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KAMAN CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[August 04, 2014]

KAMAN CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide readers of our condensed consolidated financial statements with the perspectives of management. It presents, in narrative form, information regarding our financial condition, results of operations, liquidity and certain other factors that may affect our future results, and is designed to enable the readers of this report to obtain a comprehensive understanding of our businesses, strategies, current trends and future prospects. It should be read in conjunction with our 2013 Annual Report on Form 10-K.



OVERVIEW OF BUSINESS Kaman Corporation (the "Company") is comprised of two business segments: • The Distribution segment is a leading power transmission, motion control, electrical and automation, and fluid power industrial distributor with operations throughout North America. We provide products including bearings, mechanical and electrical power transmission, fluid power, motion control, automation, material handling components, electrical control and power distribution, and MRO supplies to a broad spectrum of industrial markets throughout North America.

• The Aerospace segment produces and/or markets proprietary aircraft bearings and components; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; safe and arming solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; support for our SH-2G Super Seasprite maritime helicopters and K-MAX® manned and unmanned medium-to-heavy lift helicopters; and engineering design, analysis and certification services.


Financial performance • Net sales from continuing operations increased 6.3% and 6.5% for the three months and six months ended June 27, 2014, respectively, compared to the comparable periods in the prior year.

• Earnings from continuing operations decreased 9.5% for the three months ended June 27, 2014, compared to the comparable period in the prior year.

For the six months ended June 27, 2014, earnings from continuing operations increased 10.4% compared to the comparable period in the prior year.

• Diluted earnings per share from continuing operations decreased to $0.59, a decrease of $0.08, or 11.9% for the three months ended June 27, 2014, compared to the comparable period in the prior year. For the six months ended June 27, 2014, diluted earnings per share from continuing operations increased to $1.00, an increase of $0.07, or 7.5% compared to the comparable period in the prior year.

• Cash flows provided by operating activities of continuing operations for the six months ended June 27, 2014 were $11.8 million, $25.2 million more than the comparable period in the prior year.

Significant events • In July 2014, the Company announced that its Aerospace segment has been awarded follow-on orders totaling $13.9 million under Option 11 of the Joint Programmable Fuze ("JPF") program, raising the total under Option 11 to $55.8 million.

• On July 3, 2014, the Company's Distribution segment reached a significant milestone by successfully implementing the new enterprise-wide business system at the Minarik Automation & Controls facilities.

• On April 25, 2014, the Company completed the acquisition of specific assets of B.W. Rogers Company.

• In April 2014, the first upgraded SH-2G(I) aircraft successfully completed its first test flight, a significant milestone in the program.

• In April 2014, production of the Aerospace segment's specialty bearings in Germany was moved to a new state-of-the-art manufacturing facility in Höchstadt.

• In March 2014, the Company completed the move of its U.K. Tooling facility to a purpose-built facility in Burnley Lancashire, United Kingdom.

Outlook We are raising the low end of the sales and operating income range for Distribution from $1,180 million to $1,190 million and 4.7% to 4.8%, respectively. This reflects the improved performance we have seen in our base business and the acquired assets of B.W. Rogers. At Aerospace, we are maintaining our sales expectations for the year; however, we have lowered the top end of our range for operating income from 17.0% to 16.7%. The reduction in the range is due to a shift in the anticipated product mix 24 -------------------------------------------------------------------------------- for the year. Finally, we have increased our Free Cash Flow expectations for the year, largely reflecting lower than expected capital expenditures. Our updated outlook for 2014 is as follows: • Distribution: • Sales of $1,190 million to $1,220 million • Operating margins of 4.8% to 5.2% • Aerospace: • Sales of $640 million to $660 million • Operating margins of 16.5% to 16.7% • Interest expense of approximately $13.5 million • Corporate expense of approximately $52 million • Estimated annualized tax rate of approximately 35% • Depreciation and amortization expense of approximately $38 million • Capital expenditures of $30 million to $35 million • Free cash flow in the range of $50 million to $55 million The following table illustrates the calculation of "Free Cash Flow", a Non-GAAP financial measure: 2014 Outlook In millions Free Cash Flow(a): Net cash provided by operating activities $ 80.0 to $ 90.0 Expenditures for property, plant and equipment 30.0 to 35.0 Free Cash Flow $ 50.0 to $ 55.0 (a) Free Cash Flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less expenditures for property, plant and equipment, both of which are presented on our consolidated statements of cash flows. See Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures.

