Kaman Reports 2018 Third Quarter Results

Kaman Reports 2018 Third Quarter Results

01 November 2018

Third Quarter Highlights:

  • Diluted earnings per share of $0.05, or $0.57 adjusted*
  • Year-to-date operating cash flow of $127.4 million; Free Cash Flow*
    of $103.8 million
  • Consolidated backlog of $1.0 billion, a 35.6% increase since year
    end
  • Distribution operating margin of 5.1%, or 5.3% adjusted*, on a
    sales increase of 6.8%
  • Aerospace operating margin of 4.6%, or 13.0% adjusted*, on sales of
    $157.1 million
  • Non-cash impairment charge of $10.0 million at Aerospace

BLOOMFIELD, Conn.–(BUSINESS WIRE)–Nov. 1, 2018–
Kaman Corp. (NYSE:KAMN) today reported financial results for the third
fiscal quarter ended September 28, 2018, as follows:

                   
    Table 1. Summary of Financial Results (unaudited)      

In thousands except per share amounts

   

 

For the Three Months Ended
September 28,
2018
September 29,
2017

     Change     

Net sales:
Distribution $ 285,924 $ 267,641 $ 18,283
Aerospace 157,134   179,405   (22,271 )
Net sales $ 443,058   $ 447,046   $ (3,988 )
 
Operating income:
Distribution $ 14,592 $ 13,092 $ 1,500
% of sales 5.1 % 4.9 % 0.2 %
Aerospace 7,206 31,318 (24,112 )
% of sales 4.6 % 17.5 % (12.9 )%
Net gain (loss) on sale of assets 640 212 428
Corporate expense (15,182 ) (14,942 ) (240 )
Operating income $ 7,256   $ 29,680   $ (22,424 )
 
Adjusted EBITDA*:
Net earnings $ 1,432 $ 16,280 $ (14,848 )
Adjustments 35,020   29,242   5,778  
Adjusted EBITDA* $ 36,452   $ 45,522   $ (9,070 )
% of sales 8.2 % 10.2 % (2.0 )%
 
Earnings per share:
Diluted earnings per share $ 0.05 $ 0.58 $ (0.53 )
Adjustments 0.52   0.11   0.41  
Adjusted Diluted Earnings per Share* $ 0.57   $ 0.69   $ (0.12 )
                                     
 

Neal J. Keating, Chairman, President and Chief Executive Officer,
commented, “Our third quarter results were below expectations as we
recorded a non-cash non-tax deductible impairment charge in our U.K.
operations and we experienced some shipment delays and adverse sales mix
for several of our key aerospace programs. The shipment and mix issues
are timing related and we expect to be fully recovered in early 2019.
Our distribution business performed very well in the quarter with higher
sales and improved margins, while our Free Cash Flow* generation
continued to be very strong.

Based on our third quarter results and the expected shift of additional
sales into 2019, we are revising our outlook for the remainder of the
year. The most significant change is the delay of a Joint Programmable
Fuze DCS order. We expected to ship this order late in the fourth
quarter; however, due to increasing uncertainty around the timely
receipt of U.S. government approvals and the limited shipment windows
due to the nature of the product, we have elected to move this
transaction out of our 2018 Outlook. We are moving forward with
production and if the receipt of approvals allows us to meet our
transportation schedule we will ship these fuzes in the fourth quarter.
While we are disappointed by this potential delay, the JPF program, with
record backlog and high levels of demand, remains a key growth platform
as we move into 2019.

Turning to our results for the quarter, Distribution sales increased
6.8% to $285.9 million, or a 5.1% increase when measured on a Sales per
Sales Day* basis, resulting in our highest daily sales rate since the
third quarter of 2015. Performance across our three product lines was
very strong with fluid power and automation products delivering
mid-single digit Sales-Per-Sales Day* growth in the quarter, and our
bearings and power transmission products delivering its fourth
consecutive quarter of year-over-year Sales-Per-Sales Day* growth.
Operating margin was 5.1%, or 5.3% when adjusted for restructuring
costs, and, similar to the second quarter, was also negatively impacted
by higher group healthcare costs as well as costs associated with our
one-time employee incentives that negatively impacted our operating
margin by 40 basis points.

At Aerospace, as expected, sales and operating profit performance were
impacted by the JPF sales mix in the quarter, which was weighted
entirely to USG compared to a higher mix of DCS sales in the prior year
period. In addition, we encountered several issues that resulted in
sales being shifted out of the third quarter. Specifically, our
self-lubricating bearings products were impacted by delays associated
with two outside suppliers which led to delayed shipments and higher
scrap costs. Delivery of a K-MAX® aircraft was delayed into October, as
adverse weather conditions prevented the completion of pre-delivery
flight testing. On a positive note, Aerospace ended the quarter with a
record backlog of $870 million, up over 40% from year end. New JPF and
AH-1Z orders have added $488 million to our backlog during the year. We
are also very pleased that demand for our specialty bearing products
remain strong with new orders in the quarter up approximately 20% over
the prior year.

