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 July 3, 2009
Or
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).
Yes o 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 31, 2009, there were 25,667,243 shares of Common Stock outstanding.
PART I
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except share and per share amounts) (Unaudited)
|
|
July 3, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,419 |
|
|
$ |
8,161 |
|
Accounts receivable, net |
|
|
137,228 |
|
|
|
173,847 |
|
Inventories |
|
|
291,261 |
|
|
|
255,817 |
|
Deferred income taxes |
|
|
21,993 |
|
|
|
23,851 |
|
Income taxes receivable |
|
|
- |
|
|
|
3,450 |
|
Other current assets |
|
|
20,068 |
|
|
|
21,390 |
|
Total current assets |
|
|
482,969 |
|
|
|
486,516 |
|
Property, plant and equipment, net |
|
|
80,146 |
|
|
|
79,476 |
|
Goodwill |
|
|
88,482 |
|
|
|
83,594 |
|
Other intangibles assets, net |
|
|
30,089 |
|
|
|
28,211 |
|
Deferred income taxes |
|
|
72,483 |
|
|
|
71,926 |
|
Other assets |
|
|
16,383 |
|
|
|
12,890 |
|
Total assets |
|
$ |
770,552 |
|
|
$ |
762,613 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
1,618 |
|
|
$ |
1,241 |
|
Current portion of long-term debt |
|
|
5,000 |
|
|
|
5,000 |
|
Accounts payable – trade |
|
|
70,827 |
|
|
|
84,059 |
|
Accrued salaries and wages |
|
|
18,153 |
|
|
|
21,104 |
|
Accrued pension costs |
|
|
1,095 |
|
|
|
5,878 |
|
Accrued contract losses |
|
|
3,397 |
|
|
|
9,714 |
|
Advances on contracts |
|
|
1,397 |
|
|
|
10,612 |
|
Other accruals and payables |
|
|
39,532 |
|
|
|
39,467 |
|
Income taxes payable |
|
|
3,247 |
|
|
|
1,464 |
|
Total current liabilities |
|
|
144,266 |
|
|
|
178,539 |
|
Long-term debt, excluding current portion |
|
|
84,000 |
|
|
|
87,924 |
|
Deferred income taxes |
|
|
8,738 |
|
|
|
7,926 |
|
Liability for pension benefits |
|
|
161,882 |
|
|
|
168,148 |
|
Due to Commonwealth of Australia |
|
|
31,188 |
|
|
|
- |
|
Other long-term liabilities |
|
|
45,999 |
|
|
|
45,805 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Shareholders' equity: |
|
|
|
|
|
|
|
|
Capital stock, $1 par value per share: |
|
|
|
|
|
|
|
|
Preferred stock, 200,000 shares authorized; none outstanding |
|
|
- |
|
|
|
- |
|
Common stock, 50,000,000 shares authorized, 25,706,324 and |
|
|
|
|
|
|
|
|
25,514,525 shares issued, respectively |
|
|
25,706 |
|
|
|
25,515 |
|
Additional paid-in capital |
|
|
87,531 |
|
|
|
85,073 |
|
Retained earnings |
|
|
291,383 |
|
|
|
283,789 |
|
Accumulated other comprehensive income (loss) |
|
|
(109,608 |
) |
|
|
(119,658 |
) |
Less 48,182 and 43,907 shares of common stock, |
|
|
|
|
|
|
|
|
respectively, held in treasury, at cost |
|
|
(533 |
) |
|
|
(448 |
) |
Total shareholders’ equity |
|
|
294,479 |
|
|
|
274,271 |
|
Total liabilities and shareholders’ equity |
|
$ |
770,552 |
|
|
$ |
762,613 |
|
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands, except per share amounts) (Unaudited)
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
293,223 |
|
|
$ |
316,285 |
|
|
$ |
587,258 |
|
|
$ |
602,066 |
|
Cost of sales |
|
|
214,752 |
|
|
|
230,013 |
|
|
|
431,092 |
|
|
|
439,203 |
|
Gross profit |
|
|
78,471 |
|
|
|
86,272 |
|
|
|
156,166 |
|
|
|
162,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
62,251 |
|
|
|
63,774 |
|
|
|
130,636 |
|
|
|
126,472 |
|
Goodwill impairment |
|
|
- |
|
|
|
7,810 |
|
|
|
- |
|
|
|
7,810 |
|
Net (gain)/loss on sale of assets |
|
|
53 |
|
|
|
97 |
|
|
|
(40 |
) |
|
|
207 |
|
Operating income from continuing operations |
|
|
16,167 |
|
|
|
14,591 |
|
|
|
25,570 |
|
|
|
28,374 |
|
Interest expense, net |
|
|
866 |
|
|
|
463 |
|
|
|
1,969 |
|
|
|
462 |
|
Other expense, net |
|
|
1,081 |
|
|
|
321 |
|
|
|
1,284 |
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before income taxes |
|
|
14,220 |
|
|
|
13,807 |
|
|
|
22,317 |
|
|
|
27,450 |
|
Income tax expense |
|
|
4,826 |
|
|
|
7,717 |
|
|
|
7,547 |
|
|
|
12,492 |
|
Net earnings from continuing operations |
|
|
9,394 |
|
|
|
6,090 |
|
|
|
14,770 |
|
|
|
14,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of discontinued operations |
|
|
- |
|
|
|
506 |
|
|
|
- |
|
|
|
506 |
|
Income tax expense |
|
|
- |
|
|
|
183 |
|
|
|
- |
|
|
|
183 |
|
Net earnings from disposal of discontinued operations |
|
|
- |
|
|
|
323 |
|
|
|
- |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
9,394 |
|
|
$ |
6,413 |
|
|
$ |
14,770 |
|
|
$ |
15,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations |
|
$ |
0.37 |
|
|
$ |
0.24 |
|
|
$ |
0.58 |
|
|
$ |
0.59 |
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from disposal of discontinued operations |
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
0.01 |
|
Basic earnings per share |
|
$ |
0.37 |
|
|
$ |
0.25 |
|
|
$ |
0.58 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations |
|
$ |
0.37 |
|
|
$ |
0.24 |
|
|
$ |
0.58 |
|
|
$ |
0.59 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from disposal of discontinued operations |
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
0.01 |
|
Diluted earnings per share |
|
$ |
0.37 |
|
|
$ |
0.25 |
|
|
$ |
0.58 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
25,638 |
|
|
|
25,354 |
|
|
|
25,586 |
|
|
|
25,280 |
|
Diluted |
|
|
25,721 |
|
|
|
25,497 |
|
|
|
25,659 |
|
|
|
25,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)
|
|
For the Six Months Ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net earnings from continuing operations |
|
$ |
14,770 |
|
|
$ |
14,958 |
|
Adjustments to reconcile net earnings from continuing operations to |
|
|
|
|
|
|
|
|
net cash provided by (used in) operating activities of continuing operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
7,692 |
|
|
|
5,435 |
|
Provision for doubtful accounts |
|
|
172 |
|
|
|
(213 |
) |
Net (gain) loss on sale of assets |
|
|
(40 |
) |
|
|
207 |
|
Loss on derivative instruments |
|
|
862 |
|
|
|
- |
|
Goodwill impairment |
|
|
- |
|
|
|
7,810 |
|
Share-based compensation expense |
|
|
1,727 |
|
|
|
1,111 |
|
Excess tax benefits from share-based compensation arrangements |
|
|
71 |
|
|
|
(205 |
) |
Deferred income taxes |
|
|
1,357 |
|
|
|
3,517 |
|
Changes in assets and liabilities, excluding effects of acquisitions/divestures: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(2,780 |
) |
|
|
(36,991 |
) |
Inventories |
|
|
18,989 |
|
|
|
(15,929 |
) |
Income tax receivable |
|
|
3,450 |
|
|
|
(3,603 |
) |
Other current assets |
|
|
1,603 |
|
|
|
3,618 |
|
Accounts payable - trade |
|
|
(12,169 |
) |
|
|
4,547 |
|
Accrued contract losses |
|
|
(251 |
) |
|
|
1,270 |
|
Advances on contracts |
|
|
(684 |
) |
|
|
921 |
|
Accrued expenses and payables |
|
|
(3,928 |
) |
|
|
(9,964 |
) |
Income taxes payable |
|
|
1,571 |
|
|
|
(11,100 |
) |
Pension liabilities |
|
|
(8,869 |
) |
|
|
(2,871 |
) |
Other long-term liabilities |
|
|
(654 |
) |
|
|
(1,557 |
) |
Cash provided by (used in) operating activities of continuing operations |
|
