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 – Distribution Segment

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.

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 %
  1. Sales contributed by an acquisition are included in organic sales beginning with the thirteenth month following the date of acquisition. Prior period information is adjusted to reflect acquisition sales for that period as organic sales when calculating organic sales per sales day.

Net sales for 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.

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.