Kaman

AR 13

Financials

Part II

Financials/Management's Discussion and Analysis of Financial Condition and Results of Operations/Liquidity and Capital Resources – Part 1

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.

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
  1. 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.

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.