|
22,889 |
|
|
|
(39,039 |
) |
Cash provided by (used in) operating activities of discontinued operations |
|
|
- |
|
|
|
(183 |
) |
Cash provided by (used in) operating activities |
|
|
22,889 |
|
|
|
(39,222 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of assets |
|
|
31 |
|
|
|
65 |
|
Net proceeds form the sale of discontinued operations |
|
|
- |
|
|
|
447 |
|
Expenditures for property, plant & equipment |
|
|
(5,508 |
) |
|
|
(6,651 |
) |
Acquisition of businesses including earn out adjustment, net of cash |
|
|
(550 |
) |
|
|
(100,168 |
) |
Other, net |
|
|
(1,237 |
) |
|
|
(2,782 |
) |
Cash provided by (used in) investing activities of continuing operations |
|
|
(7,264 |
) |
|
|
(109,089 |
) |
Cash provided by (used in) investing activities of discontinued operations |
|
|
- |
|
|
|
- |
|
Cash provided by (used in) investing activities |
|
|
(7,264 |
) |
|
|
(109,089 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowings (repayments) under revolving credit agreements |
|
|
(1,117 |
) |
|
|
84,458 |
|
Debt repayment |
|
|
(2,500 |
) |
|
|
- |
|
Net change in book overdraft |
|
|
(1,989 |
) |
|
|
7,293 |
|
Proceeds from employee stock plan transactions |
|
|
899 |
|
|
|
2,519 |
|
Dividends paid |
|
|
(7,350 |
) |
|
|
(7,064 |
) |
Windfall tax benefit |
|
|
(71 |
) |
|
|
205 |
|
Other |
|
|
(36 |
) |
|
|
304 |
|
Cash provided by (used in) financing activities of continuing operations |
|
|
(12,164 |
) |
|
|
87,715 |
|
Cash provided by (used in) financing activities of discontinued operations |
|
|
- |
|
|
|
- |
|
Cash provided by (used in) financing activities |
|
|
(12,164 |
) |
|
|
87,715 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,461 |
|
|
|
(60,596 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
797 |
|
|
|
268 |
|
Cash and cash equivalents at beginning of period |
|
|
8,161 |
|
|
|
73,898 |
|
Cash and cash equivalents at end of period |
|
$ |
12,419 |
|
|
$ |
13,570 |
|
See accompanying notes to the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months and six months ended July 3, 2009 and June 27, 2008
(Unaudited)
1. BASIS OF PRESENTATION
The December 31, 2008 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 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 the 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,
2008. 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.
During the second quarter of 2009, the Company implemented modifications to its system of reporting, resulting from the changes to its internal organization over the past year, which changed its reportable segments to Industrial Distribution and Aerospace. The Company previously had five reportable business segments, Industrial Distribution
and four Aerospace segments. See Note 15, Segment Information, for further discussion of the change in the Company’s segments.
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 2009 and 2008 ended on July 3, 2009 and June 27, 2008, respectively.
2. RECENT ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162. SFAS No. 168 established the FASB Accounting Standards Codification TM ("Codification") which will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This statement is effective for interim and annual reporting periods ending after September 15, 2009. The Company
does not expect the adoption of SFAS No. 168 to have an impact on its consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 established principles and requirements for recognition and disclosure of subsequent events. In particular, it sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. This statement is to be applied to the accounting for and disclosure of subsequent events not addressed
in other applicable GAAP and is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of SFAS 165 did not have an impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued FSP No. 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, (“FSP 141R-1”). FSP 141R-1 amends the provisions in SFAS No. 141R for the initial recognition and measurement, subsequent measurement and accounting, and disclosures
for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in Statement No. 141R, and instead carries forward most of the provisions of SFAS No. 141 for acquired contingencies. FSP 141R-1 is effective for contingent assets and contingent liabilities acquired in 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. FSP 141R-1 could have an impact on the Company’s consolidated financial statements, but the nature and magnitude of its specific effects, if any, will depend upon the nature, term and size of the acquired contingencies.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
3. ADDITIONAL CASH FLOW INFORMATION
Cash payments for interest were $2.1 million and $0.9 million for the six months ended July 3, 2009, and June 27, 2008, respectively. Cash payments for income taxes, net of refunds, for the same periods were $0.5 million and $24.4 million, respectively.
On February 12, 2009, the Company completed the transfer of ownership of the Australian SH-2G(A) Super Seasprite Program inventory and equipment. As a result, the Company recorded a non-cash inventory acquisition of $52.7 million, which represented the elimination of $32.0 million of net unbilled receivables, the elimination of $6.1 million
of accrued contract losses, the recognition of the $25.8 million minimum payment liability due to the Commonwealth of Australia and $1.0 million of additional costs required to close out the program. See Note 7, Inventories, for further discussion.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following (in thousands):
|
|
July 3, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
Trade receivables |
|
$ |
69,431 |
|
|
$ |
77,071 |
|
U.S. Government contracts: |
|
|
|
|
|
|
|
|
Billed |
|
|
32,855 |
|
|
|
29,088 |
|
Costs and accrued profit – not billed |
|
|
7,087 |
|
|
|
2,450 |
|
Commercial and other government contracts: |
|
|
|
|
|
|
|
|
Billed |
|
|
30,233 |
|
|
|
26,845 |
|
Costs and accrued profit – not billed |
|
|
- |
|
|
|
40,565 |
|
Less allowance for doubtful accounts |
|
|
(2,378 |
) |
|
|
(2,172 |
) |
Accounts Receivable, net |
|
$ |
137,228 |
|
|
$ |
173,847 |
|
Accounts receivable, net also includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs, which totaled $0.6 million and $1.8 million at July 3, 2009 and December 31, 2008, respectively. The Company records revenue associated with these matters only when recovery can be estimated
reliably and realization is probable.
On February 12, 2009, the unbilled receivables associated with the SH-2G(A) program were $40.6 million and the balance of amounts received as advances on this contract were $8.6 million. These balances, totaling a net $32.0 million, were eliminated in connection with the transfer of the Australian program inventory and equipment to the Company.
See Note 7, Inventories, for further discussion.