RESULTS OF OPERATIONS Consolidated Results Net Sales For the Three Months Ended For the Six Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 (in thousands) Net sales $ 459,089 $ 431,725 $ 873,021 $ 819,800 $ change 27,364 31,499 53,221 35,855 % change 6.3 % 7.9 % 6.5 % 4.6 % The following table details the components of the increase in net sales as a percentage of consolidated net sales: 25 -------------------------------------------------------------------------------- For the Three For the Six Months Months Ended Ended June 27, 2014 June 27, 2014 Organic Sales(1): Distribution 1.9 % 1.1 % Aerospace (1.5 )% 1.4 % Total Organic Sales 0.4 % 2.5 % Sales by Recent Acquisitions: Distribution 5.9 % 4.0 % Aerospace - % - % Total Acquisition Sales 5.9 % 4.0 % % change in net sales 6.3 % 6.5 % (1) Sales contributed by acquisitions are included in organic sales beginning with the thirteenth month following the date of acquisition. See segment discussions below for additional information regarding the changes in net sales.

Gross Profit For the Three Months Ended For the Six Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 (in thousands) Gross profit $ 129,334 $ 121,257 244,195 231,523 $ change 8,077 7,425 12,672 13,091 % change 6.7 % 6.5 % 5.5 % 6.0 % % of net sales 28.2 % 28.1 % 28.0 % 28.2 % The increase in gross profit for the three months and six months ended June 27, 2014, as compared to the same periods in 2013 is attributable to the higher gross profit at our Distribution segment. The increase at Distribution was due to higher organic gross profit, which increased 2.8% and 1.9% for the three months and six months ended June 27, 2014, respectively, and the contribution of gross profit recorded by the 2013 and 2014 Distribution segment acquisitions.

Offsetting the higher gross profit at our Distribution segment was a decrease in gross profit at our Aerospace segment, primarily related to the sales mix of our bearing products and lower margins on our tooling product sales. These decreases were partially offset by the gross profit associated with New Zealand SH-2G(I) program sales and missile fuzing sales.

Selling, General & Administrative Expenses (SG&A) For the Three Months Ended For the Six Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 (in thousands) SG&A $ 101,590 $ 90,219 195,351 186,639 $ change 11,371 4,399 8,712 12,909 % change 12.6 % 5.1 % 4.7 % 7.4 % % of net sales 22.1 % 20.9 % 22.4 % 22.8 % 26--------------------------------------------------------------------------------SG&A increased by 12.6% and 4.7% for the three months and six months ended June 27, 2014, respectively, as compared to the corresponding 2013 periods. The following table details the components of the change: For the Three Months Ended For the Six Months Ended June 27, 2014 June 27, 2014 Organic SG&A(1): Distribution 4.0 % (0.8 )% Aerospace (0.3 )% 0.1 % Corporate 3.1 % 1.6 % Total Organic SG&A 6.8 % 0.9 % Acquisition SG&A: Distribution 5.8 % 3.8 % Aerospace - % - % Total Acquisition SG&A 5.8 % 3.8 % % change in SG&A 12.6 % 4.7 % (1)SG&A expense incurred by acquisitions are included in organic SG&A beginning with the thirteenth month following the date of acquisition.

The increase in SG&A for the three-month period ended June 27, 2014, was primarily attributable to higher expenses at our Distribution segment due to the 2013 and 2014 Distribution segment acquisitions and higher employee related incentive costs as a result of improved operating results. Additionally, corporate expenses were $3.0 million higher for the three-month period ended June 27, 2014, primarily driven by higher incentive compensation costs, an increase in professional services costs and an increase in depreciation expense associated with building renovations.

The increase in SG&A for the six-month period ended June 27, 2014, was primarily attributable to higher expenses at our Distribution segment due to the 2013 and 2014 acquisitions and $3.4 million of higher corporate expenses driven by the items discussed above and higher acquisition costs as compared to the same period last year.

Operating Income For the Three Months Ended For the Six Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 (in thousands) Operating income $ 27,687 $ 31,017 48,676 44,784 $ change (3,330 ) 2,997 3,892 50 % change (10.7 )% 10.7 % 8.7 % 0.1 % % of net sales 6.0 % 7.2 % 5.6 % 5.5 % The decrease in operating income for the three months ended June 27, 2014, versus the comparable period in 2013 was due to the increase in corporate expenses discussed above and a decrease in operating income at our Aerospace segment, offset by an increase in operating income at our Distribution segment.

