Kaman Reports 2019 Third Quarter Results

Third Quarter Highlights:

  • Completed Sale of the Distribution segment for $700 million in cash
  • Net sales from continuing operations up 16% to $183.0 million versus prior year
  • Aerospace GAAP operating margin increased to 18.7% from 4.6% in the prior year; Adjusted operating margin* increased 570 basis points compared to the prior year period
  • Earnings from continuing operations increased $19.6 million; Adjusted EBITDA* increased $9.7 million for an Adjusted EBITDA margin* of 14.7%, up 380 basis points over the prior year
  • Diluted earnings per share from continuing operations increased $0.70 to $0.36

BLOOMFIELD, Conn.–(BUSINESS WIRE)–Kaman Corp. (NYSE:KAMN) today reported financial results for the third fiscal quarter ended September 27, 2019. During the third quarter, the Company completed the sale of its Distribution segment for $700 million in cash, excluding certain working capital adjustments. The Distribution segment results are reported as discontinued operations for all periods presented in this release.

 

 

 

 

 

 

 

 

 

Table 1. Summary of Financial Results (unaudited)

 

 

 

 

 

 

In thousands except per share amounts

For the Three Months Ended

 

 

 

September 27,

2019

 

September 28,

2018

 

Change

 

 

 

 

 

 

 

 

 

 

Net sales from continuing operations

$

182,670

 

 

$

157,134

 

 

$

25,536

 

 

 

 

 

 

 

 

 

 

 

Operating income from continuing operations:

 

 

 

 

 

 

 

Aerospace

$

34,142

 

 

$

7,206

 

 

$

26,936

 

 

 

% of sales

18.7

%

 

4.6

%

 

14.1

%

 

 

Net (loss) gain on sale of assets

(416

)

 

(30

)

 

(386

)

 

 

Corporate expense

(18,099

)

 

(14,174

)

 

(3,925

)

 

 

Operating income from continuing operations

$

15,627

 

 

$

(6,998

)

 

$

22,625

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*:

 

 

 

 

 

 

 

Earnings from continuing operations

$

10,130

 

 

$

(9,503

)

 

$

19,633

 

 

 

Adjustments

16,767

 

 

26,661

 

 

(9,894

)

 

 

Adjusted EBITDA*

$

26,897

 

 

$

17,158

 

 

$

9,739

 

 

 

% of sales

14.7

%

 

10.9

%

 

3.8

%

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Diluted earnings per share from continuing operations

$

0.36

 

 

$

(0.34

)

 

$

0.70

 

 

 

Adjustments

0.10

 

 

0.48

 

 

(0.38

)

 

 

Adjusted diluted earnings per share from continuing operations*

$

0.46

 

 

$

0.14

 

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

Neal J. Keating, Chairman, President and Chief Executive Officer, commented, “We executed well in the third quarter delivering a significant increase in sales over the prior year period, generating a $0.70 increase in diluted earnings per share from continuing operations, or more than a 200% increase in adjusted earnings per diluted share*. Since we announced the closing of the sale of Distribution in late August, we have been focused on setting the foundation for our next stage of growth. A key step in this process is accelerating our M&A program to deploy available capital with a focus on companies that combine innovative engineering capabilities and world class manufacturing, while extending our reach into new growth markets.

We are also undertaking a comprehensive review of our general and administrative functions in order to improve operational efficiency and to align our costs with revenues. The objective of this initiative is to ensure that we have an organizational structure that will enable us to successfully compete, while streamlining processes, reducing costs, and providing a scalable infrastructure that will allow us to more effectively integrate new acquisitions. Based on the work we have performed to date, we expect full year run rate savings from these actions to be towards the high end of our prior range of $15 million to $20 million exiting 2020.

In addition, we look to build upon our legacy as a premier designer and manufacturer of highly engineered products across the aerospace and defense, medical and industrial markets. These efforts incorporate investments to drive organic growth including expanded unmanned capabilities and new composite rotor blades for the K-MAX®, laser guided height of burst sensor and next generation safe and arm technologies, and investments in new specialty bearings and engineered products families including titanium diffusion hardening. We have also been investing in facility expansions and upgrades in the U.S., Germany and the Czech Republic to increase capacity. Today, we have extraordinary businesses and we are investing across our portfolio to ensure we are positioned for growth.”