As we enter the fourth quarter and look ahead to next year, we have a
number of encouraging signs at each business. We continue to see a high
level of new orders for our most profitable products at Aerospace and
with the continued positive momentum at Distribution we are positioned
for strong performance in 2019.”

Chief Financial Officer, Robert D. Starr, commented, “GAAP diluted
earnings per share totaled $0.05 in the third quarter, or $0.57
adjusted*, compared to $0.58, or $0.69 adjusted*, in the third quarter
of 2017. The decrease in GAAP diluted earnings per share was largely due
to the non-cash non-tax deductible impairment and inventory charges we
recorded for our UK operations, as well as, the lower operating profit
at Aerospace, offset by the benefit received in the period from the
adoption of the new revenue standard.

The largest adjustment to our third quarter results relates to the
multiple non-cash non-tax deductible charges totaling $10.7 million, or
$0.39 per diluted share, recorded in our UK operations as we were
required to assess the tangible and intangible assets of this entity for
impairment. These charges included a $10.0 million non-cash impairment
charge related to acquired intangible assets and $0.7 million of
non-cash inventory write-offs. Additionally, we continued our
restructuring actions at both segments recording $1.7 million in
expense. Finally, we accrued $1.3 million, associated with employee
tax-related matters at one of our foreign operations and incurred $2.2
million for corporate development activities, including the costs
associated with due diligence for a significant specialty bearings
acquisition we elected not to pursue.

Moving to our outlook for the balance of the year and starting with
Distribution. Based on our performance through the first nine months of
the year, we are modestly revising our sales outlook to $1.135 billion
to $1.155 billion, while revising our expectations for operating margin
to 4.8% to 4.9%, or 4.9%* when adjusted for the restructuring and
severance costs.

At Aerospace we now expect sales in the range of $705.0 million to
$725.0 million, with operating margins of 12.4% to 12.7%, or 14.9% to
15.1% adjusted*. A significant portion of the downward revision in our
sales and margin expectations is the result of a shift of product sales
out of 2018 into 2019, including the JPF DCS order referenced by Neal,
the completion of our SH-2 program with Peru, and delayed shipments of
our bearing products.

We are increasing our expectation for Corporate expense to $62.0
million, or $60.0 million when adjusted for $2.2 million of costs
associated with corporate development activities incurred in the third
quarter, which included costs associated with due diligence on a
significant specialty bearings acquisition we elected not to pursue. The
adjusted corporate expense number is consistent with our prior corporate
expense outlook for the year.

Also, we are increasing our expectation for our effective tax rate for
the year to 27.0% to account for the 3.0% impact from the non-cash
impairment charge on our 2018 full year tax rate.

Our strong cash flow generation continued in the third quarter, where we
generated $33.7 million in Cash Flows from Operations, leading to Free
Cash Flow* of $25.8 million. This brings our year-to-date total Free
Cash Flow* to $103.8 million. During the third quarter, we made the
additional $10.0 million discretionary pension contribution we discussed
in the second quarter, bringing our total discretionary pension
contributions for the year to $30.0 million. Due to this additional
$10.0 million contribution, which was not included in our prior outlook,
we are slightly lowering our expectations for operating cash flows for
the year to $175.0 million to $200.0 million, or Free Cash Flow* of
$140.0 million to $165.0 million.”

2018 Outlook

The Company’s revised 2018 outlook is as follows:

  • Distribution:

    • Sales of $1.135 billion to $1.155 billion
    • Operating margins of 4.8% to 4.9% , or 4.9% when adjusted* for the
      $0.6 million of restructuring costs
    • Depreciation and amortization expense of approximately $15.0
      million
  • Aerospace:

    • Sales of $705.0 million to $725.0 million
    • Operating margins of 12.4% to 12.7%, or 14.9% to 15.1% when
      adjusted* for approximately $17.5 million of expense, including
      $5.5 million of restructuring expense
    • Depreciation and amortization expense of approximately $24.0
      million
  • Interest expense of approximately $20.0 million
  • Corporate expenses of approximately $62.0 million, or $60.0 million
    when adjusted for $2.2 million of costs associated with corporate
    development activities
  • Net periodic pension benefit of approximately $12.5 million
  • Estimated annualized tax rate of approximately 27.0%, which includes
    the full year impact for the non-cash impairment charge on our tax
    rate in 2018 of 3.0%
  • Consolidated depreciation and amortization expense of approximately
    $43.0 million
  • Capital expenditures of approximately $35.0 million
  • Cash flows from operations in the range of $175.0 million to $200.0
    million; Free Cash Flow* in the range of $140.0 million to $165.0
    million, which includes $30 million of discretionary pension
    contributions
  • Weighted average diluted shares outstanding of 28.2 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 2, 2018,
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: 2467917; 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:
2467917. 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; and engineering design, analysis and
certification services. The company is a leading distributor of
industrial parts, and operates approximately 220 customer service
centers including five distribution centers across the U.S. and Puerto
Rico. Kaman offers more than five million items including
electro-mechanical products, bearings, power transmission, motion
control and electrical and fluid power components, automation and MRO
supplies to customers in virtually every industry. Additionally, Kaman
provides engineering, design and support for automation, electrical,
linear, hydraulic and pneumatic systems as well as belting and rubber
fabrication, customized mechanical services, hose assemblies, repair,
fluid analysis and motor management. 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 28,
2018
September 29,
2017
September 28,
2018
September 29,
2017
Net sales:
Distribution $ 285,924 $ 267,641 $ 859,379 $ 817,965
Aerospace 157,134   179,405   515,135   514,028  
Net sales $ 443,058   $ 447,046   $ 1,374,514   $ 1,331,993  
 
Operating income:
Distribution $ 14,592 $ 13,092 $ 39,972 $ 40,165
Aerospace 7,206 31,318 52,609 73,060
Net gain (loss) on sale of assets 640 212 2,228 217
Corporate expense (15,182 ) (14,942 ) (45,954 ) (43,747 )
Operating income $ 7,256   $ 29,680   $ 48,855   $ 69,695  
 
 

Table 3. Depreciation and Amortization by Segment
(in
thousands) (unaudited)

For the Three Months Ended For the Nine Months Ended
September 28,
2018
September 29,
2017
September 28,
2018
September 29,
2017
Depreciation and Amortization:
Distribution $ 3,486 $ 3,640 $ 10,420 $ 11,535
Aerospace 6,049 6,056 18,561 17,589
Corporate 840   914   2,519   2,795  
Consolidated Total $ 10,375   $ 10,610   $ 31,500   $ 31,919  
 

Non-GAAP Measures Disclosure

Management believes that the Non-GAAP (i.e. Financial measures that are
noted computed in accordance with Generally Accepted Accounting
Principles) financial measures 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 28, 2018 and
September 29, 2017. The following table illustrates the calculation of
Organic Sales using the GAAP measure, “Net Sales”.

     
Table 4. Organic Sales (in thousands) (unaudited)
For the Three Months Ended For the Nine Months Ended
September 28,
2018
  September 29,
2017
September 28,
2018
September 29,
2017
Distribution
Net sales $ 285,924 $ 267,641 $ 859,379 $ 817,965
Acquisition Sales      
Organic Sales $ 285,924   $ 267,641   $ 859,379   $ 817,965
Aerospace
Net sales $ 157,134 $ 179,405 $ 515,135 $ 514,028
Acquisition Sales      
Organic Sales $ 157,134   $ 179,405   $ 515,135   $ 514,028
Consolidated
Net sales $ 443,058 $ 447,046 $ 1,374,514 $ 1,331,993
Acquisition Sales      
Organic Sales $ 443,058   $ 447,046   $ 1,374,514   $ 1,331,993
 

Organic Sales per Sales Day – Organic Sales per Sales Day is
defined as GAAP “Net sales of the Distribution segment” less sales
derived from acquisitions completed during the preceding twelve months
divided by the number of Sales Days in a given period. Sales days
(“Sales Days”) are the days that the Distribution segment’s branch
locations were open for business and exclude weekends and holidays.
Management believes Organic Sales per Sales Day provides an important
perspective on how net sales may be impacted by the number of days the
segment is open for business and provides a basis for comparing periods
in which the number of Sales Days differs.

The following table illustrates the calculation of Organic Sales per
Sales Day using “Net sales: Distribution” from the “Segment and
Geographic Information” footnote in the “Notes to Consolidated Financial
Statements” included in the Company’s Form 10-Q filed with the
Securities and Exchange Commission on November 1, 2018.

