EX-13 7 exh13.txt Five-Year Selected Financial Data Kaman Corporation and Subsidiaries (In thousands except per share amounts, shareholders and employees)
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- OPERATIONS: Revenues $1,032,326 $ 997,177 $1,018,589 $1,056,289 $ 964,548 Cost of sales 774,264 751,291* 756,057 801,088 721,088 Selling, general and administrative expense 202,319 201,807 210,969 207,120 192,058 Restructuring costs (1,680) 4,132 -- -- -- Operating income 57,423 39,947 51,563 48,081 51,402 Net gain on sale of businesses -- -- -- 80,351 -- Interest expense (income), net (1,660) (1,614) (353) 7,894 10,023 Other expense, net 1,363 1,088 1,558 234 702 Earnings before income taxes 57,720 40,473 50,358 120,304 40,677 Income taxes 20,800 15,400 20,350 49,800 17,100 Net earnings 36,920 25,073 30,008 70,504 23,577 FINANCIAL POSITION: Current assets $ 482,000 $ 460,111 $ 516,504 $ 535,304 $ 434,131 Current liabilities 173,342 168,374 228,975 259,525 195,638 Working capital 308,658 291,737 287,529 275,779 238,493 Property, plant and equipment, net 63,705 64,332 65,773 57,625 76,393 Total assets 553,830 534,203 587,230 598,161 521,736 Long-term debt 24,886 26,546 28,206 29,867 83,940 Shareholders' equity 332,046 316,377 309,494 290,010 228,130 PER SHARE AMOUNTS: Net earnings per common share - basic $ 1.61 $ 1.07 $ 1.28 $ 3.53 $ 1.07 Net earnings per common share - diluted 1.57 1.05 1.23 2.86 1.00 Dividends declared - Series 2 preferred stock -- -- -- 13.00 13.00 Dividends declared - common stock .44 .44 .44 .44 .44 Shareholders' equity - common stock 14.92 13.68 13.07 12.25 9.13 Market price range 17.75 16.13 20.38 20.38 13.38 8.77 10.06 13.00 12.00 9.38 Page 1 Five-Year Selected Financial Data Kaman Corporation and Subsidiaries (In thousands except per share amounts, shareholders and employees) 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- AVERAGE COMMON SHARES OUTSTANDING: Basic 22,936 23,468 23,407 18,941 18,607 Diluted 24,168 24,810 25,235 25,108 24,709 GENERAL STATISTICS: Registered shareholders 6,136 6,522 6,921 7,291 7,632 Employees 3,825 4,016 4,276 4,318 5,476 ====== ====== ====== ====== ======
* Cost of sales for 1999 includes the write-off of inventory of $8,250 associated with the charge taken in the Industrial Distribution segment. Page 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries RESULTS OF OPERATIONS Consolidated revenues were approximately $1.0 billion for 2000, 1999, and 1998. Each of the corporation's business segments had increased revenues for 2000. In the Aerospace segment, helicopter programs and the aircraft structures and components business were significant revenue contributors. Results for 1999 compared to 1998 reflect the Aerospace segment's ongoing performance of Australia and New Zealand SH-2G contracts, offset by lower revenues in the K-MAX(Registered Trademark) helicopter program and in the aerospace structures and components business. Results for 1998 reflect the first full year of performance for the Australia and New Zealand SH-2G programs. Aerospace segment net sales increased 2.7% in 2000 compared to a decrease of 2.9% in 1999 and an increase of 33% in 1998. The Aerospace segment's programs include the SH-2G multi-mission naval helicopter and the K-MAX medium-to-heavy lift helicopter (which together currently constitute about 60% of segment sales), aircraft structures subcontract work, and the manufacture of components such as self-lubricating bearings and driveline couplings for aircraft applications (currently about 30% of segment sales) and advanced technology products (currently about 10% of segment sales). The SH-2G helicopter program (which constitutes the primary component of the segment's total helicopter program sales) generally involves retrofit of the corporation's SH-2F helicopters, previously manufactured for the U.S. Navy (and in storage) to the SH-2G configuration. The corporation is currently performing this work under commercial contracts with the governments of Australia and New Zealand. The program for New Zealand involves five (5) aircraft, and support, for the Royal New Zealand Navy. The contract has an anticipated value of $180 million (US), of which about 84% has now been recorded as revenue. Deliveries are scheduled to begin during the first quarter of 2001. The program for Australia involves eleven (11) helicopters with support, including a support services facility, for the Royal Australian Navy. The total contract has an anticipated value of about $680 million (US). The helicopter production portion of the Page 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries work is valued at $559 million and about 75% of that amount has now been recorded as revenue. The SH-2G(A) helicopter for Australia will contain an integrated tactical avionics system ("ITAS") that will provide the most sophisticated, integrated cockpit and weapons system available in an intermediate-weight helicopter. Litton Guidance and Control Systems, a division of Litton Systems, Inc. and Litton Industries, Inc., has been a major subcontractor for both the Australia and New Zealand programs, being responsible for providing avionics system hardware and integration software. In addition, Litton has been the designer and integrator of the ITAS system specific to the Australia program. Litton had stated that it was incurring additional costs to perform its fixed price contract with the corporation for the Australia program and submitted claims for such costs to the corporation during 2000. The corporation's evaluation of the matter was different from Litton's and the corporation had, in turn, submitted claims to Litton. In an effort to resolve the entire matter, the parties conducted a mediation in early February 2001. As a result of that process, the parties arrived at an agreement in principle, under which the corporation will make certain milestone payments to Litton as it completes work on hardware and certain software contemplated under the fixed price contract and Litton will release its claims against the corporation. In return, Litton will transfer to the corporation a software integration laboratory, software and intellectual property rights and the corporation will release its claims against Litton. In addition, upon performance of the items described above, Litton's significant project responsibilities for the Australia program will end and the corporation will assume responsibility for several remaining elements of the project. Management has already begun to work with identified subcontractors (who must be acceptable to the Australian government) to negotiate contracts to perform those elements. As these contracts are developed, the overall impact of resolution of the Litton matter upon costs and profitability for the Australia program will become better understood. There will be a delay in delivery of the full ITAS system to the Australian government, although deliveries of helicopters without the full ITAS system are scheduled to begin in the first quarter of 2001 and the corporation is working with the Royal Australian Navy to coordinate these deliveries. The corporation continues to provide on-site support in the Republic of Egypt for ten (10) SH-2G helicopters that were delivered in 1998 under that country's foreign military sale agreement with the U.S. Navy. Management expects that as deliveries to New Zealand and Australia occur, revenues from SH-2G helicopter programs will decrease in 2001. Page 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries The corporation continues its marketing program to build and enhance familiarization with the SH-2G's capabilities among various governments around the world. This market is highly competitive, takes time to develop, and is influenced by economic and political conditions. The corporation continues to actively pursue this business, including possible further orders from current customers. The SH-2 is an aircraft that was originally manufactured for the United States Navy. This is no longer done, however the U.S. Naval Reserve currently maintains five (5) SH-2G aircraft active in its fleet. While these aircraft remain in service, the corporation will continue providing logistics and spare parts support for the aircraft. The corporation has taken a consignment of the U.S. Navy's inventory of SH-2 spare parts and has executed a longer term agreement with the Department of the Navy. The overall objective is for the corporation to provide further support of U.S. Naval Reserve requirements while having the ability to utilize certain inventory for support of the corporation's other SH-2 programs. During 2000, the corporation sold four (4) K-MAX helicopters to commercial customers operating in the U.S., Europe and Taiwan, principally for logging and construction. In December, the corporation was awarded a $21 million contract from the U.S. State Department for the purchase of five (5) K-MAX helicopters, equipment and spare parts to be used in Peru in support of anti- drug