Kaman Reports 2019 Second Quarter Results

Second Quarter Highlights:

  • Announced the anticipated sale of the Distribution segment
  • Net sales from continuing operations up 5% sequentially to $175 million, 2.2% lower versus prior year on dispositions and foreign currency translation
  • Consolidated operating margin from continuing operations increases 46% over prior year
  • Diluted earnings per share from continuing operations increased $0.06 to $0.23
  • Received U.S. Government approval for our $324 million DCS Contract
  • Record first half order intake for our specialty bearings and engineered products

BLOOMFIELD, Conn.–(BUSINESS WIRE)–Kaman Corp. (NYSE:KAMN) today reported financial results for the second fiscal quarter ended June 28, 2019. During the second quarter, the Company announced the anticipated sale of its Distribution segment to affiliates of Littlejohn & Co., LLC for $700 million in cash, subject to customary closing conditions and working capital adjustments. The Distribution segment results are reported as discontinued operations for all periods in the release.

 

 

 

 

 

 

 

 

 

Table 1. Summary of Financial Results (unaudited)

 

 

 

 

 

 

In thousands except per share amounts

For the Three Months Ended

 

 

 

June 28, 2019

 

June 29, 2018

 

Change

 

 

Net sales from continuing operations:

 

 

 

 

 

 

 

Aerospace

$

174,712

 

 

$

178,606

 

 

$

(3,894

)

 

 

 

 

 

 

 

 

 

 

Operating income from continuing operations:

 

 

 

 

 

 

 

Aerospace

$

24,598

 

 

$

22,741

 

 

$

1,857

 

 

 

% of sales

14.1

%

 

12.7

%

 

1.4

%

 

 

Net gain on sale of assets

 

 

1,528

 

 

(1,528

)

 

 

Corporate expense

(14,023

)

 

(17,043

)

 

3,020

 

 

 

Operating income from continuing operations

$

10,575

 

 

$

7,226

 

 

$

3,349

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*:

 

 

 

 

 

 

 

Earnings from continuing operations

$

6,389

 

 

$

4,778

 

 

$

1,611

 

 

 

Adjustments

10,735

 

 

12,807

 

 

(2,072

)

 

 

Adjusted EBITDA*

$

17,124

 

 

$

17,585

 

 

$

(461

)

 

 

% of sales

9.8

%

 

9.8

%

 

%

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Diluted earnings per share from continuing operations

$

0.23

 

 

$

0.17

 

 

$

0.06

 

 

 

Adjustments

(0.07

)

 

0.01

 

 

(0.08

)

 

 

Adjusted diluted earnings per share from continuing operations*

$

0.16

 

 

$

0.18

 

 

$

(0.02

)

 

 

 

 

 

 

 

 

Neal J. Keating, Chairman, President and Chief Executive Officer, commented, “The second quarter marked an exciting and transformational time for Kaman. During the period, we announced the sale of our Distribution segment, beginning a strategic shift toward focusing on the opportunities to maximize value in our Aerospace business. The divestiture of Distribution remains on track and will provide us significant financial capacity to execute on strategic acquisitions of complementary businesses and organic growth investments.

In our continuing operations, we exit the second quarter with strong sales of $174.7 million, up 5.0% from the first quarter. Sales declined when compared to the second quarter of 2018, due to unfavorable foreign exchange of $1.9 million and the absence of $2.5 million of sales from the Aerospace businesses sold in 2018. Highlighting our performance in the quarter was an 8.2% increase in Aerospace operating profit to $24.6 million, or 14.1% of sales, when compared to the prior year.

We are pleased that through the first six months of 2019 we had record order intake for our specialty bearings and engineered products, supporting our forecasted growth for these products and underscoring the benefits of the investments we continue to make in this business. Also, in July we received authorization from the U.S. Government to begin deliveries under our $324 million JPF DCS contract. We expect to make initial deliveries in September and continue to expect record deliveries of 40,000 to 45,000 fuzes for 2019. Backlog for this program was $427 million at the end of the second quarter and looking ahead we see opportunities to grow backlog through additional sales to foreign militaries and the U.S Government. The expected increase in volume for our JPF DCS and specialty bearing products is expected to lead to higher operating margins in the back half of the year.