(See segment discussion below for additional information.) The increase in operating income for the six months ended June 27, 2014, versus the comparable period in 2013 was due to an increase in operating income at our Distribution segment, offset by the increase in corporate expenses discussed above. The increase in operating income at our Distribution segment included the contribution of operating income from our 2013 and 2014 acquisitions, higher organic gross profit and lower operating expenses including the absence of restructuring costs. (See segment discussion below for additional information.) 27 -------------------------------------------------------------------------------- Interest Expense, Net For the Three Months Ended For the Six Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 (in thousands) Interest expense, net $ 3,297 $ 3,163 $ 6,406 $ 6,231 Interest expense, net, generally consists of interest charged on our Credit Agreement (see "Liquidity and Capital Resources - Financing Arrangements", below), which includes a revolving credit facility and a term loan facility, and other borrowings and the amortization of debt issuance costs, offset by interest income. The increase in interest expense, net for the three-month and six-month periods ended June 27, 2014, is primarily attributed to the higher average borrowings, as compared to the same periods ended June 28, 2013. (See Liquidity and Capital Resources section below for information on our borrowings.) Effective Income Tax Rate For the Three Months Ended For the Six Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 Effective income tax rate 32.8 % 35.6 % 33.8 % 34.4 % The effective income tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings for the year. The decrease in the effective tax rate for the three-month period and six-month period ended June 27, 2014, as compared to the rates for the same periods in the prior year is primarily due to a reduction in the effective state tax rate and discrete tax benefits in the second quarter of 2014, which include the recognition of a foreign exchange loss and additional inventory-related tax benefits.

Changes in Condensed Consolidated Balance Sheets Due to the acquisition of the operating assets of B.W. Rogers in the second quarter of 2014, certain line items on our Condensed Consolidated Balance Sheets increased as of June 27, 2014 as compared to December 31, 2013. Specifically, Accounts Receivable, net, Goodwill and Long-term debt, excluding current portion were impacted by this acquisition. In order to fund this acquisition, the Company used borrowings under the Revolving Credit Agreement, increasing the total borrowings under this agreement. See Note 4, Acquisitions for further detail of assets acquired and liabilities assumed as part of the acquisition.

In addition to the acquisition of B.W. Rogers, Accounts Receivable, net also increased from December 31, 2013 due to an increase in unbilled costs and accrued profit for certain Aerospace commercial contracts.

Distribution Segment Results of Operations For the Three Months Ended For the Six Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 (in thousands) Net sales $ 304,186 $ 270,233 $ 569,056 $ 527,401 $ change 33,953 17,371 41,655 21,904 % change 12.6 % 6.9 % 7.9 % 4.3 % Operating income $ 15,419 $ 13,669 $ 26,554 $ 18,299 $ change 1,750 (497 ) 8,255 (8,181 ) % change 12.8 % (3.5 )% 45.1 % (30.9 )% % of net sales 5.1 % 5.1 % 4.7 % 3.5 % 28--------------------------------------------------------------------------------Net sales The increase in net sales for the three months and six months ended June 27, 2014, as compared to the same periods in 2013 was primarily driven by the contribution of sales from our 2013 and 2014 acquisitions which totaled $25.7 million and $32.5 million, respectively.

Organic sales per sales day is a metric management uses to evaluate performance trends at our Distribution segment and is calculated by taking organic sales divided by the number of sales days in the period. The following table illustrates the calculation of organic sales per sales day. (See Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures.) For the Three Months Ended For the Six Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 (in thousands) Current period Net sales $ 304,186 $ 270,233 $ 569,056 $ 527,401 Acquisition sales (1) 25,670 25,163 32,536 48,373 Organic sales $ 278,516 $ 245,070 $ 536,520 $ 479,028 Sales days 64 64 126 127 Organic sales per sales day for the current period a $ 4,352 $ 3,829 $ 4,258 $ 3,772 Prior period Net sales from the prior year $ 270,233 $ 252,862 $ 527,401 $ 505,497 Sales days from the prior year 64 64 127 128 Organic sales per sales day from the prior year b $ 4,222 $ 3,951 $ 4,153 $ 3,949 % change in organic sales per sales day (a-b)÷b 3.1 % (3.1 )% 2.5 % (4.5 )% (1) Sales contributed by an acquisition are included in organic sales beginning with the thirteenth month following the date of acquisition. Prior period information is adjusted to reflect acquisition sales for that period as organic sales when calculating organic sales per sales day.

Net sales for the three months and six months ended June 27, 2014, increased 3.1% and 2.5%, respectively, as compared to the same periods in 2013, when measured on a same day sales basis. The increase in organic sales per sales day for the three months ended June 27, 2014, as compared to the corresponding prior year period was primarily driven by increases in sales volume to maintenance, repair and operations customers. We experienced higher sales in the machinery manufacturing, food manufacturing and the computer and electronic product manufacturing markets. These increases were partially offset by declines in the fabricated metal product manufacturing market.

