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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
|
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
| |
FOR
THE FISCAL YEAR ENDED December
31, 2004. |
OR
|
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM _________ TO
_________ |
Commission
File No. 0-1093
KAMAN
CORPORATION
(Exact
name of registrant as specified in its charter)
|
Connecticut
|
|
06-0613548 |
|
(State
or other jurisdiction |
|
(I.R.S.
Employer |
|
of
incorporation or organization) |
|
Identification
No.) |
1332 Blue
Hills Avenue
Bloomfield,
Connecticut 06002
(Address
of principal executive offices)
(860)
243-7100
Registrant's
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
|
-
Class A Common Stock, Par Value $1.00 |
|
-
6% Convertible Subordinated Debentures Due
2012 |
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated herein by reference in Part III of
this Form 10-K or any amendment to this Form 10-K x
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes x
No o
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter.
$291,018,917
as of June 30, 2004.
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock as of the latest practicable date (January 15, 2005).
|
Class
A Common |
22,106,361 |
|
Class
B Common |
667,814 |
Documents
Incorporated Herein By Reference
Portions
of the Corporation's 2004 Annual Report to Shareholders are incorporated herein
by reference and filed as Exhibit 13 to this report.
Kaman
Corporation
Index
to Form 10-K
Year
Ended December 31, 2004
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Page |
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Part
I |
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Business |
3 |
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Properties |
10 |
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Legal
Proceedings |
11 |
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Submission
of Matters to a Vote of Security Holders |
11 |
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Part
II |
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Market
for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities |
11 |
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Selected
Financial Data |
12 |
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
12 |
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Quantitative
and Qualitative Disclosures About Market Risk |
12 |
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Financial
Statements and Supplementary Data |
13 |
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
13 |
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Controls
and Procedures |
13 |
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Other
Information |
13 |
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Part
III |
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Directors
and Executive Officers of the Registrant |
14 |
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Executive
Compensation |
16 |
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
21 |
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Certain
Relationships and Related Transactions |
24 |
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Principal
Accounting Fees and Services |
24 |
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Part
IV |
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Exhibits
and Financial Statement Schedules |
25 |
PART
I
INTRODUCTION
Kaman
Corporation, incorporated in 1945, reports information for itself and its
subsidiaries (collectively, the "corporation") in the following business
segments: Aerospace, Industrial Distribution, and Music.
During
2004, the Aerospace segment's programs were conducted through three principal
businesses, consisting of Aircraft Structures and Components, Advanced
Technology Products, and Helicopter Programs. The Aircraft Structures and
Components business involves commercial and military aircraft programs,
including proprietary aircraft bearings, the production of aircraft
subassemblies and other parts for commercial airliners as well as the C-17
military transport, and helicopter subcontract work. This business constituted
about 46 percent of Aerospace segment sales for the year ended December 31,
2004. The Advanced Technology Products business manufactures products for
military and commercial markets, including safe, arm and fuzing devices for a
number of major missile and bomb programs; and precision measuring systems, mass
memory systems and electro-optic systems. This business constituted
approximately 25 percent of segment sales for the year ended December 31, 2004.
Helicopter Programs include the SH-2G Super Seasprite multi-mission maritime
helicopter and the K-MAX medium-to-heavy external lift helicopter along with
spare parts and support. This business constituted about 29 percent of segment
sales for the year ended December 31, 2004.
The
Industrial Distribution segment is the third largest North American industrial
distributor servicing the bearings, electrical/mechanical power transmission,
fluid power, motion control and materials handling markets. This segment offers
more than 1.5 million items, as well as value-added services to a base of more
than 50,000 customers spanning nearly every sector of industry from its
geographically broad-based footprint of nearly 200 locations in the United
States, Canada, and Mexico.
The Music
segment is the largest independent distributor of musical instruments and
accessories in the United States, offering more than 15,000 products from
several facilities in the United States and Canada to retailers of all sizes
worldwide for professional and amateur musicians.
