KAMN - 6.29.2012 -10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2012
Or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File 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 ¨
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 (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
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 ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
At July 20, 2012, there were 26,425,156 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)
|
| | | | | | | | |
| | June 29, 2012 | | December 31, 2011 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 15,099 |
| | $ | 14,985 |
|
Accounts receivable, net | | 211,891 |
| | 190,081 |
|
Inventories | | 351,777 |
| | 339,846 |
|
Deferred income taxes | | 24,926 |
| | 25,018 |
|
Income taxes receivable | | — |
| | 527 |
|
Other current assets | | 23,392 |
| | 29,645 |
|
Total current assets | | 627,085 |
| | 600,102 |
|
Property, plant and equipment, net of accumulated depreciation of $146,900 and $142,657, respectively | | 113,244 |
| | 111,895 |
|
Goodwill | | 153,455 |
| | 153,267 |
|
Other intangible assets, net | | 70,705 |
| | 73,816 |
|
Deferred income taxes | | 35,645 |
| | 38,434 |
|
Other assets | | 16,943 |
| | 18,884 |
|
Total assets | | $ | 1,017,077 |
| | $ | 996,398 |
|
Liabilities and Shareholders’ Equity | | |
| | |
|
Current liabilities: | | |
| | |
|
Notes payable | | $ | 3,503 |
| | $ | 1,685 |
|
Current portion of long-term debt | | 5,000 |
| | 5,000 |
|
Accounts payable – trade | | 108,337 |
| | 106,025 |
|
Accrued salaries and wages | | 31,288 |
| | 35,766 |
|
Current portion of amount due to Commonwealth of Australia | | 6,555 |
| | 6,487 |
|
Other accruals and payables | | 49,105 |
| | 62,748 |
|
Income taxes payable | | 1,499 |
| | 987 |
|
Total current liabilities | | 205,287 |
| | 218,698 |
|
Long-term debt, excluding current portion | | 221,780 |
| | 198,522 |
|
Deferred income taxes | | 6,703 |
| | 6,827 |
|
Underfunded pension | | 131,742 |
| | 135,829 |
|
Due to Commonwealth of Australia, excluding current portion | | — |
| | 6,566 |
|
Other long-term liabilities | | 52,229 |
| | 56,885 |
|
Commitments and contingencies | | — |
| | — |
|
Shareholders' equity: | | |
| | |
|
Preferred stock, $1 par value, 200,000 shares authorized; none outstanding | | — |
| | — |
|
Common stock, $1 par value, 50,000,000 shares authorized; voting; 26,685,377 and 26,495,828 shares issued, respectively | | 26,685 |
| | 26,496 |
|
Additional paid-in capital | | 115,528 |
| | 109,584 |
|
Retained earnings | | 378,832 |
| | 361,389 |
|
Accumulated other comprehensive income (loss) | | (114,697 | ) | | (117,946 | ) |
Less 269,846 and 258,424 shares of common stock, respectively, held in treasury, at cost | | (7,012 | ) | | (6,452 | ) |
Total shareholders’ equity | | 399,336 |
| | 373,071 |
|
Total liabilities and shareholders’ equity | | $ | 1,017,077 |
| | $ | 996,398 |
|
See accompanying notes to 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 |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
Net sales | | $ | 405,480 |
| | $ | 385,086 |
| | $ | 794,202 |
| | $ | 762,909 |
|
Cost of sales | | 290,151 |
| | 278,566 |
| | 572,805 |
| | 551,760 |
|
Gross profit | | 115,329 |
| | 106,520 |
| | 221,397 |
| | 211,149 |
|
Selling, general and administrative expenses | | 86,838 |
| | 82,407 |
| | 175,750 |
| | 162,475 |
|
Net (gain)/loss on sale of assets | | (8 | ) | | 34 |
| | (32 | ) | | 36 |
|
Operating income | | 28,499 |
| | 24,079 |
| | 45,679 |
| | 48,638 |
|
Interest expense, net | | 2,831 |
| | 2,821 |
| | 5,710 |
| | 5,891 |
|
Other (income) expense, net | | 84 |
| | (25 | ) | | (163 | ) | | (414 | ) |
Earnings before income taxes | | 25,584 |
| | 21,283 |
| | 40,132 |
| | 43,161 |
|
Income tax expense | | 9,105 |
| | 7,256 |
| | 14,250 |
| | 14,942 |
|
Net earnings | | $ | 16,479 |
| | $ | 14,027 |
| | $ | 25,882 |
| | $ | 28,219 |
|
| | | | | | | | |
Net earnings per share: | | |
| | |
| | | | |
Basic net earnings per share | | $ | 0.62 |
| | $ | 0.53 |
| | $ | 0.98 |
| | $ | 1.08 |
|
Diluted net earnings per share | | $ | 0.62 |
| | $ | 0.53 |
| | $ | 0.98 |
| | $ | 1.06 |
|
Average shares outstanding: | | |
| | |
| | | | |
Basic | | 26,390 |
| | 26,286 |
| | 26,342 |
| | 26,206 |
|
Diluted | | 26,534 |
| | 26,673 |
| | 26,498 |
| | 26,514 |
|
Dividends declared per share | | $ | 0.16 |
| | $ | 0.14 |
| | $ | 0.32 |
| | $ | 0.28 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
Net earnings | | $ | 16,479 |
| | $ | 14,027 |
| | $ | 25,882 |
| | $ | 28,219 |
|
Other comprehensive income, net of tax: | | | | | | | | |
Foreign currency translation adjustments | | (3,171 | ) | | 530 |
| | 526 |
| | 4,702 |
|
Change in unrealized loss on derivative instruments, for the three months and six months ended, net of tax expense of $0 and $75, and $0 and $150, respectively | | — |
| | 122 |
| | — |
| | 243 |
|
Pension plan adjustments, for the three months and six months ended, net of tax expense of $834 and $238, and $1,669 and $577, respectively | | 1,362 |
| | 388 |
| | 2,723 |
| | 942 |
|
Comprehensive income | | $ | 14,670 |
| | $ | 15,067 |
| | $ | 29,131 |
| | $ | 34,106 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
KAMAN CORPORATION AND SUBSIDIARIES
(In thousands) (Unaudited)
|
| | | | | | | | |
| | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 |
Cash flows from operating activities: | | | | |
Net earnings | | $ | 25,882 |
| | $ | 28,219 |
|
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | | |
| | |
|
Depreciation and amortization | | 13,349 |
| | 10,805 |
|
Accretion of convertible notes discount | | 858 |
| | 815 |
|
Change in allowance for doubtful accounts | | (253 | ) | | (300 | ) |
Net (gain) loss on sale of assets | | (32 | ) | | 36 |
|
Change in amount Due to Commonwealth of Australia, net of gain (loss) on derivative instruments | | (206 | ) | | 177 |
|
Stock compensation expense | | 3,581 |
| | 4,655 |
|
Excess tax (expense) benefit from share-based compensation arrangements | | (381 | ) | | (737 | ) |
Deferred income taxes | | 1,045 |
| | 3,481 |
|
Changes in assets and liabilities, excluding effects of acquisitions/divestitures: | | |
|
Accounts receivable | | (21,430 | ) | | (11,302 | ) |