efforts. The corporation recognized revenue from two (2) of these aircraft in 2000 and the contract is expected to be completed during the second quarter of 2001. The corporation continues its efforts to refocus sales development on global market opportunities in industry and government, including oil and gas exploration, power line and other utility construction, fire fighting, law enforcement, and the movement of equipment. The K-MAX program, which began in late 1994, has experienced significant market difficulties during the past few years, due in part to conditions in the commercial logging industry, the aircraft's principal application to date . Overall, management expects that successful sales development as well as profitability for the entire program will take some time to achieve. The Aerospace segment also performs subcontract work for certain aerospace manufacturing programs and manufactures various components, including self-lubricating bearings for use principally in aircraft. Although the segment experienced some softness in the market during the year, there are signs that the commercial aircraft market is strengthening. The corporation has been pursuing opportunities and won several significant contracts during 2000. Specifically, MD Helicopters selected the corporation to supply fuselages for its entire line of single-engine helicopters, Page 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries including the MD600N, MD520N, MD530F and MD500E helicopters. This multi-year program has an estimated potential value of $100 million. MD Helicopters also selected the corporation to supply composite rotor systems for its MD Explorer helicopter under a multi-year contract with an estimated potential value, including options, of $75 million. Boeing, an important customer of the segment, awarded the corporation a three-year follow-on contract to supply structural parts for Boeing's line of commercial aircraft, including fixed trailing edge kits for Boeing 777 and 767 aircraft and other parts and subassemblies for those aircraft as well as the 737, 747 and 757 aircraft. The Boeing contract has an estimated potential value of $98 million and contains a three-year option. The Aerospace segment also produces advanced technology products, including missile fuzing devices, precision measuring systems, electromagnetic motors and electro-optic devices. During 2000, the corporation was chosen by Litton Ingalls Shipbuilding as part of a Newport News Shipbuilding-led team to begin preliminary design of electric propulsion motors and drive electronics in an industry competition for the U.S. Navy's proposed next-generation DD-21 destroyer. The Aerospace segment is continuing to implement lean- thinking strategies throughout the organization in order to further enhance efficiency and reduce costs. Industrial Distribution segment net sales increased 3.1% in 2000, decreased 1.8% in 1999, and increased 5.3% in 1998. In 2000, the segment benefited from healthy market conditions and the internal initiatives implemented early in the year in order to increase efficiency and service to customers. These initiatives included consolidation of branch operations, a reorganization of its sales, marketing and field management structure, and enhanced inventory controls. Since the segment's customers include nearly every sector of U.S. industry, this business tends to be influenced by industrial production levels. Sales in the fourth quarter of 2000 were affected by weakness in industrial production levels and management is closely monitoring the economic situation. During 2000, the Industrial Distribution segment implemented its Internet e-Commerce site which contains a complete catalog of product offerings (with more than one million industrial products) and provides an important new channel for both current and new customers to transact business with the segment. Music Distribution segment net sales increased 8.6% in 2000, and decreased by 1.4% in 1999 and 9.5% in 1998. Results in 2000 reflect improvement in domestic markets and some increase in demand internationally. The segment is working to improve its market share for existing brands and is adding products that meet the needs Page 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries of its dealer base. During 2000, the segment was selected by Fred Gretsch Enterprises to assume global sales and marketing responsibility for Gretsch(Registered Trademark) brand professional quality drum products, a business that complements the segment's current drum set offerings. Total operating profit in 2000 for all the corporation's business segments was $74.6 million compared to $52.6 million for 1999, due to good earnings performance on the part of each business segment and to some degree a pretax charge described below relating to the Industrial Distribution segment. Total operating profit for all the corporation's business segments in 1998 was $67.2 million. Operating profit for the Aerospace segment in 2000 was $44.2 million compared to $44.0 million for 1999, the SH-2G helicopter programs and aircraft structures and components business being the primary contributors. This performance was offset by a loss in the K-MAX program which continues to require investment for technical work and market development. Also included in operating profit for 1999 was a reversal of a reserve in the amount of $2.5 million that was associated with the Raymond Engineering (now part of Kaman Aerospace) operation. Operating profit for the Industrial Distribution segment in 2000 was $22.9 million compared to $2.9 million in 1999, due to healthy market conditions during most of the year and internal initiatives undertaken early in the year to improve efficiency and service to customers. The 1999 performance reflects market weakness in several important customer industries and a $12.4 million pretax charge taken in the fourth quarter of that year as a result of a reorganization of operations, including a closure of certain facilities and the write-off of excess inventory. Of the charge, $1.7 million was unused and added back to operating profit for 2000. Operating profit for the Music Distribution segment in 2000 was $7.4 million compared to $5.6 million a year ago, due to improvements in domestic and international markets and improved productivity. Total operating profit in 1999, for all the corporation's business segments was down 21.8% compared to 1998, due primarily to the pretax charge in the Industrial Distribution segment described above. Operating profit for the Aerospace segment increased 1.7% for 1999, primarily due to the SH-2G helicopter programs and the aircraft structures and components business, offset by losses in the K-MAX program which continued to require investment for technical work and market development and by continuing Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries difficulties in the segment's electromagnetics business in developing new markets for niche market products (this operation was merged with Kaman Aerospace during 1999). Also included in operating profit for 1999 was the $2.5 million reserve reversal attributable to Raymond Engineering. Operating profit for the Industrial Distribution segment was down 84.3% for 1999, primarily due to the pretax charge noted above and to weakness in certain customer industries. Operating profit for the Music Distribution segment was up 5.9% for 1999, primarily due to the domestic market, which is the larger market for this business. Net earnings for 2000 were $36.9 million compared to $25.1 million in 1999 and $30.0 million in 1998. Net earnings per common share were $1.57 per diluted share in 2000 compared to $1.05 per diluted share in 1999. Net earnings for 2000 were affected positively by the add-back of $1.7 million of the 1999 charge in the Industrial Distribution segment that was unused. Net earnings for 1999 were affected positively by the reversal of a $2.5 million reserve in the Aerospace segment, described above, and negatively by the $12.4 million charge in the Industrial Distribution segment which is also described above. Net earnings for 1999 were $25.1 million compared to $30.0 million in 1998. Net earnings per common share for 1999 were $1.05 on a diluted basis compared to $1.23 for 1998. Net earnings for 1999 were impacted by the circumstances described in the previous paragraph. Excluding these adjustments, net earnings per common share increased to $1.31 on a diluted basis compared to $1.23 per share in 1998. For the years ended December 31, 2000 and December 31, 1999, interest income earned from investment of cash more than offset interest expense. For 1998, interest expense decreased almost 68%, primarily due to the application of a substantial portion of advance payments received for the Australia and New Zealand SH-2G helicopter programs and a portion of the proceeds from the sale of the Scientific Services segment to pay bank debt. The consolidated effective income tax rate was 36.0% for 2000, 