AEROSPACE
SEGMENT
This
segment had an operating loss of $14.3 million for the year ended December 31,
2004. The loss involved a variety of factors, including principally, lack of new
helicopter orders, a negative $18.2 million sales adjustment associated with the
MD Helicopters, Inc. ("MDHI") program, lack of sufficient work at the
Jacksonville facility, adjustments involving various aspects of the segment's
operations, and the delay experienced in achieving final qualification for the
JPF fuze program. These items are discussed below.
The
corporation undertook a realignment of segment operations in 2004, creating
three new operating divisions from existing Aerospace subsidiary operations. The
purpose of the realignment was to address differences among the segment's
various businesses and the changing markets they serve with the expectation that
each division will be in a position to effectively control expenses for the
services and functions that they require and achieve optimal customer service.
The three new operating divisions are: Aerostructures, responsible for the
Aerospace subsidiary's Jacksonville facility and the PlasticFab operation in
Wichita; Fuzing, responsible for the Aerospace subsidiary's Middletown, Conn.
facility and Orlando (Dayron) operations; and Helicopters, responsible for the
Aerospace subsidiary's Bloomfield, Conn. operation. These divisions, together
with Kamatics, a separate subsidiary in the Aerospace segment (including RWG
Frankenjura-Industrie Flugwerklager GmbH, the corporation's German aircraft
bearing manufacturer) constitute the four principal operating elements of the
Aerospace segment. For the year 2004, results for the segment have been reported
in the traditional format. Beginning with results for the first quarter of 2005,
the corporation will separately report sales and discuss business developments
for each of the Aerospace subsidiary's divisions and Kamatics.
Aircraft
Structures and Components
Aircraft
Structures and Components business involves commercial and military aircraft
programs, including proprietary aircraft bearings produced and sold by Kamatics,
the production of aircraft subassemblies and other parts for commercial
airliners as well as the C-17 military transport, and helicopter subcontract
work. Operations are generally conducted at the Jacksonville and Wichita
facilities, and at Kamatics located in Bloomfield.
The move
from Moosup, Conn. to the expanded Jacksonville aircraft subassemblies and parts
facility was completed in 2003. Since then, the Jacksonville operation has been
addressing the complexities of training new workers and requalifying
manufacturing processes at the facility. This, together with an insufficient
volume of sales, has resulted in an inability to achieve profitability at this
location. This has resulted in overhead and general and administrative
expenditures being absorbed at higher rates by active programs and generally
lower profitability or losses for these programs. Improving performance metrics
and reestablishing levels of customer satisfaction continue to be a focus at the
Jacksonville facility and management believes that progress was made during 2004
as the operation completed much of the requalification task and began to win new
business. The principal example is that in 2004, Sikorsky Aircraft Corporation
awarded the corporation a multi-year contract with an initial two-year value of
$27.7 million under which the corporation will manufacture the pilot cockpit for
four models of the Sikorsky BLACK HAWK helicopter. The initial work covers
approximately 84 units and includes installation of all wiring harnesses,
hydraulic assemblies, control pedals and sticks, seat tracks, pneumatic lines,
and the composite structure that holds the windscreen. The contract includes
follow-on options that, if fully exercised, would include the fabrication of
approximately 349 units, and bring the total potential value of the contract to
approximately $100.0 million over five years.
Regarding
potential future work, in January 2005, the U.S. government selected an
international team that includes Lockheed Martin, Bell Helicopter, and
AgustaWestland to provide the next "Marine One" presidential helicopter. As a
member of the winning team, the corporation anticipates that it will have the
opportunity to share in the work being sourced into the United States.
Management
continues to believe that operating conditions at the Jacksonville facility will
improve and that the move from Moosup to Jacksonville will ultimately provide a
lower cost structure from which to compete.