   

Table 5. Distribution – Organic Sales Per Sales Day
(in
thousands, except days)

(unaudited)

 

For the Three Months Ended For the Nine Months Ended
September 28,
2018
  September 29,
2017
September 28,
2018
  September 29,
2017
(in thousands)
Current period
Net sales $ 285,924 $ 267,641 $ 859,379 $ 817,965
Sales days 63   62   191   190  
Sales per Sales Day for the current period a $ 4,538   $ 4,317   $ 4,499   $ 4,305  
 
Prior period
Net sales from the prior year $ 267,641 $ 274,388 $ 817,965 $ 849,104
Sales days from the prior year 62   63   190   192  
Sales per Sales day from the prior year b $ 4,317   $ 4,355   $ 4,305   $ 4,422  
 
% change (a-b)÷b 5.1 % (0.9 )% 4.5 % (2.6 )%
               
Table 6. Distribution – Sales Days
First Quarter Second Quarter Third Quarter Fourth Quarter
Distribution Sales Days
2018 Sales Days by quarter 64 64 63 62
2017 Sales Days by quarter 64 64 62 62
2016 Sales Days by quarter 65 64 63 61
 

Adjusted EBITDA – Adjusted EBITDA is defined as net earnings
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 differs from net earnings, 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. Adjusted EBITDA 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 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 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 28, 2018 and September 29, 2017. The following table
illustrates the calculation of Adjusted EBITDA using GAAP measures:

     
Table 7. Adjusted EBITDA (in thousands) (unaudited)
For the Three Months Ended For the Nine Months Ended
September 28,
2018
  September 29,
2017
September 28,
2018
September 29,
2017
Adjusted EBITDA
Consolidated Results
Sales $ 443,058 $ 447,046 $ 1,374,514 $ 1,331,993
 
Net earnings $ 1,432 $ 16,280 $ 30,592 $ 36,029
 
Interest expense, net $ 5,085 $ 5,264 $ 15,439 $ 15,546
Income tax expense 3,893 9,237 12,027 21,034
Other expense (income), net (179 ) (483 ) (160 ) (711 )
Depreciation and amortization 10,375 10,610 31,500 31,919
Other Adjustments:
Restructuring and severance costs 1,657 2,500 5,304 2,500
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 2,162 2,162
Cost associated with senior executive retirement 2,114 2,114
Gain on the sale of land     (1,520 )  
Adjustments $ 35,020 $ 29,242 $ 76,779 $ 72,402
       
Adjusted EBITDA $ 36,452   $ 45,522   $ 107,371   $ 108,431  
Adjusted EBITDA margin 8.2 % 10.2 % 7.8 % 8.1 %
 

Free Cash Flow – Free Cash Flow 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 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 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
internally to assess overall liquidity. The following table illustrates
the calculation of Free Cash Flow using “Net cash provided by (used in)
operating activities” and “Expenditures for property, plant &
equipment”, GAAP measures from the Condensed Consolidated Statements of
Cash Flows included in this release.

         
Table 8. Free Cash Flow (in thousands) (unaudited)

For the Nine
Months Ended

For the Six
Months Ended

For the Three
Months Ended

September 28,
2018
June 29,
2018
September 28,
2018
Net cash provided by operating activities $ 127,398 $ 93,742 $ 33,656
Expenditures for property, plant & equipment (23,630 ) (15,812 ) (7,818 )
Free Cash Flow $ 103,768   $ 77,930   $ 25,838  
 
     
Table 9. Free Cash Flow – 2018 Outlook (in millions) 2018 Outlook
Free Cash Flow:    
Net cash provided by operating activities $ 175.0 to $ 200.0
Less: Expenditures for property, plant and equipment (35.0 ) to (35.0 )
Free Cash Flow $

  140.0

  to $

  165.0

 
 

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 10. Debt to Capitalization Ratio (in thousands) (unaudited)
September 28,
2018
December 31,
2017
Current portion of long-term debt $ 8,750 $ 7,500
Long-term debt, excluding current portion, net of debt issuance costs 295,584   391,651  
Debt $ 304,334   $ 399,151  
Total shareholders’ equity 638,294   635,656  
Capitalization $ 942,628   $ 1,034,807  
Debt to Capitalization Ratio 32.3 % 38.6 %
 

Adjusted Net Earnings and Adjusted Diluted Earnings Per Share
Adjusted Net Earnings and Adjusted Diluted Earnings per Share are
defined as GAAP “Net earnings” and “Diluted earnings per share”, 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 Net Earnings and Adjusted
Diluted Earnings per Share 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 Net Earnings
and Adjusted Diluted Earnings per Share using “Net earnings” and
“Diluted earnings per share” from the “Consolidated Statements of
Operations” included in the Company’s Form 10-Q filed with the
Securities and Exchange Commission on November 1, 2018.

