News Column

KAMAN CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 27, 2014

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide readers of our consolidated financial statements with the perspectives of management. MD&A presents in narrative form information regarding our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This should allow the readers of this report to obtain a comprehensive understanding of our businesses, strategies, current trends and future prospects. MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Form 10-K.



OVERVIEW OF BUSINESS

Kaman Corporation conducts business through two business segments: • Distribution, the third largest power transmission/motion control industrial distributor in North America. • Aerospace, a manufacturer and subcontractor in the international, commercial and military aerospace and defense markets.



Company financial performance • Net sales from continuing operations increased 5.6% compared to the prior

year.

• Earnings from continuing operations increased 5.1% compared to the prior year.

• Diluted earnings per share from continuing operations increased to $2.09

in 2013 compared to $2.03 in the prior year.

• Cash flows provided by operating activities from continuing operations

were $62.5 million for 2013, a decrease of $22.0 million when compared to

the prior year.

• Both our Distribution segment and our Aerospace segment had record annual

sales from continuing operations of $1.1 billion and $614.0 million, respectively.



Acquisitions

• On August 15, 2013, our Distribution segment acquired Western Fluid Components, Inc., with locations in Tacoma, Kirkland, Everett and Bellingham, Washington, a Parker distributor, which provides us with new Parker authorizations.



• On July 31, 2013, our Distribution segment acquired substantially all the

assets of Ohio Gear & Transmission Inc. of Eastlake, Ohio.

• On June 14, 2013, our Distribution segment acquired substantially all of

the assets of Northwest Hose & Fittings, Inc. based in Spokane, Washington, a Parker distributor, which provides us with new Parker authorizations.



Management changes • On February 19, 2014, Mr. Michael J. Lyon was appointed to the position of

Vice President - Tax, following the retirement of Mr. John B. Lockwood,

former Vice President - Tax.

• On November 6, 2013, the Company announced the appointment of Mr. Jairaj

Chetnani to the position of Vice President and Treasurer. • On July 1, 2013, Mr. Robert D. Starr became the Company's Senior Vice President and Chief Financial Officer, following the retirement of Mr.



William C. Denninger, former Executive Vice President and Chief Financial

Officer.



Other key events • On November 21, 2013, the Company announced that its Aerospace segment

entered into a Memorandum of Agreement ("MOA") with Boeing Canada Winnipeg

for the manufacture and assembly of two major sections of the 747-8 Wing-to-Body Fairing.



• During the fourth quarter, we recorded a $2.1 million non-cash non-tax

deductible goodwill impairment charge related to our VT Composites

reporting unit. This charge has been included in the operating results of

our Aerospace segment. • During the fourth quarter, the first cabin was delivered under our Bell Helicopter AH-1Z program.



• In October 2013, we delivered our 1,000th cockpit on the UH-60 program.

• During the third quarter, we entered into a new contract with the U.S. Air

Force ("USAF") for the sale of Joint Programmable Fuzes ("JPF").

Deliveries under this $78.5 million contract are expected to begin in the

second half of 2014. • On June 17, 2013, our Aerospace segment was selected by Triumph



Aerostructures - Vought Aircraft Division to manufacture the Fixed Leading

Edge (FLE) assemblies for the Bombardier Global 7000 and Global 8000 large, ultra long-range business jets. 26

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• On May 8, 2013, we announced that we entered into a $120.6 million

contract with the New Zealand Ministry of Defence for the sale of ten

SH-2G(I) Super Seasprite aircraft, spare parts, a full mission flight

simulator, and related logistics support.

• On April 2, 2013, we made our final minimum payment of $6.4 million (AUD)

to the Commonwealth of Australia; we have now made total payments of $39.5 million (AUD) in accordance with our settlement agreement related to the SH-2G(A) Helicopters.



• During the first quarter, we were awarded a $20.3 million JPF commercial

sales contract.

• In March 2013, we initiated restructuring activities at our Distribution

segment, which included workforce reductions and the consolidation of

field operations. These activities resulted in $3.0 million of expense in

the first quarter. Outlook



Our expectations for 2014 are as follows:

• Distribution:

• Sales of $1,115 million to $1,150 million, up 4.4% to 7.7% over 2013

• Operating margins of 4.7% to 5.2%

• Aerospace:

• Sales of $640 million to $660 million, up 4.2% to 7.5% over 2013

• Operating margins of 16.5% to 17.0%

• Interest expense of approximately $13 million

• Corporate expenses of approximately $52 million

• Estimated annualized tax rate of approximately 35%

• Capital expenditures of $35 million to $40 million

• Free cash flow of $40 million to $45 million

2014 Outlook In millions Free Cash Flow(a): Net cash provided by operating activities $ 75.0 to $ 85.0 Expenditures for property, plant and equipment 35.0 to 40.0 Free Cash Flow $ 40.0 to $ 45.0



(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 in our consolidated statements of cash flows. See Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures, in this Form 10-K.

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RESULTS OF CONTINUING OPERATIONS

Consolidated Results

Net Sales from Continuing Operations

2013 2012 2011 In thousands Distribution $ 1,067,839$ 1,012,059$ 930,131 Aerospace 613,967 580,769 547,403 Total $ 1,681,806$ 1,592,828$ 1,477,534 $ change $ 88,978$ 115,294$ 177,602 % change 5.6 % 7.8 % 13.7 %



The following table details the components of the above changes as a percentage of consolidated net sales:

2013 2012 2011 Organic Sales: Distribution (1.1 )% (0.1 )% 4.8 % Aerospace 2.1 % 0.8 % 2.2 % Total Organic Sales 1.0 % 0.7 % 7.0 % Acquisition Sales: Distribution 4.6 % 5.7 % 4.2 % Aerospace - % 1.4 % 2.5 % Total Acquisition Sales 4.6 % 7.1 % 6.7 % % change in net sales 5.6 % 7.8 % 13.7 % The increase in net sales from continuing operations for 2013 as compared to 2012 was attributable to an increase in organic sales at our Aerospace segment and the contribution of $72.6 million in sales from our Distribution segment acquisitions completed in 2013 and 2012, partially offset by lower organic sales at our Distribution segment. Foreign currency exchange rates had a $1.1 million favorable impact on sales from continuing operations during 2013. The increase in net sales from continuing operations for 2012 as compared to 2011 was attributable to an increase in organic sales at our Aerospace segment and the contribution of $106.5 million in sales from the acquisitions completed in 2012 and 2011, partially offset by lower organic sales at our Distribution segment. Foreign currency exchange rates had a $4.2 million unfavorable impact on sales from continuing operations during 2012.



See Segment Results of Operations and Financial Condition below for further discussion of segment net sales.

Gross Profit from Continuing Operations

2013 2012 2011 In thousands Gross profit $ 466,624$ 441,973$ 412,572 $ change 24,651 29,401 59,435 % change 5.6 % 7.1 % 16.8 % % of net sales 27.7 % 27.7 % 27.9 % 28

-------------------------------------------------------------------------------- Gross profit from continuing operations increased in 2013 primarily due to the increase in sales and profit for both military and commercial products/programs at our Aerospace segment and the contribution of $21.8 million of gross profit from our 2012 and 2013 acquisitions. Contributing to the Aerospace segment's improved gross profit were the incremental profit associated with higher sales of our bearing products and the gross profit associated with the initial recognition of revenue on the SH-2G(I) contract with New Zealand. These increases of $16.1 million, which were in addition to the acquisition related gross profit noted above, were partially offset by the decline in organic gross profit at the Distribution segment of approximately $14.2 million. The decline in the Distribution segment's organic gross profit was primarily due to decreases in the food and beverage manufacturing markets. Gross profit from continuing operations increased in 2012 primarily due to the contribution of $22.3 million of gross profit from our 2012 acquisitions. The Distribution segment's organic gross profit slightly improved, despite the lower organic sales. This was primarily due to increases in primary metal and fabricated metal manufacturing, nonmetallic mineral manufacturing and merchant wholesalers and durable goods, offset by declines in the food and beverage manufacturing industries, and the mining industry. The Aerospace segment had a slight decrease in organic gross profit due to the absence of commercial sales of the JPF to foreign militaries, lower shipments under our Sikorsky BLACK HAWK helicopter cockpit program due to lower customer requirements, a lower volume of work on our unmanned K-MAX® aircraft system, lower sales volume for our legacy fuze programs and $3.3 million in net loss resulting from the resolution of a program related matter. These decreases of approximately $22.2 million were largely offset by higher sales of our bearing products and an increased volume of sales of the JPF to the USG. Selling, General & Administrative Expenses (S,G&A) from Continuing Operations 2013 2012 2011 In thousands S,G&A $ 363,945$ 349,030$ 324,722 $ change 14,915 24,308 35,703 % change 4.3 % 7.5 % 12.4 % % of net sales 21.6 % 21.9 % 22.0 %



S,G&A increased for the year-ended December 31, 2013, as compared to 2012. The following table details the components of this change:

2013 2012 2011 Organic S,G&A: Distribution (0.7 )% 0.8 % 2.6 % Aerospace 0.4 % (3.0 )% 4.5 % Corporate (0.4 )% 2.6 % (0.1 )% Total Organic S,G&A (0.7 )% 0.4 % 7.0 % Acquisition S,G&A: Distribution 5.0 % 5.8 % 3.6 % Aerospace - % 1.3 % 1.8 % Corporate - % - % - % Total Acquisition S,G&A 5.0 % 7.1 % 5.4 % % change in S,G&A 4.3 % 7.5 % 12.4 % 29

