Kaman

AR 13

Financials

Part II

Financials/Financial Statements and Supplementary Data/Notes to Consolidated Financial Statements – Note 8

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

8. INVENTORIES

Inventories consist of the following:

At December 31,
In thousands 2013 2012
Merchandise for resale $ 152,194 $ 137,426
Merchandise for resale 20,609 16,557
Contracts in process:
U.S. Government, net of progress payments of $10,492
and $39,420 in 2013 and 2012, respectively
105,737 86,880
Commercial and other government contracts 71,044 33,456
Other work in process (including certain general stock materials) 28,439 79,340
Finished goods 12,472 13,726
Total $ 390,495 $ 367,385

The increase in merchandise for resale in 2013 is partially attributable to the Distribution segment acquisitions.

General and administrative costs incurred by the Aerospace segment operations that charged such costs to inventory during 2013 and 2012 were $37.4 million and $42.2 million, respectively. The estimated amounts of general and administrative costs remaining in contracts in process at December 31, 2013 and 2012, are $5.4 million and $10.4 million, respectively. These estimates are based on the ratio of such costs to total costs of production.

The Company had inventory of $8.0 million and $7.5 million as of December 31, 2013 and 2012, respectively, on consignment at customer locations, the majority of which is located with Distribution segment customers.

Inventories include amounts associated with matters such as contract changes, negotiated settlements and claims for unanticipated contract costs, which totaled $11.6 million and $6.9 million at December 31, 2013 and 2012, respectively. The increase in this balance was primarily due to the addition of $4.2 million in claims associated with a composites assembly program.

K-MAX® inventory of $17.0 million and $18.0 million as of December 31, 2013 and 2012, respectively, is included in contracts and other work in process inventory and finished goods. A substantial portion of the decrease in this balance reflects inventory being used on our contract for K-MAX® unmanned aircraft systems. Management believes that a significant portion of this K-MAX® inventory will be sold after December 31, 2014, based upon the anticipation of supporting the fleet for the foreseeable future.

At December 31, 2013 and 2012, $43.8 million and $52.6 million, respectively, of SH-2G(I), formerly SH-2G(A), inventory was included on the Company's balance sheet in contracts and other work in process inventory. On May 8, 2013, the Company announced that it had 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. 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. For more information on the SH-2G(I) inventory, see Note 17, Commitments and Contingencies.