Kaman

AR 13

Financials

Part II

Financials/Management's Discussion and Analysis of Financial Condition and Results of Operations/Segment Results of Operations and Financial Condition – Aerospace Segment – Part 2

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.

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.