During
2004, the corporation recorded non-cash adjustments in two programs conducted in
the Aircraft Structures and Components operation. The first relates to the
corporation's multi-year contracts with MDHI for production of fuselages for the
MDHI 500 and 600 series helicopters and composite rotor blades for the MD
Explorer helicopter. The corporation stopped work on the program in 2003 due to
payment issues with this customer. It had been the corporation's expectation
that MDHI would be successful in executing its strategy to improve its then
current financial and operational circumstances, however, in the third quarter
of 2004 MDHI management indicated that it had not thus far been able to resolve
the situation. As a result, the corporation recorded a sales and non-cash
pre-tax earnings charge of $20.1 million, consisting of an $18.2 million
negative sales adjustment and a $1.9 million addition to the corporation's bad
debt reserve, eliminating its investment in the program. The charge is not
expected to result in any future cash expenditures. The corporation intends to
maintain a business relationship with MDHI should it be successful in improving
its financial and operational situation.
The
second program is the corporation's contract with Boeing called "Harbour Pointe"
covering parts and subassemblies for various Boeing aircraft. This contract has
generated a lower than expected order flow and an unprofitable mix of work. In
the second quarter of 2004, the corporation determined that future demand for
these parts, many of which are associated with programs that Boeing is either
cutting back or eliminating, would be lower than previously anticipated. As a
result, the corporation recorded a $7.1 million non-cash adjustment, consisting
of an estimated accrued contract loss of $4.3 million and a valuation adjustment
of $2.8 million associated with portions of the program inventory.
Kamatics
manufactures proprietary self-lubricating bearings used in aircraft flight
controls, turbine engines and landing gear and produces driveline couplings for
helicopters. Market conditions improved during 2004 and the company experienced
increased order activity from Boeing, Airbus and other customers in both the
commercial and military sectors. While the market for specialized
high-performance products is becoming increasingly competitive, Kamatics parts
are currently in use in almost every jet-powered aircraft built in North and
South America and Europe.
Advanced
Technology Products
This
business involves manufacture of products for military and commercial markets,
including safe, arm and fuzing devices for a number of major missile and bomb
programs, and precision measuring systems, mass memory systems and electro-optic
systems. Principal operations are conducted at the Middletown, Conn. and Orlando
facilities. In conjunction with the realignment of the Aerospace segment during
the year, management worked to identify and correct certain internal operational
issues that have adversely affected the Orlando facility, which consists of the
Dayron operation that was acquired by the corporation in 2002.
A $3.5
million charge was recorded in the fourth quarter of 2004 to provide for two
product warranty-related issues. The first involves a supplier's recall of a
switch embedded in certain of Dayron's bomb fuzes. The other involves bomb fuzes
manufactured according to procedures in place at the time that Dayron was
acquired that have been found to contain an incorrect part. Management is
currently working with its customers and other parties to resolve these issues
appropriately.
Dayron
has a contract with the U.S. Air Force for production of the advanced FMU-152A/B
joint programmable fuze ("JPF"). This contract, which was the principal
motivation for the acquisition of Dayron, achieved final qualification in the
second quarter of 2004, about a year later than originally anticipated. The JPF
contract has a value of $13.6 million covering low rate initial production and
production of Lot 1 that extends through 2005 and includes options for eight
additional years of production, which, if fully exercised, would bring the total
potential value of the contract to $168.7 million. In the past few months, the
Air Force has released production for Lot 2 (including some additional
production) for $11.4 million. These releases under the contract, plus
development and engineering activity along with special tool and test equipment,
bring the total to
approximately $36.4 million to date. Work has continued on materials flow and
manpower ramp-up to meet production requirements. Now that final qualification
has been achieved, the fuze is ready to market to allied militaries. Management
expects program profitability to improve as deliveries to the U.S. military ramp
up and be further enhanced once orders are received from allied militaries.
Since
2001, the Electro-Optics Development Center ("EODC") portion of this business
(located in Tucson, Ariz.) had been teamed with the University of Arizona
("University") to build a 6.5-meter aperture collimator that will be used for
testing large optical systems in a vacuum environment. EODC had been working
under a $12.8 million fixed-price contract to design and fabricate the
structural, electrical, mechanical and software control systems for the
collimator. EODC has experienced significant cost growth in its portion of the
program which it believes is a result of changes in the scope of the project,
and in April 2004 submitted a claim in the amount of $6.3 million to the
University to recover these additional costs. Having been unable to
satisfactorily resolve this matter, the company filed suit against the
University on September 17, 2004 to recover these costs and stopped production
on the program. The University has since filed a counterclaim and the litigation
process is ongoing. Although additional efforts were made to resolve the matter
out of court, it became clear during the fourth quarter that EODC is not likely
to complete the project and therefore, a $3.5 million sales and pre-tax earnings
adjustment was recorded in the fourth quarter to reflect the contract's
curtailed status.
