Kaman Reports 2014 Second Quarter Results

Kaman Corp. (NYSE:KAMN) today reported financial results for the second quarter ended June 27, 2014.

Neal J. Keating, Chairman, President and Chief Executive Officer, stated, "Significant improvement at Distribution and strong operating profit performance at Aerospace enabled us to achieve diluted earnings per share from continuing operations of $0.59 for the quarter. Our first half performance of $1.00 of earnings per diluted share positions us well to meet our full year outlook.

Distribution sales grew 12.6% for the second quarter, with organic sales per sales day increasing 3.1%, our third straight quarter of organic sales growth. The sequential improvement in organic sales and the performance of the newly acquired B.W. Rogers drove Distribution to achieve a 5.1% operating margin. We are very pleased with the results for B.W. Rogers for the quarter and we expect to continue to realize accretive operating performance from this important acquisition. We have met our targeted expansion of our sales force and expect this initiative to meaningfully contribute toward Distribution's future growth.

Aerospace results for the second quarter benefited from the diversity of our programs, delivering strong operating margin of 17.2%. The New Zealand program continues its strong performance, as we near delivery of the first aircraft in the fourth quarter. We recently received additional orders for our JPF and we are pleased with the contribution of bearing product sales which helped us to deliver this excellent result.

As we move into the third quarter, it is important to note that our team successfully accomplished a number of significant milestones during the first half of the year. The new Aerospace facilities in Germany and the U.K. will allow us to increase our capacity and drive efficiency, enabling us to capitalize on anticipated market opportunities. At Distribution, we recently executed the first phase of the implementation of our new ERP system. This achievement is a critical first step towards full implementation and we expect to see increased efficiencies as we continue the implementation of the ERP across the rest of Distribution."

Distribution Segment

The increase in sales in the second quarter resulted from $25.7 million in sales from acquisitions and an increase of $8.3 million in organic sales, (sales from acquisitions are classified as organic beginning with the thirteenth month following the acquisition). (See Table 6 for additional details regarding the Segment's sales per sales day* performance.)

The increase in operating income in the second quarter was driven primarily by acquisitions. This increase was partially offset by a decline in organic operating income due to higher SG&A expenses, primarily related to costs associated with our sales force expansion and an increase in incentive compensation due to improved performance.

Aerospace Segment

Sales for the second quarter decreased due to a reduction in shipments on our Sikorsky BLACK HAWK helicopter program, reduced deliveries of the JPF to foreign militaries, lower military bearing product sales and decreased volume for our Egypt SH-2G(E) upgrade program. These decreases were partially offset by work performed on our SH-2G(I) contract with New Zealand, increased shipments of the JPF to the U.S. Government and increased volume for our commercial bearing products.

Operating margin in the second quarter was lower than the prior year primarily due to reduced gross profit from lower sales of bearings products and JPF program sales mix. These decreases were partially offset by work performed on our SH-2G(I) contract with New Zealand.

Outlook

We are raising the low end of the sales and operating income range for Distribution from $1,180 million to $1,190 million and 4.7% to 4.8%, respectively. This reflects the improved performance we have seen in our base business and the acquired assets of B.W. Rogers. At Aerospace, we are maintaining our sales expectations for the year; however, we have lowered the top end of our range for operating income from 17.0% to 16.7%. The reduction in the range is due to a shift in the anticipated product mix for the year. Finally, we have increased our Free Cash Flow* expectations for the year, largely reflecting lower than expected capital expenditures. Our updated outlook for 2014 is as follows:

• Distribution:
  • Sales of $1,190 million to $1,220 million
  • Operating margins of 4.8% to 5.2%

• Aerospace:
  • Sales of $640 million to $660 million
  • Operating margins of 16.5% to 16.7%
• Interest expense of approximately $13.5 million
• Corporate expenses of approximately $52 million
• Estimated annualized tax rate of approximately 35%
• Depreciation and amortization expense of approximately $38 million
• Capital expenditures of $30 million to $35 million
• Free cash flow* in the range of $50 million to $55 million

Chief Financial Officer, Robert D. Starr, commented, "Sales for the quarter totaled $459 million, up 6.3% from the prior year, driven by top line growth of 12.6% at Distribution. Adjusted EBITDA* margin in the quarter was at 8.0%, or $36.5 million. The Adjusted EBITDA* margin was lower than last year, which benefited from several non-recurring retrofit sales of our high margin aerospace bearing products and a higher level of direct commercial sales of the JPF. Through six months, our Adjusted EBITDA* was $65.7 million, an increase of 9.0% over the prior year.

At Aerospace, performance from bearing product lines, the New Zealand SH-2G(I) and JPF programs continued to drive operating profit for the segment. Sales of our bearing products were solid despite facing a tough comparison to the prior year, which benefited from non-recurring retrofit orders. The New Zealand program contributed nicely to both sales and earnings, while JPF performance was aided by higher margin direct commercial sales.

Improved performance at Distribution was achieved despite costs associated with additional sales force resources added during the first half of the year, acquisition and integration costs of B.W. Rogers and continued headwinds from our Mexico operations. We expect negative margin pressure in 2014 from our expansion of the sales force at Distribution, but believe that this will be more than offset by the contribution of B.W. Rogers and other margin improvement initiatives.