-------------------------------------------------------------------------------- S,G&A expenses from continuing operations increased for 2013 as compared to 2012 primarily due to $17.3 million of expenses related to our 2013 and 2012 acquisitions and an increase in expenses at our Aerospace segment. The increase in expense at our Aerospace segment was primarily due to higher research and development costs of approximately $2.0 million. These increases were slightly offset by lower expense for the Distribution segment's organic business due to $3.2 million of savings realized from the restructuring completed in the first quarter of 2013. Corporate expenses remained relatively flat from 2012 to 2013. This was a result of lower expenses related to our defined benefit pension plan, offset by an increase in insurance costs and building renovation expenses. S,G&A expenses from continuing operations increased for 2012 as compared to 2011 due to $23.3 million of expenses related to our 2012 and 2011 acquisitions, an increase in organic expense at our Distribution segment and higher corporate expenses. The increase in expense at our Distribution segment was attributable to an increase in employee related costs including group health insurance, and an increase in expense associated with the implementation of the new ERP system. Corporate expense increased $7.3 million for 2012 as compared to 2011, with increases in our incentive compensation expense due to an increase in the number of participants, higher acquisition related costs, and the absence of the nonrecurring benefit of $2.4 million associated with the death of a former executive received in 2011. Partially offsetting these increases was an organic decrease in expense at our Aerospace segment. The lower expense at our Aerospace segment was primarily due to the absence of a $4.75 million expense associated with the settlement of the FMU-143 matter in 2011. Goodwill Impairment 2013 2012 2011 In thousands Goodwill impairment $ 2,071 $ - $ - During 2012, the Company's VT Composites reporting unit experienced delays on certain programs that were driven by changes in customers' requirements. The Company anticipated these changes in requirements would shift revenues and related cash flows into 2013 and future periods. The anticipated revenues did not materialize to the levels we had projected in 2013, and therefore the results of Step 1 of the impairment analysis resulted in a fair value for the reporting unit below its carrying value. Prior to proceeding to Step 2 of the impairment analysis, management assessed the tangible and intangible assets subject to amortization to determine if they were impaired and concluded they were not. Upon completion of the Step 2 impairment analysis, we recorded a non-cash non-tax deductible goodwill impairment charge of $2.1 million, or 11% of the reporting unit's total goodwill balance, to reduce the carrying value of goodwill to its implied fair value. This charge has been included in the operating results of the Company's Aerospace segment.



Operating Income from Continuing Operations

2013 2012 2011 In thousands Operating income $ 100,480$ 92,838$ 87,581 $ change 7,642 5,257 29,386 % change 8.2 % 6.0 % 50.5 % % of net sales 6.0 % 5.8 % 5.9 % The increase in operating income from continuing operations for 2013 as compared to 2012 was driven by an increase at our Aerospace segment. The increase in operating income for 2012 as compared to 2011 was driven by increases at both our segments. See Segment Results of Operations and Financial Condition below for further discussion of segment operating income.



Interest Expense, Net

2013 2012 2011 In thousands Interest expense, net $ 12,559$ 12,185$ 11,646 30 -------------------------------------------------------------------------------- Net interest expense generally consists of interest charged on the revolving credit facility and other borrowings and the amortization of debt issuance costs, offset by interest income. The increase in net interest expense for 2013 as compared to 2012 was primarily due to higher average borrowings under our revolving credit facility. At December 31, 2013, the interest rate for outstanding amounts on both the revolving credit facility and term loan agreement was 1.72% compared to 1.75% at December 31, 2012.



The increase in net interest expense for 2012 as compared to 2011 was primarily due to higher average borrowings under our revolving credit facility and a higher average interest rate for the period, partially offset by lower bank commitment fees and letter of credit fees.

Effective Income Tax Rate for Continuing Operations

2013 2012 2011



Effective income tax rate 35.2 % 33.3 % 34.5 %

The effective tax rate for continuing operations represents the combined federal, state and foreign tax effects attributable to pretax earnings for the year. The increase in the effective rate for 2013 as compared to 2012 was primarily due to the non-cash non-tax deductible goodwill charge and the reversal in 2012 of a liability for unrecognized tax benefits.

The decrease in the effective rate for 2012 as compared to 2011 was due principally to the reversal of a liability for unrecognized tax benefits.

Gain on Disposal of Discontinued Operations, Net of Tax

The Company sold substantially all of the assets and liabilities of our Distribution segment's Canadian operations on December 31, 2012. The sale resulted in a net gain on disposal of discontinued operations of $0.4 million and $1.3 million for the years ended December 31, 2013 and 2012, respectively. More information on this transaction can be found in Note 2, Discontinued Operations, in the Notes to Consolidated Financial Statements included in this Form 10-K. Other Matters



Information regarding our various environmental remediation activities and associated accruals can be found in Note 17, Commitments and Contingencies, in the Notes to Consolidated Financial Statements included in this Form 10-K.

SEGMENT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Distribution Segment

Our Strategy

The Distribution segment's strategy is to grow and improve margins both organically and through acquisitions, broaden and improve our product and service offerings in mechanical, electrical and fluid power, expand our geographic footprint in order to enhance our position in the competition for municipal, regional and national accounts, and improve productivity and customer service through investments in technology and the effective integration of acquisitions. 31 --------------------------------------------------------------------------------



Results of Operations

2013 2012 2011 In thousands Net sales $ 1,067,839$ 1,012,059$ 930,131 $ change 55,780 81,928 116,715 % change 5.5 % 8.8 % 14.3 % Operating income $ 43,326$ 50,560$ 46,894 $ change (7,234 ) 3,666 16,889 % change (14.3 )% 7.8 % 56.3 % % of net sales 4.1 % 5.0 % 5.0 %



Net sales from continuing operations

Organic sales per sales day is a metric management uses to evaluate performance trends in its Distribution segment and is calculated by taking total organic sales during a specific period divided by the number of sales days in that period. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures, in this Form 10-K. 2013 vs. 2012 2012 vs. 2011 Organic Sales Per Sales Day (in thousands, except numbers of sales days) Net sales from continuing operations $ 1,067,839$ 1,012,059$ 1,012,059$ 930,131 Acquisition sales (a) 72,578 - 85,272 1,626 Organic sales $ 995,261$ 1,012,059$ 926,787$ 928,505 Sales days 253 253 253 253 Organic sales per sales day $ 3,934$ 4,000$ 3,663$ 3,670 % change (1.7 )% 8.8 % (0.2 )% 13.7 % (a)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 2013 increased as compared to 2012 due to the contribution of $72.6 million in sales in 2013 from our 2013 and 2012 acquisitions, offset in part by lower organic sales. The Distribution segment's organic sales per sales day decreased in 2013 primarily due to lower sales in the food and beverage manufacturing markets and fabricated metal product manufacturing industries, while the demand in transportation equipment, non-metallic mineral manufacturing, computer and electronic product manufacturing and chemical manufacturing increased. Net sales for 2012 increased as compared to 2011 due to the contribution of $85.3 million in sales for 2012 from our 2012 and 2011 acquisitions. The Distribution segment's organic sales decreased slightly from 2011. As a result of economic conditions, the industries in which this segment operates experienced slower growth during 2012. Specifically, there were declines in the food and beverage manufacturing industries, mining industry and machinery manufacturing industry, mostly offset by increases in primary metal and fabricated metal manufacturing, nonmetallic mineral manufacturing and merchant wholesalers and durable goods.



Operating Income

Operating income decreased during 2013 as compared to 2012 primarily due to higher operating expenses as a result of our 2013 and 2012 acquisitions, lower volume incentives due to the reduced sales volume noted above, $2.4 million of losses on mining contracts at our Mexico operations and $2.8 million of expense associated with the restructuring in the first quarter of 2013. These decreases were partially offset by cost savings of approximately $6.4 million as a result of the restructuring. 32

-------------------------------------------------------------------------------- Operating income increased during 2012 as compared to 2011 primarily due to the increased sales volume as a result of our 2012 and 2011 acquisitions. The increases were partially offset by an increase in employee related costs, including group health insurance, and an increase in expense associated with the implementation of our new ERP system.



Other Matters

Parker

We continue the process of implementing our national reseller agreement with Parker Hannifin Corporation ("Parker") hydraulics, fluid connectors and automation products via their select Tri-Motion distributors. We have made progress toward the conversion of several brands of fluid power products to Parker and will continue training initiatives in the coming quarters as we transition our customers' requirements. Sales of Parker branded products, when measured on a same store basis, were up 11.8% in 2013 as compared to the prior year; however, this growth has been mostly offset by the anticipated declines in the other fluid power brands. We believe our relationship with Parker is an important long-term marketing and strategic growth initiative for our Distribution segment.