   
Table 11. Adjusted Net Earnings and Adjusted Diluted Earnings per
Share
(In thousands except per share amounts) (unaudited)
  For the Three Months Ended For the Nine Months Ended
September 28,
2018
  September 29,
2017
September 28,
2018
September 29,
2017
Adjustments to Net Earnings, pre tax
Restructuring and severance costs at Aerospace $ 1,214 $ 2,500 $ 4,711 $ 2,500
Restructuring and severances costs at Distribution 443 593
Non-cash non-tax intangible asset impairment charge 10,039 10,039
Non-cash non-tax write-off of inventory 709 709
Employee tax-related matters in foreign operations 1,279 1,279
Cost associated with corporate development activities 2,162 2,162
Cost associated with senior executive retirement 2,114 2,114
Gain on the sale of land     (1,520 )
Adjustments, pre tax $ 15,846   $ 4,614   $ 17,973   $ 4,614
 
Tax Effect of Adjustments to Net Earnings
Restructuring and severance costs at Aerospace $ 304 $ 875 $ 1,178 $ 875
Restructuring and severances costs at Distribution 111 148
Non-cash non-tax intangible asset impairment charge
Non-cash non-tax write-off of inventory
Employee tax-related matters in foreign operations 320 320
Cost associated with corporate development activities 541 541
Cost associated with senior executive retirement 740 740
Gain on the sale of land     (380 )
Tax effect of Adjustments $ 1,276   $ 1,615   $ 1,807   $ 1,615
 
Adjustments to Net Earnings, net of tax
GAAP Net Earnings, as reported $ 1,432 $ 16,280 $ 30,592 $ 36,029
Restructuring and severance costs at Aerospace 910 1,625 3,533 1,625
Restructuring and severances costs at Distribution 332 445
Non-cash non-tax intangible asset impairment charge 10,039 10,039
Non-cash non-tax write-off of inventory 709 709
Employee tax-related matters in foreign operations 959 959
Cost associated with corporate development activities 1,621 1,621
Cost associated with senior executive retirement 1,374 1,374
Gain on the sale of land     (1,140 )
Adjusted Net Earnings $ 16,002   $ 19,279   $ 46,758   $ 39,028
 
Calculation of Adjusted Diluted Earnings per Share
GAAP diluted earnings per share $ 0.05 $ 0.58 $ 1.08 $ 1.27
Restructuring and severance costs at Aerospace 0.03 0.06 0.13 0.06
Restructuring and severances costs at Distribution 0.01 0.02
Non-cash non-tax intangible asset impairment charge 0.36 0.36
Non-cash non-tax write-off of inventory 0.03 0.03
Employee tax-related matters in foreign operations 0.03 0.03
Cost associated with corporate development activities 0.06 0.06
Cost associated with senior executive retirement 0.05 0.05
Gain on the sale of land     (0.04 )
Adjusted Diluted Earnings per Share $ 0.57   $ 0.69   $ 1.67   $ 1.38
 
Diluted weighted average shares outstanding 28,258   28,219   28,258   28,319
 

Adjusted Net Sales and Adjusted Operating Income – Adjusted Net
Sales is defined as net sales, less items not indicative of normal
sales, such as revenue recorded related to the settlement of claims.
Adjusted Operating Income is defined as operating income, 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
and Adjusted Operating Income 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 using information found in Note 16, 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 November 1, 2018.

   
Table 12. Adjusted Net Sales and Adjusted Operating Income
(In thousands) (unaudited)
  For the Three Months Ended For the Nine Months Ended
September 28,
2018
  September 29,
2017
September 28,
2018
September 29,
2017
DISTRIBUTION SEGMENT OPERATING INCOME:
Net Sales $ 285,924 $ 267,641 $ 859,379 $ 817,965
GAAP Operating income – Distribution segment 14,592 13,092 39,972 40,165
% of GAAP net sales 5.1 % 4.9 % 4.7 % 4.9 %
Restructuring and severance costs 443  

  593    
Adjusted Operating Income – Distribution segment $ 15,035 $ 13,092 $ 40,565 $ 40,165
% of net sales 5.3 % 4.9 % 4.7 % 4.9 %
AEROSPACE SEGMENT OPERATING INCOME:
Net Sales $ 157,134 $ 179,405 $ 515,135 $ 514,028
GAAP Operating income – Aerospace segment 7,206 31,318 52,609 73,060
% of GAAP net sales 4.6 % 17.5 % 10.2 % 14.2 %
Restructuring and severance costs 1,214 2,500 4,711 2,500
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    
Adjusted Operating Income – Aerospace segment $ 20,447 $ 33,818 $ 69,347 $ 75,560
% of GAAP net sales 13.0 % 18.9 % 13.5 % 14.7 %
CORPORATE EXPENSE:
GAAP Corporate Expense $ (15,182 ) $ (14,942 ) $ (45,954 ) $ (43,747 )
Cost associated with corporate development activities 2,162 2,162
Cost associated with senior executive retirement   2,114     2,114  
Adjusted Corporate Expense $ (13,020 ) $ (12,828 ) $ (43,792 ) $ (41,633 )
CONSOLIDATED OPERATING INCOME:
Net Sales $ 443,058 $ 447,046 $ 1,374,514 $ 1,331,993
GAAP – Operating income 7,256 29,680 48,855 69,695
% of GAAP net sales 1.6 % 6.6 % 3.6 % 5.2 %
Restructuring and severance costs at Distribution 443 593
Restructuring and severance costs at Aerospace 1,214 2,500 4,711 2,500
Non-cash non-tax intangible asset impairment charge 10,039 10,039
Non-cash non-tax write-off of inventory 709 709
Employee tax-related matters in foreign operations