Free Cash Flow* improved by $28.4 million over the prior year, demonstrating our commitment to improved cash flow generation, while corporate expenses through the first half of the year are in line with our expectations. Our revised segment level forecasts, combined with the balance of the outlook, results in expected 2014 net earnings remaining unchanged. Based on the cadence of certain Aerospace programs we expect to record approximately one third of the full year net earnings in the fourth quarter. Further, we have raised our expectations for Free Cash Flow* to reflect reduced capital expenditure levels."

Please see the MD&A section of the Company's SEC Form 10-Q filed concurrent 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 5, 2014, at 8:30 AM ET. Listeners may access the call live by telephone at (877) 703-6103 and from outside the U.S. at (857) 244-7302; (passcode: 39492310); or, via the Internet at www.kaman.com. A replay will also be available two hours after the call and can be accessed at (888) 286-8010 or (617) 801-6888 using the passcode: 62270654. In its discussion, management may include certain non-GAAP measures related to company performance. If so, a reconciliation of that information to GAAP, if not provided in this release, will be provided in the exhibits to the conference call and will be available through the Internet link provided above.

Non-GAAP Measure Disclosure

Management believes that the non-GAAP (Generally Accepted Accounting Principles) measures indicated 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 report and other disclosures as follows:

Adjusted EBITDA - Adjusted EBITDA is defined as operating income before depreciation and amortization. Adjusted EBITDA is calculated on our consolidated results as well as the results of our reportable segments. Adjusted EBITDA differs from Segment Operating Income, as calculated in accordance with GAAP, in that it excludes depreciation and amortization. We have made numerous investments in our business, such as acquisitions and increased capital expenditures, including facility improvements, new machinery and equipment, improvements to our information technology infrastructure and new ERP systems. Management believes Adjusted EBITDA provides an additional perspective on the operating results of the organization and earnings capacity and helps improve the comparability of our results between periods by eliminating the impact of non-cash depreciation and amortization expense. Adjusted EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. Adjusted EBITDA is not presented as an alternative measure of operating results or cash flows from operations, as determined in accordance with GAAP. No other adjustments were made during the three month and six month periods ended June 27, 2014 and June 28, 2013.

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, divided by the number of sales days in a given period. Sales days are essentially days that the Company's branch locations are 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 differ.

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 Condensed Consolidated Financial Statements” from the Company's Form 10-Q filed with the Securities and Exchange Commission on August 4, 2014. Sales from acquisitions are classified as organic beginning with the thirteenth month following the acquisition. Prior period information is adjusted to reflect acquisition sales for that period as organic sales when calculating organic sales per sales day.

Free Cash Flow - Free cash flow is defined as GAAP “Net cash provided by (used in) operating activities” less “Expenditures for property, plant & equipment.” Management believes free cash flow provides an important perspective on the cash available for dividends to shareholders, debt repayment, and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures as it excludes certain mandatory expenditures such as repayment of maturing debt. Management uses free cash flow internally to assess both business performance and 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 Consolidated Statements of Cash Flows included in this release.

Debt to Capitalization Ratio - Debt to capitalization ratio is calculated by dividing debt by capitalization. Debt is defined as GAAP “Notes payable” plus “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 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 using GAAP measures from the condensed consolidated balance sheets included 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/or markets widely used proprietary aircraft bearings and components; 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 arm solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; and support for the company's SH-2G Super Seasprite maritime helicopters and K-MAX medium-to-heavy lift helicopters. The company is a leading distributor of industrial parts, and operates more than 200 customer service locations and five distribution centers across North America. Kaman offers more than four million items including bearings, mechanical power transmission, electrical, material handling, motion control, fluid power, 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.

FORWARD-LOOKING STATEMENTS

This report 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 and thereafter contract negotiations with government authorities, both foreign and domestic; (v) the existence of standard government contract provisions permitting renegotiation of terms and termination for the convenience of the government; (vi) the conclusion to government inquiries or investigations regarding government programs, including the resolution of the Wichita subpoena matter; (vii) risks and uncertainties associated with the successful implementation and ramp up of significant new programs; (viii) potential difficulties associated with variable acceptance test results, given sensitive production materials and extreme test parameters; (ix) the receipt and successful execution of production orders for the JPF U.S. government contract, including the exercise of all contract options and receipt of orders from allied militaries, as all have been assumed in connection with goodwill impairment evaluations; (x) the continued support of the existing K-MAX® helicopter fleet, including sale of existing K-MAX® spare parts inventory; (xi) the accuracy of current cost estimates associated with environmental remediation activities at the Bloomfield, Moosup and New Hartford, CT facilities and our U.K. facilities; (xii) the profitable integration of acquired businesses into the company's operations; (xiii) the ability to implement our ERP systems in a cost-effective and efficient manner, limiting disruption to our business, and to capture their planned benefits while maintaining an adequate internal control environment; (xiv) changes in supplier sales or vendor incentive policies; (xv) the effects of price increases or decreases; (xvi) the effects of pension regulations, pension plan assumptions, pension plan asset performance and future contributions; (xvii) future levels of indebtedness and capital expenditures; (xviii) the continued availability of raw materials and other commodities in adequate supplies and the effect of increased costs for such items; (xix) the effects of currency exchange rates and foreign competition on future operations; (xx) changes in laws and regulations, taxes, interest rates, inflation rates and general business conditions; (xxi) future repurchases and/or issuances of common stock and (xxii) other risks and uncertainties set forth in our 2013 Form 10-K.

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