Helicopter
Programs
The
segment's helicopter products include the SH-2G Super Seasprite multi-mission
maritime helicopter and the K-MAX medium-to-heavy external lift helicopter along
with spare parts and support. Operations are conducted at the Bloomfield
facility. The vast majority of 2004 activity was attributable to the SH-2G
helicopter.
SH-2G
programs have generally consisted of retrofit of the corporation's SH-2F
helicopters to the SH-2G configuration or refurbishment of existing SH-2G
helicopters. The SH-2, including its F and G configurations, was originally
manufactured for the U.S. Navy. The SH-2G aircraft is currently in service with
the Egyptian Air Force and the New Zealand and Polish navies.
Work
continues on the SH-2G(A) program for Australia which involves eleven
helicopters with support, including a support services facility, for the Royal
Australian Navy ("RAN"). The total contract has a current anticipated value of
about $738 million. The helicopter production portion of the program is valued
at approximately $605 million, essentially all of which has been recorded as
sales through December 31, 2004. This contract has been in a loss position since
2002, due to increases in anticipated costs to complete the program. The
in-service support center portion of the program has a current anticipated value
of about $133 million of which about 31 percent has been recorded as sales
through December 31, 2004.
Production
of the eleven SH-2G(A) aircraft for the program is essentially complete. The
aircraft lack the full Integrated Tactical Avionics System ("ITAS") software and
progress is continuing on this element of the program. The Australian government
provisionally accepted three additional helicopters during the fourth quarter of
2004, bringing the number of aircraft now provisionally accepted to eight. The
corporation currently expects to deliver the first fully operational aircraft by
mid-year 2005, to be followed by the final acceptance process for all eleven
aircraft. Due to the complexity of the integration process and test results that
indicate additional work to be done, the corporation added $5.5 million to its
accrued contract loss during the year, $3.8 million of which was added in the
fourth quarter, to reflect the current estimate of costs to complete the
program.
The
corporation maintains a consignment of the U.S. Navy's inventory of SH-2 spare
parts under a multi-year agreement that provides the corporation the ability to
utilize certain inventory for support of its SH-2G programs.
Although
no retrofit orders have been awarded since 1997, the corporation continues to
market the SH-2G helicopter on an international basis, recognizing that this
market is highly competitive and heavily influenced by economic and political
conditions.
The
corporation continues to support K-MAX helicopters that are operating with
customers, which number less than thirty. At December 31, 2004, K-MAX
inventories included approximately $20.1 million in K-MAX spare parts and $9.8
million in aircraft owned by the corporation. As previously reported, the
corporation wrote down the value of existing aircraft, excess spare parts, and
equipment inventories in 2002, following a market evaluation of the K-MAX
helicopter program, which had experienced several years of market difficulties.
Management
is currently in discussions with the U.S. Naval Air Systems Command ("NAVAIR")
regarding the potential purchase of a portion of the Bloomfield campus that the
Aerospace subsidiary currently leases from NAVAIR and has operated for several
decades for the principal purpose of performing U.S. government contracts.
Management believes that ownership of the facility, which is currently utilized
for flight and ground test operations and limited parts manufacturing, can be
helpful to its ongoing operations. As part of its decision-making process, the
company is discussing with NAVAIR and the General Services Administration the
method that would be used to calculate the purchase price of the facility, which
could possibly include the company undertaking some level of the environmental
remediation that may be legally required in the event of a sale of the property.