5. FAIR VALUE MEASUREMENTS
Effective January 1, 2009, the Company adopted FASB Staff Position (“FSP”) SFAS No. 157-2 which had delayed the effective date of SFAS No. 157, “Fair Value Measurements”, for non-financial assets and liabilities until January 1, 2009. SFAS No. 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
SFAS No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
|
• |
|
Level 1 — Quoted prices in active markets for identical assets or liabilities. |
|
• |
|
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data. |
|
• |
|
Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
5. FAIR VALUE MEASUREMENTS (Continued)
The table below segregates all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date (in thousands):
|
|
Total Carrying |
|
|
|
|
|
Significant other |
|
|
Significant |
|
|
|
Value at |
|
|
Quoted prices in |
|
|
observable |
|
|
unobservable |
|
|
|
July 3, |
|
|
active markets |
|
|
inputs |
|
|
inputs |
|
|
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
Derivative instruments |
|
$ |
3,925 |
|
|
$ |
- |
|
|
$ |
3,925 |
|
|
$ |
- |
|
Total Assets |
|
$ |
3,925 |
|
|
$ |
- |
|
|
$ |
3,925 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
$ |
200 |
|
|
$ |
- |
|
|
$ |
200 |
|
|
$ |
- |
|
Total Liabilities |
|
$ |
200 |
|
|
$ |
- |
|
|
$ |
200 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s derivative instruments are limited to foreign exchange contracts and interest rate swaps that are measured at fair value using observable market inputs such as forward rates and our counterparties’ credit risks. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy
and have been included in other current assets, other assets and other long-term liabilities on the Condensed Consolidated Balance Sheet at July 3, 2009. Based on the continued ability to trade and enter into forward contracts and interest rate swaps, we consider the markets for our fair value instruments to be active.
The Company evaluated the credit risk associated with the counterparties to these derivative instruments and determined, that as of July 3, 2009, such credit risks have not had an adverse impact on the fair value of these instruments.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”on January 1, 2009. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, with the
intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.
The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to fluctuations in foreign currency exchange rates and interest rates. Derivative financial instruments are recognized on the consolidated balance sheets as either assets or liabilities and are measured at fair value.
Changes in the fair values of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is effective as part of a hedged transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive income are subsequently included in earnings in the periods in which earnings are affected by the hedged item. The Company does not use derivative instruments for speculative purposes.
Derivatives Designated as Cash Flow Hedges
The Company’s Term Loan Credit Agreement (“Term Loan”) contains floating rate obligations and is subject to interest rate fluctuations. During the first quarter of 2009, the Company entered into interest rate swap agreements for the purposes of hedging the eight quarterly variable-rate interest payments on its Term Loan
due in 2010 and 2011. These interest rate swap agreements are designated as cash flow hedges and are intended to manage interest rate risk associated with the Company’s variable-rate borrowings and minimize the negative impact of interest rate fluctuations on the Company’s earnings and cash flows attributable to changes in LIBOR rates. The Company will include in earnings amounts previously included in accumulated other comprehensive income upon payment of its eight quarterly variable-rate interest
payments.
The Company holds forward exchange contracts designed to hedge forecasted transactions denominated in foreign currencies. These contracts are designated as cash flow hedges and are designed to minimize the negative impact of foreign currency fluctuations on the Company’s earnings and cash flows. The Company will include in earnings
amounts previously included in accumulated other comprehensive income upon recognition of cost of sales related to the underlying transaction.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
6. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
Derivatives Designated as Cash Flow Hedges - continued
The following table shows the fair value of derivative instruments designated as cash flow hedging instruments under SFAS No. 133 (in thousands):
|
|
|
Fair Value |
|
|
|
|
|
Balance Sheet |
|
July 3, |
|
|
December 31, |
|
|
Notional |
|
|
Location |
|
2009 |
|
|
2008 |
|
|
Amount |
|
Derivative Assets |
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
Other current assets |
|
$ |
170 |
|
|
$ |
212 |
|
|
1,399 Euro |
|
Foreign exchange contracts (a) |
Other assets |
|
|
- |
|
|
|
779 |
|
|
36,516 Australian Dollars |
|
Interest rate swap contract |
Other assets |
|
|
34 |
|
|
|
- |
|
|
|
$ 40,000 |
|
Total |
|
|
$ |
204 |
|
|
$ |
991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract |
Other liabilities |
|
$ |
200 |
|
|
$ |
- |
|
|
|
$ 45,000 |
|
Total |
|
|
$ |
200 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Forward exchange contracts dedesignated on February 12, 2009. See information below for fair value after dedesignation.
The following table shows the gain or (loss) recognized in other comprehensive income for derivatives designated as cash flow hedges under SFAS No. 133 (in thousands):
|
|
For the three months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
68 |
|
|
$ |
- |
|
Foreign exchange contracts (a) |
|
|
- |
|
|
|
- |
|
Interest rate swap contracts |
|
|
1 |
|
|
|
- |
|
Total |
|
$ |
69 |
|
|
$ |
- |
|
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
(37 |
) |
|
$ |
- |
|
Foreign exchange contracts (a) |
|
|
(1,941 |
) |
|
|
- |
|
Interest rate swap contracts |
|
|
(166 |
) |
|
|
- |
|
Total |
|
$ |
(2,144 |
) |
|
$ |
- |
|
(a) |
Forward exchange contract dedesignated on February 12, 2009. See information below for amounts recognized in the Condensed Consolidated Statement of Operations after dedesignation. |
During the three months and six months ended July 3, 2009, the loss reclassified from Other Comprehensive Income for derivative instruments designated as cash flow hedges was not material. No amounts were reclassified from Other Comprehensive Income for the three months or six months ended June 27, 2008. Over the next twelve months, the Company
expects to reclassify approximately $0.2 million from Other Comprehensive Income.
During the three months and six months ended July 3, 2009, the gain recorded in other income for the ineffective portion of derivative instruments designated as cash flow hedges was not material. No such amounts were recorded for the three months or six months ended June 27, 2008.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
6. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
Derivatives Not Designated as Hedging Instruments
The following table shows the fair value of derivative instruments not designated as hedging instruments under SFAS No. 133 (in thousands):
|
|
|
Fair Value |
|
|
|
|
|
Balance Sheet |
|
July 3, |
|
|
December 31, |
|
|
Notional |
|
|
Location |
|
2009 |
|
|
2008 |
|
|
Amount |
|
Derivative Assets |
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
Other current assets |
|
$ |
42 |
|
|
$ |
- |
|
|
|
$390 |
|
Foreign exchange contracts |
Other assets |
|
|
3,679 |
|
|
|
- |
|
|
36,516 Australian Dollars |
|
Total |
|
|
$ |
3,721 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 12, 2009, the Company dedesignated the forward contract it had entered into to hedge $36.5 million (AUD) of its $39.5 million (AUD) future minimum required payments to the Commonwealth of Australia. At July 3, 2009, the U.S. dollar value of the $36.5 million (AUD) payable was $29.1 million. The following table shows the location
and amount of the gain or (loss) recognized on the Condensed Consolidated Statements of Operations for derivatives not designated as hedge instruments under SFAS No. 133 (in thousands):
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
Income Statement |
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
Location |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Derivative Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts |
Other expense, net |
|
$ |
(42 |
) |
|
$ |
- |
|
|
$ |
(42 |
) |
|
$ |
- |
|
Foreign Exchange Contracts |
Other expense, net |
|
|
(2,547 |
) |
|
|
- |
|
|
|
(4,572 |
) |
|
|
- |
|
Total |
|
|
$ |
(2,589 |
) |
|
$ |
- |
|
|
$ |
(4,614 |
) |
|
$ |
- |
|
For the three months and six months ended July 3, 2009, the Company recorded $3.0 million and $5.3 million, respectively, to other expense related to the change in the value of the previously hedged $36.5 million (AUD) payable.
Hedges of a Net Investment in Foreign Operations
The Company also maintains an approximately $7.6 million Euro note, part of the revolving credit facility, which qualifies and has been designated as an effective hedge against the Company’s investment in its German subsidiary (RWG). The U.S. dollar value of the Euro note at July 3, 2009, was $10.6 million.