38.1% for 1999, and 40.4% for 1998. The decrease in effective income tax rates is due to the reversal of prior years' tax accruals as a result of the corporation's ongoing assessment of its open tax years and lower effective state income tax rates. Effective December 31, 2000, the corporation adopted Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Therefore, freight charged to customers in the Industrial Distribution and Music Distribution segments is now included in sales rather than as an offset to freight expense. Page 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries Specifically, $14.0 million is included in sales for 2000 and prior year amounts in these segments have been restated to conform to the current presentation ($12.9 million in 1999 and $12.6 million in 1998). In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The effective date of SFAS 133 was deferred one year by SFAS 137 which was issued in 1999. As a result, the corporation adopted the Standard effective January 1, 2001. Given the corporation's minimal use of derivatives, initial adoption of the Standard did not have a material impact on the corporation's financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES The corporation's cash flow from operations has generally been sufficient to finance a significant portion of its working capital and other capital requirements. For calendar year 2000, operating activities provided cash in the amount of $8.4 million. Such activities were significantly impacted by increases in accounts receivable for the Aerospace segment's SH-2G helicopter programs. Increases in accounts payable in the Aerospace and Music Distribution businesses offset this impact to some degree. For the year, cash used in investing activities was for items such as acquisition of machinery and computer equipment used in manufacturing and distribution. Cash used in financing activities was primarily attributable to the payment of dividends to common shareholders, repurchase of Class A common stock pursuant to a repurchase program for use in administration of the corporation's stock plans and general corporate purposes, and the sinking fund requirement for the corporation's debentures (described below). The corporation had approximately $48.2 million in cash and cash equivalents at December 31, 2000 with an average balance of $59.3 million for the year. These funds have been invested in high quality, short-term instruments. Page 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries For calendar year 1999, operating activities provided cash in the amount of $42.5 million. In the Aerospace segment this is primarily a result of earnings from operations together with the receipt of additional payments on accounts receivable, offset to some extent by growth in K-MAX inventories, payments on accounts payable, and ongoing reductions in the advances on the SH-2G contracts. In the Industrial Distribution segment, this result largely reflects reductions in inventories. For 1999, cash used in investing activities was primarily for the acquisition of machinery and computer equipment used in manufacturing and distribution. In addition, cash used by financing activities was primarily attributable to the payment of dividends to common shareholders and repurchase of Class A common stock pursuant to a repurchase program for use in administration of the corporation's stock plans and general corporate purposes, and the sinking fund requirement for the corporation's debentures (described below). For calendar year 1998, operating activities used cash in the amount of $16.4 million, principally due to increases in accounts receivable and inventories in the Aerospace segment and payment of taxes due on the Scientific Services segment sale that occurred in 1997, offset by increases in accounts payable in the Aerospace segment. During the year, cash used in investing activities was for items such as acquisition of machinery and computer equipment used in manufacturing and distribution, while cash provided by investing activities consisted principally of a post-closing adjustment to the purchase price of the Scientific Services segment. Cash used in financing activities was primarily attributable to the repayment of debt, the payment of dividends to common shareholders, and repurchase of Class A common stock pursuant to a repurchase program for use in connection with administration of the corporation's stock plans and general corporate purposes, and the sinking fund requirement for the corporation's debentures (described below). At December 31, 2000, the corporation had $26.5 million of its 6% convertible subordinated debentures outstanding. The debentures are convertible into shares of Class A common stock at any time on or before March 15, 2012 at a conversion price of $23.36 per share, generally at the option of the holder. Pursuant to a sinking fund requirement that began March 15, 1997, the corporation redeems approximately $1.7 million of the outstanding principal of the debentures each year. In February, 2000, the corporation's board of directors approved a replenishment of the corporation's stock repurchase program, providing for repurchase of an additional 1.4 million Class A common shares for use in administration of the corporation's stock plans and for general corporate purposes. In November, 2000, the corporation's board of directors approved Page 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries another replenishment of the stock repurchase program, providing for the repurchase of an aggregate of 1.4 million Class A common shares for the same purposes. Approximately 1.1 million shares were repurchased during 2000. In November, 2000, the corporation entered into a new revolving credit agreement to replace the agreement that was scheduled to expire in January 2001. The new agreement involves eight financial institutions, many of whom were participants in the prior agreement and is suited to the corporation's projected borrowing needs. The new agreement has a maximum unsecured line of credit of $225 million which consists of a $150 million commitment for five (5) years and a $75 million commitment under a "364 day" arrangement which is renewable annually for an additional 364 days. The most restrictive of the covenants contained in the new agreement requires the corporation to have EBITDA, as defined, at least equal to 300% of interest expense and a ratio of consolidated total indebtedness to total capitalization of not more than 55%. Letters of credit are generally considered borrowings for purposes of the new revolving credit agreement as they were under the prior agreement. The governments of Australia and New Zealand made advance payments of $104.3 million in connection with their SH-2G contracts in 1997 and those payments were fully secured by the corporation through the issuance of irrevocable letters of credit. At present, the face amount of these letters of credit has been reduced to $41.2 million in accordance with the terms of the relevant contracts. Further reductions are anticipated as certain contract milestones are achieved. For 2000, average bank borrowings were $2.3 million, compared to $3.3 million for 1999 and 1998. As of December 23, 1997, 95,106 shares of the Corporation's Series 2 preferred stock were converted to Class A common stock pursuant to a call for partial redemption issued on November 20, 1997. During the first quarter of 1998, pursuant to another redemption call, the corporation completed the process of converting virtually all of its Series 2 preferred stock to Class A common stock with an immaterial number of Series 2 preferred shares being redeemed by the corporation and settled in cash. Page 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaman Corporation and Subsidiaries Management believes that the corporation's cash flow from operations and available unused bank lines of credit under its revolving credit agreement will be sufficient to finance its working capital and other capital requirements for the foreseeable future. FORWARD-LOOKING STATEMENTS This report contains forward-looking information relating to the corporation's business and prospects, including the SH-2G and K-MAX helicopter programs, aircraft structures and components, the industrial and music distribution businesses, operating cash flow, and other matters that involve a number of uncertainties that may cause actual results to differ materially from expectations. Those uncertainties include, but are not limited to: 1) political developments in countries where the corporation intends to do business; 2) standard government contract provisions permitting renegotiation of terms and termination for the convenience of the government; 3) economic and competitive conditions in markets served by the corporation, including industry consolidation in the United States and global economic conditions; 4) timing of satisfactory completion of the Australian SH-2G(A) program; 5) the timing, degree and scope of market acceptance for products such as a repetitive lift helicopter; 6) U.S. industrial production levels; 7) currency exchange rates, taxes, laws and regulations, inflation rates, general business conditions and other factors. Any forward- looking information should be considered with these factors in mind. Page 12 SELECTED QUARTERLY FINANCIAL DATA Kaman Corporation and Subsidiaries (In thousands except per share amounts)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ----- NET SALES: 2000 $263,204 $259,610 $255,160 $253,260 $1,031,234 1999 252,734 249,483 245,247 247,940 995,404 GROSS PROFIT: 2000 $ 64,452 $ 63,482 $ 63,620 $ 65,416 $ 256,970 1999 64,288 63,225 62,155 54,445 244,113 NET EARNINGS: 2000 $ 8,556 $ 9,271 $ 9,535 $ 9,558 $ 36,920 1999 7,273 8,031 8,197 1,572 25,073 PER COMMON SHARE - BASIC: 2000 $ .37 $ .40 $ .41 $ .43 $ 1.61 1999 .31 .34 .35 .07 1.07 PER COMMON SHARE - DILUTED: 2000 $ .36 $ .39 $ .40 $ .42 $ 1.57 1999 .30 .33 .34 .07 1.05 ======== ======== ======== ======== ==========