Enterprise Resource Planning System ("ERP")

In July 2012, we announced our decision to invest in a new enterprise-wide business system for our Distribution segment. The current anticipated total investment in the new system is approximately $45 million, which will be spread over a number of years. Of the total investment, approximately 75% will be capitalized. Depreciation and amortization of the capitalized cost is expected to begin in the first half of 2014 and increase over the following 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. For the years ended December 31, 2013 and 2012, expenses incurred were approximately $1.3 million and $1.3 million, respectively, and capital expenditures were $9.9 million and $7.4 million, respectively. In 2014, the Distribution segment is expected to reach a significant milestone when the Minarik Automation & Controls facilities go live on the new system. Aerospace Segment Our Strategy Our strategy for the Aerospace segment is to expand our global market position in defense and commercial markets while maintaining leadership in product technical performance and application engineering support, and continuing to concentrate on lean manufacturing techniques, lead time reduction and low cost sourcing. Results of Operations The following table presents selected financial data for our Aerospace segment: 2013 2012 2011 In thousands Net sales $ 613,967$ 580,769$ 547,403 $ change 33,198 33,366 60,887 % change 5.7 % 6.1 % 12.5 % Operating income $ 102,573$ 89,142$ 80,424 $ change 13,431 8,718 13,273 % change 15.1 % 10.8 % 19.8 % % of net sales 16.7 % 15.3 % 14.7 % 33

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Net Sales

2013 versus 2012 Aerospace segment net sales increased primarily due to a $31.5 million increase in sales on our military programs. The increase in military sales was primarily attributable to the initial recognition of revenue on the SH-2G(I) contract with New Zealand, increased sales on our JPF program, revenue recognized on the AH-1Z program and higher military bearing product sales. These increases totaled $46.7 million and were offset by a $14.9 million decrease in other sales, including a $5.8 million decrease in sales resulting from the cancellation of the blade erosion coating program, a decline in shipments on the Sikorsky BLACK HAWK helicopter program and lower fabrication sales. Commercial sales increased $1.7 million for 2013 as compared to 2012. This increase was due to higher commercial bearing product sales, an increase in deliveries of various commercial composite and metallic structures products/programs and higher tooling sales. These increases totaled $21.8 million but were substantially offset by a $19.6 million decrease in sales due to lower sales of engineering design services resulting from a reduction in requirements by a major OEM customer, the absence of the $2.5 million of sales recorded in 2012 upon resolution of a program related matter and lower sales of K-MAX® commercial spares. 2012 versus 2011 Net sales increased for 2012 as compared to 2011 due to a $39.8 million increase in commercial sales primarily attributable to higher commercial bearing product sales, an increase in sales volume on our commercial composite programs, higher volume of sales of K-MAX® commercial spare parts, the incremental contribution of sales from the acquisition of VT Composites in 2011 and increased shipments on the Boeing 777 due to customer requested rate increases. These increases totaled $41.7 million and were partially offset by decreases in engineering design services for commercial platforms primarily driven by a reduction in customer requirements. Additionally, sales increased due to the resolution of a program related matter in the fourth quarter of 2012 which resulted in the receipt of $2.5 million. Military sales decreased $6.4 million for 2012 as compared to 2011. The decrease was due to lower shipments on our Sikorsky BLACK HAWK helicopter cockpit and joining programs, a decrease in sales volume on our legacy fuze programs, a decrease in sales volume on our helicopter aftermarket programs, including the SH-2G(E) upgrade program and sales of SH-2G spare parts to New Zealand. These decreases totaled $44.2 million but were largely offset by a $37.5 million increase attributable to higher military bearing product sales and higher JPF program sales. Operating Income 2013 versus 2012 The increase in operating income for 2013 as compared to 2012 was primarily due to gross profit attributable to the revenue recognized on the SH-2G(I) program, higher commercial and military bearing product sales and higher gross profit on our JPF program. Additionally, operating income benefited from the absence of the $3.3 million net loss related to the resolution of a program related matter in 2012. These product/program profit increases totaled $24.7 million. The higher profit contributions were partially offset by $7.5 million of lower gross profit related to lower sales and corresponding profit of engineering design services, lower sales and corresponding profit on the Sikorsky BLACK HAWK helicopter cockpit program and a $2.1 million non-cash non-tax deductible goodwill impairment charge. Additionally, SG&A expense increased $3.6 million, which was partially due to a $2.0 million increase in research and development expense. 2012 versus 2011 Operating income increased for 2012 as compared to 2011 as a result of increased gross profit due to higher shipments of the JPF to the USG, increased sales and corresponding profit on commercial and military bearing products and lower SG&A costs, including the absence of legal fees related to the settlement of the FMU-143 program litigation matters in 2011. These increases totaled $34.9 million. Offsetting these increases were lower commercial sales of the JPF fuze to foreign militaries, a lower gross profit on our legacy fuze programs, lower shipments on our Sikorsky BLACK HAWK programs, lower volume of work on our unmanned K-MAX® aircraft system, a lower volume of work on our helicopter aftermarket programs and a write-off of $3.3 million related to the settlement of a program related matter. These decreases totaled $25.5 million. 34 --------------------------------------------------------------------------------



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 contract cost to total contract 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, we record the effects of adjustments in profit estimates each period. If at any time management determines that in the case of a particular contract total costs will exceed total contract revenue, we record a provision for the entire anticipated contract loss at that time. The net decrease in our operating income from changes in contract estimates totaled $3.0 million for the year ended December 31, 2013, $4.7 million for the year ended December 31, 2012, and $2.7 million for the year ended December 31, 2011. These decreases were primarily driven by cost growth on aerostructure assemblies. Additionally, in 2012 and 2011 we experienced cost growth on our JPF program. Backlog 2013 2012 2011 In thousands Backlog $ 601,954$ 531,923$ 531,920 The backlog balance increased from 2012 to 2013, primarily due to the $120.6 million contract for the sale of ten SH-2G(I) aircraft, spare parts, a full mission flight simulator, and related logistics support to the New Zealand Ministry of Defence and an increase of $34 million related to our USG JPF program. These increases were primarily offset by deliveries of bearing products and fuzes under our JPF program. The backlog balance remained consistent from 2011 to 2012; however, the composition of backlog changed. Backlog related to our JPF program decreased by $59.4 million, which was in large part offset by a $31.3 million increase in our UH-60 backlog and a $14.8 million increase in backlog for our commercial composites programs. Major Programs/Product Lines Defense Markets 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. Initial deliveries under this program began in the third quarter of 2010 and full rate production began during the fourth quarter of 2012. Approximately 31 ship sets were delivered in 2013. In recent press reports, the continuation of this program has been called into question; however, management has not received any indication from its customer that this program will be terminated. We continue to receive orders for future delivery and at December 31, 2013, our backlog was $25.2 million.



Bearings

Our bearings products are included on military platforms manufactured in North America and Europe. These products are used as original equipment and/or specified as replacement parts by the manufacturers. The most significant portion of our military sales is derived from U.S. military platforms, such as the AH-64, C-17 and F/A-18 aircraft, and sales in Europe for the Typhoon program. These products are primarily proprietary self-lubricating, ball and roller bearings for aircraft flight controls, turbine engines, and landing gear and driveline couplings for helicopters. 35 --------------------------------------------------------------------------------



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 delivered only 114 cockpits this year as compared to the 124 cockpits delivered in 2012. Included in backlog at December 31, 2013, is $84.4 million for orders on this program. The segment also performed additional subcontract work involving blade erosion coating on this aircraft. During the fourth quarter of 2012, this program was put on stop work by the customer, due to a supplier related matter. In the fourth quarter of 2013, we were notified the blade erosion coating program had been canceled. AH-1Z The segment manufactures cabins for the increased capability AH-1Z attack helicopter, which is produced by Bell Helicopter 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. We currently have $24.3 million in backlog for orders under this program, and with potential follow-on options the program value could exceed $200.0 million. The first cabin was delivered in the fourth quarter of 2013.



C-17

The segment continues production of structural wing subassemblies for the Boeing C-17. We have received orders under this program that will extend our work through the fourth quarter of 2014. During 2013, we delivered 10 ship sets. We expect to deliver 10 ship sets in 2014.



Egypt SH-2G(E)

The segment continues work under a program for depot level maintenance and upgrades for nine Kaman SH-2G(E) helicopters originally delivered to the Egyptian government during the 1990s. This program has a total contract value of approximately $81.0 million. As of December 31, 2013, $3.0 million remains in backlog for this program. SH-2G(I) On May 6, 2013, we announced that the New Zealand Ministry of Defence ("MoD") entered into a $120.6 million contract for the purchase of ten SH-2G(I) Super Seasprite aircraft, spare parts, a full mission flight simulator, and related logistics support. The contract calls for the aircraft to be delivered over a period of approximately three years. We have begun work under this program and expect to deliver the first aircraft in the second half of 2014.



FMU-152 - Joint Programmable Fuze ("JPF")

We manufacture the JPF, an electro-mechanical bomb safe and arming device, which allows the settings of a weapon to be programmed in flight. During 2009, we entered into a contract modification with the USAF for the award of Options 6, 7 and 8 under our multi-option JPF contract. Under Option 8, we were awarded a total of $79.2 million in JPF orders from the USAF for fuzes to be delivered in 2012 and 2013. In the third quarter of 2013, we were awarded USAF sales orders totaling $78.5 million under a new base contract, also referred to as Option 10. Total JPF backlog at December 31, 2013, is $99.6 million. A total of 6,873 fuzes passed acceptance testing and were delivered to our customers during the fourth quarter of 2013, for a total of 20,883 fuzes delivered in 2013. 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 ones. As a result, identifying a root cause can take longer and result in inconsistent delivery quantities from quarter to quarter. We expect to deliver 20,000 to 26,000 fuzes in 2014.