1,279

1,279

Cost associated with corporate development activities 2,162 2,162
Cost associated with senior executive retirement 2,114 2,114
Gain on the sale of land     (1,520 )  
Adjusted Operating Income $

23,102

$ 34,294 $

66,828

$ 74,309
% of GAAP net sales 5.2 % 7.7 % 4.9 % 5.6 %
 

The following table reconciles our GAAP operating margin outlook for
Distribution and Aerospace for 2018 to our Adjusted Operating Margin
outlook for Distribution and Aerospace for 2018:

     
Table 13. Adjusted Operating Income – Outlook
2018 Outlook
Adjusted Operating Income – Outlook Low End of Range High End of Range
Distribution
Net Sales – Outlook $ 1,135.0   to $

1,155.0

 
 
Operating income – Outlook 55.0 to

56.1

GAAP operating margin – outlook 4.8 % to 4.9 %
Restructuring and transition costs 0.6   to 0.6  
Restructuring costs as a percentage of sales 0.1 % to

— 

%
Adjusted Operating Income – Outlook $ 55.6   to $

56.7

 
Adjusted Operating Margin – Outlook 4.9 % to 4.9 %
 
Aerospace
Net Sales – Outlook $ 705.0   to $ 725.0  
 
Operating income – Outlook 87.5 to 92.0
GAAP operating margin – outlook 12.4 % to 12.7 %
Restructuring and transition costs 5.5 to 5.5
Non-cash non-tax intangible asset impairment charge 10.0 to 10.0
Non-cash non-tax write-off of inventory 0.7 to 0.7
Employee tax-related matters in foreign operations 1.3   to 1.3  
Total Adjustments 17.5 to 17.5
Restructuring and transition costs as a percentage of sales 2.5 % to 2.4 %
Adjusted Operating Income – Outlook $ 105.0   to $ 109.5  
Adjusted Operating Margin – Outlook 14.9 % to 15.1 %
 

FORWARD-LOOKING STATEMENTS

This release contains “forward-looking statements” within the meaning of
the safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. Forward-looking statements also may be included in
other publicly available documents issued by the Company and in oral
statements made by our officers and representatives from time to time.
These forward-looking statements are intended to provide management’s
current expectations or plans for our future operating and financial
performance, based on assumptions currently believed to be valid. They
can be identified by the use of words such as “anticipate,” “intend,”
“plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,”
“strategy,” “future,” “likely,” “may,” “should,” “would,” “could,”
“will” and other words of similar meaning in connection with a
discussion of future operating or financial performance. Examples of
forward looking statements include, among others, statements relating to
future sales, earnings, cash flows, results of operations, uses of cash
and other measures of financial performance.