During the quarter we continued to make investments to help drive sustained long term organic growth. First, we recently announced the expansion of GRW, our precision bearings operations in Germany. This expansion will allow us to increase capacity to meet the higher forecasted demand, while creating a more efficient layout and increasing the efficiency of our operations. Second, we continue to execute on the development of our K-MAX® unmanned mission management system and we are seeing strong interest from commercial operators for this technology. Lastly, we recently opened our new customer service and delivery center which will support both our K-MAX® and SH-2 Super Seasprite customers. This customer service center includes our brand new K-MAX® flight simulator and consolidates a number of our customer support functions under one roof. These initiatives represent just a sample of the opportunities we have undertaken to drive continued growth in our business.”

Chief Financial Officer, Robert D. Starr, commented, “Through the first six months of 2019 we generated cash flows from continuing operations of $10.9 million. Cash usage in the second quarter was due in part to a buildup of inventory in our Joint Programmable Fuze and self-lubricating bearings products which we expect to deliver in the second half of the year. Sales in the second half of the year are expected to be 20% higher at the mid-point than first half results, leading to expected sales from continuing operations for the full year in the range of $740.0 million to $760.0 million, an increase of $10.0 million in the low end of our previous expectations. The higher volume of JPF DCS and specialty bearing products is expected to contribute to higher operating margins in the second half of the year. As such we expect Aerospace operating margin in the range of 16.7% to 17.2%, a 195 bps increase at the mid-point over our first half performance of 15.0%.

We are progressing towards a third quarter closing of the sale of the Distribution segment. The net proceeds of the sale are expected to be approximately $600 million, after taxes of approximately $75 million and transaction expenses of approximately $25 million to $30 million. Of the approximately $600 million in net proceeds, we will use approximately $100 million to pay down amounts outstanding on our revolving credit facility. We expect to deploy a significant portion of the remaining proceeds toward our acquisition priorities and organic growth initiatives. In addition, we are evaluating the return of capital to shareholders through dividend and share buybacks; however, the scope and timing of these capital return options have not been finalized.”

2019 Outlook

Our revised 2019 outlook for Aerospace performance:

  • Aerospace:

    • Sales of $740.0 million to $760.0 million
    • Operating margins of 16.7% to 17.2%
    • Depreciation and amortization expense of approximately $21.0 million

Please see the MD&A section of the Company’s Form 10-Q filed with the Securities and Exchange Commission concurrently with the issuance of this release for greater detail on our results and various company programs.

A conference call has been scheduled for tomorrow, August 1, 2019, at 8:30 AM ET. Listeners may access the call live by telephone at (844) 473-0975 and from outside the U.S. at (562) 350-0826 using the Conference ID: 33675726; or, via the Internet at www.kaman.com. A replay will also be available two hours after the call and can be accessed at (855) 859-2056 or (404) 537-3406 using the Conference ID: 33675726. In its discussion, management may reference certain non-GAAP financial measures related to company performance. A reconciliation of that information to the most directly comparable GAAP measures is provided in this release.

About Kaman Corporation

Kaman Corporation, founded in 1945 by aviation pioneer Charles H. Kaman, and headquartered in Bloomfield, Connecticut conducts business in the aerospace and industrial distribution markets. The Company produces and markets proprietary aircraft bearings and components; super precision, miniature ball bearings; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; safe and arming solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; restoration, modification and support of our SH-2G Super Seasprite maritime helicopters; manufacture and support of our K-MAX® manned and unmanned medium-to-heavy lift helicopters. More information is available at www.kaman.com.