Inventories | | (11,725 | ) | | (430 | ) |
Income tax receivable | | 527 |
| | (142 | ) |
Other current assets | | 7,821 |
| | 13,265 |
|
Accounts payable - trade | | (3,168 | ) | | (4,615 | ) |
Accrued contract losses | | (725 | ) | | 255 |
|
Advances on contracts | | (949 | ) | | 4,446 |
|
Other accrued expenses and payables | | (19,897 | ) | | (30,652 | ) |
Income taxes payable | | 542 |
| | (301 | ) |
Pension liabilities | | 438 |
| | (7,642 | ) |
Other long-term liabilities | | 222 |
| | (3,887 | ) |
Net cash provided by (used in) operating activities | | (4,501 | ) | | 6,146 |
|
Cash flows from investing activities: | | |
| | |
|
Proceeds from sale of assets | | 239 |
| | 232 |
|
Expenditures for property, plant & equipment | | (10,967 | ) | | (12,530 | ) |
Acquisition of businesses including earn out adjustments, net of cash received | | (7,938 | ) | | (2,015 | ) |
Other, net | | (116 | ) | | 312 |
|
Cash provided by (used in) investing activities | | (18,782 | ) | | (14,001 | ) |
Cash flows from financing activities: | | |
| | |
|
Net borrowings (repayments) under revolving credit agreements | | 26,702 |
| | (3,803 | ) |
Debt repayment | | (2,500 | ) | | (2,500 | ) |
Net change in book overdraft | | 5,365 |
| | 5,940 |
|
Proceeds from exercise of employee stock awards | | 2,651 |
| | 4,001 |
|
Purchase of treasury shares | | (659 | ) | | (858 | ) |
Dividends paid | | (8,411 | ) | | (7,520 | ) |
Debt issuance costs | | — |
| | (715 | ) |
Windfall tax (expense) benefit | | 381 |
| | 737 |
|
Other | | — |
| | (453 | ) |
Cash provided by (used in) financing activities | | 23,529 |
| | (5,171 | ) |
Net increase (decrease) in cash and cash equivalents | | 246 |
| | (13,026 | ) |
Effect of exchange rate changes on cash and cash equivalents | | (132 | ) | | 532 |
|
Cash and cash equivalents at beginning of period | | 14,985 |
| | 32,232 |
|
Cash and cash equivalents at end of period | | $ | 15,099 |
| | $ | 19,738 |
|
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
1. BASIS OF PRESENTATION
The December 31, 2011, condensed consolidated balance sheet amounts have been derived from the previously audited consolidated balance sheet of Kaman Corporation and subsidiaries (collectively, the “Company”), but do not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the remainder 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 presentation. The statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. 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 2012 and 2011 ended on June 29, 2012 and July 1, 2011, respectively.
Pension Accounting
In 2011 the Company elected to change its method of recognizing pension expense. Previously, for its non-contributory qualified defined benefit pension plan ("Qualified Pension Plan"), the Company used the market-related value of plan assets reflecting changes in the fair value of plan assets amortized over a four-year period. Under the new accounting method, the market-related value of plan assets reflects the actual change in the fair value of plan assets for the year. While the historical policy of recognizing pension expense is considered acceptable under U.S. GAAP, the Company believes that the new policy is preferable as it eliminates the delay in recognition of the change in fair value of plan assets for the calculation of market-related value of plan assets.
The impacts of all adjustments made to the condensed consolidated financial statements are summarized below:
Condensed Consolidated Statements of Operations
|
| | | | | | | | | | | | |
| | For the Three Months Ended July 1, 2011 |
In thousands | | Previously Reported | | Revised | | Effect of Change |
Cost of Sales | | $ | 278,917 |
| | $ | 278,566 |
| | $ | (351 | ) |
Gross profit | | $ | 106,169 |
| | $ | 106,520 |
| | $ | 351 |
|
Selling, general and administrative expenses | | $ | 83,033 |
| | $ | 82,407 |
| | $ | (626 | ) |
Operating income | | $ | 23,102 |
| | $ | 24,079 |
| | $ | 977 |
|
Earnings before income taxes | | $ | 20,306 |
| | $ | 21,283 |
| | $ | 977 |
|
Income tax expense | | $ | 6,885 |
| | $ | 7,256 |
| | $ | 371 |
|
Net earnings | | $ | 13,421 |
| | $ | 14,027 |
| | $ | 606 |
|
Basic net earnings per share | | $ | 0.51 |
| | $ | 0.53 |
| | $ | 0.02 |
|
Diluted net earnings per share | | $ | 0.50 |
| | $ | 0.53 |
| | $ | 0.03 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
1. BASIS OF PRESENTATION (CONTINUED)
Pension Accounting (Continued)
|
| | | | | | | | | | | | |
| | For the Six Months Ended July 1, 2011 |
In thousands | | Previously Reported | | Revised | | Effect of Change |
Cost of Sales | | $ | 552,462 |
| | $ | 551,760 |
| | $ | (702 | ) |
Gross profit | | $ | 210,447 |
| | $ | 211,149 |
| | $ | 702 |
|
Selling, general and administrative expenses | | $ | 163,727 |
| | $ | 162,475 |
| | $ | (1,252 | ) |
Operating income | | $ | 46,684 |
| | $ | 48,638 |
| | $ | 1,954 |
|
Earnings before income taxes | | $ | 41,207 |
| | $ | 43,161 |
| | $ | 1,954 |
|
Income tax expense | | $ | 14,200 |
| | $ | 14,942 |
| | $ | 742 |
|
Net earnings | | $ | 27,007 |
| | $ | 28,219 |
| | $ | 1,212 |
|
Basic net earnings per share | | $ | 1.03 |
| | $ | 1.08 |
| | $ | 0.05 |
|
Diluted net earnings per share | | $ | 1.02 |
| | $ | 1.06 |
| | $ | 0.04 |
|
Condensed Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | | |
| | For the Three Months Ended July 1, 2011 |
In thousands | | Previously Reported | | Revised | | Effect of Change |
Other comprehensive income: | | | | | | |
Pension plan adjustments, net of tax | | $ | 994 |
| | $ | 388 |
| | $ | (606 | ) |
|
| | | | | | | | | | | | |
| | For the Six Months Ended July 1, 2011 |
In thousands | | Previously Reported | | Revised | | Effect of Change |
Other comprehensive income: | | | | | | |
Pension plan adjustments, net of tax | | $ | 2,154 |
| | $ | 942 |
| | $ | (1,212 | ) |
Condensed Consolidated Statements of Cash Flows
|
| | | | | | | | | | | | |
| | For the Six Months Ended July 1, 2011 |
In thousands | | Previously Reported | | Revised | | Effect of Change |
Cash flows from operating activities: | | | | | | |
Net earnings | | $ | 27,007 |
| | $ | 28,219 |
| | $ | 1,212 |
|
Change in pension liabilities | | $ | (6,430 | ) | | $ | (7,642 | ) | | $ | (1,212 | ) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