Because forward-looking statements relate to the future, they are
subject to inherent risks, uncertainties and other factors that may
cause the Company’s actual results and financial condition to differ
materially from those expressed or implied in the forward-looking
statements. Such risks, uncertainties and other factors include, among
others: (i) changes in domestic and foreign economic and competitive
conditions in markets served by the Company, particularly the defense,
commercial aviation and industrial production markets; (ii) changes in
government and customer priorities and requirements (including
cost-cutting initiatives, government and customer shut-downs, the
potential deferral of awards, terminations or reductions of expenditures
to respond to the priorities of Congress and the Administration, or
budgetary cuts resulting from Congressional actions or automatic
sequestration); (iii) changes in geopolitical conditions in countries
where the Company does or intends to do business; (iv) the successful
conclusion of competitions for government programs (including new,
follow-on and successor programs) and thereafter successful contract
negotiations with government authorities (both foreign and domestic) for
the terms and conditions of the programs; (v) the timely receipt of any
necessary export approvals and/or other licenses or authorizations from
the U.S. Government; (vi) timely satisfaction or fulfillment of material
contractual conditions precedents in customer purchase orders,
contracts, or similar arrangements; (vii) the existence of standard
government contract provisions permitting renegotiation of terms and
termination for the convenience of the government; (viii) the successful
resolution of government inquiries or investigations relating to our
businesses and programs; (ix) risks and uncertainties associated with
the successful implementation and ramp up of significant new programs,
including the ability to manufacture the products to the detailed
specifications required and recover start-up costs and other investments
in the programs; (x) potential difficulties associated with variable
acceptance test results, given sensitive production materials and
extreme test parameters; (xi) the receipt and successful execution of
production orders under the Company’s existing U.S. government JPF
contract, including the exercise of all contract options and receipt of
orders from allied militaries, but excluding any next generation
programmable fuze programs, as all have been assumed in connection with
goodwill impairment evaluations; (xii) the continued support of the
existing K-MAX® helicopter fleet, including sale of existing K-MAX®
spare parts inventory and the receipt of orders for new aircraft
sufficient to recover our investment in the restart of the K-MAX®
production line; (xiii) the accuracy of current cost estimates
associated with environmental remediation activities; (xiv) the
profitable integration of acquired businesses into the Company’s
operations; (xv) the ability to implement our ERP systems in a
cost-effective and efficient manner, limiting disruption to our
business, and allowing us to capture their planned benefits while
maintaining an adequate internal control environment; (xvi) changes in
supplier sales or vendor incentive policies; (xvii) the effects of price
increases or decreases; (xviii) the effects of pension regulations,
pension plan assumptions, pension plan asset performance, future
contributions and the pension freeze, including the ultimate
determination of the U.S. Government’s share of any pension curtailment
adjustment calculated in accordance with CAS 413; (xix) future levels of
indebtedness and capital expenditures; (xx) the continued availability
of raw materials and other commodities in adequate supplies and the
effect of increased costs for such items; (xxi) the effects of currency
exchange rates and foreign competition on future operations; (xxii)
changes in laws and regulations, taxes, interest rates, inflation rates
and general business conditions; (xxiii) the effects, if any, of the
UK’s exit from the EU; (xxiv) future repurchases and/or issuances of
common stock; (xxv) the occurrence of unanticipated restructuring costs
or the failure to realize anticipated savings or benefits from past or
future expense reduction actions; and (xxvi) other risks and
uncertainties set forth herein and in our 2017 Form 10-K and our Third
Quarter Form 10-Q filed November 1, 2018.

Any forward-looking information provided in this release should be
considered with these factors in mind. We assume no obligation to update
any forward-looking statements contained in this report.

 

KAMAN CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts) (unaudited)

   
For the Three Months Ended For the Nine Months Ended
September 28,
2018
  September 29,
2017
September 28,
2018
  September 29,
2017
Net sales $ 443,058 $ 447,046 $ 1,374,514 $ 1,331,993
Cost of sales 314,500   308,581   976,206   934,689  
Gross profit 128,558 138,465 398,308 397,304
Selling, general and administrative expenses 110,246 106,497 336,338 325,326
Other intangible assets impairment 10,039 10,039
Restructuring costs 1,657 2,500 5,304 2,500
Net gain on sale of assets (640 ) (212 ) (2,228 ) (217 )
Operating income 7,256 29,680 48,855 69,695
Interest expense, net 5,085 5,264 15,439 15,546
Non-service pension and post retirement benefit cost (income) (2,975 ) (618 ) (9,043 ) (2,203 )
Other expense (income), net (179 ) (483 ) (160 ) (711 )
Earnings before income taxes 5,325 25,517 42,619 57,063
Income tax expense 3,893   9,237   12,027   21,034  
Net earnings $ 1,432   $ 16,280   $ 30,592   $ 36,029  
 
Earnings per share:
Basic earnings per share $ 0.05 $ 0.58 $ 1.09 $ 1.31
Diluted earnings per share $ 0.05 $ 0.58 $ 1.08 $ 1.27
Average shares outstanding:
Basic 28,009 27,907 27,944 27,536
Diluted 28,258   28,219   28,258   28,319  
Dividends declared per share $ 0.20   $ 0.20   $ 0.60   $ 0.60  
 
 

KAMAN CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts) (unaudited)