The increase in organic sales per sales day for the six months ended June 27, 2014, as compared to the corresponding prior year period was primarily driven by increases in sales volume to both maintenance, repair and operations customers and original equipment manufacturer customers. We experienced higher sales for the six-month period ended June 27, 2014, in the computer and electronic product manufacturing and fabricated metal product manufacturing markets. These increases were mostly offset by declines in the merchant wholesalers and durable goods market.

Operating income The increase in Distribution segment operating income for the three months and six months ended June 27, 2014, as compared to the corresponding prior year periods was driven by 2013 and 2014 acquisitions. Additionally, for the six-month period ended June 27, 2014, there was an increase in organic gross profit and lower SG&A expenses, partially offset by additional losses on mining contracts at our Mexico operations. The decline in SG&A expenses was primarily due to the absence of $3.0 million in restructuring charges and lower pension costs, partially offset by costs associated with the expansion of our sales force and higher incentive compensation as a result of improved operating results.

29 --------------------------------------------------------------------------------Other Matters Enterprise Resource Planning System In July 2012, we announced our decision to invest in a new enterprise-wide business system for our Distribution segment. The anticipated total investment in the new system is approximately $45 million, which will be incurred over a number of years. Of the total investment, we expect that approximately 75% will be capitalized. From its inception through June 27, 2014, we have spent $26.4 million on this project, of which $22.7 million has been capitalized.

Depreciation and amortization of the capitalized cost will commence in the second half of 2014 and is expected to increase over the next three to four years. In order to minimize disruptions to our ongoing operations we have developed a project plan that takes a phased approach to implementation and includes appropriate contingencies. In early July 2014, the Distribution segment reached a significant milestone when the Minarik Automation & Controls facilities went live on the new system. For the three months and six months ended June 27, 2014, expenses incurred totaled approximately $0.2 million and $0.5 million, respectively, and capital expenditures totaled $1.2 million and $5.8 million, respectively.

Aerospace Segment Results of Operations For the Three Months Ended For the Six Months Ended June 27, June 28, June 27, June 28, 2014 2013 2014 2013 (in thousands) Net sales $ 154,903 $ 161,492 $ 303,965 $ 292,399 $ change (6,589 ) 14,128 11,566 13,951 % change (4.1 )% 9.6 % 4.0 % 5.0 % Operating income $ 26,681 $ 28,678 $ 48,702 $ 49,589 $ change (1,997 ) 2,520 (887 ) 7,530 % change (7.0 )% 9.6 % (1.8 )% 17.9 % % of net sales 17.2 % 17.8 % 16.0 % 17.0 % Net sales Sales decreased for the three-month period ended June 27, 2014, as compared to the comparable period in 2013, primarily due to a net $9.4 million decrease in sales of our military products/programs. Sales decreases of $21.4 million were primarily attributable to lower commercial sales of the JPF to foreign militaries, lower military bearing product sales as anticipated due to non-recurring military retrofit orders in the same period last year, lower shipments on the Sikorsky BLACK HAWK helicopter program and lower sales volume on the Egypt SH-2G(E) upgrade program. These decreases were partially offset by a $12.1 million increase in military sales resulting from work performed on our SH-2G(I) contract with New Zealand and higher shipments of our JPF to the USG during the quarter.

Offsetting the decline in sales of our military products/programs for the three months ended June 27, 2014, was a $2.8 million increase in commercial sales, primarily a result of $2.1 million in higher commercial bearing product sales.

Sales increased for the six-month period ended June 27, 2014, as compared to the comparable period in 2013, due to increases of $6.6 million and $5.0 million in sales of our military and commercial products/programs, respectively. Military sales increases of $31.9 million primarily related to work performed on our SH-2G(I) contract with New Zealand, higher shipments of our JPF to the USG and increased sales volume on our Tomahawk fuze program. These military sales increases were partially offset by $25.3 million of decreases attributable to lower commercial sales of the JPF to foreign militaries, lower military bearing product sales as anticipated due to non-recurring military retrofit orders in the same period last year, lower shipments on the Sikorsky BLACK HAWK helicopter program and lower sales volume on the Egypt SH-2G(E) upgrade program.

Commercial sales increases of $9.8 million related to increased deliveries on commercial composite structures products/programs and higher commercial bearing product sales. These increases were offset by lower sales of engineering design services and lower sales on the Boeing 767 program, totaling $5.0 million.