The following table shows the amount of the cumulative translation adjustment recorded in other comprehensive income (in thousands):
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
Location |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro note |
Cumulative Translation Adjustment |
|
$ |
420 |
|
|
$ |
(11 |
) |
|
$ |
208 |
|
|
$ |
806 |
|
Total |
|
|
$ |
420 |
|
|
$ |
(11 |
) |
|
$ |
208 |
|
|
$ |
806 |
|
The Company did not reclassify any amounts from other comprehensive income to earnings during the three or six months ended July 3, 2009 or June 27, 2008.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
7. INVENTORIES
Inventories consist of the following (in thousands):
|
|
July 3, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Merchandise for resale |
|
$ |
94,385 |
|
|
$ |
106,757 |
|
Contracts and other work in process |
|
|
178,473 |
|
|
|
130,299 |
|
Finished goods (including certain general stock materials) |
|
|
18,403 |
|
|
|
18,761 |
|
Total |
|
$ |
291,261 |
|
|
$ |
255,817 |
|
K-MAX® inventory of $24.2 million and $23.6 million as of July 3, 2009 and December 31, 2008, respectively, is included in other work in process and finished goods. Management believes that a significant portion of this K-MAX inventory will be sold after July 3, 2010, based upon the anticipation of supporting the fleet for the foreseeable
future.
On February 12, 2009, the Company completed the transfer of ownership of the Australian SH-2G(A) Super Seasprite Program inventory and equipment. As a result, the Company recorded $52.7 million of contracts and other work in process inventory, which represented the following (in thousands):
Net unbilled accounts receivable* |
|
$ |
32,041 |
|
Accrued contract loss eliminated |
|
|
(6,072 |
) |
USD equivalent of $39.5 million (AUD) minimum liability due to the |
|
|
|
|
Commonwealth of Australia (translated at the exchange rate in |
|
|
|
|
effect on the transaction date, which was 0.6522) |
|
|
25,772 |
|
Additional costs required to close out program |
|
|
1,000 |
|
Total inventory recorded on February 12, 2009 |
|
$ |
52,741 |
|
* The unbilled receivables associated with the SH-2G(A) program were $40.6 million and the balance of amounts received as advances on this contract were $8.6 million. These balances, netting to $32.0 million, were eliminated in connection with the transfer of the Australian program inventory and equipment to the Company.
Management believes that a significant portion of this inventory will be sold after July 3, 2010, based upon the time needed to market the aircraft and prepare them for sale. For more information on the Australian SH-2G(A) inventory see Note 11, Commitments and Contingencies.
8. ACCRUED CONTRACT LOSSES
The following is a summary of activity and balances associated with accrued contract losses (in thousands):
Balance at December 31, 2008 |
|
$ |
9,714 |
|
Additions to loss accrual |
|
|
1,743 |
|
Costs incurred |
|
|
(1,787 |
) |
Released to income |
|
|
(201 |
) |
Elimination of Australian loss accrual |
|
|
(6,072 |
) |
Balance at July 3, 2009 |
|
$ |
3,397 |
|
The transfer of ownership of the SH-2G(A) Super Seasprite program inventory and equipment, effectively ended the associated production and service contracts. As a result, accrued contract losses of $6.1 million were eliminated.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
9. ENVIRONMENTAL COSTS
The following table displays the activity and balances associated with accruals related to environmental costs included in other accruals and payables and other long-term liabilities (in thousands):
Balance at December 31, 2008 |
|
$ |
16,136 |
|
Additions to accrual |
|
|
453 |
|
Payments |
|
|
(851 |
) |
Changes in foreign currency |
|
|
282 |
|
Balance at July 3, 2009 |
|
$ |
16,020 |
|
10. PENSION PLANS
Components of net pension cost for the qualified pension plan and Supplemental Employees’ Retirement Plan ("SERP") are as follows (in thousands):
|
|
Qualified Pension Plan |
|
|
SERP |
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
|
|
July 3, 2009 |
|
|
June 27, 2008 |
|
|
July 3, 2009 |
|
|
June 27, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned |
|
$ |
3,312 |
|
|
$ |
3,069 |
|
|
$ |
87 |
|
|
$ |
185 |
|
Interest cost on projected |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit obligation |
|
|
7,684 |
|
|
|
7,338 |
|
|
|
258 |
|
|
|
405 |
|
Expected return on plan assets |
|
|
(8,059 |
) |
|
|
(8,681 |
) |
|
|
- |
|
|
|
- |
|
Effect of settlement/curtailment |
|
|
- |
|
|
|
- |
|
|
|
767 |
|
|
|
- |
|
Net amortization and deferral |
|
|
965 |
|
|
|
16 |
|
|
|
(165 |
) |
|
|
298 |
|
Net pension cost |
|
$ |
3,902 |
|
|
$ |
1,742 |
|
|
$ |
947 |
|
|
$ |
888 |
|
|
|
Qualified Pension Plan |
|
|
SERP |
|
|
|
For the Six Months Ended |
|
|
For the Six Months Ended |
|
|
|
July 3, 2009 |
|
|
June 27, 2008 |
|
|
July 3, 2009 |
|
|
June 27, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned |
|
$ |
6,712 |
|
|
$ |
6,138 |
|
|
$ |
195 |
|
|
$ |
369 |
|
Interest cost on projected |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit obligation |
|
|
15,231 |
|
|
|
14,676 |
|
|
|
506 |
|
|
|
789 |
|
Expected return on plan assets |
|
|
(15,808 |
) |
|
|
(17,362 |
) |
|
|
- |
|
|
|
- |
|
Effect of settlement/curtailment |
|
|
- |
|
|
|
- |
|
|
|
767 |
|
|
|
1,006 |
|
Net amortization and deferral |
|
|
1,742 |
|
|
|
31 |
|
|
|
(336 |
) |
|
|
706 |
|
Net pension cost |
|
$ |
7,877 |
|
|
$ |
3,483 |
|
|
$ |
1,132 |
|
|
$ |
2,870 |
|
For the 2009 plan year, the Company contributed $10.9 million to the qualified pension plan in April 2009 and does not expect to make any further contributions for this plan year. For the 2009 plan year, the Company expects to make payments of $5.7 million for the SERP of which $5.0 million and $5.2 million were made in the three months and
six months ended July 3, 2009, respectively. In the first quarter of 2009, the Company also made a $1.7 million contribution to the qualified pension plan for the 2008 plan year.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
11. COMMITMENTS AND CONTINGENCIES
Legal Matters
There continue to be two warranty-related matters that impact the FMU-143 program at the Aerospace segment’s Orlando facility, (“Orlando Facility”). 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 Facility was acquired by the Company. The U.S. Army Sustainment Command (“USASC”), the procurement agency that administers the FMU-143 contract, had authorized warranty rework for the bellows motor matter in late 2004/early 2005; however, the Company was not permitted to finish the rework due to issues raised by the USASC primarily related to administrative matters and requests for verification of the accuracy
of test equipment (which accuracy was subsequently verified).
In late 2006, the USASC informed the Company that it was changing its remedy under the contract from performance of warranty rework to an "equitable adjustment" to the contract price. The Company responded, explaining its view that it had complied with contract requirements. In June 2007, the USASC affirmed its position and gave instructions
for disposition of the subject fuzes, including both the impact switch and bellows motor related items, to a Navy facility and the Company complied with that direction. By letter dated April 24, 2009, the United States Government (“USG”) notified the Company that it is contemplating litigation, alleging liability associated with this matter, including specific claims of about $6.0 million (treble damages) in connection with allegedly "false claims" by the Company for payment for fuzes containing the
incorrect part and $3.0 million in connection with rework. By letter dated July 16, 2009, USASC informed the Company that it also demands payment of $9.8 million under the contract related to warranty rework. The Company believes that the allegations are unfounded and will vigorously defend itself should a false claims suit be filed and the Company will file an appeal before the Armed Services Board of Contract Appeals (the "Board") to contest the monetary demand under the contract. At July 3, 2009,
the Company had no amount accrued for this demand.
