$	8,231
Precision Products		880			4,015			2,685			6,545
Helicopters		2,866			(244	)		3,724			(1,269	)
Specialty Bearings		13,941			10,204			26,909			20,763
Total Aerospace Segments	$	11,439		$	17,655		$	26,055		$	34,270
$ change		(6,216	)		6,992			(8,215	)		13,606
% change		(35.2	)%		65.6	%		(24.0	)%		65.8	%

Kaman’s strategies for the Aerospace segments are:

·	Aerostructures: Take advantage of the trend toward increased outsourcing by both the aircraft prime manufacturers and Tier 1 suppliers.

·	Precision Products: Become the leading producer of fuzing systems for the U.S. military and allied militaries.

·	Helicopters: Take advantage of increasing subcontracting opportunities as helicopter prime manufacturers shift focus from manufacturing to final assembly and systems integration.

·	Specialty Bearings: Maintain leadership in product technical performance and application engineering support while staying ahead of the curve in product technology enhancement, lean manufacturing techniques and lead time reduction.

AEROSTRUCTURES SEGMENT

	For the Three Months Ended						For the Six Months Ended
In thousands	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007
Net sales	$	30,944		$	23,322		$	59,737		$	48,501
$ change		7,622			6,270			11,236			14,529
% change		32.7	%		36.8	%		23.2	%		42.8	%

Operating income	$	(6,248	)	$	3,680		$	(7,263	)	$	8,231
$ change		(9,928	)		1,683			(15,494	)		3,867
% change		(269.8	)%		84.3	%		(188.2	)%		88.6	%
% of net sales		(20.2	)%		15.8	%		(12.2	)%		17.0	%

Backlog	$	254,985		$	137,767

The growth in net sales for both the second quarter and first half of 2008 was partially attributable to $3.6 million of sales by Brookhouse, which was acquired in mid-June 2008. The remainder of the sales growth was due to higher production levels and increased shipments to Sikorsky for the BLACK HAWK helicopter program at our Jacksonville facility, offset partially by a decrease in Wichita facility sales due to the production and operational issues discussed below. During the second quarter of 2008, the segment delivered 32 cockpits as compared to the 18 delivered in the second quarter of 2007. For both the second quarter and first half of 2008, the additional gross margin generated by the higher sales volume was more than offset by the charges recorded at the Wichita facility. These charges in the second quarter of 2008 include the goodwill impairment charge of $7.8 million as well as $2.4 million for the write off of redundant and excess costs that were incurred due to the operational issues that the facility has been working through. These charges are in addition to the $4.5 million in additional costs recorded in the first quarter of 2008.

On June 12, 2008, we acquired Brookhouse Holdings, Limited, a leader in the design and manufacture of composite aerostructures, aerospace tooling, and repair and overhaul services based in Darwen, Lancashire, England. The purchase price was 43 million pounds sterling ($85.1 million based on an exchange rate of 1.98) in cash. The acquisition further diversifies our platform positions in both the military and commercial markets, and significantly enhances our position in the higher-growth markets for composite structures.

Aerostructures – Major Programs

In the second quarter of 2008, our Jacksonville facility continued to deliver cockpits under our current orders for the Sikorsky BLACK HAWK helicopter program. In June 2008, Sikorsky placed an order for an additional 238 cockpits. To date, Sikorsky has placed orders for 549 cockpits for various models of the helicopter, under both the original contract signed in late 2004 and the new Memorandum of Agreement entered into in late 2007. This program includes the installation of all wiring harnesses, hydraulic assemblies, control pedals and sticks, seat tracks, pneumatic lines, and the composite structure that holds the windscreen for cockpits on most models of the BLACK HAWK helicopter. This program has a total potential value of at least $250 million. We expect that deliveries on the current orders will continue through 2010. A total of 217 cockpits have been delivered under this contract from inception through the second quarter of 2008.