30 --------------------------------------------------------------------------------Operating income The decrease in operating income for the three months ended June 27, 2014, compared to the comparable period in 2013 was primarily due to lower sales and corresponding gross profit on our military bearing products and lower commercial sales of the JPF to foreign militaries. These products/program profit decreases resulted in $4.2 million of lower operating income, partially offset by approximately $2.0 million of higher operating income as a result of the work performed on our New Zealand SH-2G(I) program.

The decrease in operating income for the six months ended June 27, 2014, compared to the comparable period in 2013 was primarily due to lower margins on our military bearing products and tooling sales and lower gross profit associated with lower sales on the Egypt SH-2G(E) upgrade program. These decreases, totaling $7.6 million, were partially offset by an increase of $7.0 million mostly attributable to the New Zealand SH-2G(I) program, a higher level of sales under the JPF program and higher sales under our Tomahawk fuze program.

Long-Term Contracts For long-term aerospace contracts, we generally recognize sales and income based on the percentage-of-completion method of accounting, which allows for recognition of revenue as work on a contract progresses. We recognize sales and profit based on either (1) the cost-to-cost method, in which sales and profit are recorded based upon the ratio of costs incurred to estimated total costs to complete the contract, or (2) the units-of-delivery method, in which sales are recognized as deliveries are made and cost of sales is computed on the basis of the estimated ratio of total cost to total sales.

Revenue and cost estimates for all significant long-term contracts for which revenue is recognized using the percentage-of-completion method of accounting are reviewed and reassessed quarterly. Based upon these reviews, the Company records the effects of adjustments in profit estimates each period. If at any time the Company determines that in the case of a particular contract total costs will exceed total contract revenue, the Company will record a provision for the entire anticipated contract loss at that time. There was a net decrease to the Company's operating income from changes in contract estimates of $0.6 million for the three-month period ended June 27, 2014. The decrease was primarily a result of cost growth on the Sikorsky BLACK HAWK helicopter program.

For the six-month period ended June 27, 2014, changes in contract estimates contributed $0.2 million to the Company's operating income. The increase for the six-month period was primarily a result of continued improved performance on the JPF program, offset by the cost growth on the Sikorsky BLACK HAWK helicopter program.

There was a net decrease to the Company's operating income from changes in contract estimates of $2.7 million for the three-month and six-month periods ended June 28, 2013. The decreases were a result of cost growth due to revised estimates in various programs, including the Sikorsky BLACK HAWK helicopter program, Bell helicopter offload program and a fuze program.

Backlog June 27, December 31, 2014 2013 (in thousands) Backlog $ 551,009 $ 601,954 Backlog decreased during the first half of 2014. This decrease is primarily due to bearing product sales, JPF deliveries, work performed on the SH-2G(I) New Zealand program, deliveries of BLACK HAWK helicopter cockpits and sales under certain composite structure programs. These sales totaled $214.9 million and were partially offset by orders of $164.5 million that consisted of new orders under the JPF and A-10 programs and bearing products orders.

Major Programs/Product Lines Below is a discussion of significant changes in the Aerospace segment's major programs during the first half of 2014. See our 2013 Annual Report on Form 10-K for a complete discussion of our Aerospace segment's programs.

A-10 The segment has contracted with Boeing to produce the wing control surfaces (inboard and outboard flaps, slats and deceleron assemblies) for the U.S. Air Force's A-10 fleet. This contract has a potential value of over $110.0 million; however, annual quantities will vary, as they are dependent upon the orders Boeing receives from the U.S. Air Force. Through June 27, 2014, 31 -------------------------------------------------------------------------------- approximately 80 shipsets have been delivered over the life of this program and we expect to deliver approximately 25 shipsets during the remainder of 2014. The Department of Defense Fiscal Year 2015 Budget has eliminated funding for the A-10 fleet; however, a final determination as to the future of this program has not been made and there is congressional support for its continuation. At June 27, 2014, our program backlog was $41.4 million and total program inventory was $19.8 million. We received an order for additional shipsets in January 2014, and through the date of this filing we have not received any indication from our customer that this program will be terminated.

BLACK HAWK The Sikorsky BLACK HAWK helicopter cockpit program involves the manufacture of cockpits including the installation of all wiring harnesses, hydraulic assemblies, control pedals and sticks, seat tracks, pneumatic lines, and the composite structure that holds the windscreen for most models of the BLACK HAWK helicopter. As a result of lower customer demand, we expect to deliver 90 BLACK HAWK cockpits this year, compared to 114 cockpits delivered in 2013. We currently have $65.9 million of orders under this program in backlog and have delivered 42 cockpits during the first half of 2014.