2. RECENT ACCOUNTING STANDARDS
In June 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-05, “Comprehensive Income (ASC Topic 220) - Presentation of Comprehensive Income.” ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The guidance requires changes in presentation only, which the Company adopted during the first quarter of 2012.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
|
| | | | | | | | |
| | June 29, 2012 | | December 31, 2011 |
In thousands | | | | |
Trade receivables | | $ | 134,045 |
| | $ | 123,081 |
|
U.S. Government contracts: | | |
| | |
|
Billed | | 24,350 |
| | 18,726 |
|
Costs and accrued profit – not billed | | 2,873 |
| | 2,494 |
|
Commercial and other government contracts: | | |
| | |
|
Billed | | 53,188 |
| | 48,023 |
|
Costs and accrued profit – not billed | | 478 |
| | 1,051 |
|
Less allowance for doubtful accounts | | (3,043 | ) | | (3,294 | ) |
Accounts receivable, net | | $ | 211,891 |
| | $ | 190,081 |
|
Accounts receivable, net includes amounts for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:
|
| | | | | | | | |
| | June 29, 2012 | | December 31, 2011 |
In thousands | | | | |
Contract changes, negotiated settlements and claims for unanticipated contract costs | | $ | 119 |
| | $ | 119 |
|
Total | | $ | 119 |
| | $ | 119 |
|
4. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
The following table presents the carrying value and fair value of financial instruments that are not carried at fair value at June 29, 2012 and December 31, 2011:
|
| | | | | | | | | | | | | | | | |
| | June 29, 2012 | | December 31, 2011 |
In thousands | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Long-term debt | | $ | 226,780 |
| | $ | 247,313 |
| | $ | 203,522 |
| | $ | 218,048 |
|
The above fair values were computed based on quoted market prices and discounted future cash flows, as applicable. Differences from carrying values are attributable to interest rate changes subsequent to when the transaction occurred. The fair values of Cash and cash equivalents, Accounts receivable, net, Notes payable, and Accounts payable - trade approximate their carrying amounts due to the short-term maturities of these instruments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires us 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. |
Recurring Fair Value Measurements
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 their fair value at the measurement date:
|
| | | | | | | | | | | | | | | |
| Total Carrying Value at | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
In thousands | June 29, 2012 | | | |
Derivative instruments | $ | 1,289 |
| | $ | — |
| | $ | 1,289 |
| | $ | — |
|
Total Assets | $ | 1,289 |
| | $ | — |
| | $ | 1,289 |
| | $ | — |
|
| | | | | | | |
Contingent consideration | $ | 3,075 |
| | $ | — |
| | $ | — |
| | $ | 3,075 |
|
Total Liabilities | $ | 3,075 |
| | $ | — |
| | $ | — |
| | $ | 3,075 |
|
|
| | | | | | | | | | | | | | | |
| Total Carrying Value at | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
In thousands | December 31, 2011 | | | |
Derivative instruments | $ | 3,518 |
| | $ | — |
| | $ | 3,518 |
| | $ | — |
|
Total Assets | $ | 3,518 |
| | $ | — |
| | $ | 3,518 |
| | $ | — |
|
| | | | | | | |
Contingent consideration | $ | 3,355 |
| | $ | — |
| | $ | — |
| | $ | 3,355 |
|
Total Liabilities | $ | 3,355 |
| | $ | — |
| | $ | — |
| | $ | 3,355 |
|
The Company’s derivative instruments are foreign exchange contracts that are measured at fair value using observable market inputs such as forward rates and our counterparties’ credit risks. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy and have been included in other current assets and other assets on the Condensed Consolidated Balance Sheets at June 29, 2012 and December 31, 2011. Based on the continued ability to trade and enter into forward contracts, 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 June 29, 2012, such credit risks have not had an adverse impact on the fair value of these instruments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
Recurring Fair Value Measurements - Continued
The Company’s contingent consideration liability, included in Other accruals and payables and Other long-term liabilities on the Condensed Consolidated Balance Sheets, is associated with the 2011 acquisition of Target Electronic Supply ("Target"). This liability was measured at fair value based on the potential payments of the liability associated with the unobservable input of the estimated post-acquisition financial results of Target through 2014 and, therefore, is a Level 3 liability. The table below presents a rollforward of the instruments valued using Level 3 inputs:
|
| | | | |
In thousands | | |
Balance at December 31, 2011 | | $ | 3,355 |
|
Reduction of liability released to income | | (483 | ) |
Accretion of implicit interest expense | | 203 |
|
Balance at June 29, 2012 | | $ | 3,075 |
|
5. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Overview
The Company is exposed to certain risks relating to its ongoing business operations, including market risks relating to fluctuations in foreign currency exchange 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.
The Company holds forward exchange contracts designed to hedge forecasted transactions denominated in foreign currencies and to minimize the impact of foreign currency fluctuations on the Company’s earnings and cash flows. Some of these contracts were designated as cash flow hedges. The Company will include in earnings amounts currently included in accumulated other comprehensive income upon recognition of cost of sales related to the underlying transaction. During the three and six months ended July 1, 2011, the loss reclassified to earnings from other comprehensive income for derivative instruments formerly designated as cash flow hedges was $0.2 million and $0.4 million, respectively. No amounts were reclassified to income from other comprehensive income for derivative instruments formerly designated as cash flow hedges during the three or six months ended June 29, 2012. Over the next twelve months the income related to cash flow hedges expected to be reclassified from other comprehensive income is $0.1 million.