In applying the guidance of Statement of Financial Accounting Standards No. 5
"Accounting for Contingencies", the corporation's management has concluded that,
while not probable, it is reasonably possible that the corporation may agree to
undertake some level of environmental remediation, should the facility be sold
to the corporation. Based on the discussions so far, however, it is not possible
to determine the magnitude, if any, of such a potential undertaking. Therefore,
no liability for environmental remediation at the facility has been recorded to
date.
The
corporation is also working with government and environmental authorities to
prepare the closed Moosup facility for eventual sale.
INDUSTRIAL
DISTRIBUTION SEGMENT
This
segment experienced significant increases in sales and operating profits for the
year ended December 31, 2004. These results reflect the combined effects of an
improved industrial economy, a full year of benefit from the acquisition of
Industrial Supplies, Inc., and market share gains as well as the impact of cost
control, process improvement, and the company’s “lean-thinking” practices that
were implemented during the difficult economic times of the past few years.
Vendor incentives in the form of rebates (i.e., vendors provide inventory
purchase rebates to distributors at specified volume-purchasing levels), while
still important, represented a smaller percentage of operating profits than it
has in recent years because of the increase in sales.
This
segment is the third largest North American industrial distributor servicing the
bearings, electrical/mechanical power transmission, fluid power, motion control
and materials handling markets. Products and value-added services are offered to
a customer base of more than 50,000 companies representing a highly diversified
cross section of North American industry. Because of its diversified customer
base, segment performance tends to track the U.S. Industrial Production Index
and is affected to a large extent by the overall business climate for its
customer industries, including plant capacity utilization levels and the effect
of pricing spikes and/or interruptions for basic commodities such as steel and
oil. A weaker U.S. dollar is currently stimulating customers' export sales and
the demand from China for raw materials continues to benefit the segment's
locations that participate in mining, steel and cement production markets.
Success
in the segment's markets requires a combination of competitive pricing (with
pricing pressures more pronounced with respect to larger customers) and
value-added services that save customers money while helping them become more
efficient and productive. Management believes that this segment has the
appropriate platforms, including technology, systems management and customer and
supplier relationships to compete effectively in the evolving and highly
fragmented industrial distribution industry. The segment's size and scale of
operations allow it to attract highly skilled personnel and realize internal
operating efficiencies, and also to take advantage of vendor incentives, which
tend to favor the larger distributors. Management believes that the segment's
resources and product knowledge enable it to offer a comprehensive product line
and invest in sophisticated inventory management and control systems while its
position in the industry enhances its ability to rebound during economic
recoveries and grow through acquisitions.
Over the
past several years, large companies have increasingly centralized their
purchasing, focusing on suppliers that can service all of their plant locations
across a wide geographic area. To meet these requirements, the segment has
expanded its geographic presence through the selective opening of new branches
and acquisitions in key markets of the upper midwest, the south, and Mexico. The
segment's footprint of nearly 200 locations now covers 70 of the top 100
industrial markets in the United States. Management's goal is to grow the
Industrial Distribution segment by expanding into additional areas that enhance
its ability to compete for large regional and national customer accounts. In the
third quarter of 2004, the company acquired Brivsa de Mexico, a small
distributor located in Monterrey, thus expanding the company's ability to serve
its national account customers with operations in this important Mexican
industrial center.
In
addition to providing timely access to power transmission, motion control,
material handling electrical components, bearings, accessories and services, the
segment seeks to assist customers in identifying opportunities to utilize these
maintenance and production items in ways that help them increase efficiency,
reduce downtime, and lower production costs. In part, this explains the
segment's approach to competing for large regional and national multi-location
accounts, which now constitute about 20 percent of annual sales. During 2004,
the segment implemented new national account business with Tyco International
(US), Inc. Phelps Dodge, James Hardie and Quad Graphics. In addition, the
segment was named a national distributor for IMI Norgren, Inc., providing an
additional major line to sell through the segment's entire U.S. branch network.
In the fourth quarter of the year, Procter & Gamble, already a customer of
the segment, selected the segment as its bearings and power transmission
supplier in Canada, complementing the segment's U.S. business with this large
national account customer. A new location in Toronto was opened to serve that
account while providing a platform for expansion in the area.