As reported previously, a separate contract dispute between the Orlando Facility and the USASC relative to the FMU-143 fuze program is now in litigation. The USASC has basically alleged the existence of latent defects in certain fuzes due to unauthorized rework during production and has sought to revoke their acceptance. Management believes
that the Orlando Facility has performed in accordance with the contract and it is the government that has materially breached its terms in several ways; as a result, during the fourth quarter of 2007, the Company cancelled the contract and in January 2008, commenced litigation before the Armed Services Board of Contract Appeals (the “Board”) requesting a declaratory judgment that the cancellation was proper. At about the same time, the USASC notified the Company that it was terminating the contract
for default, making the allegations noted above and the Company filed a second complaint with the Board appealing that termination decision. The litigation process continues. In the same letter of July 16, 2009, referenced above, USASC also demanded for these alleged latent defects a repayment by the Company of $5.7 million. The Company contests this demand and will file an appeal of it at the Board. At July 3, 2009, the Company had no amount
accrued for these matters as it believes that the likelihood of an adverse outcome to this litigation is remote.
Other Matters
Revenue Sharing Agreement with the Commonwealth of Australia
As previously reported, the Company has agreed to share proceeds from its sale of the former SH-2G (A) aircraft (along with spare parts and associated equipment) with the Commonwealth of Australia on a predetermined basis. Total payments of at least $39.5 million (AUD) will be made to the Commonwealth regardless of sales,
with at least $26.7 million (AUD) to be paid by March 2011, and, to the extent cumulative payments have not yet reached $39.5 million (AUD), additional payments of $6.4 million (AUD) each in March of 2012 and 2013. In late 2008, the Company entered into forward contracts for the purpose of hedging these required payments. These contracts represent $36.5 million (AUD) of the $39.5 million (AUD) required payments and have been accounted for in accordance with SFAS 133. See Note 6, Derivative Financial
Instruments, for further discussion of these instruments and their dedesignation during the first quarter of 2009. In addition, to secure these payments, the Company has provided the Commonwealth with a $39.5 million (AUD) unconditional letter of credit, which will be reduced as such payments are made. At July 3, 2009, the Company has made required payments of $0.4 million (AUD). As of that date, the U.S. dollar value of the remaining $39.1 million (AUD) required payment was $31.2 million.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
11. COMMITMENTS AND CONTINGENCIES (Continued)
Other Matters - continued
Moosup
The Connecticut Department of Environmental Protection (“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 2009. Site characterization of the environmental condition of the property began in 2008 and is expected to continue during 2009.
The total anticipated cost of the environmental remediation activities associated with the Moosup property is $4.1 million, all of which has been accrued. The total amount paid to date in connection with these environmental remediation activities is $1.8 million. A portion ($0.3 million) of the accrual related to this property is included
in other accruals and payables and the balance is included in other long-term liabilities. The remaining balance of the accrual reflects the total anticipated cost of completing these environmental remediation activities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.
Ovation
In connection with sale of the Music segment in 2007, the Company assumed responsibility for meeting certain requirements of the Connecticut Transfer Act (the “Transfer Act”) that applied to our transfer of the New Hartford, Connecticut, facility leased by that segment for guitar manufacturing purposes (“Ovation”).
Under the Transfer Act, those responsibilities essentially consist of assessing the site's environmental conditions and remediating environmental impairments, if any, caused by Ovation's operations prior to the sale. The site is a multi-tenant industrial park, in which Ovation and other unrelated entities lease space. The environmental assessment process began in 2008 and will continue during 2009.
The Company's estimate of its portion of the cost to assess the environmental conditions and remediate this site is $2.2 million, unchanged from previously reported estimates, all of which has been accrued. The total amount paid to date in connection with these environmental remediation activities is $0.3 million. A portion ($0.4 million)
of the accrual related to this property is included in other accruals and payables and the balance is included in other long-term liabilities. The remaining balance of the accrual reflects the total anticipated cost of completing these environmental remediation activities. Although it is reasonably possible that additional costs will be paid in connection with the resolution of this matter, the Company is unable to estimate the amount of such additional costs, if any, at this time.
NAVAIR Property
In August 2008, we completed the purchase of the portion of the Bloomfield campus that Kaman Aerospace Corporation had leased from NAVAIR for many years. In connection with the purchase, we have assumed responsibility for environmental remediation at the facility as may be required under the Transfer Act and we continue the effort to define
the scope of the remediation that will be required by the CTDEP. The assumed environmental liability of $10.3 million was recorded by taking the undiscounted remediation liability of $20.8 million and discounting it at a rate of 8%. This remediation process will take many years to complete.
Brookhouse
In connection with the purchase of Brookhouse Holdings Ltd. (“Brookhouse”), the Company accrued £1.6 million, or $2.6 million at July 3, 2009, for environmental compliance at their facilities. The Company continues to assess the work that may be required, which may result in a change to this accrual.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
11. COMMITMENTS AND CONTINGENCIES (Continued)
Other Matters - continued
Brookhouse - continued
In December 2008, a workplace accident occurred at Brookhouse in which one employee died and another was seriously injured. In accordance with U.K. law, the matter is the subject of an ongoing investigation, being carried out jointly by Lancashire Police and the Health and Safety Executive (“HSE”) in order to determine whether
criminal charges are appropriate in this case. The Company has not been notified as to whether the investigation has been concluded. Following the conclusion of the investigation, it is expected that there will also be proceedings before the HSE under U.K. Health and Safety legislation. The Company currently believes that the total potential financial exposure of the two Brookhouse subsidiaries involved in the matter with respect to government proceedings is not likely to be material to its consolidated financial
statements.
12. COMPUTATION OF EARNINGS PER SHARE
Effective January 1, 2009, the Company adopted FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities”. FSP No. EITF 03-6-1 requires that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend-equivalents
be treated as participating securities in calculating earnings per share. FSP No. EITF 03-6-1 was effective for the Company beginning with the first interim period after December 15, 2008, and was applied retrospectively to all prior periods. The adoption of FSP No. EITF 03-6-1 did not have a material impact on the calculation of earnings per share.
The computation of basic earnings per share is based on net earnings divided by the weighted average number of shares of common stock outstanding for each year. The computation of diluted earnings per share includes the common stock equivalency of dilutive options and unvested restricted stock awards granted to employees under the Stock Incentive
Plan.