Derivatives Not Designated as Hedging Instruments
The following table shows the fair value of derivative instruments not designated as hedging instruments:
|
| | | | | | | | | | | | |
| | | | Fair Value | | |
| | Balance Sheet | | June 29, | | December 31, | | Notional |
In thousands | | Location | | 2012 | | 2011 | | Amount |
Derivative Assets | | | | | | | | |
Foreign exchange contracts | | Other current assets /Other assets | | $ | 1,222 |
| | $ | 3,517 |
| | $3,408 / $9,816 Australian Dollars |
Foreign exchange contracts | | Other current assets | | 67 |
| | 1 |
| | $4,854 / $5,481 |
Total | | | | $ | 1,289 |
| | $ | 3,518 |
| | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
5. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Derivatives Not Designated as Hedging Instruments (continued)
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 June 29, 2012, the U.S. dollar value of the remaining $3.4 million (AUD) payable was $3.5 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:
|
| | | | | | | | | | | | | | | | | | |
| | | | For the Three Months Ended | | For the Six Months Ended |
| | Income Statement Location | | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
In thousands | | | | | | | | | | |
Derivative Assets | | | | | | | | | | |
Foreign exchange contracts (a) | | Other expense, net | | $ | 15 |
| | $ | 475 |
| | $ | 283 |
| | $ | 725 |
|
Foreign exchange contracts | | Other expense, net | | (78 | ) | | — |
| | 72 |
| | — |
|
Total | | | | $ | (63 | ) | | $ | 475 |
| | $ | 355 |
| | $ | 725 |
|
Derivative Liabilities | | | | |
| | |
| | | | |
Foreign exchange contracts | | Other expense, net | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) |
Total | | | | $ | — |
|
| $ | — |
| | $ | — |
| | $ | (2 | ) |
| |
a) | For the three months and six months ended June 29, 2012, the Company recorded income of $0.1 million and expense of $0.1 million, respectively, to other expense related to the change in the value of the previously hedged AUD payable. For the three months and sixth months ended July 1, 2011, the Company recorded income of $0.4 million and $0.3 million, respectively, to other income related to the change in value of the previously hedged AUD payable. |
6. INVENTORIES
Inventories consist of the following:
|
| | | | | | | | |
| | June 29, 2012 | | December 31, 2011 |
In thousands | | | | |
Merchandise for resale | | $ | 123,044 |
| | $ | 129,345 |
|
Contracts and other work in process | | 214,139 |
| | 195,299 |
|
Finished goods (including certain general stock materials) | | 14,594 |
| | 15,202 |
|
Total | | $ | 351,777 |
| | $ | 339,846 |
|
Inventories include amounts associated with matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. These amounts are as follows:
|
| | | | | | | | |
| | June 29, 2012 | | December 31, 2011 |
In thousands | | | | |
Contract changes, negotiated settlements and claims for unanticipated contract costs | | $ | 7,322 |
| | $ | 7,432 |
|
Total | | $ | 7,322 |
| | $ | 7,432 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
6. INVENTORIES (CONTINUED)
K-MAX® inventory of $18.8 million and $20.3 million as of June 29, 2012, and December 31, 2011, respectively, is included in contracts and other work in process inventory and finished goods. Management believes that a significant portion of this K-MAX® inventory will be sold after June 29, 2013, based upon the anticipation of supporting the fleet for the foreseeable future.
SH-2G(I), formerly SH-2G(A), inventory of $52.7 million at both June 29, 2012 and December 31, 2011, is included in contracts and other work in process inventory. Management believes that a significant portion of this inventory will be sold after June 29, 2013, based upon the time needed to market the aircraft and prepare them for sale. For more information on the SH-2G(I) inventory, see Note 9, Commitments and Contingencies.
7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company:
|
| | | | | | | | | | | | |
| | Industrial Distribution | | Aerospace | | Total |
In thousands | | | | | | |
Gross balance at December 31, 2011 | | $ | 59,112 |
| | $ | 108,336 |
| | $ | 167,448 |
|
Accumulated impairment | | — |
| | (14,181 | ) | | (14,181 | ) |
Net balance at December 31, 2011 | | 59,112 |
| | 94,155 |
| | 153,267 |
|
Additions | | — |
| | — |
| | — |
|
Impairments | | — |
| | — |
| | — |
|
Foreign currency translation | | 31 |
| | 157 |
| | 188 |
|
Ending balance at June 29, 2012 | | $ | 59,143 |
| | $ | 94,312 |
| | $ | 153,455 |
|
Other intangible assets consisted of:
|
| | | | | | | | | | | | | | | | | | |
| | | | At June 29, | | At December 31, |
| | | | 2012 | | 2011 |
| | Amortization Period | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
In thousands | | | | | | | | | | |
Customer lists / relationships | | 7-21 years | | $ | 79,826 |
| | $ | (11,830 | ) | | $ | 79,517 |
| | $ | (9,017 | ) |
Trademarks / trade names | | 3-7 years | | 1,825 |
| | (888 | ) | | 1,824 |
| | (703 | ) |
Non-compete agreements and other | | 1-9 years | | 4,288 |
| | (2,668 | ) | | 4,280 |
| | (2,254 | ) |
Patents | | 17 years | | 636 |
| | (484 | ) | | 636 |
| | (467 | ) |
Total | | | | $ | 86,575 |
| | $ | (15,870 | ) | | $ | 86,257 |
| | $ | (12,441 | ) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
8. PENSION PLANS
Components of net pension cost for the Qualified Pension Plan and Supplemental Employees’ Retirement Plan (SERP) are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | Qualified Pension Plan | | SERP |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
In thousands | | | | | | | | |
Service cost for benefits earned during the year | | $ | 3,519 |
| | $ | 3,090 |
| | $ | 95 |
| | $ | 90 |
|
Interest cost on projected benefit obligation | | 6,578 |
| | 7,062 |
| | 105 |
| | 129 |
|
Expected return on plan assets | | (9,469 | ) | | (9,180 | ) | | — |
| | — |
|
Amortization of prior service credit (cost) | | 25 |
| | 24 |
| | — |
| | — |
|
Recognized net loss | | 1,960 |
| | 960 |
| | 40 |
| | 38 |
|
Net pension benefit cost | | $ | 2,613 |
| | $ | 1,956 |
| | $ | 240 |
| | $ | 257 |
|
|
| | | | | | | | | | | | | | | | |
| | For the Six Months Ended |
| | Qualified Pension Plan | | SERP |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
In thousands | | | | | | | | |
Service cost for benefits earned during the year | | $ | 7,038 |
| | $ | 6,040 |
| | $ | 191 |
| | $ | 180 |
|
Interest cost on projected benefit obligation | | 13,156 |
| | 14,162 |
| | 210 |
| | 258 |
|
Expected return on plan assets | | (18,939 | ) | | (17,557 | ) | | — |
| | — |
|
Amortization of prior service credit (cost) | | 50 |
| | 49 |
| | — |
| | — |
|
Recognized net loss | | 3,921 |
| | 1,785 |
| | 79 |
| | 76 |
|
Additional amount recognized due to curtailment/settlement | | — |
| | — |
| | — |
| | 560 |
|
Net pension benefit cost | | $ | 5,226 |
| | $ | 4,479 |
| | $ | 480 |
| | $ | 1,074 |
|
The following tables show the amount of the contributions made during each period and the amount of contributions the Company expects to make to the Qualified Pension Plan and SERP:
Contributions paid-to-date:
|
| | | | | | | | | | | | | | | | |
| | Qualified Pension Plan | | SERP |
| | As of June 29, 2012 | | As of December 31, 2011 | | As of June 29, 2012 | | As of December 31, 2011 |
In thousands | | | | | | | | |
Contributions paid-to-date | | $ | 5,000 |
| | $ | 19,600 |
| | $ | 267 |
| | $ | 4,400 |
|
Expected Contributions in 2012:
|
| | | | | | | | |
| | Qualified Pension Plan | | SERP |
In thousands | | | | |
Expected contributions | | $ | 10,000 |
| | $ | 500 |
|
The remaining $5.0 million of the $10.0 million contribution to the qualified pension plan was contributed in July 2012.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
9. COMMITMENTS AND CONTINGENCIES
Legal Matters
Wichita Subpoena Matter
In 2011, the U.S. District Court for the District of Kansas issued a grand jury subpoena to the Aerospace segment's Wichita facility regarding a government investigation of record keeping associated with the manufacture of certain composite parts. Management is cooperating with the government's investigation and believes that it has fully complied with its legal obligations in connection with the manufacture of the parts in question. At June 29, 2012, the Company had no amount accrued for this matter, as it is unable to estimate the amount of costs, if any, that might be incurred in connection with the resolution of this matter at this time. The Company believes that the likelihood of an adverse outcome to this matter is remote.