From 1997
to the present, a total of forty-three legal proceedings (relating to
approximately eighty-five individuals) involving alleged asbestos-containing
products have been instituted against the corporation, virtually all of which
have involved this segment. In all proceedings, the corporation was one of many
unrelated defendants. The proceedings involving this segment relate primarily to
products allegedly supplied to the U.S. Navy by a company from which the segment
acquired assets, more than twenty-five years ago. Management believes that it
has good defenses to these claims. Nine of the proceedings were resolved with no
payments being made. Six proceedings are outstanding at this time. The
remainder of the proceedings have been settled for an aggregate amount that is
immaterial, with contribution from insurance carriers (who address these matters
on a case-by-case basis with no assurance of contribution in any potential
future case). Because of the immaterial nature of these settlements in each
instance and in the aggregate, no reserve has so far been required. At this
time, management continues to believe that its overall exposure to liability in
these matters is de minimis in nature.
MUSIC
SEGMENT
The
segment is the largest independent distributor of musical instruments and
accessories in the United States, offering more than 15,000 products from
several facilities in the United States and Canada to retailers of all sizes
worldwide for professional and amateur musicians.
The
segment experienced increased sales and operating profits for the year ended
December 31, 2004. There was good demand for the segment's lines of branded
musical instruments and accessories and a reasonably good Christmas season for
the retail sector. Sales for both the guitar and percussion lines were up for
the year along with continued growth in sales to both large and small retailers
with such products as Gretsch® drums
and Sabian® cymbals.
The Ovation LX series premier guitar was also introduced in 2004 and has
received high acceptance ratings from players and positive reviews in the
national music trade press.
The segment's
array of fretted instruments includes premier and proprietary products, such as
the Ovation® and Hamer® guitars, and Takamine®
guitars under an exclusive distribution agreement. The segment has also
significantly extended its line of percussion products and accessories over the
past few years, augmenting its CB®, Toca® and
Gibraltar® lines to include an exclusive distribution agreement with
Gretsch® drums and acquiring Latin Percussion and Genz Benz (an
amplification equipment manufacturer).
The
business is affected by consumer sentiment as retailers gauge how aggressively
to stock for the holiday selling season, and by actual consumer spending levels.
It is also affected by changes in consumers' musical tastes and interests.
Consequently, a principal strategy of the segment over the past several years
has been to add popular premier branded products that can be brought to market
exclusively by the segment.
An
important industry trend of the past several years has been consolidation in the
retail market with the growth in the very large retail chains. The concentration
of sales to these large customers is increasing and along with this is an
increase in pricing pressures. Management believes that it has built upon its
competitive advantages by creating and maintaining industry-leading distribution
systems and the computerized business-to-business capabilities that large
national retailers increasingly require, while continuing to support its
traditional base of small retailers.
Technology
is an important part of the segment's business. The segment's customers have
access to kmconline.com, an industry-leading e-commerce site for expedited
direct ordering of merchandise that helps customers cut costs and improve
efficiencies through electronic exchange of information. Approximately 25% of
sales orders were received and transmitted to the warehouse for shipment with
little or no manual intervention in 2004, more than double the number of the
prior year.
While the
vast majority of the segment's sales are to North American customers, the
segment has been building its presence in European, Asian and Australian markets
as well. In addition, to ensure high quality while offering value at different
price points, the segment's products are manufactured both in the United States
and abroad.
*Sabian
and Gretsch are registered trademarks of other organizations.
AVAILABLE
INFORMATION
The
corporation's website address is www.kaman.com. The corporation's Annual Report
on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K as
well as amendments to those reports filed or furnished pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, together with Section 16 insider
beneficial stock ownership reports, are available free of charge through the
website as soon as reasonably practicable after they are electronically filed or
furnished to the Securities and Exchange Commission. The information contained
in the corporation's website is not intended to be incorporated into this Annual
Report on Form 10-K.
The
Corporation's Governance Principles and all Board of Directors' standing
Committee Charters (including Audit, Corporate Governance, Personnel &
Compensation and Finance) are also located on the corporation's
website.