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except per share amount) |
|
Net Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
$ |
9,394 |
|
|
$ |
6,090 |
|
|
$ |
14,770 |
|
|
$ |
14,958 |
|
Net earnings from discontinued operations, net of tax |
|
|
- |
|
|
|
323 |
|
|
|
- |
|
|
|
323 |
|
Net earnings |
|
$ |
9,394 |
|
|
$ |
6,413 |
|
|
$ |
14,770 |
|
|
$ |
15,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding |
|
|
25,638 |
|
|
|
25,354 |
|
|
|
25,586 |
|
|
|
25,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
0.37 |
|
|
$ |
0.24 |
|
|
$ |
0.58 |
|
|
$ |
0.59 |
|
Basic earnings per share from discontinued operations |
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
0.01 |
|
Basic earnings per share |
|
$ |
0.37 |
|
|
$ |
0.25 |
|
|
$ |
0.58 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding |
|
|
25,638 |
|
|
|
25,354 |
|
|
|
25,586 |
|
|
|
25,280 |
|
Weighted average shares issuable on exercise of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dilutive stock options |
|
|
83 |
|
|
|
143 |
|
|
|
73 |
|
|
|
164 |
|
Weighted average diluted shares outstanding |
|
|
25,721 |
|
|
|
25,497 |
|
|
|
25,659 |
|
|
|
25,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations |
|
$ |
0.37 |
|
|
$ |
0.24 |
|
|
$ |
0.58 |
|
|
$ |
0.59 |
|
Diluted earnings per share from discontinued operations |
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
0.01 |
|
Diluted earnings per share |
|
$ |
0.37 |
|
|
$ |
0.25 |
|
|
$ |
0.58 |
|
|
$ |
0.60 |
|
Excluded from the diluted earnings per share calculation are 717,884 and 695,653 anti-dilutive shares granted to employees, for the three months and six months ended July 3, 2009, respectively, based on average stock price. Excluded from the diluted earnings per share calculation are 9,000 and 4,500 anti-dilutive shares granted to employees, for the three months and six months ended June
27, 2008, respectively, based on average stock price.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
13. SHARE-BASED ARRANGEMENTS
The following table summarizes share-based compensation expense recorded during each period presented (in thousands):
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Stock options |
|
$ |
244 |
|
|
$ |
361 |
|
|
$ |
661 |
|
|
$ |
810 |
|
Restricted stock awards |
|
|
544 |
|
|
|
678 |
|
|
|
996 |
|
|
|
1,035 |
|
Stock appreciation rights |
|
|
38 |
|
|
|
(309 |
) |
|
|
(48 |
) |
|
|
(837 |
) |
Employee stock purchase plan |
|
|
62 |
|
|
|
49 |
|
|
|
118 |
|
|
|
103 |
|
Total share-based compensation |
|
$ |
888 |
|
|
$ |
779 |
|
|
$ |
1,727 |
|
|
$ |
1,111 |
|
Stock option activity was as follows:
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, 2009 |
|
|
July 3, 2009 |
|
|
|
Stock Options |
|
|
Weighted-average
exercise price |
|
|
Stock Options |
|
|
Weighted-average exercise price |
|
Stock Options outstanding at beginning of period |
|
|
924,129 |
|
|
$ |
18.25 |
|
|
|
743,679 |
|
|
$ |
18.81 |
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
213,210 |
|
|
|
16.35 |
|
Exercised |
|
|
(1,000 |
) |
|
|
11.50 |
|
|
|
(24,560 |
) |
|
|
14.65 |
|
Forfeited or expired |
|
|
(5,000 |
) |
|
|
9.90 |
|
|
|
(14,200 |
) |
|
|
21.52 |
|
Stock Options outstanding at July 3, 2009 |
|
|
918,129 |
|
|
$ |
18.31 |
|
|
|
918,129 |
|
|
$ |
18.31 |
|
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 ended |
|
|
For the six months ended |
|
|
|
July 3, 2009* |
|
|
June 27, 2008 |
|
|
July 3, 2009 |
|
|
June 27, 2008 |
|
Expected option term |
|
|
- |
|
|
6.5 years |
|
|
6.5 years |
|
|
6.5 years |
|
Expected volatility |
|
|
- |
|
|
|
44.4 |
% |
|
|
47.7 |
% |
|
|
42.5 |
% |
Risk-free interest rate |
|
|
- |
|
|
|
3.4 |
% |
|
|
2.0 |
% |
|
|
3.3 |
% |
Expected dividend yield |
|
|
- |
|
|
|
1.9 |
% |
|
|
2.2 |
% |
|
|
1.8 |
% |
Per share fair value of options granted |
|
$ |
- |
|
|
$ |
8.81 |
|
|
$ |
6.43 |
|
|
$ |
9.29 |
|
* There were no stock options granted during the three months ended July 3, 2009.
Restricted Stock activity was as follows:
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, 2009 |
|
|
July 3, 2009 |
|
|
|
Restricted Stock Awards |
|
|
Weighted-average grant date fair value |
|
|
Restricted Stock Awards |
|
|
Weighted-average grant date fair value |
|
Restricted Stock outstanding at beginning of period |
|
|
210,404 |
|
|
$ |
22.80 |
|
|
|
149,794 |
|
|
$ |
26.39 |
|
Granted |
|
|
38,000 |
|
|
|
15.44 |
|
|
|
122,050 |
|
|
|
16.07 |
|
Vested |
|
|
(16,000 |
) |
|
|
15.33 |
|
|
|
(39,440 |
) |
|
|
19.70 |
|
Forfeited or expired |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Restricted Stock outstanding at July 3, 2009 |
|
|
232,404 |
|
|
$ |
22.11 |
|
|
|
232,404 |
|
|
$ |
22.11 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
13. SHARE-BASED ARRANGEMENTS (Continued)
Stock Appreciation Rights activity was as follows:
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, 2009 |
|
|
July 3, 2009 |
|
|
|
Stock Appreciation Rights (SAR) |
|
|
Weighted-average exercise price |
|
|
Stock Appreciation Rights (SAR) |
|
|
Weighted-average exercise price |
|
SARs outstanding at beginning of period |
|
|
21,700 |
|
|
$ |
10.66 |
|
|
|
39,700 |
|
|
$ |
10.32 |
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
(18,000 |
) |
|
|
9.90 |
|
Forfeited or expired |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
SARs outstanding at July 3, 2009 |
|
|
21,700 |
|
|
$ |
10.66 |
|
|
|
21,700 |
|
|
$ |
10.66 |
|
Total cash paid to settle stock appreciation rights (at intrinsic value) during the six months ended July 3, 2009, was $0.1 million. No cash was paid to settle stock appreciation rights for the three months ended July 3, 2009. Total cash paid to settle stock appreciation rights (at intrinsic value) during the three and six months
ended June 27, 2008, was $0.2 million. SARs are re-evaluated on a quarterly basis using the Black-Scholes valuation model.
14. GOODWILL
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company for the period ended July 3, 2009 (in thousands):
|
|
Balance at
December 31, 2008 |
|
|
Additions |
|
|
Impairments |
|
|
Foreign Currency Adjustments |
|
|
Balance at
July 3, 2009 |
|
|
|
|
|
Industrial Distribution |
|
$ |
15,615 |
|
|
$ |
21 |
|
|
$ |
- |
|
|
$ |
(221 |
) |
|
$ |
15,415 |
|
Aerospace |
|
|
67,979 |
|
|
|
79 |
|
|
|
- |
|
|
|
5,009 |
|
|
|
73,067 |
|
Total |
|
$ |
83,594 |
|
|
$ |
100 |
|
|
$ |
- |
|
|
$ |
4,788 |
|
|
$ |
88,482 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
15. SEGMENT INFORMATION
During the second quarter of 2009, the Company implemented modifications to its system of reporting, resulting from the changes to its internal organization over the past year, which changed its reportable segments. These changes to the internal organization included the creation of the Aerospace Group management team and the establishment
of the President of Kaman Aerospace Group, Inc. as the segment manager of the combined Aerospace companies. The Industrial Distribution segment, which has been under the leadership of a segment manager for some time, was not impacted by these changes. Following these changes we determined that under the provisions of SFAS No. 131 we now have two reportable segments, Industrial Distribution and Aerospace. These segments are reflective of how the Company’s Chief Operating Decision Maker
(“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company’s CODM is its Chief Executive Officer. Prior period disclosures have been adjusted to reflect the change in reportable segments. Summarized financial information by segment is as follows (in thousands):
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Distribution |
|
$ |
155,954 |
|
|
$ |
203,333 |
|
|
$ |
332,860 |
|
|
$ |
385,498 |
|
Aerospace |
|
|
137,269 |
|
|
|
112,952 |
|
|
|
254,398 |
|
|
|
216,568 |
|
Net sales |
|
$ |
293,223 |
|
|
$ |
316,285 |
|
|
$ |
587,258 |
|
|
$ |
602,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Distribution |
|
$ |
3,065 |
|
|
$ |
9,735 |
|
|
$ |
5,844 |
|
|
$ |
18,808 |
|
Aerospace |
|
|
21,600 |
|
|
|
11,439 |
* |
|
|
36,897 |
|
|
|
26,055 |
* |
Net gain (loss) on sale of assets |
|
|
(53 |
) |
|
|
(97 |
) |
|
|
40 |
|
|
|
(207 |
) |
Corporate expense |
|
|
(8,445 |
) |
|
|
(6,486 |
) |
|
|
(17,211 |
) |
|
|
(16,282 |
) |
Operating income |
|
|
16,167 |
|
|
|
14,591 |
|
|
|
25,570 |
|
|
|
28,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
866 |
|
|
|
463 |
|
|
|
1,969 |
|
|
|
462 |
|
Other expense, net |
|
|
1,081 |
|
|
|
321 |
|
|
|
1,284 |
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
14,220 |
|
|
|
13,807 |
|
|
|
22,317 |
|
|
|
27,450 |
|
Income tax expense |
|
|
4,826 |
|
|
|
7,717 |
|
|
|
7,547 |
|
|
|
12,492 |
|
Net earnings from continuing operations |
|
|
9,394 |
|
|
|
6,090 |
|
|
|
14,770 |
|
|
|
14,958 |
|
Net earnings from discontinued operations |
|
|
- |
|
|
|
323 |
|
|
|
- |
|
|
|
323 |
|
Net earnings |
|
$ |
9,394 |
|
|
$ |
6,413 |
|
|
$ |
14,770 |
|
|
$ |
15,281 |
|
* Includes a non-cash, non-tax-deductible, impairment charge of $7.8 million recorded in the second quarter of 2008.
16. SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
Changes in shareholders’ equity for the six months ended July 3, 2009, were as follows (in thousands):
Balance, December 31, 2008 |
|
$ |
274,271 |
|
Net earnings |
|
|
14,770 |
|
Change in pension & post-retirement benefit plans, net |
|
|
1,209 |
|
Foreign currency translation adjustment, net |
|
|
10,184 |
|
Unrealized gain (loss) on derivative instruments, net |
|
|
(1,343 |
) |
Dividends declared |
|
|
(7,176 |
) |
Employee stock plans and related tax benefit |
|
|
789 |
|
Share-based compensation activity |
|
|
1,775 |
|
Balance, July 3, 2009 |
|
$ |
294,479 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
16. SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Continued)
Total comprehensive income (loss) is shown below (in thousands):
|
|
For the three months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,394 |
|
|
$ |
6,413 |
|
Change in pension and post-retirement benefit plans, |
|
|
|
|
|
|
|
|
net of tax of expense of $516 and $54 |
|
|
842 |
|
|
|
104 |
|
Foreign currency translation adjustment, |
|
|
|
|
|
|
|
|
net of tax benefit of $160 and tax expense of $616 |
|
|
9,589 |
|
|
|
1,258 |
|
Unrealized gain (loss) on derivative |
|
|
|
|
|
|
|
|
instruments, net of tax expense of $30 |
|
|
49 |
|
|
|
- |
|
Total comprehensive income |
|
$ |
19,874 |
|
|
$ |
7,775 |
|
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,770 |
|
|
$ |
15,281 |
|
Change in pension and post-retirement benefit plans, |
|
|
|
|
|
|
|
|
net of tax of expense of $741 and $491 |
|
|
1,209 |
|
|
|
831 |
|
Foreign currency translation adjustment, |
|
|
|
|
|
|
|
|
net of tax benefit of $79 and tax expense of $306 |
|
|
10,184 |
|
|
|
1,496 |
|
Unrealized gain (loss) on derivative |
|
|
|
|
|
|
|
|
instruments, net of tax of benefit of $823 |
|
|
(1,343 |
) |
|
|
- |
|
Total comprehensive income |
|
$ |
24,820 |
|
|
$ |
17,608 |
|
Amounts reclassified from other comprehensive income into net income were $0.8 million and $1.2 million for the three months and six months ended July 3, 2009, respectively. These amounts represent the reclassification for changes in pension and post-retirement benefit plans. Amounts reclassified from other comprehensive income into net income
were $0.1 million and $0.8 million for the three months and six months ended June 27, 2008, respectively. These amounts also represent the reclassification for changes in pension and post-retirement benefit plans.
During the three months and six months ended July 3, 2009, the loss reclassified from other comprehensive income for derivative instruments was not material. No amounts were reclassified from other comprehensive income for the three months or six months ended June 27, 2008.
The components of accumulated other comprehensive income (loss) are shown below (in thousands):
|
|
As of |
|
|
|
July 3, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Changes in pension and post-retirement benefit plans |
|
$ |
(95,686 |
) |
|
$ |
(96,895 |
) |
Foreign currency translation adjustment |
|
|
(13,383 |
) |
|
|
(23,567 |
) |
Unrealized gain (loss) on derivative instruments |
|
|
(539 |
) |
|
|
804 |
|
Accumulated other comprehensive income (loss) |
|
$ |
(109,608 |
) |
|
$ |
(119,658 |
) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the three months and six months ended July 3, 2009, and June 27, 2008
(Unaudited)
17. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through August 6, 2009, which represents the date the financial statements were issued. The Company received a letter dated July 16, 2009 from the USASC regarding the previously disclosed warranty-related matters that impact the FMU-143 program. See Note 11, Commitments and Contingencies, for further
discussion. No other subsequent events were identified that required disclosure.
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. The MD&A presents in narrative form information regarding our financial condition, results of operations, liquidity and
certain other factors that may affect our future results. This will allow our shareholders to obtain a comprehensive understanding of our businesses, strategies, current trends and future prospects. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in our 2008 Form 10-K.
MANAGEMENT OVERVIEW
During the second quarter of 2009, we implemented modifications to our system of reporting, resulting from changes to our internal organization over the past year, which changed our reportable segments. The changes to our internal organization included the creation of the Aerospace Group management team and the establishment of the President
of Kaman Aerospace Group, Inc. as the segment manager of the combined Aerospace companies. The Industrial Distribution segment, which has been under the leadership of a segment manager for some time, was not impacted by these changes.