Table 2. Summary of Segment Information (in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

For the Three Months

Ended

 

For the Six Months

Ended

 

 

June 28,

2019

 

June 29,

2018

 

June 28,

2019

 

June 29,

2018

Net sales from continuing operations:

 

 

 

 

 

 

 

 

Aerospace

 

$

174,712

 

 

$

178,606

 

 

$

341,146

 

 

$

358,001

 

 

 

 

 

 

 

 

 

 

Operating income from continuing operations:

 

 

 

 

 

 

 

 

Aerospace

 

$

24,598

 

 

$

22,741

 

 

$

51,210

 

 

$

45,403

 

Net gain (loss) on sale of assets

 

 

 

1,528

 

 

65

 

 

1,589

 

Corporate expense

 

(14,023

)

 

(17,043

)

 

(28,331

)

 

(31,150

)

Operating income from continuing operations

 

$

10,575

 

 

$

7,226

 

 

$

22,944

 

 

$

15,842

 

Table 3. Depreciation and Amortization from continuing operations (in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

For the Three Months

Ended

 

For the Six Months

Ended

 

 

June 28,

2019

 

June 29,

2018

 

June 28,

2019

 

June 29,

2018

Depreciation and Amortization:

 

 

 

 

 

 

 

 

Aerospace

 

$

5,457

 

 

$

6,202

 

 

$

10,775

 

 

$

12,512

 

Corporate

 

786

 

 

834

 

 

1,590

 

 

1,679

 

Consolidated Total

 

$

6,243

 

 

$

7,036

 

 

$

12,365

 

 

$

14,191

 

Non-GAAP Measures Disclosure

Management believes that the Non-GAAP financial measures (i.e. Financial measures that are not computed in accordance with Generally Accepted Accounting Principles) identified by an asterisk (*) used in this release or in other disclosures provide important perspectives into the Company’s ongoing business performance. The Company does not intend for the information to be considered in isolation or as a substitute for the related GAAP measures. Other companies may define the measures differently. We define the Non-GAAP measures used in this release and other disclosures as follows:

Organic Sales – Organic Sales is defined as “Net Sales” less sales derived from acquisitions completed during the preceding twelve months. We believe that this measure provides management and investors with a more complete understanding of underlying operating results and trends of established, ongoing operations by excluding the effect of acquisitions, which can obscure underlying trends. We also believe that presenting Organic Sales separately for our segments provides management and investors with useful information about the trends impacting our segments and enables a more direct comparison to other businesses and companies in similar industries. Management recognizes that the term “Organic Sales” may be interpreted differently by other companies and under different circumstances. No other adjustments were made during the three-month and six-month fiscal periods ended June 28, 2019 and June 29, 2018, respectively. The following table illustrates the calculation of Organic Sales using the GAAP measure, “Net Sales”.

Table 4. Organic Sales from continuing operations (in thousands) (unaudited)

 

 

 

 

 

 

 

 

For the Three Months

Ended

 

For the Six Months

Ended

 

 

June 28,

2019

 

June 29,

2018

 

June 28,

2019

 

June 29,

2018

Aerospace

 

 

 

 

 

 

 

 

Net sales

 

$

174,712

 

 

$

178,606

 

 

$

341,146

 

 

$

358,001

 

Acquisition Sales

 

 

 

 

 

 

 

 

Organic Sales

 

$

174,712

 

 

$

178,606

 

 

$

341,146

 

 

$

358,001

 

Adjusted EBITDA from continuing operations – Adjusted EBITDA from continuing operations is defined as earnings from continuing operations before interest, taxes, other expense (income), net, depreciation and amortization and certain items that are not indicative of the operating performance of the Company’s segments or corporate function for the period presented. Adjusted EBITDA from continuing operations differs from earnings from continuing operations, as calculated in accordance with GAAP, in that it excludes interest expense, net, income tax expense, depreciation and amortization, other expense (income), net and certain items that are not indicative of the operating performance of the Company’s segments or corporate function for the period presented. We have made numerous investments in our business, such as acquisitions and capital expenditures, including facility improvements, new machinery and equipment, improvements to our information technology infrastructure and new ERP systems, which we have adjusted for in Adjusted EBITDA from continuing operations. Adjusted EBITDA from continuing operations also does not give effect to cash used for debt service requirements and thus does not reflect funds available for distributions, reinvestments or other discretionary uses.