FINANCIAL
INFORMATION
Information
concerning each segment's performance for the last three fiscal years is
included in the Segment Information section of the corporation's 2004 Annual
Report to Shareholders (Exhibit 13 to this Form 10-K) and such section is
incorporated herein by reference.
PRINCIPAL
PRODUCTS AND SERVICES
Following
is information for the three preceding fiscal years concerning the percentage
contribution of each business segment's products and services to the
corporation's consolidated net sales:
| |
Years
Ended December 31 |
| |
2002 |
|
2003 |
|
2004 |
|
Aerospace |
31.3% |
|
28.1% |
|
25.4% |
|
Industrial
Distribution |
54.2% |
|
55.7% |
|
58.5% |
|
Music |
14.5% |
|
16.2% |
|
16.1% |
|
Total |
100.0% |
|
100.0% |
|
100.0% |
RESEARCH
AND DEVELOPMENT EXPENDITURES
Aerospace
segment government sponsored research expenditures, included in cost of sales,
were $5.9 million in 2004; $4.9 million in 2003, and $9.8 million in 2002.
Independent research and development expenditures, included in selling, general
and administrative expenses, were $4.0 million in 2004, $4.3 million in 2003 and
$5.4 million in 2002.
BACKLOG
Program
backlog of the Aerospace segment was approximately $309.6 million at December
31, 2004, $322.4 million at December 31, 2003 and $370.0 million at December 31,
2002.
The
corporation anticipates that approximately 73% of its backlog at the end of 2004
will be performed in 2005. Approximately 46.9% of the backlog at the end of 2004
is related to U.S. government contracts or subcontracts which are included in
backlog to the extent that funding has been appropriated by Congress and
allocated to the particular contract by the relevant procurement agency.
Virtually all of these funded government contracts have been
signed.
GOVERNMENT
CONTRACTS
During
2004, approximately 93.3% of the work performed by the corporation directly or
indirectly for the U.S. government was performed on a fixed-price basis and the
balance was performed on a cost-reimbursement basis. Under a fixed-price
contract, the price paid to the contractor is negotiated at the outset of the
contract and is not generally subject to adjustment to reflect the actual costs
incurred by the contractor in the performance of the contract. Cost
reimbursement contracts provide for the reimbursement of allowable costs and an
additional negotiated fee.
The
corporation's U.S. government contracts and subcontracts contain the usual
required provisions permitting termination at any time for the convenience of
the government with payment for work completed and associated profit at the time
of termination.
COMPETITION
The
Aerospace segment operates in a highly competitive environment with many other
organizations, some of which are substantially larger and have greater financial
and other resources.
The
corporation competes for its aircraft structures and components business on the
basis of price, product quality, and the reputation of the corporation.
Competitors for this business include small machine shops and offshore
manufacturing facilities. The corporation competes for its specialty aircraft
bearing business based on quality and proprietary knowledge; product endurance;
and special performance characteristics. The corporation competes for its
advanced technology fuzing business primarily on the basis of technical
competence, product quality, and to some extent, price; and also on the basis of
its experience as a developer and manufacturer of such products for particular
applications and the availability of facilities, equipment and personnel. The
corporation competes for its helicopter programs business with other helicopter
manufacturers on the basis of price, performance, and mission capabilities; and
also on the basis of its experience as a manufacturer of helicopters, the
quality of its products and services, and the availability of facilities and
equipment to perform contracts. The corporation's K-MAX helicopter competes with
military surplus helicopters and other used commercial helicopters employed for
lifting, as well as with alternative methods of meeting lifting requirements.
Consolidation in the industry has increased the level of international
competition for helicopter programs. The corporation is also affected by the
political and economic circumstances of its potential foreign
customers.
Industrial
distribution operations are subject to a high degree of competition from several
other national distributors, two of which are substantially larger than the
corporation; and from many regional and local firms. In addition, the
corporation faces competition from low-cost industrial products manufactured off
shore and introduced into the U.S. market from a number of sources. Competitive
forces have intensified due to the increasing importance of large national and
North American accounts and the increasing use of independent purchasing
consultants retained by such national accounts. In addition, competitive forces
have increased due to the increased use of supplier “partnering” agreements or
other contractual arrangements providing the customer with a variety of cost
savings opportunities.