The quarterly per common share-diluted amounts for 1999 do not equal the "Total Year" figure due to the calculation being anti-dilutive in the fourth quarter. Page 13 CONSOLIDATED BALANCE SHEETS Kaman Corporation and Subsidiaries (In thousands except share and per share amounts)
December 31 2000 1999 ----------- ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 48,157 $ 76,249 Accounts receivable 212,374 156,173 Inventories 196,148 199,731 Deferred income taxes 18,550 21,100 Other current assets 6,771 6,858 --------- --------- Total current assets 482,000 460,111 --------- --------- PROPERTY, PLANT AND EQUIPMENT, NET 63,705 64,332 OTHER ASSETS 8,125 9,760 --------- --------- TOTAL ASSETS $ 553,830 $ 534,203 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 2,060 $ 2,854 Current portion of long-term debt 1,660 1,660 Accounts payable - trade 58,057 48,760 Accrued salaries and wages 9,824 9,778 Accrued vacations 5,954 6,069 Advances on contracts 41,905 50,243 Other accruals and payables 49,766 45,073 Income taxes payable 4,116 3,937 --------- --------- Total current liabilities 173,342 168,374 --------- --------- DEFERRED CREDITS 23,556 22,906 LONG-TERM DEBT, EXCLUDING CURRENT PORTION 24,886 26,546 Page 14 CONSOLIDATED BALANCE SHEETS Kaman Corporation and Subsidiaries (In thousands except share and per share amounts) December 31 2000 1999 ----------- ---- ---- SHAREHOLDERS' EQUITY: Capital stock, $1 par value per share: Preferred stock, authorized 700,000 shares: Series 2 preferred stock, 6 1/2% cumulative convertible, authorized 500,000 shares, none outstanding -- -- Common stock: Class A, authorized 48,500,000 shares, nonvoting; $.10 per common share dividend preference; issued 23,066,260 shares in 2000 and 1999 23,066 23,066 Class B, authorized 1,500,000 shares, voting; issued 667,814 shares in 2000 and 1999 668 668 Additional paid-in capital 77,298 78,422 Retained earnings 251,526 224,702 Unamortized restricted stock awards (1,643) (1,944) Accumulated other comprehensive income (loss) (749) (625) --------- --------- 350,166 324,289 Less 1,485,427 shares and 608,858 shares of Class A common stock in 2000 and 1999, respectively, held in treasury, at cost (18,120) (7,912) --------- --------- Total shareholders' equity 332,046 316,377 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 553,830 $ 534,203 ========= =========
See accompanying notes to consolidated financial statements. Page 15 CONSOLIDATED STATEMENTS OF OPERATIONS Kaman Corporation and Subsidiaries (In thousands except per share amounts)
Year ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- REVENUES: Net sales $1,031,234 $ 995,404 $1,017,124 Other 1,092 1,773 1,465 ---------- -------- ---------- 1,032,326 997,177 1,018,589 ---------- -------- ---------- COSTS AND EXPENSES: Cost of sales* 774,264 751,291 756,057 Selling, general and administrative expense 202,319 201,807 210,969 Restructuring costs (1,680) 4,132 -- Interest expense (income), net (1,660) (1,614) (353) Other expense, net 1,363 1,088 1,558 ---------- --------- ---------- 974,606 956,704 968,231 ---------- --------- ---------- EARNINGS BEFORE INCOME TAXES 57,720 40,473 50,358 INCOME TAXES 20,800 15,400 20,350 ---------- --------- ---------- NET EARNINGS $ 36,920 $ 25,073 $ 30,008 =========== ========= ========== PER SHARE: Net earnings per common share: Basic $ 1.61 $ 1.07 $ 1.28 Diluted 1.57 1.05 1.23 Dividends declared - common stock .44 .44 .44 =========== ========= ==========
* Cost of sales for 1999 includes the write-off of inventory of $8,250 associated with the charge taken in the Industrial Distribution segment. See accompanying notes to consolidated financial statements. Page 16 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Kaman Corporation and Subsidiaries (In thousands except share amounts)
Year ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- SERIES 2 PREFERRED STOCK: Balance - beginning of year $ -- $ -- $ 37,691 Shares converted -- -- (37,691) ------- ------- -------- Balance - end of year -- -- -- ------- ------- -------- CLASS A COMMON STOCK: Balance - beginning of year 23,066 23,066 19,936 Shares issued upon conversion -- -- 3,000 Shares issued - other -- -- 130 ------- ------- -------- Balance - end of year 23,066 23,066 23,066 ------- ------- -------- CLASS B COMMON STOCK 668 668 668 ------- ------- -------- ADDITIONAL PAID-IN CAPITAL: Balance - beginning of year 78,422 78,899 42,876 Conversion of Series 2 preferred stock -- -- 34,691 Employee stock plans (897) (463) 318 Restricted stock awards (227) (14) 1,014 ------- ------- -------- Balance - end of year 77,298 78,422 78,899 ------- ------- -------- RETAINED EARNINGS: Balance - beginning of year 224,702 209,920 190,336 Net earnings 36,920 25,073 30,008 Dividends declared - common stock (10,096) (10,291) (10,424) -------- -------- -------- Balance - end of year 251,526 224,702 209,920 --------- -------- -------- UNAMORTIZED RESTRICTED STOCK AWARDS: Balance - beginning of year (1,944) (1,500) (1,147) Stock awards issued (516) (1,288) (949) Amortization of stock awards 817 844 596 --------- --------- --------- Balance - end of year (1,643) (1,944) (1,500) --------- --------- --------- Page 17 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Kaman Corporation and Subsidiaries (In thousands except share amounts) Year ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) : Balance - beginning of year (625) (774) (320) Foreign currency translation adjustment* (124) 149 (220) Reclassification adjustment -- -- (234) --------- --------- --------- Balance - end of year (749) (625) (774) --------- --------- --------- TREASURY STOCK: Balance - beginning of year (7,912) (785) (30) Shares acquired in 2000 - 1,126,888; 1999 - 802,721; 1998 - 131,462 (13,660) (10,596) (2,212) Shares reissued under various stock plans 3,452 3,469 1,457 --------- --------- --------- Balance - end of year (18,120) (7,912) (785) --------- --------- --------- TOTAL SHAREHOLDERS' EQUITY $ 332,046 $ 316,377 $ 309,494 ========= ========= =========
* Comprehensive income is $36,796, $25,222 and $29,788 for 2000, 1999, and 1998, respectively. See accompanying notes to consolidated financial statements. Page 18 CONSOLIDATED STATEMENTS OF CASH FLOWS Kaman Corporation and Subsidiaries (In thousands except share amounts)
Year ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 36,920 $ 25,073 $ 30,008 Adjustments to reconcile net earnings to cash provided by (used in) operating activities: Depreciation and amortization 11,630 11,998 11,068 Restructuring costs (1,680) 4,132 -- Deferred income taxes (75) (800) 200 Other, net 6,551 3,690 2,805 Changes in current assets and liabilities, net of effects of businesses sold: Accounts receivable (56,201) 52,077 (21,974) Inventories* 3,583 8,166 (8,412) Other current assets 87 2,591 768 Accounts payable - trade 9,297 (2,811) 6,307 Advances on contracts (8,338) (51,133) (3,347) Accrued expenses and payables 6,400 (8,449) (3,054) Income taxes payable 179 (1,992) (30,799) --------- --------- --------- Cash provided by (used in) operating activities 8,353 42,542 (16,430) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of businesses and other assets 56 538 5,642 Expenditures for property, plant and equipment (11,044) (10,964) (19,184) Other, net (963) 194 (478) --------- --------- --------- Cash provided by (used in) investing activities (11,951) (10,232) (14,020) --------- --------- --------- Page 19 CONSOLIDATED STATEMENTS OF CASH FLOWS Kaman Corporation and Subsidiaries (In thousands except share amounts) Year ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in notes payable (794) (287) (2,406) Reduction of long-term debt (1,660) (1,660) (1,661) Proceeds from exercise of employee stock plans 1,813 1,704 1,970 Purchases of treasury stock (13,660) (10,596) (2,212) Dividends paid - common stock (10,193) (10,352) (10,085) --------- --------- --------- Cash provided by (used in) financing activities (24,494) (21,191) (14,394) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28,092) 