Chief Financial Officer, Robert D. Starr, commented, “During the quarter we closed the sale of the Distribution business for $700 million, or approximately $600 million net of transaction expenses and estimated taxes. We paid down all amounts outstanding under our revolving credit facility which lowered our debt to capitalization ratio* to 18.6% with the only debt outstanding associated with our convertible notes. As we look to redeployment, we have approximately $1.0 billion of available capital from debt and cash and we expect to use a significant portion of this to execute on acquisitions and organic growth initiatives. We remain disciplined and patient in our approach and will execute on opportunities that best align with our strategic objectives.

Sales for the quarter increased 16.3% to $182.7 million when compared to the third quarter of 2018. Higher sales primarily resulted from increased sales for our specialty bearings products and initial deliveries under our $324 million JPF DCS contract. These increases were partially offset by lower revenue on our JPF USG program, a $1.4 million foreign currency headwind, and the absence of $1.3 million in sales from the disposition of our engineering services and UK tooling businesses in 2018.

Operating profit of $15.6 million increased $22.6 million over the prior year period due to an increase in profit across our product offerings and the absence of a $10.0 million intangible asset impairment charge recorded in the prior year period. When adjusted for $3.0 million in costs related to our corporate development activities and $1.2 million in costs associated with the transition services agreement with Distribution, adjusted operating income* more than doubled to $19.9 million, from adjusted operating income* of $7.3 million in the prior-year period. Stronger operating margin resulted from the mix of JPF DCS orders and specialty bearings sales, as well as improved operating results from a number of our aerospace structures programs.

Through the first nine months of 2019 we had cash flows from continuing operations of $11.3 million and free cash flow* use of $6.1 million. As highlighted in our second quarter remarks, cash usage was due to the buildup of inventory in our Joint Programmable Fuze and self-lubricating bearings products to support the strong sales we experienced in the third quarter and expect to continue in the fourth quarter of 2019. We are leaving our guidance unchanged for 2019, with full year sales from continuing operations in the range of $740.0 million to $760.0 million and Aerospace operating margin in the range of 16.7% to 17.2% based on increased volumes of our JPF DCS and specialty bearings products in the fourth quarter.”

2019 Outlook

Our 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, November 5, 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: 4530599; 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: 4530599. 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 was founded in 1945 by aviation pioneer Charles H. Kaman. Headquartered in Bloomfield, Connecticut. The Company conducts business in the aerospace & defense, industrial, and medical markets. The Company produces and/or markets widely used 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; aerostructure engineering design analysis and FAA certification services; safe and arming solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; production of the K-MAX® medium-to-heavy lift helicopter; and support for the company’s SH-2G Super Seasprite maritime aircraft. More information is available at www.kaman.com.

Table 2. Summary of Segment Information

(in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 27,

2019

 

September 28,

2018

 

September 27,

2019

 

September 28,

2018

Net sales from continuing operations:

 

 

 

 

 

 

 

 

Aerospace

 

$

182,670

 

 

$

157,134

 

 

$

523,816

 

 

$

515,135

 

 

 

 

 

 

 

 

 

 

Operating income from continuing operations:

 

 

 

 

 

 

 

 

Aerospace

 

$

34,142

 

 

$

7,206

 

 

$

85,352

 

 

$

52,609

 

Net (loss) gain on sale of assets

 

(416

)

 

(30

)

 

(351

)

 

1,559

 

Corporate expense

 

(18,099

)

 

(14,174

)

 

(46,430

)

 

(45,324

)

Operating income from continuing operations

 

$

15,627

 

 

$

(6,998

)

 

$

38,571

 

 

$

8,844

 

Table 3. Depreciation and Amortization from

continuing operations (in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 27,

2019

 

September 28,

2018

 

September 27,

2019

 

September 28,

2018

Depreciation and Amortization:

 

 

 

 

 

 

 

 

Aerospace

 

$

6,156

 

 

$

6,049

 

 

$

16,931

 

 

$

18,561

 

Corporate

 

787

 

 

840

 

 

2,377

 

 

2,519

 

Consolidated Total

 

$

6,943

 

 

$

6,889

 

 

$

19,308

 

 

$

21,080

 

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 nine-month fiscal periods ended September 27, 2019 and September 28, 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 Nine Months Ended

 

 

September 27,

2019

 

September 28,

2018

 