Music
operations compete with domestic and foreign distributors. Certain musical
instrument products manufactured by the corporation are subject to competition
from U.S. and foreign manufacturers as well. The corporation competes in these
markets on the basis of service, price, performance, and inventory variety and
availability. The corporation also competes on the basis of quality and market
recognition of its music products and has established trademarks and trade names
under which certain of its music products are produced, as well as under private
label manufacturing in a number of foreign countries and exclusive distribution
agreements with other manufacturers of recognized trademarked
products.
FORWARD-LOOKING
STATEMENTS
This
report may contain forward-looking information relating to the corporation's
business and prospects, including aerostructures and helicopter subcontract
programs and components, advanced technology products, the SH-2G and K-MAX
helicopter programs, the industrial distribution and music 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) the successful conclusion of competitions
for government programs and thereafter contract negotiations with government
authorities, both foreign and domestic; 2) political conditions in countries
where the corporation does, or intends to do, business; 3) standard government
contract provisions permitting renegotiation of terms and termination for the
convenience of the government; 4) economic and competitive conditions in markets
served by the corporation, particularly defense, commercial aviation, industrial
production and consumer market for music products, as well as global economic
conditions; 5) satisfactory completion of the Australian SH-2G(A)program,
including successful completion and integration of the full ITAS software; 6)
receipt and successful execution of production orders for the JPF U.S.
government contract (including the exercise of all contract options as such
exercise has been assumed in connection with goodwill impairment evaluations)
and receipt of orders from allied militaries; 7) satisfactory resolution of the
EODC/University of Arizona litigation; 8) achievement of enhanced business base
in the Aerospace segment in order to better absorb overhead and general and
administrative expenses; 9) satisfactory results of negotiations with NAVAIR
concerning the corporation's leased facility in Bloomfield, Conn.; 10)
profitable integration of acquired businesses into the corporation's operations;
11) changes in supplier sales or vendor incentive policies; 12) the effect of
price increases or decreases; 13) pension plan assumptions and future
contributions; 14) continued availability of raw materials in adequate supplies;
15) satisfactory resolution of the supplier switch and incorrect part issues
attributable to Dayron suppliers and others; 16) cost
growth in connection with potential environmental remediation activities related
to the Bloomfield and Moosup facilities; and 17) successful
replacement of the corporation's revolving credit facility upon its expiration;
and 18) currency
exchange rates, taxes, changes in laws and regulations, interest rates,
inflation rates, general business conditions and other factors. Any
forward-looking information provided in this report should be considered with
these factors in mind. The corporation assumes no obligation to update any
forward-looking statements contained in this report.
EMPLOYEES
As of
December 31, 2004, the Corporation employed 3,581 individuals throughout its
business segments and corporate headquarters as follows:
|
Aerospace |
|
1,597 |
|
Industrial
Distribution |
|
1,483 |
|
Music |
|
411 |
|
Corporate
Headquarters |
|
90 |
PATENTS
AND TRADEMARKS
The
corporation holds patents and trademarks reflecting functional, design and
technical accomplishments in a wide range of areas covering both basic
production of certain products, including aerospace products and music
instruments, as well as highly specialized devices and advanced technology
products in defense related and commercial fields.
Although
the corporation's patents and trademarks enhance its competitive position,
management believes that none of such patents or trademarks is singularly or as
a group essential to its business as a whole. The corporation holds or has
applied for U.S. and foreign patents with expiration dates that range through
the year 2023.
These
patents are allocated among the corporation's business segments as follows:
| |
U.S.
PATENTS |
|
FOREIGN
PATENTS |
|
Segment |
Issued |
|
Pending |
|
Issued |
|
Pending |
| |
|
|
|
|
|
|
|
|
Aerospace |
41 |
|
3 |
|
7 |
|
7 |
|
Industrial
Distribution |
|