Kaman

AR 13

Financials

Part II

Financials/Financial Statements and Supplementary Data/Notes to Consolidated Financial Statements – Note 3

For the Years Ended December 31, 2013, 2012 and 2011

3. ACQUISITIONS

The following table illustrates cash paid for acquisitions:

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

2013 Acquisitions

On June 14, 2013, the Company acquired substantially all of the assets of Northwest Hose & Fittings, Inc. ("Northwest Hose"). Northwest Hose, formed in 1995, is an authorized Parker Hannifin distributor of hydraulic hose, fittings and adapters as well as couplers and industrial hose to a diverse group of industries such as the metals, agricultural, industrial machinery and equipment industries. Northwest Hose is headquartered in Spokane, Washington.

On July 31, 2013, the Company acquired substantially all of the assets of Ohio Gear & Transmission of Eastlake, Ohio. Founded in 1973, Ohio Gear & Transmission is a distributor of mechanical power transmission equipment, bearings and electric automation systems as well as a designer and fabricator of specialized gearing products serving a variety of industries including food, packaging, material handling, and general machinery.

On August 15, 2013, the Company acquired Western Fluid Components, Inc. ("Western"). Western is headquartered in Everett, Washington, and has other Washington facilities in Tacoma, Kirkland and Bellingham. Founded in 1975, Western is one of the largest fluid connector distributors in Washington and a full-line distributor for Parker Hannifin's Fluid Connector Group.

These acquisitions were accounted for as purchase transactions. The assets acquired and liabilities assumed for the 2013 acquisitions were recorded based on their fair value at the date of acquisition as follows (in thousands):

Cash $ 143
Accounts receivable, net 3,122
Inventories 3,423
Property, plant and equipment 446
Other tangible assets 797
Goodwill 9,493
Other intangible assets 4,788
Other liabilities (4,248)
Net assets acquired 17,964
Less cash received (143)
Total consideration $ 17,821

The goodwill associated with Northwest Hose and Ohio Gear & Transmission is tax deductible. The goodwill for the three acquisitions reflects expected synergies from combining the operations of the acquired businesses with the Company's operations and intangible assets that do not qualify for separate recognition, such as an assembled workforce. Included in the Condensed Consolidated Statements of Operations for the year ended December 31, 2013, is $11.1 million of revenue from these acquisitions.

The fair value of the identifiable intangible assets of $4.8 million, consisting primarily of customer lists/relationships, non-compete agreements and trade names, was determined using the income approach. Specifically, the discounted cash flows method was utilized for the customer relationships and non-compete agreements and the relief-from-royalty method was utilized for the trade names. The fair value of the customer relationships ($4.6 million) is being amortized on a straight-line basis over periods ranging from 7 to 10 years; and the fair value of the other intangible assets ($0.2 million) is being amortized over periods ranging from 3 to 5 years, the estimated useful lives of the assets.

Proforma results of operations have not been presented because the effect of the acquisitions was not material.

2012 Acquisitions

On August 31, 2012, the Company acquired substantially all of the assets and certain liabilities of Zeller Corporation ("Zeller"), included in its Distribution segment. Zeller, formed in 1961, is a value-added distributor of electrical and automation components and solutions, including motion control, programmable logic controller based automation, machine vision, electrical controls and power distribution products. Zeller is headquartered in Rochester, NY with other locations in Syracuse and Buffalo, NY; Foxboro, MA; and Winston-Salem, NC.

On July 2, 2012, the Company acquired substantially all of the assets of Florida Bearings, Inc. ("FBI"), included in its Distribution segment. FBI is a distributor of bearings, power transmission and pump products as well as a provider of value-add services such as predictive maintenance and motor, gearbox and pump repair to diverse industries, such as the water, wastewater, municipal, food and aggregate industries. FBI is headquartered in Miami, FL with locations in Hialeah, Ft. Lauderdale, Riviera Beach and Orlando, FL.

These acquisitions were accounted for as purchase transactions. The assets acquired and liabilities assumed for the 2012 acquisitions were recorded based on their fair value at the date of acquisition as follows (in thousands):

Cash $ 4
Accounts receivable, net 13,156
Inventories 7,384
Property, plant and equipment 3,370
Other tangible assets 738
Goodwill 38,619
Other intangible assets 24,117
Other liabilities (10,545)
Total of net assets acquired 76,843
Less cash received (4)
Total consideration $ 76,839

The goodwill associated with these acquisitions is tax deductible. The goodwill is the result of expected synergies from combining the operations of the acquired businesses with the Company's operations and intangible assets that do not qualify for separate recognition, such as an assembled workforce. During the fourth quarter of 2012, the Company had a positive working capital adjustment which reduced its contractual commitment for a 2012 acquisition by $0.2 million. There is $102.2 million and $33.2 million of revenue from these acquisitions included in the Consolidated Statement of Operations for the years ended December 31, 2013 and 2012, respectively.

The fair value of the identifiable intangible assets of $24.1 million, consisting of trade names, non-compete agreements and customer list/relationships, was determined using the income approach. Specifically, the relief-from-royalty method was utilized for the trade names and the discounted cash flows method was utilized for the customer relationships and non-compete agreements. The trade names, $0.8 million, are being amortized over a 5-year period; the non-compete agreements, $1.2 million, are being amortized over periods ranging from 4 to 5 years; and the customer relationships, $22.1 million, are being amortized over periods ranging from 6 to 12 years, the estimated useful lives of the assets.

Proforma results of operations have not been presented because the effect of the acquisitions was not material.

For the acquisitions completed in 2012, the Company has paid $75.8 million of the total consideration of $76.8 million through December 31, 2013. The remaining $1.0 million includes amounts relating to holdback provisions.

Contingency Payments - Aerospace

Included in acquisition costs are contingency payments to the former owners of the Aerospace Orlando facility acquired in 2003. These payments are based on the attainment of certain milestones, and over the term of the agreement could total $25.0 million. These contingency payments are recorded as additional goodwill and totaled $3.5 million, $0.2 million and $0.7 million during 2013, 2012 and 2011, respectively. Through December 31, 2013, the Company has recorded additional goodwill of $16.5 million related to these contingency payments. Payment of $3.5 million recorded in 2013 will occur in the first quarter of 2014.