11,119 (44,844) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 76,249 65,130 109,974 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,157 $ 76,249 $ 65,130 ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: During 1998, holders of the corporation's Series 2 preferred stock converted 188,456 shares into 3,000,174 shares of Class A common stock. * The change in inventories for 1999 includes the write-off of inventory of $8,250 associated with the charge taken in the Industrial Distribution segment. See accompanying notes to consolidated financial statements. Page 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the parent corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - Surplus funds are invested in cash equivalents which consist of highly liquid investments with original maturities of three months or less. Long-Term Contracts - Revenue Recognition - Sales and estimated profits under long-term contracts are principally recognized on the percentage-of-completion method of accounting. This method uses the ratio that costs incurred bear to estimated total costs, after giving effect to estimates of costs to complete based upon most recent information for each contract. Sales and estimated profits on other contracts are recorded as products are shipped or services are performed. Reviews of contracts are made periodically throughout their lives and revisions in profit estimates are recorded in the accounting period in which the revisions are made. Any anticipated contract losses are charged to operations when first indicated. Inventories - Inventory of merchandise for resale is stated at cost (using the average costing method) or market, whichever is lower. Contracts and work in process and finished goods are valued at production cost represented by material, labor and overhead, including general and administrative expenses where applicable. Contracts and work in process and finished goods are not recorded in excess of net realizable values. Property, Plant and Equipment - Depreciation of property, plant and equipment is computed primarily on a straight-line basis over the estimated useful lives of the assets. At the time of retirement or disposal, the acquisition cost of the asset and related accumulated Page 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) depreciation are eliminated and any gain or loss is credited or charged against income. Maintenance and repair items are charged against income as incurred, whereas renewals and betterments are capitalized and depreciated. Research and Development - Research and development costs not specifically covered by contracts are charged against income as incurred. Such costs amounted to $5,463 in 2000, $4,877 in 1999, and $8,534 in 1998. Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. Recent Accounting Pronouncements - Effective December 31, 2000, the corporation adopted Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Therefore, freight charged to customers in the Industrial Distribution and Music Distribution segments is now included in sales rather than as an offset to freight expense. Freight charged to customers was $14,036, $12,944 and $12,583 for 2000, 1999 and 1998, respectively. In addition, any freight expense previously recorded as part of selling, general and administrative expenses has been reclassified to cost of sales. All prior amounts have been restated to conform to the current presentation. RESTRUCTURING COSTS In connection with the Industrial Distribution segment's initiatives to streamline operational structure and increase efficiency, the segment took a pretax charge of $12,382 ($7,670 after taxes or $.32 per share diluted) in the fourth quarter of 1999. The costs associated with the reorganization of operations, consolidation of branches and the closure of other facilities totaled $4,132. The write-off of excess inventory totaled $8,250 and is included in cost of sales. Of the total restructuring charge, approximately $1,300 related to severance costs for approximately 65 branch operations and regional management employees that the segment expected to Page 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) separate from service in 2000. The remaining balance of the restructuring charge related to costs to close down 10 branches and three other facilities in 2000. In the fourth quarter of 2000, the segment determined that the cost for severance and facilities would be $1,680 lower than originally planned and as a result, the segment recorded a favorable change in estimate of that amount. The reduction in severance costs of $686 is principally due to certain employees transferring to other positions within the segment, which decreased the number of people separated from service to 47. The reduction in facilities costs of $994 is the result of favorable lease terminations and more rapid exit from the various locations. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
December 31 2000 1999 ----------- ---- ---- Trade receivables, net of allowance for doubtful accounts of $4,636 in 2000, $4,519 in 1999 $ 72,248 $75,377 U.S. Government contracts: Billed 6,996 9,938 Recoverable costs and accrued profit - not billed 22,954 24,611 Commercial and other government contracts: Billed 33,510 20,419 Recoverable costs and accrued profit - not billed 76,666 25,828 -------- -------- Total $212,374 $156,173 ======== ========
Recoverable costs and accrued profit - not billed represent costs incurred on contracts which will become billable upon future deliveries, achievement of specific contract milestones or completion of engineering and service type contracts. Management estimates that approximately $1,328 of such costs and accrued profits at December 31, 2000 will be collected after one year. Page 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) INVENTORIES Inventories are comprised as follows:
December 31 2000 1999 ----------- ---- ---- Merchandise for resale $ 88,640 $ 89,184 Contracts in process: U.S. Government 3,723 4,951 Commercial 10,312 7,844 Other work in process (including certain general stock materials) 51,883 39,192 Finished goods 41,590 58,560 -------- -------- Total $196,148 $199,731 ======== ========
Included above in other work in process and finished goods at December 31, 2000 and 1999 is K-MAX inventory of $78,638 and $87,384, respectively. The aggregate amounts of general and administrative costs allocated to contracts in process during 2000, 1999 and 1998 were $53,387, $49,752, and $55,178, respectively. The estimated amounts of general and administrative costs remaining in contracts in process at December 31, 2000 and 1999 amount to $2,115, and $1,138, respectively, and are based on the ratio of such allocated costs to total costs incurred. Page 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment are recorded at cost and summarized as follows:
December 31 2000 1999 ----------- ---- ---- Land $ 6,230 $ 6,212 Buildings 34,637 34,640 Leasehold improvements 14,979 13,605 Machinery, office furniture and equipment 115,049 112,297 -------- -------- Total 170,895 166,754 Less accumulated depreciation and amortization 107,190 102,422 -------- -------- Property, plant and equipment, net $ 63,705 $ 64,332 ======== ========
CREDIT ARRANGEMENTS - SHORT-TERM BORROWINGS AND LONG-TERM DEBT Revolving Credit Agreement - On November 13, 2000, the corporation entered into a new revolving credit agreement with several banks to replace its then existing revolving credit agreement. The new agreement has a maximum unsecured line of credit of $225,000 which consists of a $150,000 commitment expiring in November 2005 and a $75,000 commitment under a "364 Day" arrangement which is renewable annually for an additional 364 days. Outstanding letters of credit at November 13, 2000, were transferred to the new revolving credit agreement at that time and are also considered to be indebtedness under the new agreement. Short-Term Borrowings - Under its revolving credit agreement, the corporation has the ability to borrow funds on both a short-term and long-term basis. The corporation also has arrangements with other banks, generally to borrow funds on a short-term basis with interest at current market rates. Page 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) Short-term borrowings outstanding are as follows:
December 31 2000 1999 ----------- ---- ---- Revolving credit agreement $ -- $ -- Other credit arrangements 2,060 2,854 ------ ------ Total $2,060 $2,854 ====== ======
Long-Term Debt - The corporation has long-term debt as follows:
December 31 2000 1999 ----------- ---- ---- Revolving credit agreement $ -- $ -- Convertible subordinated debentures 26,546 28,206 ------- ------- Total 26,546 28,206 Less current portion 1,660 1,660 ------- ------- Total excluding current portion $24,886 $26,546 ======= =======