Management believes Adjusted EBITDA from continuing operations provides an additional perspective on the operating results of the organization and its earnings capacity and helps improve the comparability of our results between periods because it provides a view of our operations that excludes items that management believes are not reflective of operating performance, such as items traditionally removed from net earnings in the calculation of EBITDA as well as Other expense (income), net and certain items that are not indicative of the operating performance of the Company’s segments or corporate function for the period presented. Adjusted EBITDA from continuing operations is not presented as an alternative measure of operating performance, as determined in accordance with GAAP. No other adjustments were made during the three-month and six-month fiscal periods ended June 28, 2019 and June 29, 2018. The following table illustrates the calculation of Adjusted EBITDA from continuing operations using GAAP measures:

Table 5. Adjusted EBITDA from continuing operations (in thousands) (unaudited)

 

 

 

 

 

 

 

 

For the Three Months

Ended

 

For the Six Months

Ended

 

 

June 28,

2019

 

June 29,

2018

 

June 28,

2019

 

June 29,

2018

Adjusted EBITDA from continuing operations

 

 

 

 

 

 

 

 

Consolidated Results

 

 

 

 

 

 

 

 

Sales from continuing operations

 

$

174,712

 

 

$

178,606

 

 

$

341,146

 

 

$

358,001

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

6,389

 

 

$

4,778

 

 

$

12,211

 

 

$

9,748

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

5,236

 

 

5,000

 

 

10,537

 

 

10,323

 

Income tax (benefit) expense

 

(487

)

 

123

 

 

947

 

 

1,817

 

Other (income) expense, net

 

(463

)

 

364

 

 

(552

)

 

22

 

Depreciation and amortization

 

6,243

 

 

7,036

 

 

12,365

 

 

14,191

 

Other Adjustments:

 

 

 

 

 

 

 

 

Restructuring and severance costs

 

206

 

 

1,804

 

 

472

 

 

3,497

 

Gain on the sale of land

 

 

 

(1,520

)

 

 

 

(1,520

)

Adjustments

 

$

10,735

 

 

$

12,807

 

 

$

23,769

 

 

$

28,330

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from continuing operations

 

$

17,124

 

 

$

17,585

 

 

$

35,980

 

 

$

38,078

 

Adjusted EBITDA margin

 

9.8

%

 

9.8

%

 

10.5

%

 

10.6

%

Free Cash Flow from continuing operations – Free Cash Flow from continuing operations is defined as GAAP “Net cash provided by (used in) operating activities” in a period less “Expenditures for property, plant & equipment” in the same period. Management believes Free Cash Flow from continuing operations provides an important perspective on our ability to generate cash from our business operations and, as such, that it is an important financial measure for use in evaluating the Company’s financial performance. Free Cash Flow from continuing operations should not be viewed as representing the residual cash flow available for discretionary expenditures such as dividends to shareholders or acquisitions, as it may exclude certain mandatory expenditures such as repayment of maturing debt and other contractual obligations. Management uses Free Cash Flow from continuing operations internally to assess overall liquidity. The following table illustrates the calculation of Free Cash Flow from continuing operations using “Net cash provided by (used in) operating activities from continuing operations” and “Expenditures for property, plant & equipment”, GAAP measures from the Condensed Consolidated Statements of Cash Flows included in this release.

Table 6. Free Cash Flow from continuing operations (in thousands) (unaudited)

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

June 28,

2019

 

June 29,

2018

 

2019 vs. 2018

Net cash provided by operating activities from continuing operations

 

$

10,862

 

 

$

79,715

 

 

$

(68,853

)

Expenditures for property, plant & equipment

 

(11,375

)

 

(10,831

)

 

(544

)

Free Cash Flow from continuing operations

 

$

(513

)

 

$

68,884

 

 

$

(69,397

)

Debt to Capitalization Ratio – Debt to Capitalization Ratio is calculated by dividing debt by capitalization. Debt is defined as GAAP “Current portion of long-term debt” plus “Long-term debt, excluding current portion”. Capitalization is defined as Debt plus GAAP “Total shareholders’ equity”. Management believes that Debt to Capitalization Ratio is a measurement of financial leverage and provides an insight into the financial structure of the Company and its financial strength. The following table illustrates the calculation of Debt to Capitalization Ratio using GAAP measures from the Condensed Consolidated Balance Sheets included in this release.