September 27,

2019

 

September 28,

2018

Aerospace

 

 

 

 

 

 

 

 

Net sales

 

$

182,670

 

 

$

157,134

 

 

$

523,816

 

 

$

515,135

 

Acquisition Sales

 

 

 

 

 

 

 

 

Organic Sales

 

$

182,670

 

 

$

157,134

 

 

$

523,816

 

 

$

515,135

 

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 nine-month fiscal periods ended September 27, 2019 and September 28, 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 Nine Months Ended

 

 

September 27,

2019

 

September 28,

2018

 

September 27,

2019

 

September 28,

2018

Adjusted EBITDA from continuing operations

 

 

 

 

 

 

 

 

Consolidated Results

 

 

 

 

 

 

 

 

Sales from continuing operations

 

$

182,670

 

 

$

157,134

 

 

$

523,816

 

 

$

515,135

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

10,130

 

 

$

(9,503

)

 

$

22,341

 

 

$

245

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

4,058

 

 

5,084

 

 

14,595

 

 

15,407

 

Income tax expense

 

2,297

 

 

559

 

 

3,244

 

 

2,376

 

Other (income) expense, net

 

185

 

 

(163

)

 

(367

)

 

(141

)

Depreciation and amortization

 

6,943

 

 

6,889

 

 

19,308

 

 

21,080

 

Other Adjustments:

 

 

 

 

 

 

 

 

Restructuring and severance costs

 

81

 

 

1,214

 

 

553

 

 

4,711

 

Non-cash intangible asset impairment charge

 

 

 

10,039

 

 

 

 

10,039

 

Non-cash write-off of inventory

 

 

 

709

 

 

 

 

709

 

Employee tax-related matters in foreign operations

 

 

 

1,279

 

 

 

 

1,279

 

Cost associated with corporate development activities

 

2,993

 

 

1,051

 

 

2,993

 

 

1,051

 

Costs from transition services agreement

 

1,154

 

 

 

 

1,154

 

 

 

Income from transition services agreement

 

(944

)

 

 

 

(944

)

 

 

Gain on the sale of land

 

 

 

 

 

 

 

(1,520

)

Adjustments

 

$

16,767

 

 

$

26,661

 

 

$

40,536

 

 

$

54,991

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from continuing operations

 

$

26,897

 

 

$

17,158

 

 

$

62,877

 

 

$

55,236

 

Adjusted EBITDA margin

 

14.7

%

 

10.9

%

 

12.0

%

 

10.7

%

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 Nine

Months Ended

 

For the Six

Months Ended

 

For the Three

Months Ended

 

 

September 27,

2019

 

June 28,

2019

 

September 27,

2019

Net cash provided by operating activities from continuing operations

 

$

11,336

 

 

$

10,862

 

 

$

474

 

Expenditures for property, plant & equipment

 

(17,411

)

 

(11,375

)

 

(6,036

)

Free Cash Flow from continuing operations

 

$

(6,075

)

 

$

(513

)

 

$

(5,562

)

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)

 

 

 

 

 

 

September 27, 2019

 

December 31, 2018

Current portion of long-term debt

 

$

 

 

$

9,375

 

Long-term debt, excluding current portion

 

180,653

 

 

284,256

 

Debt

 

$

180,653

 

 

$

293,631

 

Total shareholders’ equity

 

788,944

 

 

633,157

 

Capitalization

 

$

969,597

 

 

$

926,788

 

Debt to Capitalization Ratio

 

18.6

%

 

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 November 4, 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 Nine Months Ended

 

 

September 27,

2019

 

September 28,

2018

 

September 27,

2019

 

September 28,

2018

Adjustments to Earnings from Continuing Operations, pre tax

 

 

 

 

 

 

 

 

Restructuring and severance costs at Aerospace

 

$

81

 

 

$

1,214

 

 

$

553

 

 

$

4,711

 

Costs associated with corporate development activities

 

2,993

 

 

1,051

 

 

2,993

 

 

1,051

 

Costs from transition services agreement

 

1,154

 

 

 

 

1,154

 

 

 

Income from transition services agreement

 

(944

)

 

 

 

(944

)

 

 

Benefit from change in state tax laws

 

 

 

 

 

(2,137

)

 

 

Non-cash non-taxable intangible assets impairment charge

 

 

 

10,039

 

 