Restrictive Covenants - The most restrictive of the covenants contained in the new revolving credit agreement requires the corporation to have EBITDA, as defined, at least equal to 300% of interest expense and a ratio of consolidated total indebtedness to total capitalization of not more than 55%. Certain Letters of Credit - The face amounts of irrevocable letters of credit issued under the corporation's revolving credit agreement totaled $41,195 and $47,208 at December 31, 2000 and 1999, respectively. Convertible Subordinated Debentures - The corporation issued its 6% convertible subordinated debentures during 1987. The debentures are convertible into shares of the Class A common stock of Kaman Page 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) Corporation at any time on or before March 15, 2012 at a conversion price of $23.36 per share at the option of the holder unless previously redeemed by the corporation. Pursuant to a sinking fund requirement that began March 15, 1997, the corporation redeems $1,660 of the outstanding principal amount of the debentures annually. The debentures are subordinated to the claims of senior debt holders and general creditors. These debentures have a fair value of $23,095 at December 31, 2000 based upon current market prices. Long-Term Debt Annual Maturities - The aggregate amounts of annual maturities of long-term debt for each of the next five years is $1,660. Interest Payments - Cash payments for interest were $2,407, $2,426 and $2,565 for 2000, 1999 and 1998, respectively. ADVANCES ON CONTRACTS Advances on contracts include customer advances together with customer payments and billings associated with the achievement of certain contract milestones in excess of costs incurred for SH-2G helicopter contracts. Virtually all of the customer advances continue to be secured by letters of credit. It is anticipated that the advances on contracts along with the face amounts of these letters of credit will be further reduced as various contract milestones are achieved. INCOME TAXES The components of income taxes are as follows:
2000 1999 1998 ---- ---- ---- Current: Federal $ 17,690 $ 13,824 $ 15,650 State 3,185 2,376 4,500 -------- -------- -------- 20,875 16,200 20,150 -------- -------- -------- Deferred: Federal (65) (650) 150 State (10) (150) 50 -------- -------- -------- (75) (800) 200 -------- -------- -------- Total $ 20,800 $ 15,400 $ 20,350 ======== ======== ========
Page 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) The components of the deferred tax assets and deferred tax liabilities are presented below:
December 31 2000 1999 ----------- ---- ---- Deferred tax assets: Long-term contracts $ 1,547 $ 1,474 Deferred employee benefits 14,539 14,309 Inventory 4,435 4,619 Accrued liabilities and other items 6,504 7,698 -------- ------- Total deferred tax assets 27,025 28,100 -------- -------- Deferred tax liabilities: Depreciation and amortization (6,540) (7,834) Other items (3,910) (3,766) -------- -------- Total deferred tax liabilities (10,450) (11,600) -------- -------- Net deferred tax asset $ 16,575 $ 16,500 ======== ========
No valuation allowance has been recorded because the corporation believes that these deferred tax assets will, more likely than not, be realized. This determination is based largely upon the corporation's historical earnings trend as well as its ability to carryback reversing items within two years to offset taxes paid. In addition, the corporation has the ability to offset deferred tax assets against deferred tax liabilities created for such items as depreciation and amortization. The provisions for federal income taxes approximate the amounts computed by applying the U.S. federal income tax rate to earnings before income taxes after giving effect to state income taxes. The consolidated effective tax rate was lower due to the reversal of prior years' tax accruals of $1,534 and $1,250 in 2000 and 1999, respectively, as a result of the corporation's ongoing assessment of its open tax years. Cash payments for income taxes were $20,611, $18,204 and $51,590 in 2000, 1999 and 1998, respectively. Page 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) PENSION PLAN The corporation has a non-contributory defined benefit pension plan covering all of its full-time U.S. employees upon their completion of hours of service requirements. Benefits under this plan are generally based upon an employee's years of service and compensation levels during employment with an offset provision for social security benefits. It is the corporation's policy to fund pension costs accrued. Plan assets are invested in a diversified portfolio consisting of equity and fixed income securities (including $12,868 of Class A common stock of Kaman Corporation at December 31, 2000). The pension plan costs were computed using the projected unit credit actuarial cost method and include the following components:
2000 1999 1998 ---- ---- ---- Service cost for benefits earned during the year $ 9,528 $ 9,837 $ 8,794 Interest cost on projected benefit obligation 21,688 20,348 19,648 Expected return on plan assets (29,050) (25,998) (22,757) Net amortization and deferral (2,635) (1,909) (1,909) -------- -------- -------- Net pension cost (income) $ (469) $ 2,278 $ 3,776 ======== ======== ========
The change in actuarial present value of the projected benefit obligation is as follows:
December 31 2000 1999 ----------- ---- ---- Projected benefit obligation at beginning of year $ 299,228 $ 297,516 Service cost 9,528 9,837 Interest cost 21,688 20,348 Actuarial liability (gain) loss (2,091) (13,442) Benefit payments (16,080) (15,031) --------- --------- Projected benefit obligation at end of year $ 312,273 $ 299,228 ========= =========
Page 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) The actuarial liability gain of $2,091 for 2000 is attributable to variations from anticipated experience while the actuarial liability gain of $13,442 for 1999 consists principally of adjustments for changes in the discount rate and average rate of increase in compensation levels. The change in fair value of plan assets is as follows:
December 31 2000 1999 ----------- ---- ---- Fair value of plan assets at beginning of year $ 415,358 $ 362,758 Actual return on plan assets 14,796 65,252 Employer contribution 379 2,379 Benefit payments (16,080) (15,031) --------- --------- Fair value of plan assets at end of year $ 414,453 $ 415,358 ========= ========= Excess of assets over projected benefit obligation $ 102,180 $ 116,130 Unrecognized prior service cost (290) (345) Unrecognized net gain (100,097) (112,987) Unrecognized net transition asset (1,854) (3,707) --------- --------- Accrued pension cost $ 61 $ 909 ========= =========
The actuarial assumptions used in determining the funded status of the pension plan are as follows:
December 31 2000 1999 ----------- ---- ---- Discount rate 7.5 % 7.5 % Expected return on plan assets 8.625% 8.625% Average rate of increase in compensation levels 4.5 % 4.5 % ===== =====
Page 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) The corporation also has a thrift and retirement plan in which all employees meeting the eligibility requirements may participate. Employer matching contributions are currently made to the plan with respect to a percentage of each participant's pretax contribution. Effective January 1, 2000, certain participating subsidiaries increased their employer contributions to fifty cents ($.50), up from twenty five cents ($.25), for each dollar that a participant contributed, up to 5% of compensation. Employer contributions to the plan totaled $3,514, $1,691 and $1,683 in 2000, 1999, and 1998, respectively. COMMITMENTS AND CONTINGENCIES Rent commitments under various leases for office space, warehouse, land and buildings expire at varying dates from January 2001 to December 2010. Certain annual rentals are subject to renegotiation, with certain leases renewable for varying periods. Lease periods for machinery and equipment vary from 1 to 5 years. Substantially all real estate taxes, insurance and maintenance expenses are obligations of the corporation. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties. The following future minimum rental payments are required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2000: 2001 $13,295 2002 7,421 2003 3,555 2004 2,356 2005 1,389 Thereafter 2,306 ------- Total $30,322 =======