MH-92

The Sikorsky Canadian MH-92 helicopter program includes the manufacture and assembly of composite tail rotor pylons. This program has undergone numerous customer directed design changes that caused costs on this program to exceed the originally proposed price for the contract. To date, we have recorded $8.0 million in contract losses, none of which was recorded in 2013. As of December 31, 2013, we have four units left to ship under this program. 36 --------------------------------------------------------------------------------



Commercial Markets

777 / 767

In late 2007, we signed a seven-year follow-on contract with Boeing for the production of fixed wing trailing edge assemblies for the Boeing 777 and 767 aircraft. During 2013, on average we delivered 8 ship sets per month on the Boeing 777 platform and 1 ship set per month on the Boeing 767. For 2014, we currently estimate deliveries on the 777 and 767 programs to remain consistent with 2013. This multi-year contract has a potential value in excess of $100 million; however, annual quantities will vary, as they are dependent upon the orders Boeing receives from its customers. We are currently in negotiations for a follow-on contract. Airbus



Our U.K. Composites operations provide composite components for many Airbus platforms. The most significant of these are the A320, A330, A340 and A350. Orders for all of these platforms are dependent on the customer's build rate.

Bearings

Our bearings products are included on commercial airliners and regional/business jets manufactured in North and South America, Europe and Asia and are used as original equipment and/or specified as replacement parts by airlines and aircraft manufacturers. These products are primarily proprietary self-lubricating, ball and roller bearings for aircraft flight controls, turbine engines, landing gear, and driveline couplings for helicopters. The most significant portion of our commercial sales is derived from Boeing and Airbus platforms, such as the Boeing 737, 747, 777 and 787 and the Airbus A320, A330, A350 and A380. Bell Helicopter In September 2009, we were awarded a five-year contract with a potential value of $53.0 million to build composite helicopter blade skins and skin core assemblies for Bell Helicopter. Under the terms of the contract, we are providing 18 different assemblies for H1, 406, 407, 412, 427, 429, 430 and BA609 aircraft. All work is being performed at our full-service aerospace innovation and manufacturing support center in Bloomfield, Connecticut. At December 31, 2013, $14.3 million was included in backlog for orders under this program, which will allow us to continue to perform work under this program through the end of 2014. Annual quantities for this program will vary, as they are dependent upon the orders Bell receives from its customers.



Engineering Design Services

The Company offers engineering design services to Aerospace OEM customers. Engineering design service programs generate revenue primarily through the billing of employees' time spent on customer projects. Our engineers provide value to new aircraft development and product improvement programs.

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.



Other Matters

Sequestration

During 2011, the federal government was unable to reach agreement on budget reduction measures required by the Budget Control Act of 2011 (the "Budget Act") passed by Congress. Because Congress and the Administration could not reach agreement, the Budget Act triggered automatic reductions in both defense and discretionary spending in January 2013. While we do not believe these automatic spending reductions directly impacted our business, financial condition or operating results during 2013, the future impact of sequestration is uncertain and there can be no assurance that these automatic across-the-board budget cuts will not adversely affect our business and profitability in future periods. We believe our portfolio of programs and product offerings are well positioned and will not be materially impacted by DoD budget cuts in 2014. We continue to monitor developments in this area and work with our suppliers and customers to understand the potential impact on our Company. 37 -------------------------------------------------------------------------------- For a discussion of other matters related to our Aerospace segment see Note 17, Commitments and Contingencies, in the Notes to Consolidated Financial Statements included in this Form 10-K.



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 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 this 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 raise additional debt or equity capital to support other business activities including potential future acquisitions. We anticipate our capital expenditures will be approximately $35.0 to $40.0 million in 2014, primarily related to machinery and equipment and information technology infrastructure. In addition to our working capital requirements, one or more of the following items could have an impact on our liquidity during the next 12 months:



• the matters described in Note 17, Commitments and Contingencies, in the

Notes to Consolidated Financial Statements, including:

• the cost of defending the Wichita matter; and

• the cost of existing environmental remediation matters;

• required 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. This is evidenced by the Credit Agreement entered into during the fourth quarter of 2012 and our $115.0 million issuance of convertible notes in November 2010. Management regularly monitors its 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 Australian SH-2G(A) (now designated SH-2G(I)) aircraft, a full mission flight simulator, and related logistics support to the New Zealand Ministry of Defence. Pursuant to the terms of the revenue sharing agreement with the Commonwealth of Australia, the Company will share proceeds from the resale with the Commonwealth on a predetermined basis. Through December 31, 2013, the Company has paid $39.5 million (AUD), the required minimum amount of payments pursuant to the revenue sharing agreement, and has accrued $1.4 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 December 31, 2013, the letter of credit balance associated with this program was $30.3 million. 38 --------------------------------------------------------------------------------



A summary of our consolidated cash flows from continuing operations is as follows:

2013 2012 2011 13 vs. 12 12 vs. 11 (in thousands) Total cash provided by (used in): Operating activities $ 62,547$ 84,580$ 43,861$ (22,033 )$ 40,719 Investing activities (61,275 ) (117,856 ) (106,116 ) 56,581 (11,740 ) Financing activities (8,115 ) 39,640 45,473



(47,755 ) (5,833 )

Free Cash Flow(a) : Net cash provided by (used in) operating activities $ 62,547$ 84,580$ 43,861$ (22,033 )$ 40,719 Expenditures for property, plant and equipment (40,928 ) (32,569 ) (28,816 ) (8,359 ) (3,753 ) Free cash flow $ 21,619$ 52,011$ 15,045$ (30,392 )$ 36,966



(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 in our consolidated statements of cash flows. See Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures, in this Form 10-K.

2013 vs. 2012

Net cash provided by operating activities of continuing operations decreased $22.0 million in 2013 compared to 2012, primarily due to an increase in accounts receivable balances at both segments, partially due to approximately $16.0 million of outstanding receivables with foreign customers associated with our Aerospace segment's JPF program which was collected subsequent to year end. Offsetting the decrease in cash provided was a lower use of cash for accounts payable, primarily related to inventory buys made in the fourth quarter. Net cash used in investing activities of continuing operations decreased $56.6 million due to a $69.8 million decrease in cash used for acquisitions, partially offset by an increase of $8.4 million in cash used for the purchase of property, plant and equipment, including the new ERP system at our Distribution segment and improvements to the Company's corporate facilities. Net cash used in financing activities of continuing operations for 2013 was $8.1 million, compared to net cash provided by financing activities of continuing operations for 2012 of $39.6 million. This change reflects the proceeds of $100.0 million we received in 2012 from the issuance of long-term debt that did not occur in 2013. This decrease was offset by borrowings under the revolving credit agreement and lower debt repayments.



2012 vs. 2011

Net cash provided by operating activities of continuing operations increased $40.7 million in 2012 compared to 2011, primarily due to the following:

• increased net earnings, driven by increased operating income at both our

segments;

• a decrease in contributions to our qualified pension plan;

• a decrease in our accounts receivable balances due to improved collection

efforts at both our segments;

• an increase in inventory due to lower sales volume in the fourth quarter

at our Distribution segment and an increase in program start-up costs in

our Aerospace segment; and

• an increase in cash used to liquidate prior year accruals and other

payables due to settlement of the FMU-143 matter in early 2012, partially

offset by lower payments of the Australian liability in 2012 as compared

to 2011. Net cash used in investing activities of continuing operations increased $11.7 million due to an increase in cash used for acquisitions and the purchase of property, plant and equipment, including the new ERP system at our Distribution segment. These increases were partially offset by the receipt of $8.7 million from the disposal of our Distribution segment's Canadian operations. 39 -------------------------------------------------------------------------------- Net cash provided by financing activities of continuing operations decreased $5.8 million in 2012 compared to 2011. In 2012, we had net repayments under the former revolving credit agreement of $11.3 million, compared to net borrowings of $62.0 million in 2011. Additionally, we received proceeds of $100.0 million from the issuance of long-term debt in 2012 and had debt repayments of $35.0 million on the former term loan agreement.