40 mm
The Orlando facility is one of five defendants in a qui tam suit under the False Claims Act brought by John D. King, a former employee of one of the other defendants. The case, United States ex rel. King v. DSE, Inc., et al., No. 9:08-cv-02416 (M.D. Fla.), is currently pending in the U.S. District Court for the Middle District of Florida. The United States Department of Justice has declined to intervene in the suit, and the case is being brought by Mr. King. The suit alleges that the Orlando facility knowingly submitted false claims or made false statements in connection with its work on 40 mm grenade programs. Management believes that it has fully complied with its legal obligations in connection with this program. At June 29, 2012, the Company had no amount accrued for this matter, as it is unable to estimate the amount of costs, if any, that might be incurred in connection with the resolution of this matter at this time. The Company believes that the likelihood of an adverse outcome to this matter is remote.
Other Matters
Revenue Sharing Agreement with the Commonwealth of Australia
The Company is actively engaged in efforts to resell the former Australia SH-2G(A) (now designated the SH-2G(I)) aircraft, spare parts and equipment to other potential customers. Pursuant to the terms of its revenue sharing agreement with the Commonwealth of Australia, the Company will share all proceeds from the resale of the aircraft, spare parts, and equipment with the Commonwealth on a predetermined basis, and total payments of at least $39.5 million (AUD) must be made to the Commonwealth regardless of sales. Cumulative payments of $33.1 million (AUD) have been made through June 29, 2012. An additional payment of $6.4 million (AUD) must be paid in March of 2013 to the extent that cumulative payments have not yet reached $39.5 million (AUD) at that date.
To secure these payments, the Company has provided the Commonwealth of Australia with an unconditional letter of credit, which is being reduced as such payments are made. The letter of credit balance at June 29, 2012, was $6.6 million. The letter of credit balance will continue to be reduced as payments are made to the Commonwealth of Australia. As of June 29, 2012, the U.S. dollar value of the remaining $6.4 million (AUD) required payment was $6.6 million, which is due in March 2013. In late 2008, the Company entered into foreign currency exchange contracts that limit the foreign currency risks associated with these required payments. These contracts will enable the Company to purchase $3.4 million (AUD) for $2.2 million. See Note 5, Derivative Financial Instruments, for further discussion of these instruments.
Moosup
This facility is currently being held for disposal. Site characterization of the environmental condition of the property, which began in 2008, is continuing.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other Matters - Continued
Moosup - continued
The total anticipated cost of the environmental remediation activities associated with the Moosup property is $4.3 million, unchanged from the previously reported estimates, all of which has been accrued. The total amount paid to date in connection with these environmental remediation activities is $2.3 million. A portion ($0.1 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.
New Hartford
In connection with the sale of the Company’s 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, which began in 2008, is still in process.
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 $0.5 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.
Bloomfield
In connection with the Company’s 2008 purchase of the portion of the Bloomfield campus that Kaman Aerospace Corporation had leased from NAVAIR, the Company assumed responsibility for environmental remediation at the facility as may be required under the Transfer Act and continues 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 determined by taking the undiscounted estimated remediation liability of $20.8 million and discounting it at a rate of 8%. This remediation process will take many years to complete. The total amount paid to date in connection with these environmental remediation activities is $4.3 million. A portion ($1.9 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. 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.
United Kingdom
In connection with the purchase of U.K. Composites, the Company accrued, at the time of acquisition, £1.6 million for environmental compliance at the facilities. The remaining balance of the accrual at June 29, 2012 was £0.6 million, with £0.8 million having been paid to date in connection with these environmental remediation activities and £0.2 million released to income in 2011. The U.S. dollar equivalent of the remaining environmental compliance liability as of June 29, 2012, is $0.9 million, which is included in other accruals and payables. The Company continues to assess the work that may be required, which may result in a change to this accrual. 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
10. COMPUTATION OF EARNINGS PER SHARE
The computation of basic earnings per share is based on net earnings divided by the weighted average number of shares of common stock outstanding for each year. The computation of diluted earnings per share includes the common stock equivalency of dilutive options granted to employees under the Stock Incentive Plan.
Excluded from the diluted earnings per share calculation for the three and six months ended June 29, 2012, respectively, are 372,486 and 358,208 shares of equity awards granted to employees that are anti-dilutive based on the average stock price. Excluded from the diluted earnings per share calculation for the three and six months ended July 1, 2011, respectively, are 156,230 and 268,207 shares of equity awards granted to employees that are anti-dilutive based on the average stock price.