Table 7. Debt to Capitalization Ratio (in thousands) (unaudited)

 

 

 

 

 

 

June 28, 2019

 

December 31, 2018

Current portion of long-term debt

 

$

127,603

 

 

$

9,375

 

Long-term debt, excluding current portion, net of debt issuance costs

 

180,196

 

 

284,256

 

Debt

 

$

307,799

 

 

$

293,631

 

Total shareholders’ equity

 

658,169

 

 

633,157

 

Capitalization

 

$

965,968

 

 

$

926,788

 

Debt to Capitalization Ratio

 

31.9

%

 

31.7

%

Adjusted Earnings from Continuing Operations and Adjusted Diluted Earnings Per Share from Continuing Operations – Adjusted Earnings from Continuing Operations and Adjusted Diluted Earnings per Share from Continuing Operations are defined as GAAP “Earnings from Continuing Operations” and “Diluted earnings per share from continuing operations”, less items that are not indicative of the operating performance of the business for the periods presented. These items are included in the reconciliation below. Management uses Adjusted Earnings from Continuing Operations and Adjusted Diluted Earnings per Share from Continuing Operations to evaluate performance period over period, to analyze the underlying trends in our business and to assess its performance relative to its competitors. We believe that this information is useful for investors and financial institutions seeking to analyze and compare companies on the basis of operating performance.

The following table illustrates the calculation of Adjusted Earnings from Continuing Operations and Adjusted Diluted Earnings per Share from Continuing Operations using “Earnings from Continuing Operations” and “Diluted earnings per share from continuing operations” from the “Consolidated Statements of Operations” included in the Company’s Form 10-Q filed with the Securities and Exchange Commission on July 31, 2019.

Table 8. Adjusted Earnings from continuing operations and Adjusted Diluted Earnings per Share from continuing operations

 

 

 

 

(In thousands except per share amounts) (unaudited)

 

 

 

 

 

 

For the Three Months

Ended

 

For the Six Months

Ended

 

 

June 28,

2019

 

June 29,

2018

 

June 28,

2019

 

June 29,

2018

Adjustments to Earnings from Continuing Operations, pre tax

 

 

 

 

 

 

 

 

Restructuring and severance costs at Aerospace

 

$

206

 

 

$

1,804

 

 

$

472

 

 

$

3,497

 

Benefit from change in state tax laws

 

(2,137

)

 

 

 

(2,137

)

 

 

Gain on the sale of land

 

 

 

(1,520

)

 

 

 

(1,520

)

Adjustments, pre tax

 

$

(1,931

)

 

$

284

 

 

$

(1,665

)

 

$

1,977

 

 

 

 

 

 

 

 

 

 

Tax Effect of Adjustments to Earnings from Continuing Operations

 

 

 

 

 

 

 

 

Restructuring and severance costs at Aerospace

 

$

(17

)

 

$

451

 

 

$

34

 

 

$

874

 

Benefit from change in state tax laws

 

 

 

 

 

 

 

 

Gain on the sale of land

 

 

 

(380

)

 

 

 

(380

)

Tax effect of Adjustments

 

$

(17

)

 

$

71

 

 

$

34

 

 

$

494

 

 

 

 

 

 

 

 

 

 

Adjustments to Earnings from Continuing Operations, net of tax

 

 

 

 

 

 

 

 

GAAP Earnings from continuing operations, as reported

 

$

6,389

 

 

$

4,778

 

 

$

12,211

 

 

$

9,748

 

Restructuring and severance costs at Aerospace

 

223

 

 

1,353

 

 

438

 

 

2,623

 

Benefit from change in state tax laws

 

(2,137

)

 

 

 

(2,137

)

 

 

Gain on the sale of land

 

 

 

(1,140

)

 

 

 

(1,140

)

Adjusted Earnings from continuing operations

 

$

4,475

 

 

$

4,991

 

 

$

10,512

 

 

$

11,231

 

 

 

 

 

 

 

 

 

 

Calculation of Adjusted Diluted Earnings per Share from Continuing Operations

 