Lease expense for all operating leases, including leases with terms of less than one year, amounted to $14,710, $15,413 and $14,683 for 2000, 1999 and 1998, respectively. Page 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) From time to time, the corporation is subject to various claims and suits arising out of the ordinary course of business, including commercial, employment and environmental matters. While the ultimate result of all such matters is not presently determinable, based upon its current knowledge, management does not expect that their resolution will have a material adverse effect on the corporation's consolidated financial position. One such matter involves Litton Guidance and Control Systems, a division of Litton Systems, Inc. and Litton Industries, Inc., which has been a major subcontractor for both the Australia and New Zealand SH-2G Helicopter programs, being responsible for providing avionics system hardware and integration software. In addition, Litton has been the designer and integrator of the ITAS system specific to the Australia program. Litton had stated that it was incurring additional costs to perform its fixed price contract with the corporation for the Australia program and submitted claims for such costs to the corporation during 2000. The corporation's evaluation of the matter was different from Litton's and the corporation had, in turn, submitted claims to Litton. In an effort to resolve the entire matter, the parties conducted a mediation in early February 2001. As a result of that process, the parties arrived at an agreement in principle, under which the corporation will make certain milestone payments to Litton as it completes work on hardware and certain software contemplated under the fixed price contract and Litton will release its claims against the corporation. In return, Litton will transfer to the corporation a software integration laboratory, software and intellectual property rights and the corporation will release its claims against Litton. In addition, upon performance of the items described above, Litton's significant project responsibilities for the Australia program will end and the corporation will assume responsibility for several remaining elements of the project. COMPUTATION OF EARNINGS PER COMMON SHARE The earnings per common share - basic computation is based on the earnings applicable to common stock divided by the weighted average number of shares of common stock outstanding for each year. The earnings per common share - diluted computation includes the common stock equivalency of options granted to employees under the Stock Incentive Plan. The earnings per common share - diluted computation also assumes that at the beginning of the year the 6% convertible subordinated debentures are converted into Class A common stock with the resultant reduction in interest costs net of tax. Excluded from the earnings per common share - diluted calculation are options granted to employees that are anti-dilutive based on the average stock price for the year. Page 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts)
2000 1999 1998 ---- ---- ---- Earnings per common share - basic Earnings applicable to common stock $36,920 $25,073 $30,008 ======= ======= ======= Weighted average shares outstanding (000) 22,936 23,468 23,407 ======= ======= ======= Earnings per common share - basic $ 1.61 $ 1.07 $ 1.28 ======= ======= ======= Earnings per common share - diluted Earnings applicable to common stock $36,920 $25,073 $30,008 Plus: After-tax interest savings on convertible debentures 1,031 1,046 1,075 ------- ------- ------- Earnings applicable to common stock assuming conversion $37,951 $26,119 $31,083 ======= ======= ======= Weighted average shares outstanding (000) 22,936 23,468 23,407 Plus shares issuable on: Conversion of Series 2 preferred stock -- -- 282 Conversion of 6% convertible debentures 1,151 1,221 1,293 Exercise of dilutive options 81 121 253 ------- ------- ------- Weighted average shares outstanding assuming conversion (000) 24,168 24,810 25,235 ======= ======= ======= Earnings per common share - diluted $ 1.57 $ 1.05 $ 1.23 ======= ======= =======
Page 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) As of December 23, 1997, 95,106 shares of the corporation's Series 2 preferred stock were converted to Class A common stock pursuant to a call for partial redemption issued on November 20, 1997. Pursuant to a redemption call on January 8, 1998 for the balance of the Series 2 preferred stock, the remaining shares were converted into 3,000,174 shares of Class A common stock as of February 9, 1998. An immaterial amount of Series 2 preferred stock shares were redeemed by the corporation and settled in cash. STOCK PLANS Employees Stock Purchase Plan - The Kaman Corporation Employees Stock Purchase Plan allows employees to purchase Class A common stock of the corporation, through payroll deductions, at 85% of the market value of shares at the time of purchase. The plan provides for the grant of rights to employees to purchase a maximum of 1,500,000 shares of Class A common stock. There are no charges or credits to income in connection with the plan. During 2000, 145,485 shares were issued to employees at prices ranging from $7.76 to $13.60 per share. During 1999, 140,620 shares were issued to employees at prices ranging from $9.03 to $13.49 per share. During 1998, 115,374 shares were issued to employees at prices ranging from $12.43 to $16.47 per share. At December 31, 2000, there were approximately 1,088,000 shares available for offering under the plan. Stock Incentive Plan - The corporation maintains a Stock Incentive Plan which includes a continuation and extension of a predecessor stock incentive program. The Stock Incentive Plan provides for the grant of non-statutory stock options, incentive stock options, restricted stock awards and stock appreciation rights primarily to officers and other key employees. The number of shares of Class A common stock reserved for issuance under this plan is 2,210,000 shares. Stock options are generally granted at prices not less than the fair market value at the date of grant. Options granted under the plan generally expire ten years from the date of grant and are exercisable on a cumulative basis with respect to 20% of the optioned shares on each of the five anniversaries from the date of grant. Restricted stock awards are generally granted with restrictions that lapse at the rate of 20% per year and are amortized accordingly. Stock appreciation rights generally expire ten years from the date of grant and are exercisable on a cumulative basis with respect to 20% of the rights on each of the five anniversaries from the date of grant. These awards are subject to forfeiture if a recipient separates from service with the corporation. Page 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) Restricted stock awards were made for 62,500 shares at prices ranging from $10.31 to $10.75 per share in 2000, 91,000 shares at prices ranging from $11.81 to $14.50 per share in 1999 and 62,500 shares at prices ranging from $17.00 to $19.25 per share in 1998. At December 31, 2000, there were 161,000 shares remaining subject to restrictions pursuant to these awards. Stock appreciation rights were issued for 130,000 shares at $10.31 in 2000, 270,000 shares at prices ranging from $14.13 to $14.50 per share in 1999 and 165,000 shares at $17.00 per share in 1998, to be settled only for cash. The corporation recorded $1,732 of expense in 2000, income of $703 in 1999 due to the grant price being higher than the year end market price and $203 of expense in 1998 for these stock appreciation rights. Page 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) Stock option activity is as follows:
Weighted-Average Exercise Stock options outstanding: Options Price -------------------------- ------- ----- Balance at January 1, 1998 791,080 10.50 Options granted 205,000 17.00 Options exercised (79,845) 8.94 Options cancelled (121,415) 10.56 ---------- ----------- Balance at December 31, 1998 794,820 12.32 Options granted 312,800 14.38 Options exercised (26,760) 9.56 Options cancelled (39,850) 14.25 ---------- ----------- Balance at December 31, 1999 1,041,010 12.94 Options granted 225,500 10.31 Options exercised (75,360) 8.86 Options cancelled (121,170) 13.65 ---------- ----------- Balance at December 31, 2000 1,069,980 12.59 ========== =========== Weighted average contractual life remaining at December 31, 2000 6.7 years =========== Range of exercise prices for options $ 8.00- $ 12.51- outstanding at December 31, 2000 $ 12.50 $ 17.00 ---------- ----------- Options outstanding 511,880 558,100 Options exercisable 278,700 193,510 Weighted average contractual remaining life of options outstanding 5.9 years 7.5 years Weighted average exercise price: Options outstanding $ 10.08 $ 14.89 Options exercisable $ 9.88 $ 14.85 ========== ===========
As of December 31, 1999 and 1998, there were 438,720 and 349,950 options exercisable, respectively. Page 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) As permitted by the Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," the corporation has elected to continue following the guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock- based transactions with employees. Accordingly, no compensation cost has been recognized for its stock plans other than for the restricted stock awards and stock appreciation rights. Under the disclosure alternative of SFAS 123, the pro forma net earnings and earnings per common share information presented below includes the compensation cost of stock options issued to employees based on the fair value at the grant date and includes compensation cost for the 15% discount offered to participants in the employees stock purchase plan.