Financing Arrangements

Credit Agreement

On November 20, 2012, we entered into a new Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and RBS Citizens, N.A. as Co-Syndication Agents, J.P. Morgan Securities LLC ("J.P. Morgan Securities"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") and RBS Citizens, N.A. as Joint Bookrunners and Joint Lead Arrangers, and the other lenders named therein (collectively, the "Lenders"), which expires on July 31, 2017. The Credit Agreement replaced our then existing $275.0 million Amended and Restated Revolving Credit Agreement and $42.5 million Second Amended and Restated Term Loan Credit Agreement. The Credit Agreement provides a $400.0 million revolving credit facility under which we may issue letters of credit for our benefit and a $100.0 million term loan facility. The term loan commitment requires quarterly payments of principal (which commenced on March 31, 2013) at the rate of $2.5 million per quarter with $55.0 million payable in the final quarter of the facility's term. We may increase the aggregate amount of each of the revolving credit facility and the term loan facility by up to $100.0 million in accordance with the terms of the Credit Agreement. Interest rates on amounts outstanding under the Credit Agreement are variable. At December 31, 2013 and 2012, the interest rates for the outstanding amounts on the Credit Agreement were 1.72% and 1.75%, respectively. In addition, we are required to pay a quarterly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.200% to 0.325% per annum, based on the Consolidated Senior Secured Leverage Ratio. Fees for outstanding letters of credit range from 1.250% to 2.125%, based on the Consolidated Senior Secured Leverage Ratio. 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 to 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. The Company was in compliance with those financial covenants as of and for the quarter ended December 31, 2013, and management does not anticipate noncompliance in the foreseeable future. Total average bank borrowings under our revolving credit facility and term loan facility during the year ended December 31, 2013, were $188.8 million compared to $143.1 million for the year ended December 31, 2012. As of December 31, 2013 and 2012, there was $285.6 million and $331.1 million available for borrowing, respectively, net of letters of credit. However, based on EBITDA levels for 2013 amounts available for borrowing were limited to $217.6 million. Letters of credit are generally considered borrowings for purposes of calculating available borrowings. A total of $36.8 million and $14.6 million in letters of credit was outstanding as of December 31, 2013 and 2012, respectively. The letter of credit related to the guaranteed minimum payments to the Commonwealth of Australia in connection with the ownership transfer of the 11 SH-2G(A) helicopters (along with spare parts and associated equipment) was eliminated in the second quarter of 2013, having been $6.7 million at December 31, 2012, following the delivery of the final guaranteed minimum payment of $6.4 million (AUD) on April 2, 2013. The letter of credit balance related to the SH-2G(I) New Zealand sales contract was $30.3 million at December 31, 2013. The letter of credit balance related to this contract could reach a potential $60.1 million over its three-year term.



Convertible Notes

In November 2010, we issued convertible unsecured notes due on November 15, 2017, in the aggregate principal amount of $115.0 million in a private placement offering (the "Convertible Notes"). These notes bear 3.25% interest per annum on the principal amount, payable semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2011. Proceeds from the offering were $111.0 million, net of fees and expenses which were capitalized. The proceeds were used to repay $62.2 million of borrowings outstanding on the Company's Revolving Credit Agreement, make a $25.0 million voluntary contribution to the Qualified Pension Plan and pay $13.2 million for the purchase of call options related to the convertible note offering. See below for further discussion of the call options. 40 -------------------------------------------------------------------------------- The Convertible Notes will mature on November 15, 2017, unless earlier redeemed, repurchased by the Company or converted. Upon conversion, the Convertible Notes require net share settlement, where the aggregate principal amount of the notes will be paid in cash and remaining amounts due, if any, will be settled in cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election.



The following table illustrates the conversion rate at each date:

December 31, 2013 December 31, 2012 Convertible Notes Conversion Rate per $1,000 principal amount (1) 29.6292 29.5635 Conversion Price (2) $ 33.75 $ 33.83 Contingent Conversion Price (3) $ 43.88 $ 43.97 Aggregate shares to be issued upon conversion (4) 3,407,357



3,399,802

(1) Represents the number of shares of Common Stock hypothetically issuable per $1,000 principal amount of Notes, subject to adjustments per the Convertible Note Indenture dated November 19, 2010. At the date the Company issued the Convertible Notes, the conversion rate initially equaled 29.4499 shares of common stock per $1,000 principal amount of notes (which is equivalent to an initial conversion price of approximately $33.96 per share of common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events, such as an increase in the dividend paid to shareholders. (2) Represents $1,000 divided by the conversion rate as of such date. The conversion price reflects the strike price of the embedded option within the Convertible Note. Were the Company's share price to exceed the conversion price at conversion the noteholders would be entitled to receive additional consideration either in cash, shares or a combination, the form of which is at the sole discretion of the Company. (3) Prior to May 15, 2017, the notes are convertible only in the following circumstances: (1) during any fiscal quarter commencing after April 1, 2011, and only during any such fiscal quarter, if the last reported sale price of our common stock was greater than or equal to 130% of the applicable conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, (2) upon the occurrence of specified corporate transactions, or (3) during the five consecutive business-day period following any five consecutive trading-day period in which, for each day of that period, the trading price for the notes was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day. On and after May 15, 2017 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon a change in control or termination of trading, holders of the notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount, plus any accrued and unpaid interest. (4) Represents the number of shares hypothetically issuable upon conversion of the principal balance of the Convertible Notes at each date; however, as the terms of the Convertible Notes require net share settlement, the aggregate principal amount of the notes will be paid in cash. Amounts due in excess of the principal, if any, may be settled in cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's election. Because the embedded conversion option is indexed to the Company's own stock and would be classified in shareholders' equity, it does not meet the criterion under FASB Accounting Standards Codification Topic 815 - Derivatives and Hedging ("ASC 815") that would require separate accounting as a derivative instrument. In connection with the offering, we entered into convertible note hedge transactions with affiliates of the initial purchasers. These transactions are intended to reduce the potential dilution to our Company's shareholders upon any future conversion of the notes. The call options, which cost an aggregate $13.2 million, were recorded as a reduction of additional paid-in capital. The Company also entered into warrant transactions concurrently with the offering, pursuant to which we sold warrants to acquire up to approximately 3.4 million shares of our common stock to the same counterparties that entered into the convertible note hedge transactions. Proceeds received from the issuance of the warrants totaled approximately $1.9 million and were recorded as additional paid-in capital. The convertible note hedge and warrant transactions effectively increased the conversion price of the convertible notes. 41 --------------------------------------------------------------------------------



The following table illustrates the warrant price at each date:

December 31, 2013 December 31, 2012 Warrants Warrant Price $ 44.14 $ 44.23 The note payable principal balance at the date of issuance of $115.0 million was bifurcated into the debt component of $101.7 million and the equity component of $13.3 million. The difference between the note payable principal balance and the value of the debt component is being accreted to interest expense over a period of 7 years. The debt component was recognized at the present value of associated cash flows discounted using a 5.25% discount rate, the borrowing rate at the date of issuance for a similar debt instrument without a conversion feature. We recorded $0.5 million of debt issuance costs as an offset to additional paid-in capital. The balance, $3.1 million, is being amortized over the term of the notes. The following table illustrates the dilutive effect of securities issued under the convertible debt and warrants at various theoretical average share prices for our stock as of December 31, 2013: Theoretical Average Share Price



of Kaman Stock

$33.75$40.00$44.14$45.00$50.00 Dilutive Shares associated with: Convertible Debt - 532,357 802,010 851,801 1,107,357 Warrants - - - 65,118 399,342 Total dilutive shares - 532,357 802,010 916,919 1,506,699 Debt Issuance Costs Total expense associated with the amortization of debt issuance costs for the years ended December 31, 2013, 2012 and 2011, was $1.1 million, $1.3 million and $1.3 million, respectively.



Interest Rate Swaps

During 2013, we entered into interest rate swap agreements for the purposes of hedging the eight quarterly variable-rate Term Loan interest payments due in 2014 and 2015. These interest rate swap agreements were designated as cash flow hedges and intended to manage interest rate risk associated with our variable-rate borrowings and minimize the impact on our earnings and cash flows of interest rate fluctuations attributable to changes in LIBOR rates. For the years ended December 31, 2013 and 2012, there was no additional interest expense associated with interest rate swap agreements. For future periods, as a result of the interest rate swap agreements, the fixed rate per the agreements may be higher than the variable rate on our Term Loan.



Other Sources/Uses of Capital

Pension

We contributed $10.0 million to the qualified pension plan and $2.3 million to the SERP during 2013. In 2012, we contributed $10.0 million to the qualified pension plan and $1.6 million to the SERP. In 2014, we have contributed $10.0 million to the qualified pension plan (as of the date of this filing) and expect to contribute $0.8 million to the SERP. 42 --------------------------------------------------------------------------------



Acquisitions

The following table illustrates the cash paid for acquisitions:

For the year ended December 31, 2013 2012 2011 In thousands Cash paid for acquisitions completed during the year $ 17,284$ 74,465$ 75,500 Cash paid for holdback payments during the year 828 12,307



1,460

Earnout and other payments during the year 50 1,205 712 Total cash paid for acquisitions $ 18,162$ 87,977



$ 77,672

Total consideration for the three acquisitions completed in 2013 was $17.8 million, with $0.4 million remaining to be paid to sellers representing holdback provisions. Total consideration for acquisitions completed in 2012 and 2011 was $76.8 million and $79.7 million, respectively. As of December 31, 2013, we have $1.0 million and $0.4 million remaining to be paid to sellers representing holdback provisions related to 2012 and 2011 acquisitions, respectively. We anticipate that we will continue to identify and evaluate potential acquisition candidates, the purchase of which may require the use of additional capital.



Stock Repurchase Plan

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. During 2013 and 2012, there were no shares repurchased under this program. There were 165,632 shares repurchased at an average price of $28.48 during 2011 under this program. At December 31, 2013, approximately 1.0 million shares remained authorized for repurchase under this program.