AH-1Z The segment manufactures cabins for the increased capability AH-1Z attack helicopter, which is produced by Bell Helicopter ("Bell") for the U.S. Marine Corps. The cabin is the largest and most complex airframe structure utilized in the final assembly of the AH-1Z helicopter and has not been manufactured new since 1995. During the first quarter of 2014, Bell conducted the first test flight for the re-designed AH-1Z helicopter. We have provided Bell with partially complete cabins to allow Bell to progress on the completion of initial aircraft; however, revenue for this program is recognized based on the acceptance of completed cabins. We continue to work with Bell to complete the remaining items necessary to deliver completed cabins and recognize the related revenue. As of June 27, 2014, we have shipped a total of two complete cabins and four substantially complete cabins. Revenue has only been recognized on the two complete cabins. Our total program inventory is $37.3 million and we currently have $25.4 million in backlog associated with this program; with potential follow-on options the program value could exceed $200.0 million.

C-17 The segment continues production of structural wing subassemblies for the Boeing C-17. During the first quarter of 2014, Boeing announced that it was ending production three months earlier than it had originally planned, resulting in the production of three fewer aircraft. In the first half of 2014, we delivered approximately six shipsets, and now have one shipset remaining in backlog. We do not expect to receive any additional orders.

FMU-152 - Joint Programmable Fuze ("JPF") The segment manufactures the JPF, an electro-mechanical bomb safe and arming device, which allows the settings of a weapon to be programmed in flight. In July 2014, we were awarded an additional $13.9 million under Option 11, bringing the total award under this option to $55.8 million, for fuzes to be delivered in 2015 and 2016. Additionally, we were awarded direct commercial sales ("DCS") of $10.8 million for fuzes to be delivered in 2014. Total JPF backlog at June 27, 2014, is $108.4 million.

During the quarter we delivered a total of 5,901 fuzes, which consisted of 4,274 fuzes delivered to the U.S. Government and 1,627 fuzes delivered as direct commercial sales to foreign governments. A total of 11,078 fuzes have been delivered through the first half of 2014. We occasionally experience lot acceptance test failures due to the complexity of the product and the extreme parameters of the acceptance test. Given the maturity of the product, we now generally experience isolated failures, rather than systematic failures. As a result, identifying a root cause can take longer and may result in fluctuating delivery performance from quarter to quarter. We expect to deliver approximately 20,000 to 26,000 fuzes in 2014.

Learjet 85 In 2010, our U.K. Composites operation was awarded a contract for the Learjet 85 program. We manufacture composite passenger entry and over-wing exit doors for the Learjet 85, a mid-sized business jet built primarily from composites and featuring advances in aerodynamics, structures and efficiency. We began delivery during the second quarter of 2013. In April 2014, Bombardier conducted the first test flight for the Learjet 85. We anticipated completing deliveries on initial orders under this program in 2014; however, due to technical issues with the main fuselage, Bombardier has moved the delivery schedule for our manufactured parts into 2015.

32--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES Discussion and Analysis of Cash Flows We assess liquidity in terms of our ability to generate cash to fund working capital requirements and investing and financing activities. Significant factors affecting liquidity include: cash flows generated from or used by operating activities, capital expenditures, investments in our business segments and their programs, acquisitions, divestitures, dividends, availability of future credit, adequacy of available bank lines of credit, and factors that might otherwise affect the company's business and operations generally, as described under the heading "Risk Factors" and "Forward-Looking Statements" in Item 1A of Part I of our 2013 Annual Report on Form 10-K.

We continue to rely upon bank financing as an important source of liquidity for our business activities including acquisitions. We believe this, when combined with cash generated from operating activities, will be sufficient to support our anticipated cash requirements for the foreseeable future. However, we may decide to issue additional debt or raise equity capital to support other business activities including potential future acquisitions. We anticipate our capital expenditures will be approximately $30.0 to $35.0 million in 2014, primarily related to machinery and equipment and information technology infrastructure.

Included in this is approximately $11.9 million associated with investments in enterprise resource planning (ERP) systems primarily for our Distribution segment and, to a lesser extent, certain Aerospace facilities.

We anticipate a variety of items will have an impact on our liquidity during the next 12 months, in addition to our working capital requirements. These could include one or more of the following: • the matters described in Note 11, Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements, including: • the cost of defending the Wichita matter; and • the cost of existing environmental remediation matters; • contributions to our qualified pension plan and Supplemental Employees' Retirement Plan ("SERP"); • costs associated with new aerospace start-up programs; and • the extension of payment terms by our customers.