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
In thousands, except per share amounts | | | | | | | | |
Net earnings | | $ | 16,479 |
| | $ | 14,027 |
| | $ | 25,882 |
| | $ | 28,219 |
|
| | | | | | | | |
Basic: | | | | | | | | |
Weighted average number of shares outstanding | | 26,390 |
| | 26,286 |
| | 26,342 |
| | 26,206 |
|
Net earnings per share | | $ | 0.62 |
| | $ | 0.53 |
| | $ | 0.98 |
| | $ | 1.08 |
|
Diluted: | | |
| | |
| | | | |
Weighted average number of shares outstanding | | 26,390 |
| | 26,286 |
| | 26,342 |
| | 26,206 |
|
Weighted average shares issuable on exercise of dilutive stock options | | 144 |
| | 262 |
| | 156 |
| | 245 |
|
Weighted average shares issuable on exercise of convertible notes | | — |
| | 125 |
| | — |
| | 63 |
|
Total | | 26,534 |
| | 26,673 |
| | 26,498 |
| | 26,514 |
|
Diluted net earnings per share | | $ | 0.62 |
| | $ | 0.53 |
| | $ | 0.98 |
| | $ | 1.06 |
|
In November 2010, the Company issued Convertible Notes due on November 15, 2017, in the aggregate principal amount of $115.0 million. Shares issuable under the Convertible Notes were excluded from the diluted earnings per share calculation for the three-month and six-month periods ended June 29, 2012 because the conversion price was greater than the average market price of our stock during those periods. For the three-month period ended July 1, 2011, shares issuable under the Convertible Notes that were dilutive during the period were included in the calculation of earnings per share as the exercise price for the Convertible Notes was less than the average share price. Excluded from the diluted earnings per share calculation for the three and six months ended June 29, 2012 are 3,396,016 and 3,394,841 shares, respectively, issuable under the warrants sold in connection with the Company’s convertible note offering as they would be anti-dilutive. Excluded from the diluted earnings per share calculation for the three and six months ended July 1, 2011, are 3,386,739 shares issuable under the warrants sold in connection with the Company’s convertible note offering as they would be anti-dilutive.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
11. SHARE-BASED ARRANGEMENTS
General
The Company accounts for stock options and restricted stock as equity awards whereas the stock appreciation rights and employee stock purchase plan are accounted for as liability awards. Compensation expense for stock options and restricted stock awards is recognized on a straight-line basis over the vesting period of the awards.
The following table summarizes share-based compensation expense recorded during each period presented:
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
In thousands | | | | | | | | |
Stock options | | $ | 417 |
| | $ | 360 |
| | $ | 1,071 |
| | $ | 1,034 |
|
Restricted stock awards | | 1,357 |
| | 2,381 |
| | 2,297 |
| | 3,285 |
|
Stock appreciation rights | | — |
| | 48 |
| | — |
| | 179 |
|
Employee stock purchase plan | | 110 |
| | 81 |
| | 213 |
| | 157 |
|
Total share-based compensation | | $ | 1,884 |
| | $ | 2,870 |
| | $ | 3,581 |
| | $ | 4,655 |
|
Stock option activity is as follows:
|
| | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | June 29, 2012 |
| | Options | | Weighted - average exercise price | | Options | | Weighted - average exercise price |
Options outstanding at beginning of period | | 1,106,447 |
| | $ | 25.38 |
| | 979,658 |
| | $ | 23.35 |
|
Granted | | — |
| | — |
| | 181,620 |
| | 33.59 |
|
Exercised | | (16,243 | ) | | 20.87 |
| | (55,431 | ) | | 17.19 |
|
Forfeited or expired | | — |
| | — |
| | (15,643 | ) | | 17.66 |
|
Options outstanding at June 29, 2012 | | 1,090,204 |
| | 25.45 |
| | 1,090,204 |
| | 25.45 |
|
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 |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
Expected option term (years) | |
|
| |
|
| | 5.4 |
| | 6.5 |
|
Expected volatility | | — | % | | — | % | | 46.5 | % | | 43.9 | % |
Risk-free interest rate | | — | % | | — | % | | 0.9 | % | | 2.9 | % |
Expected dividend yield | | — | % | | — | % | | 1.9 | % | | 2.2 | % |
Per share fair value of options granted | | $ | — |
| | $ | — |
| | $ | 12.00 |
| | $ | 12.05 |
|
No stock options were granted during the three months ended June 29, 2012 and July 1, 2011.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
11. SHARE-BASED ARRANGEMENTS (CONTINUED)
Restricted Stock activity is as follows:
|
| | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | June 29, 2012 |
| | 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 | | 311,517 |
| | $ | 27.73 |
| | 309,533 |
| | $ | 25.74 |
|
Granted | | 18,992 |
| | 33.71 |
| | 94,392 |
| | 33.67 |
|
Vested | | (36,630 | ) | | 28.65 |
| | (108,244 | ) | | 26.65 |
|
Forfeited or expired | | — |
| | — |
| | (1,802 | ) | | 23.54 |
|
Restricted Stock outstanding at June 29, 2012 | | 293,879 |
| | 28.00 |
| | 293,879 |
| | 28.00 |
|
12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is organized based upon the nature of its products and services, and is composed of two operating segments each overseen by a segment manager. These segments are reflective of how the Company’s Chief Executive Officer, who is its Chief Operating Decision Maker (“CODM”), reviews operating results for the purposes of allocating resources and assessing performance. The Company has not aggregated operating segments for purposes of identifying reportable segments.
The Aerospace segment produces and/or markets widely used proprietary aircraft bearings and components; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; safe and arm solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; support for the Company’s SH-2G Super Seasprite maritime helicopters and K-MAX® medium-to-heavy lift helicopters; and engineering services.
The Industrial Distribution segment is the third largest power transmission/motion control industrial distributor in North America. The segment provides products including bearings, mechanical power transmission, electrical, fluid power, motion control, automation, material handling components, and MRO supplies to a broad spectrum of industrial markets throughout North America.
Summarized financial information by business segment is as follows:
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
In thousands | | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
Net sales: | | | | | | | | |
Industrial Distribution | | $ | 258,116 |
| | $ | 239,307 |
| | $ | 515,754 |
| | $ | 478,177 |
|
Aerospace | | 147,364 |
| | 145,779 |
| | 278,448 |
| | 284,732 |
|
Net sales | | $ | 405,480 |
| | $ | 385,086 |
| | $ | 794,202 |
| | $ | 762,909 |
|
Operating income: | | |
| | |
| | | | |
Industrial Distribution | | $ | 14,645 |
| | $ | 12,636 |
| | $ | 27,425 |
| | $ | 24,750 |
|
Aerospace | | 26,158 |
| | 22,360 |
| | 42,059 |
| | 43,779 |
|
Net gain (loss) on sale of assets | | 8 |
| | (34 | ) | | 32 |
| | (36 | ) |
Corporate expense | | (12,312 | ) | | (10,883 | ) | | (23,837 | ) | | (19,855 | ) |
Operating income | | 28,499 |
| | 24,079 |
| | 45,679 |
| | 48,638 |
|
Interest expense, net | | 2,831 |
| | 2,821 |
| | 5,710 |
| | 5,891 |
|
Other expense (income), net | | 84 |
| | (25 | ) | | (163 | ) | | (414 | ) |
Earnings before income taxes | | 25,584 |
| | 21,283 |
| | 40,132 |
| | 43,161 |
|
Income tax expense | | 9,105 |
| | 7,256 |
| | 14,250 |
| | 14,942 |
|
Net earnings | | $ | 16,479 |
| | $ | 14,027 |
| | $ | 25,882 |
| | $ | 28,219 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the three months and six months ended June 29, 2012 and July 1, 2011
(Unaudited)
13. SHAREHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in shareholders’ equity for the six months ended June 29, 2012, were as follows (in thousands):
|
| | | | |
Balance at December 31, 2011 | | $ | 373,071 |
|
Comprehensive income | | 29,131 |
|
Dividends declared | | (8,439 | ) |
Employee stock plans and related tax benefit | | 2,651 |
|
Purchase of treasury shares | | (659 | ) |
Share-based compensation activity | | 3,581 |
|
Balance at June 29, 2012 | | $ | 399,336 |
|
The components of accumulated other comprehensive income (loss) are shown below (in thousands):
|
| | | | | | | | |
| | As of |
| | June 29, 2012 | | December 31, 2011 |
Changes in pension and post-retirement benefit plans | | $ | (93,388 | ) | | $ | (96,111 | ) |
Foreign currency translation adjustment | | (20,839 | ) | | (21,365 | ) |
Unrealized gain (loss) on derivative instruments | | (470 | ) | | (470 | ) |
Accumulated other comprehensive income (loss) | | $ | (114,697 | ) | | $ | (117,946 | ) |
No amounts were reclassified from other comprehensive income into net earnings for foreign currency translation adjustments in 2012 and 2011.