NON-GAAP FINANCIAL MEASURES

Management believes that the non-GAAP (Generally Accepted Accounting Principles) measures used in this report on Form 10-K 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. 43 --------------------------------------------------------------------------------



CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Contractual Obligations

The following table summarizes certain of the Company's contractual obligations as of December 31, 2013: Payments due by period (in millions) More than 5 Contractual Obligations Total Within 1 year 1-3 years 3-5 years years Long-term debt $ 167.6 $ 10.0 $ 20.0$ 137.6 $ - Convertible notes 115.0 - - 115.0 - Interest payments on debt (a) 40.5 11.6 17.3 9.8 1.8 Operating leases 64.3 20.7 25.9 8.9 8.8 Purchase obligations (b) 143.0 134.6 8.2 0.2 - Other long-term obligations (c) 52.4 14.7 17.1 6.0 14.6 Planned funding of pension and SERP (d) 19.6 10.8 3.4 1.0 4.4 Total $ 602.4 $ 202.4 $ 91.9$ 278.5$ 29.6 Note: For more information refer to Note 12, Debt; Note 17, Commitments and Contingencies; Note 16, Other Long-Term Liabilities; Note 15, Pension Plans, and Note 14, Income Taxes in the Notes to Consolidated Financial Statements included in this Form 10-K.



(a) Interest payments on debt are calculated based on the applicable rate and

payment dates for each instrument. For variable-rate instruments, interest

rates and payment dates are based on management's estimate of the most likely

scenarios for each relevant debt instrument.

(b) This category includes purchase commitments to suppliers for materials and

supplies as part of the ordinary course of business, consulting arrangements

and support services. Only obligations in the amount of at least $50,000 are

included.

(c) This category includes obligations under the Company's long-term incentive

plan, deferred compensation plan, environmental liabilities, acquisition

holdbacks and unrecognized tax benefits.

(d) This category includes planned funding of the Company's SERP and qualified

pension plan. Projected funding for the qualified pension plan beyond one

year has not been included as there are several significant factors, such as

the future market value of plan assets and projected investment return rates,

which could cause actual funding requirements to differ materially from projected funding.



Off-Balance Sheet Arrangements

The following table summarizes our off-balance sheet arrangements:

Payments due by period (in millions)

More than 5 Total Within 1 year 1-3 years 3-5 years years Acquisition earn-out (1) $ 3.5 $ 3.5 $ - $ - $ - Total $ 3.5 $ 3.5 $ - $ - $ -



(1) The obligation to pay earn-out amounts depends upon the attainment of

specific milestones by an aerospace operating unit acquired in 2002.

As of December 31, 2013, we had $36.8 million of outstanding standby letters of credit under the Credit Agreement, $30.3 million of which related to the New Zealand sales contract. 44

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CRITICAL ACCOUNTING ESTIMATES

Our significant accounting policies are outlined in Note 1 to the Consolidated Financial Statements included in this Form 10-K. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures based upon historical experience, current trends and other factors that management believes to be relevant. We are also responsible for evaluating the propriety of our estimates, judgments, and accounting methods as new events occur. Actual results could differ from those estimates. Management periodically reviews the Company's critical accounting policies, estimates, and judgments with the Audit Committee of our Board of Directors. The most significant areas currently involving management judgments and estimates are described below. Long-Term Contracts Methodology Judgment and Uncertainties Effect if Actual Results Differ From Assumptions For long-term aerospace The While we do not believe there is a contracts, we generally percentage-of-completion reasonable likelihood there will be recognize sales and income method requires that we a material change in estimates or based on the estimate future revenues assumptions used to calculate our percentage-of-completion and costs over the life of long-term revenues and costs, method of accounting, a contract. Revenues are estimating the percentage of work which allows for estimated based upon the complete on certain programs is a recognition of revenue as original contract price, complex task. As a result, changes work on a contract with consideration being to these estimates could have a progresses. We recognize given to exercised contract significant impact on our results of sales and profit based options, change orders and operations. These programs include upon either (1) the in some cases projected the SH-2G(I) New Zealand program, cost-to-cost method, in customer requirements. the Sikorsky BLACK HAWK program, the which sales and profit are Contract costs may be JPF program, the Boeing A-10 recorded based upon the incurred over a period of program, our Bell Helicopter ratio of costs incurred to several years, and the programs and several other programs. estimated total costs to estimation of these costs Estimating the ultimate total cost complete the contract, or requires significant of these programs is challenging due (2) the units-of-delivery judgment based upon the to the complexity of the programs, method, in which sales are acquired knowledge and the increase in production of new recognized as deliveries experience of program programs, the nature of the are made and cost of sales managers, engineers, and materials needed to complete these is computed on the basis financial professionals. programs, change orders related to of the estimated ratio of Estimated costs are based the programs and the need to manage total contract cost to primarily on anticipated our customers' expectations. These total contract sales. purchase contract terms, programs are an important element in historical performance our continuing strategy to increase Management performs trends, business base and operating efficiencies and detailed quarterly reviews other economic projections. profitability as well as broaden our of all of our significant The complexity of certain business base. Management continues long-term contracts. Based programs as well as to monitor and update program cost upon these reviews, we technical risks and estimates quarterly for these record the effects of uncertainty as to the contracts. A significant change in adjustments in profit future availability of an estimate on one or more of these estimates each period. If materials and labor programs could have a material at any time management resources could affect the effect on our financial position and determines that in the company's ability to results of operations. The net case of a particular accurately estimate future decrease in our operating income contract total costs will contract costs. from changes in contract estimates exceed total contract totaled $3.0 million for the year revenue, we record a ended December 31, 2013, $4.7 provision for the entire million for the year ended anticipated contract loss December 31, 2012, and $2.7 million at that time. for the year ended December 31, 2011. 45

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Allowance for Doubtful Accounts

Methodology Judgment and Uncertainties



Effect if Actual Results Differ From

Assumptions The allowance for doubtful Write-offs are charged As of December 31, 2013 and 2012, accounts represents against the allowance for our allowance for doubtful accounts management's best estimate of doubtful accounts only after was $3.8 million and $3.1 million, probable losses inherent in the we have exhausted all respectively. Receivables written receivable balance. These collection efforts. Actual off, net of recoveries, in 2013 and estimates are based on known write-offs and adjustments 2012 were $1.0 million and $1.2 past due amounts and historical could differ from the million, respectively. write-off experience, as well allowance estimates due to as trends and factors impacting unanticipated changes in the Currently we do not believe that we the credit risk associated with business environment as well have a significant amount of risk specific customers. In an as factors and risks relative to the allowance for effort to identify adverse associated with specific doubtful accounts. A 10% change in trends for trade receivables, customers. the allowance would have a $0.4 we perform ongoing reviews of million effect on pre-tax earnings. account balances and the aging of receivables. Amounts are considered past due when payment has not been received within a pre-determined time frame based upon the credit terms extended. For our government and commercial contracts, we evaluate, on an ongoing basis, the amount of recoverable costs. The recoverability of costs is evaluated on a contract-by-contract basis based upon historical trends of payments, program viability and the customer's credit-worthiness. 46

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Inventory Valuation Methodology Judgment and Uncertainties Effect if Actual Results Differ From Assumptions We have four types of The process for evaluating Inventory valuation at our inventory (a) inventory obsolescence or Distribution segment generally merchandise for resale, market value often requires less subjective management (b) contracts in requires the company to judgment than the valuation of process, (c) other work make subjective judgments certain inventory in the Aerospace in process, and (d) and estimates concerning segment. finished goods. future sales levels, Merchandise for resale quantities and prices at Management reviews the K-MAX® is stated at the lower which such inventory will inventory balance on an annual basis of the cost of the be sold in the normal to determine whether any additional inventory or its fair course of business. We write-downs are necessary. If such a market value. Contracts adjust our inventory by write-down were to occur, this could in process, other work the difference between the have a significant impact on our in process and finished estimated market value and operating results. A 10% write-down goods are valued at the actual cost of our of the December 31, 2013, inventory production cost inventory to arrive at net balance would have affected pre-tax comprised of material, realizable value. Changes earnings by approximately $1.7 labor and overhead, in estimates of future million in 2013. including general and sales volume may administrative expenses necessitate future on certain government write-downs of inventory contracts. Contracts in value. The K-MAX® process, other work in inventory balance, process, and finished consisting of work in goods are reported at process and finished the lower of cost or net goods, was $17.0 million realizable value. We as of December 31, 2013. include raw material We believe that it is amounts in the contracts stated at net realizable in process and other value, although lack of work in process demand for spare parts in balances. Raw material the future could result in includes certain general additional write-downs of stock materials but the inventory value. primarily relates to Overall, management purchases that were made believes that our in anticipation of inventory is appropriately specific programs that valued and not subject to have not been started as further obsolescence in of the balance sheet the near term. date. The total amount of raw material included On May 8, 2013, we in these in process announced that the New amounts was 5% of the Zealand Ministry of total inventory balance Defence (MoD) entered into as of December 31, 2013, a $120.6 million contract and less than 5% of the for the purchase of ten total inventory balance SH-2G(I) Super Seasprite as of December 31, 2012. aircraft, spare parts, a full mission flight simulator, and related logistics support. Although a substantial portion of the SH-2G(I) inventory will be used in the performance of this new contract, management believes that $29.8 million of the SH-2G(I) inventory will be sold after December 31, 2014, based upon the time needed to prepare the aircraft for sale and the requirements of our customer. Additionally, an estimated $5.4 million of inventory will remain after completion of this program. This balance represents one aircraft and various spare parts. 47