However, we do not believe any of these matters will lead to a shortage of capital resources or liquidity that would prevent us from continuing with our business operations as expected.

We regularly monitor credit market conditions to identify potential issues that may adversely affect, or provide opportunities for, the securing and/or pricing of additional financing, if any, that may be necessary to continue with our growth strategy and finance working capital requirements.

Management regularly monitors pension plan asset performance and the assumptions used in the determination of our benefit obligation, comparing them to actual performance. We continue to believe the assumptions selected are valid due to the long-term nature of our benefit obligation.

In 2013, the Company signed a $120.6 million contract to resell ten of the former Australia SH-2G(A) (now designated SH-2G(I)) aircraft, spare parts, a full mission flight simulator, and related logistics support to the New Zealand Ministry of Defence. Pursuant to the terms of its revenue sharing agreement with the Commonwealth of Australia, the Company will share proceeds from the resale with the Commonwealth on a predetermined basis. Through June 27, 2014, the Company has paid $39.5 million (AUD), the required minimum amount of payments pursuant to the revenue sharing agreement, and has accrued $2.2 million for amounts due in excess of the required minimum payments based upon the sale price stipulated in the contract with New Zealand.

Upon entering into the sales contract with the New Zealand Ministry of Defence, we agreed to provide unconditional letters of credit for the receipt of advance payments on this program. As we perform under the contract and meet certain predetermined milestones, the letter of credit requirements will be gradually reduced. As of June 27, 2014, the letter of credit balance associated with this program totaled $30.3 million.

33 -------------------------------------------------------------------------------- A summary of our consolidated cash flows from continuing operations is as follows: For the Six Months Ended June 27, June 28, 2014 2013 2014 vs. 2013 (in thousands) Total cash (used in) provided by: Operating activities of continuing operations $ 11,763 $ (13,407 ) $ 25,170 Investing activities (94,557 ) (26,960 ) (67,597 ) Financing activities 83,629 32,572 51,057 Free Cash Flow (a): Net cash provided by (used in) operating activities of continuing operations $ 11,763 $ (13,407 ) $ 25,170 Expenditures for property, plant and equipment (18,058 ) (21,267 ) 3,209 Free cash flow $ (6,295 ) $ (34,674 ) $ 28,379 (a) Free Cash Flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less expenditures for property, plant and equipment, both of which are presented on our Condensed Consolidated Statements of Cash Flows. See Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures for more information regarding Free Cash Flow.

Net cash provided by operating activities increased for the six months ended June 27, 2014, versus the comparable period in 2013, primarily due to an increase in net earnings and lower inventory on the JPF program and lower SH-2G(I) inventory as we continue to perform under the New Zealand program.

These changes were partially offset by the decrease in advances on contracts relating to the SH-2G(I) New Zealand contract.

Net cash used in investing activities increased for the six months ended June 27, 2014, versus the comparable period in 2013. The increase was primarily related to the acquisition of the operating assets of B.W. Rogers.

Net cash provided by financing activities increased $51.1 million for the six months ended June 27, 2014, versus the comparable period in 2013, primarily due to an increase in borrowings under the Revolving Credit Agreement in 2014 as compared to the same period in the prior year. The borrowings in 2014 were used to fund the B.W. Rogers acquisition and working capital requirements.

Financing Arrangements On November 20, 2012, we entered into a Credit Agreement (the "Credit Agreement") that includes a $400.0 million Revolving Credit Facility expiring July 31, 2017. The Revolving Credit Facility includes an "accordion" feature that would allow us to increase the aggregate amount available to $500.0 million, subject to additional commitments from lenders. The Revolving Credit Facility may be used for working capital, letters of credit and other general corporate purposes, including acquisitions. The Credit Agreement also includes a $100.0 million Term Loan Facility expiring on July 31, 2017, which is in addition to our Revolving Credit Facility. Principal payments, which started in the first quarter of 2013, of $2.5 million are due quarterly, with $55.0 million of the initial aggregate principal payable in the final quarter of the Term Loan Facility. We may increase the term loan by up to an aggregate of $100.0 million in accordance with the terms of the agreement.

Interest rates on amounts outstanding under the Credit Agreement are variable.

At June 27, 2014, the interest rate for the outstanding amounts on the Credit Agreement was 1.58%. At December 31, 2013, the interest rate for the outstanding amounts on the Credit Agreement was 1.72%.