In mid July 2008, the company signed a long-term requirements contract with Boeing for the production of wing control surfaces for the U.S. Air Force’s A-10 fleet. This work will be performed at the Aerostructures Jacksonville facility and has a potential contract value in excess of $100 million. The agreement calls for the segment to supply inboard and outboard flaps, slats and deceleron assemblies. The contract will commence in 2008 with initial deliveries scheduled to begin in early 2010. Full rate production is expected to begin in 2011 with an average of approximately 47 shipsets per year through 2015. The annual quantities may vary and will be dependent upon the orders that Boeing receives from the Air Force.

The production of structural wing subassemblies for the Boeing C-17 continues to be an important element in maintaining a sufficient business base at the Jacksonville facility. Early in the second quarter of 2008, we received an order for an additional 10 shipsets. Production under these orders will continue through 2009, and it is possible that work for this program will continue thereafter as Boeing determines the future requirements for this aircraft. Additionally, in late 2007 we signed a seven-year follow-on contract with Boeing for the production of fixed wing trailing edge assemblies for the Boeing 777 and 767 aircraft. Both of these programs are important to the segment’s continued growth.

At the Aerostructures Wichita facility, we continue our efforts to implement corrective actions to resolve personnel, quality and production process issues. As previously reported, these issues arose in connection with the facility's rapid expansion to accommodate ramp up of three contracts, all of which were awarded in 2006; specifically, Spirit AeroSystems and Shenyang Aircraft Corporation for the Boeing 787 Dreamliner program and Sikorsky Aircraft Corporation for the Canadian MH-92 helicopter program. In the first quarter, management responsibility for the facility was consolidated with the Jacksonville management team in order to share operational knowledge. During the second quarter we successfully hired key personnel, including the recent appointment of Greg Steiner as President of our Aerospace Group and other key management at the Wichita facility, and stabilized the workforce. We also made efforts toward resolving production and equipment issues. In July 2008, the "probation" status that was imposed by a major customer in the first quarter, as previously reported, has been removed, and this customer has allowed production to resume on all programs.

Despite these efforts, the Wichita facility has continued to experience difficulties. Specifically, the facility's AS9100 (a form of ISO 9000) certification (the suspension of which was previously reported) is not expected to be restored until early in the fourth quarter of 2008 due to the administrative and audit activities that must be conducted to re-institute full certification. In fact, management learned during the second quarter that the certification agency had, without prior discussions with management, changed the facility's status to "withdrawn" from "suspended"; management has been informed that this situation can only be corrected by the audit activity described above. The facility's lack of certification status has adversely affected its ability to fully perform its obligations under certain contracts. These circumstances, combined with the personnel and operational issues described above and other factors affecting specific programs, have resulted in two of the contracts awarded in 2006 being terminated. Specifically, we received a notice from Spirit in June 2008 seeking a default termination of its contract. Management has cooperated with Spirit AeroSystems to achieve the customer’s production objectives while reserving our legal rights with respect to the appropriateness of the contract termination. In addition, in July 2008 the Shenyang contract has been terminated under a mutually satisfactory arrangement that essentially waives all potential claims other than warranty items. This arrangement also provides compensation to the Wichita facility for its tooling, which will be transferred directly to Boeing. Although both of these terminated programs were currently loss contracts for the company, they were considered significant to the overall operating results of the Wichita facility. Finally, inventories at the facility have increased significantly due to delays in shipments as a result of these circumstances.

The Wichita facility is making progress on other programs, including the tail rotor pylon work for Sikorsky's Canadian MH-92 helicopter program with support from the Jacksonville facility. We plan to begin renegotiating pricing on this program with Sikorsky within the next several months. While there is still significant work to be done, we believe that the right management team is in place to meet the challenges currently confronted by the Wichita facility, however it is expected that it will take most of 2008 to resolve them satisfactorily.

PRECISION PRODUCTS SEGMENT

	For the Three Months Ended						For the Six Months Ended
In thousands	June 27, 2008			June 29, 2007			June 27, 2008			June 29, 2007
Net sales	$	27,236		$	23,962		$	51,366		$	42,462
$ change		3,274			9,328			8,904			8,786
% change		13.7	%		63.7	%		21.0	%		26.1	%

Operating income	$	880		$	4,015		$