-------------------------------------------------------------------------------- Goodwill and Other Intangible Assets Methodology Judgment and Uncertainties Effect if Actual Results Differ From Assumptions Goodwill and certain In years that management For each reporting unit, we intangible assets that performs a qualitative performed the Step One test and the have indefinite lives are assessment we consider the percentage by which the fair value evaluated at least following qualitative exceeded the carrying value was in annually for impairment. factors: general economic excess of 25%, with the exception of The annual evaluation is conditions in the markets U.K. Composites and VT Composites. generally performed served by the reporting For the reporting units whose fair during the fourth units carrying goodwill, value exceeded the carrying value in quarter, using forecast relevant industry-specific excess of 25%, a decrease of 1% in information. All performance statistics, our terminal growth rates or an intangible assets are changes in the carrying increase of 1% in our discount rates also reviewed for value of the individual would not result in a fair value possible impairment reporting units, and calculation less than the carrying whenever changes in assumptions used in the value. conditions indicate that most recent fair value their carrying value may calculation, including For U.K. Composites, the fair value not be recoverable. For forecasted results of exceeded the carrying value by 10%. reporting units that operations, the weighted A 1% increase in our discount rate qualify for a qualitative average cost of capital or a 10% decrease in fair value assessment, management and recent transaction would result in a fair value will perform the two-step multiples. calculation less than the carrying impairment test after a value. A 1% decrease in our terminal period of three years has For step one of the two growth rate would not result in a elapsed. step impairment test, fair value calculation less than In accordance with management estimated the carrying value. generally accepted fair value of the accounting principles, we reporting units using an For VT Composites, the Step One test test goodwill for income methodology based resulted in a fair value calculation impairment at the on management's estimates less than the carrying value. A Step reporting unit level. The of forecasted cash flows, Two test was performed for this identification and with those cash flows reporting unit, resulting in a $2.1 measurement of goodwill discounted to present million impairment charge being impairment involves the value using rates taken in 2013. estimation of fair value commensurate with the of the reporting unit as risks associated with As with all assumptions, there is an compared to its carrying those cash flows. In inherent level of uncertainty and value. In the addition, management used actual results, to the extent they Distribution segment, a market-based valuation differ from those assumptions, could this testing is conducted method involving analysis have a material impact on fair at the segment level as of market multiples of value. For example, multiples for no components represent revenues and earnings similar type reporting units could reporting units. In the before interest, taxes, deteriorate due to changes in Aerospace segment, depreciation and technology or a downturn in economic testing is conducted at a amortization ("EBITDA") conditions. A reduction in customer level one level below the for (i) a group of demand would impact our assumed segment level, and comparable public growth rate resulting in a reduced components are not companies and (ii) recent fair value. Potential events or aggregated for purposes transactions, if any, circumstances could have a negative of goodwill testing. involving comparable effect on the estimated fair value. companies. In estimating The loss of a major customer or The carrying value of the fair value of the program could have a significant goodwill as of December reporting units, a impact on the future cash flows of 31, 2013, was $105.6 weighing of 80% to the the reporting unit(s). Advances in million and $98.3 million income approach and 20% to technology by our competitors could for the Distribution and the market-based valuation result in our products becoming Aerospace segments, method was selected, obsolete. respectively. The consistent with prior Aerospace specific year. A higher weighting reporting units was applied to the contributing to the total estimate derived from the goodwill balance were as income approach as it is follows: Precision based on Management's Products Orlando facility assumptions specific for ("KPP-Orlando"), $32.9 the reporting units, which million; Specialty are the outcome of an Bearings RWG internal planning process. Frankenjura-Industrie While the guideline Flugwerklager GMBH companies in the market ("RWG"), $7.5 million; based valuation method Kaman Engineering have comparability to the Services ("KES"), $8.5 reporting units, they may million; VT Composites, not fully reflect the $16.8 million; and UK market share, product Composites, $32.6 portfolio and operations million. See Note 10, of the reporting units. Goodwill and Other Intangible Assets, Net, in the Notes to Consolidated Financial Statements for additional information regarding these assets and for a discussion of the $2.1 million goodwill impairment charge taken by our VT Composites reporting unit. continues on next page 48

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Goodwill and Other Intangible Assets (continued)

Methodology Judgment and Uncertainties Effect if Actual Results Differ From Assumptions The carrying value of In performing our test we We do not currently believe there is other intangible assets used an assumed terminal a reasonable likelihood that there as of December 31, 2013, growth rate of 3.0% - 3.5% will be a material change in was $48.5 million and for the reporting units. estimates or assumptions used to $41.0 million for the The discount rate utilized test goodwill and other intangible Distribution and to reflect the risk and assets for impairment losses. Aerospace segments, uncertainty in the However, if actual results are not respectively. financial markets and consistent with our estimates or specifically in our assumptions, we may be exposed to an internally developed impairment charge that could be earnings projections material. ranged from 9.5% - 16.0% for these reporting units. Changes in these estimates and assumptions could materially affect the results of our tests for goodwill impairment. Under Step Two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. 49

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Long-Term Incentive Programs Methodology Judgment and Uncertainties Effect if Actual Results Differ From Assumptions The Company maintains a Option-pricing models and We do not currently believe there is Stock Incentive Plan, generally accepted a reasonable likelihood that there which provides for valuation techniques will be a material change in the share-based payment require management to make estimates or assumptions we use to awards, including assumptions and to apply determine stock-based compensation non-statutory stock judgment to determine the expense. However, if actual results options, restricted fair value of our awards. are not consistent with our stock, stock These assumptions and estimates or assumptions, we may be appreciation rights, and judgments include exposed to changes in share-based long-term incentive estimating the future compensation expense that could be program ("LTIP") awards. volatility of our stock material. We determine the fair price, expected dividend value of our yield, future employee If actual results are not consistent non-qualified stock turnover rates and future with the assumptions used, the option awards at the employee stock option share-based compensation expense date of grant using a exercise behaviors. reported in our financial statements Black-Scholes model. We Changes in these may not be representative of the determine the fair value assumptions can materially actual economic cost of the of our restricted share affect the fair value share-based compensation. A 10% awards at the date of estimate. change in our share-based grant using an average compensation expense for the year of the high and low Our long-term incentive ended December 31, 2013, would have market price of our plan requires management affected pre-tax earnings by stock. to make assumptions approximately $0.5 million in 2013. regarding the likelihood Due to the timing of availability of LTIP awards provide of achieving long-term the Russell 2000 data, there is a certain senior Company goals as well as risk that the amount we have executives an estimate future Russell recorded as LTIP expense could be opportunity to receive 2000 results. different from the actual payout. A award payments, 10.0 percentage point increase in generally in cash. For the total performance factor earned each performance cycle, for our LTIP would result in a the Company's financial reduction of 2013 pretax earnings of results are compared to $1.4 million. the Russell 2000 indices for the same periods based upon the following: (a) average return on total capital, (b) earnings per share growth and (c) total return to shareholders. No awards will be payable unless the Company's performance is at least in the 25th percentile of the designated indices. The maximum award is payable if performance reaches the 75th percentile of the designated indices. Awards for performance between the 25th and 75th percentiles are determined by straight-line interpolation. Awards will be paid out at 100% at the 50th percentile. In order to estimate the liability associated with LTIP awards, management must make assumptions as to how our current performance compares to current Russell 2000 data based upon the Russell 2000's historical results. This analysis is performed on a quarterly basis. When sufficient Russell 2000 data for a year is available, which typically will not be until May or June of the following year, management will adjust the liability to reflect its best estimate of the total award. Actual results could differ significantly from management's estimates. The total estimated liability as of December 31, 2013, was $13.1 million. 50