 

 

 

 

 

 

 

GAAP diluted earnings per share from continuing operations

 

$

0.23

 

 

$

0.17

 

 

$

0.43

 

 

$

0.34

 

Restructuring and severance costs at Aerospace

 

0.01

 

 

0.05

 

 

0.02

 

 

0.09

 

Benefit from change in state tax laws

 

(0.08

)

 

 

 

(0.08

)

 

 

Gain on the sale of land

 

 

 

(0.04

)

 

 

 

(0.04

)

Adjusted Diluted Earnings per Share from continuing operations

 

$

0.16

 

 

$

0.18

 

 

$

0.37

 

 

$

0.39

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

28,123

 

 

28,349

 

 

28,097

 

 

28,258

 

Adjusted Net Sales from continuing operations and Adjusted Operating Income from continuing operations – Adjusted Net Sales from continuing operations is defined as net sales from continuing operations, less items not indicative of normal sales, such as revenue recorded related to the settlement of claims. Adjusted Operating Income from continuing operations is defined as operating income from continuing operations, less items that are not indicative of the operating performance of the Company’s segments or corporate function for the period presented. These items are included in the reconciliation below. Management uses Adjusted Net Sales from continuing operations and Adjusted Operating Income from continuing operations to evaluate performance period over period, to analyze underlying trends in our segments and corporate function and to assess their performance relative to their competitors. We believe that this information is useful for investors and financial institutions seeking to analyze and compare companies on the basis of operating performance. The following table illustrates the calculation of Adjusted Operating Income from continuing operations using information found in Note 18, Segment and Geographic Information, to the Consolidated Financial Statements included in the Company’s Form 10-Q filed with the Securities and Exchange Commission on July 31, 2019.

Table 9. Adjusted Net Sales and Adjusted Operating Income from Continuing Operations

 

 

 

 

(In thousands) (unaudited)

 

 

 

 

 

 

For the Three Months

Ended

 

For the Six Months

Ended

 

 

June 28,

2019

 

June 29,

2018

 

June 28,

2019

 

June 29,

2018

AEROSPACE SEGMENT OPERATING INCOME:

 

 

 

 

 

 

 

 

Net Sales

 

$

174,712

 

 

$

178,606

 

 

$

341,146

 

 

$

358,001

 

GAAP Operating income – Aerospace segment

 

$

24,598

 

 

$

22,741

 

 

$

51,210

 

 

$

45,403

 

% of GAAP net sales

 

14.1

%

 

12.7

%

 

15.0

%

 

12.7

%

Restructuring and severance costs

 

206

 

 

1,804

 

 

472

 

 

3,497

 

Adjusted Operating Income – Aerospace segment

 

$

24,804

 

 

$

24,545

 

 

$

51,682

 

 

$

48,900

 

% of GAAP net sales

 

14.2

%

 

13.7

%

 

15.1

%

 

13.7

%

CORPORATE EXPENSE:

 

 

 

 

 

 

 

 

GAAP Corporate Expense

 

$

(14,023

)

 

$

(17,043

)

 

$

(28,331

)

 

$

(31,150

)

CONSOLIDATED OPERATING INCOME:

 

 

 

 

 

 

 

 

Net Sales from continuing operations

 

$

174,712

 

 

$

178,606

 

 

$

341,146

 

 

$

358,001

 

GAAP – Operating income from continuing operations

 

$

10,575

 

 

$

7,226

 

 

$

22,944

 

 

$

15,842

 

% of GAAP net sales

 

6.1

%

 

4.0

%

 

6.7

%

 

4.4

%

Restructuring and severance costs

 

206

 

 

1,804

 

 

472

 

 

3,497

 

Gain on sale of land

 

 

 

(1,520

)

 

 

 

(1,520

)

Adjusted Operating Income

 

$

10,781

 

 

$

7,510

 

 

$

23,416

 

 

$

17,819

 

% of GAAP net sales

 

6.2

%

 

4.2

%

 

6.9

%

 

5.0

%

Contacts

James Coogan

V.P., Investor Relations

(860) 243-6342

James.Coogan@kaman.com

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