   
September 28,
2018
December 31,
2017
Assets
Current assets:
Cash and cash equivalents $ 26,222 $ 36,904
Accounts receivable, net 235,682 313,451
Contract assets 128,039
Contract costs, current portion 5,296
Inventories 303,145 367,437
Income tax refunds receivable 4,157 2,889
Other current assets 35,411   27,188  
Total current assets 737,952   747,869  
Property, plant and equipment, net of accumulated depreciation of
$269,241 and $252,611, respectively
189,133 185,452
Goodwill 347,549 351,717
Other intangible assets, net 95,255 117,118
Deferred income taxes 21,026 27,603
Contract costs, noncurrent portion 12,124
Other assets 28,610   25,693  
Total assets $ 1,431,649   $ 1,455,452  
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt, net of debt issuance costs $ 8,750 $ 7,500
Accounts payable – trade 136,030 127,591
Accrued salaries and wages 47,901 48,352
Contract liabilities, current portion 21,284
Advances on contracts 8,527
Income taxes payable 1,517
Other current liabilities 59,466   52,812  
Total current liabilities 273,431   246,299  
Long-term debt, excluding current portion, net of debt issuance costs 295,584 391,651
Deferred income taxes 7,218 8,024
Underfunded pension 82,572 126,924
Contract liabilities, noncurrent portion 85,044
Other long-term liabilities 49,506 46,898
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $1 par value, 200,000 shares authorized; none
outstanding
Common stock, $1 par value, 50,000,000 shares authorized; voting;
29,524,943 and 29,141,467 shares issued, respectively
29,525 29,141
Additional paid-in capital 198,072 185,332
Retained earnings 592,103 587,877
Accumulated other comprehensive income (loss) (116,661 ) (115,814 )
Less 1,545,603 and 1,325,975 shares of common stock, respectively,
held in treasury, at cost
(64,745 ) (50,880 )
Total shareholders’ equity 638,294   635,656  
Total liabilities and shareholders’ equity $ 1,431,649   $ 1,455,452  
 
 
KAMAN CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands) (unaudited)

  For the Nine Months Ended
September 28,
2018
  September 29,
2017
Cash flows from operating activities:

Net earnings

$ 30,592 $ 36,029

Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:

Depreciation and amortization 31,500 31,919
Amortization of debt issuance costs 1,355 1,564
Accretion of convertible notes discount 1,934 2,769
Provision for doubtful accounts 1,273 743
Net gain on sale of assets (2,228 ) (217 )

Other intangible assets impairment

10,039
Loss on debt extinguishment 137
Net loss (gain) on derivative instruments 642 (789 )
Stock compensation expense 4,989 4,917
Deferred income taxes 8,094 6,450
Changes in assets and liabilities, excluding effects of
acquisitions/divestitures:
Accounts receivable 46,411 (44,537 )
Contract assets (45,686 )
Contract costs (6,576 )
Inventories (10,561 ) 12,317
Income tax refunds receivable (1,268 ) 5,430
Other assets (9,720 ) (2,084 )
Accounts payable – trade 7,446 (5,373 )
Contract liabilities 94,935 231
Accrued restructuring costs (445 ) 1,467
Advances on contracts 1,458
Other current liabilities 2,687 1,850
Income taxes payable (3,048 ) 3,830
Pension liabilities (36,185 ) (11,531 )
Other long-term liabilities 1,218   (2,746 )
Net cash provided by operating activities 127,398   43,834  
Cash flows from investing activities:
Proceeds from sale of assets 2,433 513
Expenditures for property, plant & equipment (23,630 ) (19,874 )
Acquisition of businesses (net of cash acquired) (1,365 )
Other, net (2,435 ) (2,375 )
Net cash used in investing activities (23,632 ) (23,101 )
Cash flows from financing activities:
Net repayments under revolving credit agreements (89,727 ) (73,779 )
Debt repayment (5,625 ) (5,000 )
Proceeds from the issuance of 2024 convertible note 200,000
Repayment of 2017 convertible notes (163,654 )
Purchase of capped call – 2024 convertible notes (20,500 )
Proceeds from bond hedge settlement – 2017 convertible notes 58,564
Net change in bank overdraft 4,669 1,115
Proceeds from exercise of employee stock awards 6,448 5,426
Purchase of treasury shares (11,996 ) (6,931 )
Dividends paid (16,751 ) (15,892 )
Debt and equity issuance costs (7,469 )
Other (729 ) (379 )
Net cash used in financing activities (113,711 ) (28,499 )
Net decrease in cash and cash equivalents (9,945 ) (7,766 )
Effect of exchange rate changes on cash and cash equivalents (737 ) 1,990
Cash and cash equivalents at beginning of period 36,904   41,205  
Cash and cash equivalents at end of period $ 26,222   $ 35,429  
 
Supplemental disclosure of noncash activities:
Value of common shares issued for unwind of warrant transactions $ 7,583 $ 30,279
 

Source: Kaman Corporation

Kaman Corporation
James Coogan
V.P., Investor Relations
(860)
243-6342
James.Coogan@kaman.com