Kaman Announces Third Quarter 2004 Results

Kaman Corp. (USA) released third quarter 2004 results, showing a substantial loss driven by issues with its aerospace-related businesses, on sales otherwise up over 2003. Kaman is a diversified industrial product manufacturer and distributor. Important market segments are dedicated to military, aerospace and industrial products, including parallel aftermarket replacement product markets. Publicly traded (Nasdaq: KAMNA), Kaman's founder and his son, Charles Kaman and Charles II, own 48% of the company's outstanding shares. Kaman also maintains the now-unusual arrangement of one person -- Paul Kuhn -- serving as Chairman, President and CEO. The company's Kamatics bearing manufacturing business produces proprietary bearings for aircraft and aerospace applications. It owns bearing manufacturer RWG Frankenjura-Industrie Flugwerklager GmbH, acquired in 2001. Kaman's Industrial Distribution business is North America's third largest bearing and power transmission product distributor. Kaman's Music business, although apparently unrelated, is North America's largest independent distributor of musical instruments and accessories, with five facilities in the United States and Canada. Third quarter 2004 sales were $246 million, up more than 10% from $223.3 million for the same period in 2003. Trouble showed, however, in cost of goods sold, climbing to 79.4% of sales, from 75.5% in 2003, while SG&A rose to 26% of sales from 24% of sales in 2003. Interest expense also rose, as long-term debt has grown through the year from $36.6 million at the beginning of the year to $65.2 million at the end of third quarter. The net effect for Kaman was a third quarter loss of $11.9 million, from a narrow $1.2 million profit in third quarter 2003. The loss dragged Kaman's nine-month 2004 result to a loss of $12.4 million, where it had earned $18.4 million profit in the first nine months of 2003. The company's third quarter, said Mr. Kuhn was, "primarily attributable to events in the Aerospace segment, including a non-cash sales and pre-tax earnings charge in the third quarter of $20.1 million ... that eliminates the company's investment in contracts with MD Helicopters, Inc (MDHI, formerly Boeing's McDonnell-Douglas civil helicopter business, now a division of the Dutch military supply company RDM Holding). Included in the third quarter results were $2.0 million in severance costs associated with realignment of the segment's management team, and approximately $1.6 million in increased accrued contract costs associated with the Australia SH-2G(A) helicopter program." In the management team change, Joseph Lubenstein, who joined the company in mid-2001 as President of Kaman Aerospace, was forced out in August. Essentially, Kaman took a $20 million charge as a bad debt and lost sales to MDHI: $18.2 million in sales adjustment and $1.9 million in bad debt. The charge covered helicopter fuselages (for the MD500 and MD600 series) and composite rotor blades (for MD Explorers) Kaman produced for MDHI. Kaman had not been paid by MDHI since 2003, but delayed writing off the program until now. The charge would have caused Kaman to violate a covenant of its $150 million revolving credit arrangement, but it was amended on the last day of the quarter to avoid triggering the covenant. The Aircraft Structures and Components business, other than the MD Helicopters issues, performed better than expected, with results for the Kamatics proprietary aircraft bearing business, "significantly higher in the third quarter and nine-month periods compared to a year ago. These products are in use in most military and commercial aircraft in production. Business conditions overall continued to improve with signs of mounting customer momentum across the markets served." Another potential issue is a $12.8 million fixed-price contract Kaman took on for a 6.5-meter collimeter at the University of Arizona's Steward Observatory. Due to higher-than-expected costs Kaman claims are due to customer changes, Kaman sued the university to be paid an additional $6.3 million. Kaman also stopped work on the program, potentially exposing it to an even higher damage award if the university prevails in its countersuit. The company's SH-2G Super Seasprite and K-MAX helicopter programs are growing, but the 11 SH-2G(A) helicopters delivered to Australia lack the required Integrated Tactical Avionics System (ITAS), which is still under development but should be finalized by mid-2005.