14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the issuance date of these financial statements. No material 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 condensed consolidated financial statements with the perspectives of management. 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. MD&A is designed to enable the readers of this report to obtain a comprehensive understanding of our businesses, strategies, current trends and future prospects. Our MD&A should be read in conjunction with our 2011 Annual Report on Form 10-K.
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 and defense markets. |
Financial performance
| |
• | Net sales increased 5.3% and 4.1% for the three months and six months ended June 29, 2012, respectively, compared to the comparable periods in the prior year. |
| |
• | Net earnings increased 17.5% for the three months ended June 29, 2012, and decreased 8.3% for the six months ended June 29, 2012, compared to the comparable periods in the prior year. |
| |
• | Diluted earnings per share increased to $0.62 for the three months ended June 29, 2012, an increase of $0.09 compared to the comparable period in prior year. Diluted earnings per share decreased to $0.98 for the six months ended June 29, 2012, a decrease of $0.08 compared to the comparable period in the prior year. |
| |
• | Cash flows used in operating activities were $4.5 million for the six months ended June 29, 2012, an increase of $10.6 million when compared to the comparable period in the prior year. |
| |
• | Achieved record sales and operating profit at our Industrial Distribution segment for the quarter ended June 29, 2012. |
Key events
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• | In July 2012, we entered into a five year contract with Aircelle to produce composite structures at our UK Composites facility. |
| |
• | In June 2012, the U.S. Department of State granted us permission to negotiate a possible sale of SH-2G(I) Super Seasprite Helicopters to the Government of New Zealand. |
| |
• | We delivered 5,892 fuzes under our Joint Programmable Fuze ("JPF") program with the U.S. Government during the second quarter of 2012, for a total of 10,314 fuzes in the first half of 2012. |
| |
• | On May 30, 2012, we signed a long-term agreement ("LTA") for the next multi-year contract on the Sikorsky BLACK HAWK helicopter cockpit program, which will allow us to continue to perform work under this program through 2017. |
| |
• | On May 2, 2012, we announced an agreement in principle entered into by Kaman Aerospace Group and Kineco Private Limited to form a manufacturing company in Goa, India, Kineco Kaman Composites - India, subject to the completion of due diligence. We continue to make progress on our due diligence procedures and have not yet finalized an agreement. The newly formed company will manufacture advanced composite structures for aerospace, medical and other industries. |
| |
• | In March 2012 we paid $6.3 million (AUD) to the Commonwealth of Australia in accordance with our settlement agreement related to the SH-2G(A) Helicopters. Through June 29, 2012, we have made cumulative payments of $33.1 million (AUD) with the final guaranteed payment of $6.4 million (AUD) due in March 2013. |
| |
• | On February 7, 2012, our common stock began trading on the New York Stock Exchange. |
Outlook
We are updating our outlook for 2012. We now expect full year sales and operating margins at the low end of the ranges given below. At Aerospace, we have eliminated sales and profit from an Unmanned K-MAX bridge buy from 2012 and expect legacy fuze and composite program deliveries to shift to the right and a reduction in deliveries of BLACK HAWK cockpits. However, we anticipate upside for additional JPF deliveries to offset these reductions. At Industrial Distribution, second half sales and profit will be impacted by lower organic growth, due to slower industrial activity, partially offset by the contribution from the acquisition of Florida Bearings. Additionally, we have reduced our previous expectation for interest expense from $13.5 million to $11.5 million and expect Corporate expenses to be near the high end of the range.
| |
• | Industrial Distribution: |
| |
◦ | Sales of $1,035 million to $1,055 million |
| |
◦ | Operating margin between 5.4% and 5.6% |
| |
◦ | Sales of $605 million to $625 million |
| |
◦ | Operating margin between 15.7% and 16.0% |
| |
• | Corporate expenses in the range of $44 million to $46 million |
| |
• | Interest expense of approximately $11.5 million |
| |
• | Estimated tax rate of approximately 35% |
| |
• | Free cash flow in the range of $30 million to $35 million. |
RESULTS OF CONTINUING OPERATIONS
Consolidated Results
Net Sales
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
| | (in thousands) |
Net Sales | | $ | 405,480 |
| | $ | 385,086 |
| | $ | 794,202 |
| | $ | 762,909 |
|
$ change | | 20,394 |
| | 67,999 |
| | 31,293 |
| | 169,050 |
|
% change | | 5.3 | % | | 21.4 | % | | 4.1 | % | | 28.5 | % |
The increase in net sales for the three months and six months ended June 29, 2012, versus the comparable periods in 2011 was attributable to an organic increase in sales in our Industrial Distribution segment and the contribution of sales from our 2011 acquisitions. For the six month period these increases were partially offset by a decrease in sales in our Aerospace segment. Foreign currency exchange rates had a $2.4 million and $3.3 million unfavorable impact on sales during the three months and six months ended June 29, 2012, respectively. (See segment discussion below for additional information.)