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Pension Plans Methodology Judgment and Uncertainties Effect if Actual Results Differ From Assumptions We maintain a qualified The discount rate A lower discount rate increases the defined benefit pension, represents the interest present value of benefit obligations as well as a rate used to determine the and increases pension expense. A one non-qualified present value of future percentage point decrease in the Supplemental Employees cash flows currently assumed discount rate would have Retirement Plan expected to be required to increased pension expense in 2013 by ("SERP"), for certain settle the pension $8.4 million. A one percentage point key executives. See Note obligation. For 2013, increase in the assumed discount 15, Pension Plans, in management reviewed the rate would have decreased pension the Notes to Citigroup Pension Discount expense in 2013 by $7.1 million. Consolidated Financial Curve and Liability Index Statements included in to determine the continued A lower expected rate of return on this Form 10-K for appropriateness of our pension plan assets would increase further discussion of discount rate assumptions. pension expense. For 2013 and 2012, these plans. This index was designed to the expected rate of return on plan provide a market average assets was 7.5%. A one-percentage Expenses and liabilities discount rate to assist point increase/decrease in the associated with each of plan sponsors in valuing assumed return on pension plan these plans are the liabilities associated assets would have changed pension determined based upon with postretirement expense in 2013 by approximately actuarial valuations. obligations. Additionally, $5.5 million. During 2013 the actual Integral to these we reviewed the changes in return on pension plan assets of actuarial valuations are the general level of 3.2% was lower than our expected a variety of assumptions interest rates since the rate of return on pension plan including expected last measurement date assets of 7.5%. return on plan assets noting that overall rates and discount rate. We had increased when regularly review these compared to 2012. assumptions, which are updated at the Based upon this measurement date, information, we used a December 31st. In 4.60% discount rate as of accordance with December 31, 2013, for the generally accepted qualified defined benefit accounting principles, pension plan. This rate the impact of takes into consideration differences between the participants in our actual results and the pension plan and the assumptions are anticipated payment stream accumulated and as compared to the generally amortized over Citigroup Index and rounds future periods, which the results to the nearest will affect expense fifth basis point. For the recognized in future SERP, we used the same periods. methodology as the pension plan and derived a discount rate of 3.60% in 2013 for the benefit obligation. The difference in the discount rates is primarily due to the expected duration of SERP payments, which is shorter than the anticipated duration of benefit payments to be made to the average participant in the pension plan. The qualified defined benefit pension plan and SERP used discount rates of 3.70% and 2.85% at December 31, 2012, respectively, for purposes of calculating the benefit obligation. The expected long-term rate of return on plan assets represents the average rate of earnings expected on the funds invested to provide for anticipated benefit payments. The expected return on assets assumption is developed based upon several factors. Such factors include current and expected target asset allocation, our historical experience of returns by asset class type, a risk premium and an inflation estimate. 51

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Income Taxes Methodology Judgment and Uncertainties Effect if Actual Results Differ From Assumptions Tax laws in certain of Management believes that We do not anticipate a significant our operating sufficient income will be change in our unrecognized tax jurisdictions require earned in the future to benefits within the next twelve items to be reported for realize deferred income months. We file tax returns in tax purposes at different tax assets, net of numerous U.S. and foreign times than the items are valuation allowances jurisdictions, with returns subject reflected in our recorded. The realization to examination for varying periods, financial statements. One of these deferred tax but generally back to and including example of such temporary assets can be impacted by 2008. It is our policy to record differences is changes to tax laws or interest and penalties on depreciation expense. statutory tax rates and unrecognized tax benefits as income Other differences are future taxable income taxes. A one percent permanent, such as levels. increase/decrease in our tax rate expenses that are never would affect our 2013 earnings by deductible on our tax Our effective tax rate on $0.9 million. returns, an example being earnings from continuing a charge related to the operations was 35.2% for impairment of goodwill. 2013. Our effective tax Temporary differences rate is based on expected create deferred tax or reported income or assets and liabilities. loss, statutory tax rates, Deferred tax assets and tax planning generally represent items opportunities available to that can be used as tax us in the various deductions or credits in jurisdictions in which we our tax returns in future operate. Significant years for which we have judgment is required in already recorded the tax determining our effective benefit in our financial tax rate and in evaluating statements. Deferred tax our tax positions. We liabilities generally establish reserves when, represent tax expense despite our belief that recognized in our our tax return positions financial statements for are valid and defensible, which payment is not yet we believe that certain due or the realized tax positions may not prevail benefit of expenses we if challenged. We adjust have already reported in these reserves in light of our tax returns, but have changing facts and not yet recognized as circumstances, such as the expense in our financial progress of a tax audit or statements. changes in tax legislation. Our effective As of December 31, 2013, tax rate includes the we had recognized $36.5 impact of reserve million of deferred tax provisions and changes to assets, net of valuation reserves that we consider allowances. The appropriate. This rate is realization of these then applied to our benefits is dependent in quarterly operating part on future taxable results. In the event that income. For those U.S. there is a significant states where the unusual or one-time item expiration of tax loss or recognized in our credit carryforwards or operating results, the tax the projected operating attributable to that item results indicates that would be separately realization is not calculated and recorded at likely, a valuation the same time as the allowance is provided. unusual or one-time item. 52

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Environmental Costs Methodology Judgment and Uncertainties Effect if Actual Results Differ From Assumptions Our operations are Environmental costs are At December 31, 2013, amounts subject to environmental accrued when it is accrued for known environmental regulation by federal, probable that a liability remediation costs were $11.5 state and local has been incurred and the million. A 10% change in this authorities in the United amount can be reasonably accrual would have impacted pre-tax States and regulatory estimated. The most likely earnings by $1.2 million. Further authorities with cost to be incurred is information about our environmental jurisdiction over our accrued based on an costs is provided in Note 11, foreign operations. As a evaluation of currently Environmental Costs, in the Notes to result, we have available facts with Consolidated Financial Statements. established and update, respect to each individual as necessary, policies site, including existing relating to environmental technology, current laws standards of performance and regulations and prior for our operations remediation experience. worldwide. Liabilities with fixed or readily determinable When we become aware of payment dates are an environmental risk, we discounted. perform a site study to ascertain the potential We believe that magnitude of expenditures necessary to contamination and the comply with the present estimated cost of regulations governing remediation. environmental protection will not have a material We continually evaluate effect upon our the identified competitive position, environmental issues to consolidated financial ensure the time to position, results of complete the remediation operations or cash flows. and the total cost of remediation are consistent with our initial estimate. If there is any change in the cost and/or timing of remediation, the accrual is adjusted accordingly. 53

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RECENT ACCOUNTING STANDARDS

A summary of recent accounting standards is included in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

SELECTED QUARTERLY FINANCIAL DATA

First Second Third Fourth Total 2013 Quarter Quarter Quarter Quarter Year (in thousands, except per share amounts) Net sales $ 388,075$ 431,725$ 423,663$ 438,343$ 1,681,806 Gross profit $ 110,266$ 121,257$ 118,857$ 116,244$ 466,624 Earnings from continuing operations $ 7,154$ 17,892$ 18,695$ 12,958$ 56,699 Earnings (loss) from discontinued operations, net of tax $ - $ - $ 64$ (83 )$ (19 ) Gain on disposal of discontinued operations, net of tax $ - $ - $ 420 $ - $ 420 Net earnings $ 7,154$ 17,892$ 19,179$ 12,875$ 57,100 Basic earnings per share: From continuing operations $ 0.27$ 0.67$ 0.70$ 0.48$ 2.12 From discontinued operations $ - $ - $ - $ - $ - From disposal of discontinued operations $ - $ - $ 0.02 $ - $ 0.02 Basic earnings per share $ 0.27$ 0.67$ 0.72$ 0.48$ 2.14 Diluted earnings per share: From continuing operations $ 0.26$ 0.67$ 0.68$ 0.48$ 2.09 From discontinued operations $ - $ - $ - $ (0.01 )$ (0.01 ) From disposal of discontinued operations $ - $ - $ 0.02 $ - $ 0.02 Diluted earnings per share $ 0.26$ 0.67$ 0.70$ 0.47$ 2.10 First Second Third Fourth Total 2012 Quarter Quarter Quarter Quarter Year (in thousands, except per share amounts) Net sales $ 383,719$ 400,226$ 409,567$ 399,316$ 1,592,828 Gross profit $ 104,600$ 113,832$ 114,069$ 109,472$ 441,973 Earnings from continuing operations $ 9,092$ 16,118$ 14,784$ 13,934$ 53,928 Earnings from discontinued operations, net of tax $ 311$ 361$ 198$ (1,096 )$ (226 ) Gain on disposal of discontinued operations, net of tax $ - $ - $ - $ 1,323$ 1,323 Net earnings $ 9,403$ 16,479$ 14,982$ 14,161$ 55,025 Basic earnings per share: From continuing operations $ 0.35$ 0.61$ 0.56$ 0.52$ 2.04 From discontinued operations $ 0.01$ 0.01$ 0.01$ (0.04 )$ (0.01 ) From disposal of discontinued operations $ - $ - $ - $ 0.05$ 0.05 Basic earnings per share $ 0.36$ 0.62$ 0.57$ 0.53$ 2.08 Diluted earnings per share: From continuing operations $ 0.35$ 0.61$ 0.55$ 0.52$ 2.03 From discontinued operations $ 0.01$ 0.01$ 0.01$ (0.04 )$ (0.01 ) From disposal of discontinued operations $ - $ - $ - $ 0.05$ 0.05 Diluted earnings per share $ 0.36$ 0.62$ 0.56$ 0.53$ 2.07 54

-------------------------------------------------------------------------------- Included within certain quarterly results are a variety of unusual or significant adjustments that may affect comparability. The most significant of such adjustments are described below as well as within Management's Discussion and Analysis of Financial Condition and Results of Operations and the Notes to Consolidated Financial Statements. Additionally, due to the nature of the earnings per share calculation, the sum of quarterly earnings per share data may not equal the cumulative earnings per share data for the year. Nonrecurring items within the 2013 quarterly results are as follows: fourth quarter, a $2.1 million non-cash non-tax deductible charge for the impairment of goodwill related to VT Composites and a $0.4 million gain on discontinued operations due to a favorable tax result versus previous estimates and other activity related to the settlement of the closing balance sheet of the Distribution segment's Canadian operations. Nonrecurring items within the 2012 quarterly results are as follows: fourth quarter, $3.3 million of net loss related to the resolution of a program related matter and $1.3 million gain on the sale of substantially all of the assets and liabilities of the Distribution segment's Canadian operations. 55



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