2000 1999 1998 ---- ---- ---- Net earnings: As reported $36,920 $25,073 $30,008 Pro forma 36,288 24,497 29,534 Earnings per common share - basic: As reported 1.61 1.07 1.28 Pro forma 1.58 1.04 1.26 Earnings per common share - diluted: As reported 1.57 1.05 1.23 Pro forma 1.55 1.03 1.22 ------- ------- -------
The fair value of each option grant is estimated on the date of grant by using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for grants in 2000, 1999, and 1998: Page 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts)
2000 1999 1998 ---- ---- ---- Expected dividend yield 4.3% 3.1% 2.6% Expected volatility 38.0% 34.0% 31.0% Risk-free interest rate 6.5% 5.3% 5.6% Expected option lives 8 years 8 years 8 years Per share fair value of options granted $ 3.35 $ 4.75 $ 5.78 ======= ======= =======
SEGMENT INFORMATION The corporation reports results in three business segments -- Aerospace, Industrial Distribution and Music Distribution. The Aerospace segment consists primarily of aerospace related business for global government and commercial markets, including the retrofit of SH-2 helicopters from the SH-2F to the SH-2G configuration as well as support services, logistics and spare parts for that helicopter; manufacture of the K-MAX helicopter together with spare parts and technical support; subcontract work consisting of fabrication of aircraft structures; and production of components, including self-lubricating bearings and couplings. The Industrial Distribution segment provides replacement parts, including bearings, power transmission, motion control and materials handling components to nearly every sector of industry in North America, along with industrial engineering support services. Operations are conducted from many locations across the United States and British Columbia, Canada. In 1999, the segment took a pretax charge of $12,382 to write-off inventory and streamline its operational structure and increase efficiency. During 2000, $1,680 of this pretax charge was unused and added back to operating profit. The Music Distribution segment consists of distribution of musical instruments and accessories in the U.S. and abroad through offices in the U.S. and Canada. Music operations also include some manufacture of guitars. Page 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) Summarized financial information by business segment is as follows:
2000 1999 1998 ---- ---- ---- Net sales: Aerospace $ 381,932 $ 371,757 $ 382,697 Industrial Distribution 520,779 505,261 514,379 Music Distribution 128,523 118,386 120,048 ---------- ---------- -------- $1,031,234 $ 995,404 $1,017,124 =========== ========= ========== Operating profit: Aerospace $ 44,236 $ 44,023 $ 43,304 Industrial Distribution 22,902 2,908 18,550 Music Distribution 7,441 5,627 5,315 ---------- --------- ---------- 74,579 52,558 67,169 Interest, corporate and other expense, net (16,859) (12,085) (16,811) ---------- --------- ---------- Earnings before income taxes $ 57,720 $ 40,473 $ 50,358 ========== ========= ========== Identifiable assets: Aerospace $ 307,762 $ 251,443 $ 294,566 Industrial Distribution 137,297 141,913 160,873 Music Distribution 53,444 53,714 54,577 Corporate 55,327 87,133 77,214 ---------- --------- ---------- $ 553,830 $ 534,203 $ 587,230 ========== ========= ========== Capital expenditures: Aerospace $ 6,110 $ 6,631 $ 11,369 Industrial Distribution 2,947 2,398 3,568 Music Distribution 812 1,773 1,770 Corporate 1,175 162 2,477 --------- -------- --------- $ 11,044 $ 10,964 $ 19,184 ========== ======== ========= Depreciation and amortization: Aerospace $ 5,875 $ 5,963 $ 5,586 Industrial Distribution 3,138 3,395 3,077 Music Distribution 1,490 1,508 1,317 Corporate 1,127 1,132 1,088 --------- -------- --------- $ 11,630 $ 11,998 $ 11,068 ========== ======== ========= Page 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Kaman Corporation and Subsidiaries December 31, 2000, 1999 and 1998 (In thousands except share and per share amounts) 2000 1999 1998 ---- ---- ---- Geographic information - sales: United States $ 789,533 $737,023 $ 793,544 Australia/New Zealand 186,537 200,796 158,068 Canada 29,455 28,724 35,438 Europe 12,765 11,590 11,980 Japan 6,862 10,172 9,527 Other 6,082 7,099 8,567 --------- -------- --------- $1,031,234 $995,404 $1,017,124 ========== ======== ==========
Operating profit is total revenues less cost of sales and selling, general and administrative expense other than general corporate expense. Identifiable assets are year-end assets at their respective net carrying value segregated as to segment and corporate use. Corporate assets are principally cash and cash equivalents and net property, plant and equipment. Net sales by the Aerospace segment made under contracts with U.S. Government agencies (including sales to foreign governments through foreign military sales contracts with U.S. Government agencies) account for $81,519 in 2000, $72,285 in 1999 and $92,539 in 1998. Sales made by the Aerospace segment under a contract with one customer were $130,285, $145,006 and $119,222 in 2000, 1999 and 1998, respectively. Page 40 REPORT OF INDEPENDENT AUDITORS Kaman Corporation and Subsidiaries KPMG LLP Certified Public Accountants One Financial Plaza Hartford, Connecticut 06103 THE BOARD OF DIRECTORS AND SHAREHOLDERS KAMAN CORPORATION: We have audited the accompanying consolidated balance sheets of Kaman Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three year period ended December 31, 2000. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kaman Corporation and subsidiaries at December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP February 5, 2001 Page 41