Gross Profit
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
| | (in thousands) |
Gross Profit | | $ | 115,329 |
| | $ | 106,520 |
| | $ | 221,397 |
| | $ | 211,149 |
|
$ change | | 8,809 |
| | 23,260 |
| | 10,248 |
| | 55,134 |
|
% change | | 8.3 | % | | 27.9 | % | | 4.9 | % | | 35.3 | % |
% of net sales | | 28.4 | % | | 27.7 | % | | 27.9 | % | | 27.7 | % |
Gross profit increased for the three months and six months ended June 29, 2012, versus the comparable periods in 2011 primarily due to organic increases in gross profit at our Industrial Distribution segment, primarily the result of higher sales volume compared to the prior year, the contribution of gross profit from our 2011 acquisitions and, for the three-month period, an increase in organic gross profit in our Aerospace segment. The increases for the six-month period were partially offset by a decrease in organic gross profit in our Aerospace segment.
The increase in organic gross profit for the three months ended June 29, 2012 in our Aerospace segment was due to increased volume on our bearing product lines and increased shipments of the JPF to the USG. Partially offsetting these increases were lower direct commercial sales of the JPF to foreign militaries, lower gross profit on our other legacy fuze programs, a lower volume of work on our unmanned K-MAX® aircraft system, and fewer shipments of Sikorsky BLACK HAWK Helicopter Cockpits.
The organic decrease in gross profit for the six months ended June 29, 2012 in our Aerospace segment was due to lower direct commercial sales of the JPF to foreign militaries, lower gross profit on our other legacy fuze programs, a lower volume of work on our unmanned K-MAX® aircraft system, fewer shipments of Sikorsky BLACK HAWK Helicopter Cockpits and the phase-out of joining and installation work under our Sikorsky offload program. These decreases were partially offset by increased volume on our bearing product lines, increased deliveries of the JPF to the USG and increased volume on our helicopter aftermarket work related to the Egypt upgrade program and K-MAX spares and support.
Selling, General & Administrative Expenses (SG&A)
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
| | (in thousands) |
SG&A | | $ | 86,838 |
| | $ | 82,407 |
| | $ | 175,750 |
| | $ | 162,475 |
|
$ change | | 4,431 |
| | 9,299 |
| | 13,275 |
| | 19,436 |
|
% change | | 5.4 | % | | 12.7 | % | | 8.2 | % | | 13.6 | % |
% of net sales | | 21.4 | % | | 21.4 | % | | 22.1 | % | | 21.3 | % |
SG&A increased for the three months ended June 29, 2012, versus the comparable period in 2011 primarily due to the following:
| |
• | SG&A expenses from our 2011 acquisitions; |
| |
• | organic increases in expenses at our Industrial Distribution segment; |
| |
• | increases in corporate incentive compensation expenses; and |
| |
• | higher acquisition related costs. |
SG&A increased for the six months ended June 29, 2012, versus the comparable period in 2011 primarily due to the following:
| |
• | SG&A expenses from our 2011 acquisitions; |
| |
• | organic increases in expenses at our Industrial Distribution segment; |
| |
• | the absence of the $2.4 million non-recurring benefit received in the first half of 2011 associated with the death of a former executive; |
| |
• | increases in corporate incentive compensation expenses; and |
| |
• | higher acquisition related costs in 2012, primarily related to an acquisition we chose not to pursue. |
The increases for the three months and six months ended June 29, 2012 were partially offset by decreases in organic SG&A expenses at our Aerospace segment primarily due to the absence of the legal fees associated with FMU-143 program litigation matters in 2011.
Operating Income
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
| | (in thousands) |
Operating Income | | $ | 28,499 |
| | $ | 24,079 |
| | 45,679 |
| | $ | 48,638 |
|
$ change | | 4,420 |
| | 13,983 |
| | (2,959 | ) | | 35,142 |
|
% change | | 18.4 | % | | 138.5 | % | | (6.1 | )% | | 260.4 | % |
% of net sales | | 7.0 | % | | 6.3 | % | | 5.8 | % | | 6.4 | % |
The increase in operating income for the three months ended June 29, 2012, versus the comparable period in 2011 was due to an increase in both our Aerospace segment and Industrial Distribution segment operating income, slightly offset by an increase in corporate expenses. (See segment discussion below for additional information.)
The decrease in operating income for the six months ended June 29, 2012, versus the comparable period in 2011 was due to a decrease in the Aerospace segment operating income and an increase in corporate expenses. (See segment discussion below for additional information.)
Interest Expense, Net
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
| | (in thousands) |
Interest Expense, net | | $ | 2,831 |
| | $ | 2,821 |
| | $ | 5,710 |
| | $ | 5,891 |
|
Interest expense, net generally consists of interest charged on the revolving credit facility and other borrowings and the amortization of debt issuance costs, offset by interest income. The decrease in interest expense, net for the six months ended June 29, 2012, versus the comparable period in 2011 was primarily due to a decrease in bank commitment fees and letter of credit fees, offset by higher average borrowings and a higher average interest rate for the period. At June 29, 2012, the interest rate for outstanding amounts on both the Revolving Credit Agreement and Term Loan Agreement was 1.74% compared to 1.56% at July 1, 2011.
Effective Income Tax Rate
|
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
| | (in thousands) |
Effective Income Tax Rate | | 35.6 | % | | 34.1 | % | | 35.5 | % | | 34.6 | % |
The effective income tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the year. We anticipate the annual effective tax rate in 2012 will be approximately 35%. The increase in the effective tax rate for the three months and six months ended June 29, 2012 was due to changes in our liability for uncertain tax positions in the prior year, and for the six-month period the receipt of non-taxable life insurance proceeds in the first quarter of 2011.
Industrial Distribution Segment
Results of Operations
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
| | (in thousands) |
Net Sales | | $ | 258,116 |
| | $ | 239,307 |
| | $ | 515,754 |
| | $ | 478,177 |
|
$ change | | 18,809 |
| | 28,383 |
| | 37,577 |
| | 87,994 |
|
% change | | 7.9 | % | | 13.5 | % | | 7.9 | % | | 22.6 | % |
| | | | | | | | |
Operating Income | | $ | 14,645 |
| | $ | 12,636 |
| | $ | 27,425 |
| | $ | 24,750 |
|
$ change | | 2,009 |
| | 4,923 |
| | 2,675 |
| | 12,225 |
|
% change | | 15.9 | % | | 63.8 | % | | 10.8 | % | | 97.6 | % |
% of net sales | | 5.7 | % | | 5.3 | % | | 5.3 | % | | 5.2 | % |
Organic Sales Per Sales Day
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 29, 2012 | | July 1, 2011 | | June 29, 2012 | | July 1, 2011 |
| | (in thousands) |
Net sales | | $ | 258,116 |
| | $ | 239,307 |
| | $ | 515,754 |
| | $ | 478,177 |
|
Acquisition sales | | 13,769 |
| | — |
| | 28,353 |
| | — |
|
Organic sales | | $ | 244,347 |
| | $ | 239,307 |
| | $ | 487,401 |
| | $ | 478,177 |
|
Sales days | | 64 |
| | 64 |
| | 128 |
| | |