OVERVIEW OF BUSINESS
Kaman Corporation is composed of two business segments:
· |
Industrial Distribution, the third largest power transmission/motion control industrial distributor in North America. |
· |
Aerospace, a manufacturer and subcontractor in the international commercial and military aerospace markets. |
The following is a summary of our financial performance and key events that occurred during the six months ended July 3, 2009:
· |
Our net sales decreased 7.3% and 2.5% for the three months and six months ended July 3, 2009, respectively, compared to the comparable periods in the prior year. |
· |
Our net earnings from continuing operations increased 54.3% for the three months ended July 3, 2009 and decreased 1.3% for the six months ended July 3, 2009 compared to the comparable periods in the prior year. |
· |
Diluted earnings per share from continuing operations increased to $0.37 for the three months ended July 3, 2009, an increase of 54.2% compared to the comparable period in the prior year. |
· |
Diluted earnings per share from continuing operations declined to $0.58 for the six months ended July 3, 2009, a decrease of 1.7% compared to the comparable period in the prior year. |
· |
Cash flows provided by operating activities of continuing operations were $22.9 million for the six months ended July 3, 2009, which was an increase of $61.9 million when compared to the comparable period in the prior year. |
· |
On February 12, 2009, we completed the transfer of title to the 11 Australian SH-2G(A) Super Seasprite helicopters, including related inventory and equipment, from the Commonwealth of Australia to the company. |
· |
Philip A. Goodrich was appointed Vice President of Business Development on March 4, 2009. He has responsibility for strategy development, mergers and acquisitions, new market development activities for our existing products and services, and leading our new Kaman – Goal Achievement Process. |
· |
Robert D. Starr was appointed Vice President and Treasurer on April 29, 2009. His responsibilities include oversight of the treasury department, banking relationships, capital market transactions and investment management administration of our pension assets. |
· |
During the second quarter of 2009, we entered into a contract modification with the United States Government (“USG”) for the award of Options 6, 7 and 8 under the multi-option Joint Programmable Fuze (“JPF”) contract. The total value of the Option 6 award is approximately $53 million and deliveries are expected to begin in the second
quarter of 2010. Upon exercise, the value of Options 7 and 8 will depend on the quantity selected by the USG, add-ons, foreign military orders and future funding. |
CONSOLIDATED RESULTS OF OPERATIONS
Net Sales
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Net sales |
|
$ |
293,223 |
|
|
$ |
316,285 |
|
|
$ |
587,258 |
|
|
$ |
602,066 |
|
$ change |
|
|
(23,062 |
) |
|
|
43,903 |
|
|
|
(14,808 |
) |
|
|
63,154 |
|
% change |
|
|
(7.3 |
)% |
|
|
16.1 |
% |
|
|
(2.5 |
)% |
|
|
11.7 |
% |
The decrease in net sales for the three months and six months ended July 3, 2009 as compared to the comparable periods in 2008 was attributable to a decline in organic sales at our Industrial Distribution segment and to unfavorable foreign exchange rates. The unfavorable exchange rates impacted sales by $2.9 million, or 1.0%, and $5.7 million,
or 1.0%, for the three months and six months ended July 3, 2009, respectively. These decreases were partially offset by the organic sales growth in our Aerospace segment and the contribution of $11.3 million in sales for the three months ended July 3, 2009 from the acquisition of Brookhouse Holdings Ltd. (“Brookhouse”) in June 2008 and the acquisition of Industrial Rubber & Mechanics Incorporated (“INRUMEC”) in October 2008, and the contribution of $37.8 million in sales for the six
months ended July 3, 2009 from the acquisition of Industrial Supply Corp (“ISC”) in March 2008, the acquisition of Brookhouse, and the acquisition of INRUMEC.
Gross Profit
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Gross Profit |
|
$ |
78,471 |
|
|
$ |
86,272 |
|
|
$ |
156,166 |
|
|
$ |
162,863 |
|
$ change |
|
|
(7,801 |
) |
|
|
11,688 |
|
|
|
(6,697 |
) |
|
|
13,118 |
|
% change |
|
|
(9.0 |
)% |
|
|
15.7 |
% |
|
|
(4.1 |
)% |
|
|
8.8 |
% |
% of net sales |
|
|
26.8 |
% |
|
|
27.3 |
% |
|
|
26.6 |
% |
|
|
27.1 |
% |
Gross profit decreased for the three months and six months ended July 3, 2009 as compared to the comparable periods in 2008 primarily due to a decrease in gross profit at our Industrial Distribution segment, partially offset by an increase at our Aerospace segment and the addition of gross profit from the acquisition of Brookhouse for the
three months ended July 3, 2009 and the addition of gross profit from the acquisition of ISC, Brookhouse and INRUMEC for the six months ended July 3, 2009. The decrease in gross profit at Industrial Distribution was primarily a result of lower sales volume, while the increase in Aerospace was driven by increased shipments on the Sikorsky BLACKHAWK helicopter cockpit and JPF fuze programs and increased sales of the bearing products for the military markets. These increases were slightly offset by the absence of
gross profit previously generated from the now terminated Australian helicopter support program and decreased sales volume related to our bearing product lines for the commercial and regional / business jet markets.
Selling, General & Administrative Expenses (S,G&A)
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
S,G and A |
|
$ |
62,251 |
|
|
$ |
63,774 |
|
|
$ |
130,636 |
|
|
$ |
126,472 |
|
$ change |
|
|
(1,523 |
) |
|
|
4,993 |
|
|
|
4,164 |
|
|
|
8,496 |
|
% change |
|
|
(2.4 |
)% |
|
|
8.5 |
% |
|
|
3.3 |
% |
|
|
7.2 |
% |
% of net sales |
|
|
21.2 |
% |
|
|
20.2 |
% |
|
|
22.2 |
% |
|
|
21.0 |
% |
The decrease in S,G&A for the three months ended July 3, 2009 as compared to the comparable period in 2008 is primarily due to a reduction in expense at our Industrial Distribution segment and the favorable impact of furloughs. Furloughs were taken by our Corporate Officers and employees at our Industrial Distribution segment and select
operations of our Aerospace segment. These decreases were offset by S,G&A expenses of Brookhouse and INRUMEC acquired during 2008 and increases in pension expense and other Corporate expense. The increase in other Corporate expense was driven by an increase in stock appreciation rights expense, partially offset by lower expense for group insurance.
The increase in S,G&A for the six months ended July 3, 2009 as compared to the comparable period in 2008 is primarily due to the acquisitions of ISC, Brookhouse and INRUMEC made during 2008 and increases in pension expense and other Corporate expenses, partially offset by the favorable impact of furloughs. Furloughs were taken
by our Corporate Officers and employees at our Industrial Distribution segment and select operations of our Aerospace segment. The increase in Corporate expenses was driven by an increase in stock appreciation rights expense. These increases were partially offset by a reduction in Supplemental Employees’ Retirement Plan (“SERP”) expense, lower group insurance expense and a reduction in expense related to incentive compensation plans.
Goodwill Impairment
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Goodwill Impairment |
|
$ |
- |
|
|
$ |
7,810 |
|
|
$ |
- |
|
|
$ |
7,810 |
|
During the second quarter of 2008, the Aerospace Wichita facility lost two of its major contracts and experienced continuing production and quality issues. As a result, we performed an interim test of goodwill for impairment and recorded a non-tax-deductible goodwill impairment charge of $7.8 million. This represented the entire goodwill balance
for the reporting unit. No such impairment charge was taken during the three months or six months ended July 3, 2009. We will perform our annual test of goodwill impairment during the fourth quarter of 2009.
Operating Income
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Operating Income |
|
$ |
16,167 |
|
|
$ |
14,591 |
|
|
$ |
25,570 |
|
|
$ |
28,374 |
|
$ change |
|
|
1,576 |
|
|
|
(1,270 |
) |
|
|
(2,804 |
) |
|
|
(3,410 |
) |
% change |
|
|
10.8 |
% |
|
|
(8.0 |
)% |
|
|
(9.9 |
)% |
|
|
(10.7 |
)% |
% of net sales |
|
|
5.5 |
% |
|
|
4.6 |
% |
|
|
4.4 |
% |
|
|
4.7 |
% |
The increase in operating income for the three months ended July 3, 2009 compared to the comparable period in 2008 was primarily driven by the absence of the $7.8 million non-tax-deductible goodwill impairment charge recorded in 2008, operating income associated with the acquisition of Brookhouse and a slight increase in organic Aerospace
segment operating income, substantially offset by a decrease in operating income at our Industrial Distribution segment.
The decrease in operating income in the six months ended July 3, 2009 compared to the same period in 2008 was primarily driven by a decrease in operating income at our Industrial Distribution segment offset in part by the absence of the $7.8 million goodwill impairment charge taken in 2008, operating income associated with the acquisition
of Brookhouse and a slight increase in Aerospace segment organic operating income.
Interest Expense, Net
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Interest Expense, net |
|
$ |
866 |
|
|
$ |
463 |
|
|
$ |
1,969 |
|
|
$ |
462 |
|
Net interest expense generally consists of interest charged on the revolving credit facility and other borrowings offset by interest income. The increase in net interest expense was primarily due to higher total average bank borrowing and lower interest income for the three months and six months ended July 3, 2009 compared to the comparable
periods in 2008. The higher average bank borrowings for the three months and six months ended July 3, 2009 was the result of increased borrowings under the revolving credit agreement and term loan agreement to fund the three acquisitions completed in 2008.
Effective Income Tax Rate
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|