 

 

10,039

 

Non-cash non-taxable write-off of inventory

 

 

 

709

 

 

 

 

709

 

Employee tax-related matters in foreign operations

 

 

 

1,279

 

 

 

 

1,279

 

Gain on the sale of land

 

 

 

 

 

 

 

(1,520

)

Adjustments, pre tax

 

$

3,284

 

 

$

14,292

 

 

$

1,619

 

 

$

16,269

 

 

 

 

 

 

 

 

 

 

Tax Effect of Adjustments to Earnings from Continuing Operations

 

 

 

 

 

 

 

 

Restructuring and severance costs at Aerospace

 

$

15

 

 

$

304

 

 

$

70

 

 

$

1,178

 

Costs associated with corporate development activities

 

554

 

 

263

 

 

380

 

 

263

 

Costs from transition services agreement

 

213

 

 

 

 

147

 

 

 

Income from transition services agreement

 

(175

)

 

 

 

(120

)

 

 

Benefit from change in state tax laws

 

 

 

 

 

 

 

 

Non-cash non-taxable intangible assets impairment charge

 

 

 

 

 

 

 

 

Non-cash non-taxable write-off of inventory

 

 

 

 

 

 

 

 

Employee tax-related matters in foreign operations

 

 

 

320

 

 

 

 

320

 

Gain on the sale of land

 

 

 

 

 

 

 

(380

)

Tax effect of Adjustments

 

$

607

 

 

$

887

 

 

$

477

 

 

$

1,381

 

 

 

 

 

 

 

 

 

 

Adjustments to Earnings from Continuing Operations, net of tax

 

 

 

 

 

 

 

 

GAAP Earnings from continuing operations, as reported

 

$

10,130

 

 

$

(9,503

)

 

$

22,341

 

 

$

245

 

Restructuring and severance costs at Aerospace

 

66

 

 

910

 

 

483

 

 

3,533

 

Costs associated with corporate development activities

 

2,439

 

 

788

 

 

2,613

 

 

788

 

Costs from transition services agreement

 

941

 

 

 

 

1,007

 

 

 

Income from transition services agreement

 

(769

)

 

 

 

(824

)

 

 

Benefit from change in state tax laws

 

 

 

 

 

(2,137

)

 

 

Non-cash non-taxable intangible assets impairment charge

 

 

 

10,039

 

 

 

 

10,039

 

Non-cash non-taxable write-off of inventory

 

 

 

709

 

 

 

 

709

 

Employee tax-related matters in foreign operations

 

 

 

959

 

 

 

 

959

 

Gain on the sale of land

 

 

 

 

 

 

 

(1,140

)

Adjusted Earnings from continuing operations

 

$

12,807

 

 

$

3,902

 

 

$

23,483

 

 

$

15,133

 

 

 

 

 

 

 

 

 

 

Calculation of Adjusted Diluted Earnings per Share from Continuing Operations

 

 

 

 

 

 

 

 

GAAP diluted earnings per share from continuing operations

 

$

0.36

 

 

$

(0.34

)

 

$

0.79

 

 

$

0.01

 

Restructuring and severance costs at Aerospace

 

 

 

0.03

 

 

0.02

 

 

0.13

 

Costs associated with corporate development activities

 

0.09

 

 

0.03

 

 

0.09

 

 

0.03

 

Costs from transition services agreement

 

0.04

 

 

 

 

0.04

 

 

 

Income from transition services agreement

 

(0.03

)

 

 

 

(0.03

)

 

 

Benefit from change in state tax laws

 

 

 

 

 

(0.07

)

 

 

Non-cash non-taxable intangible assets impairment charge

 

 

 

0.36

 

 

 

 

0.35

 

Non-cash non-taxable write-off of inventory

 

 

 

0.03

 

 

 

 

0.03

 

Employee tax-related matters in foreign operations

 

 

 

0.03

 

 

 

 

0.03

 

Gain on the sale of land

 

 

 

 

 

 

 

(0.04

)

Adjusted Diluted Earnings per Share from continuing operations

 

$

0.46

 

 

$

0.14

 

 

$

0.84

 

 

$

0.54

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

28,117

 

 

28,258

 

 

28,104

 

 

28,258

 

Contacts

James Coogan

V.P., Investor Relations

(860) 243-6342

James.Coogan@kaman.com

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