The financial covenants associated with the Credit Agreement include a requirement that (i) the ratio of Consolidated Senior Secured Indebtedness to Consolidated EBITDA, as defined in the Credit Agreement, cannot be greater than 3.50 to 1.00, (ii) the ratio of Consolidated Total Indebtedness to Consolidated EBITDA, as defined in the Credit Agreement, cannot be greater than 4.00 to 1.00, and (iii) the ratio of Consolidated EBITDA, as defined in the Credit Agreement, to the sum of (a) all interest, premium payments, debt discounts, fees, charges and related expenses and (b) the portion of rent expense under capital leases that is treated as interest expense, as defined in the Credit Agreement, cannot be less than 4.00 to 1.00. We were in compliance with those financial covenants as of and for the quarter ended June 27, 2014, and we do not anticipate noncompliance in the foreseeable future.

34 -------------------------------------------------------------------------------- Total average bank borrowings during the quarter ended June 27, 2014, were $208.4 million compared to $188.8 million for the year ended December 31, 2013.

As of June 27, 2014, and December 31, 2013, there was $197.7 million and $285.6 million available for borrowing, respectively, under the Revolving Credit Facility, net of letters of credit. However, based on EBITDA levels for the six months ended June 27, 2014, amounts available for borrowing were limited to $177.7 million. Letters of credit are generally considered borrowings for purposes of the Revolving Credit Facility. A total of $35.0 million and $36.8 million in letters of credit was outstanding under the Revolving Credit Facility as of June 27, 2014, and December 31, 2013, respectively. The letter of credit balance related to the SH-2G(I) New Zealand sales contract was $30.3 million at June 27, 2014. The letter of credit balance related to this contract could reach a potential $60.1 million over its three-year term.

Other Sources/Uses of Capital This year we have contributed $10.0 million to the qualified pension plan and $0.6 million to the SERP through the end of the second quarter. We do not expect to make any further contributions to the qualified pension plan during 2014. We plan to contribute an additional $0.3 million to the SERP in 2014. For the 2013 plan year, we contributed $10.0 million to the qualified pension plan and $2.3 million to the SERP.

In November 2000, our Board of Directors approved a replenishment of our stock repurchase program, providing for repurchase of an aggregate of 1.4 million common shares for use in administration of our stock plans and for general corporate purposes. There were no shares repurchased under this program during the first six months of 2014. At June 27, 2014, approximately 1.0 million shares remained authorized for repurchase under this program.

NON-GAAP FINANCIAL MEASURES Management believes the non-GAAP (Generally Accepted Accounting Principles) measures used in this report on Form 10-Q provide investors with important perspectives into our ongoing business performance. We do not intend for the information to be considered in isolation or as a substitute for the related GAAP measures. Other companies may define the measures differently. We define the non-GAAP measures used in this report and other disclosures as follows: Organic Sales per Sales Day Organic sales per sales day is defined as GAAP "Net sales of the Distribution segment" less sales derived from acquisitions completed during the preceding twelve months divided by the number of sales days in a given period. Sales days are the number of business days that the Distribution segment's branch locations were open for business and exclude weekends and holidays. Management believes sales per sales day provides an important perspective on how net sales may be impacted by the number of days the segment is open for business. Management uses organic sales per sales day as a measurement to compare periods in which the numbers of sales days differ.

Free Cash Flow Free cash flow is defined as GAAP "Net cash provided by (used in) operating activities" less "Expenditures for property, plant & equipment", both of which are presented in our Condensed Consolidated Statements of Cash Flows. Management believes free cash flow provides an important perspective on the cash available for dividends to shareholders, debt repayment, and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures as it excludes certain mandatory expenditures such as repayment of maturing debt. Management uses free cash flow internally to assess both business performance and overall liquidity.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS There have been no material changes outside the ordinary course of business in our contractual obligations or off-balance sheet arrangements during the first six months of 2014. See our 2013 Annual Report on Form 10-K for a discussion of our contractual obligations and off-balance sheet arrangements.

35 --------------------------------------------------------------------------------CRITICAL ACCOUNTING ESTIMATES Preparation of the Company's financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis and the Notes to Consolidated Financial Statements in the Company's 2013 Annual Report on Form 10-K describe the critical accounting estimates and significant accounting policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in the Company's critical accounting estimates and significant accounting policies in 2014.

RECENT ACCOUNTING STANDARDS Information regarding recent changes in accounting standards is included in Note 2, Recent Accounting Standards, of the Notes to Condensed Consolidated Financial Statements in this report.

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