Market Overview

Kaman Reports 2018 Second Quarter Results

Share:

Second Quarter Highlights:

  • Diluted earnings per share of $0.53, or $0.54 adjusted*, on a 12.2%
    increase in GAAP net earnings over the prior year
  • Year-to-date operating cash flow of $93.7 million; Free Cash Flow*
    of $77.9 million
  • Consolidated backlog of $969.0 million, a 30.6% increase since year
    end
  • Distribution operating margin of 4.7% on a sales increase of 3.9%
  • Aerospace operating margin of 12.7%, or 13.7% adjusted*, on sales
    of $178.6 million

Kaman Corp. (NYSE:KAMN) today reported financial results for the second
fiscal quarter ended June 29, 2018, as follows:

 
  Table 1. Summary of Financial Results (unaudited)
In thousands except per share amounts   For the Three Months Ended

June 29,

 

June 30,

 

2018

2017

Change
Net sales:
Distribution $ 289,523 $ 278,706 $ 10,817
Aerospace 178,606   170,300   8,306  
Net sales $ 468,129   $ 449,006   $ 19,123  
 
Operating income:
Distribution $ 13,546 $ 15,657 $ (2,111 )
% of sales 4.7 % 5.6 % (0.9 )%
Aerospace 22,741 25,712 (2,971 )
% of sales 12.7 % 15.1 % (2.4 )%
Net gain (loss) on sale of assets 1,525 (15 ) 1,540
Corporate expense (16,937 ) (14,828 ) (2,109 )
Operating income $ 20,875   $ 26,526   $ (5,651 )
 
Adjusted EBITDA*:
Net earnings $ 15,094 $ 13,458 $ 1,636
Adjustments 19,718   24,487   (4,769 )
Adjusted EBITDA* $ 34,812   $ 37,945   $ (3,133 )
% of sales 7.4 % 8.5 % (1.1 )%
 
Earnings per share:
Diluted earnings per share $ 0.53 $ 0.48 $ 0.05
Adjustments 0.01     0.01  
Adjusted Diluted Earnings per Share* $ 0.54   $ 0.48   $ 0.06  
 

Neal J. Keating, Chairman, President and Chief Executive Officer,
commented, "Our second quarter results benefited from increased demand
across our broad Aerospace product offerings and continued organic sales
growth at Distribution. As we look to the remainder of the year we
remain encouraged by the underlying performance of both of our operating
segments.

"At Distribution, we have completed a significant portion of our
national account onboarding processes, which we expect will lead to
stronger sales in the second half of the year. As a result, we are
increasing our expectations for organic sales growth for the full year
to 5% to 8%. Operating margin for the segment was below expectations as
a number of items impacted performance for the second quarter, including
lower vendor incentives, higher than anticipated group health and
employee costs, and increased freight costs. In addition, we began to
implement restructuring actions to improve organizational effectiveness
while reducing selling, general and administrative costs. These actions
are expected to result in approximately $0.6 million of additional
expense in 2018 and generate annual savings of approximately $2.5
million.

"At Aerospace, we won a number of contract awards that contributed to
our backlog of $825 million at quarter end. We expect to conclude
deliveries on Option 13 of our JPF USG Contract in the near term and
continue to work through our more than $400 million of backlog for this
product. Demand for the JPF remains strong, as evidenced by our recently
announced $69.4 million USG order and we are working on a number of
other significant new opportunities. We expect an increase in sales and
margin for the remainder of the year at Aerospace as the sales mix
shifts to higher margin JPF and specialty bearings products which are
both benefiting from the strong order intake we have seen through the
first half of the year."

Chief Financial Officer Robert D. Starr commented, "We continued to
generate strong cash flow in the second quarter leading to year-to-date
cash flow from operations of $93.7 million and Free Cash Flow* of $77.9
million. As we discussed last quarter, we made an additional $10.0
million discretionary pension contribution in April bringing our year to
date contributions to $20.0 million. We received a favorable tax benefit
for the second quarter contribution and as a result recorded a discrete
benefit in the period which helped lower our second quarter effective
tax rate to 18.6%. Similar to the first quarter, sales and earnings in
the second quarter benefited from the adoption of the new revenue
standard.

"We are revising our outlook for the year to reflect the performance we
achieved through the first half of 2018. For Aerospace we are tightening
up our sales range and now expect sales in the range of $755 million to
$775 million, while increasing our expectations for operating margin to
15.9% to 16.1%, or 16.6% to 16.8% when adjusted for the $5.5 million of
anticipated restructuring costs. This new range implies a significant
increase in margins in the back half of the year and is primarily due to
the expected increase in sales of JPF and specialty bearings products,
and the benefit from our restructuring actions.

"At Distribution, our prior sales outlook for the year implied an
organic growth rate of 3% to 7%. To-date we have seen organic growth of
4.2% and with the completion of a significant portion of our onboarding
processes for our new national accounts we are raising our full year
sales expectations at Distribution to a range of $1,135 million to
$1,170 million. We are lowering our expectations for operating margin at
Distribution to reflect a shift in the anticipated sales mix, the
anticipated cost of the restructuring activities and the impact from the
forecasted continuation of increased group health costs for the
remainder of the year. We now expect operating margin in the range of
4.8% to 5.0%, or 4.9% to 5.1% when adjusted for the $0.6 million of
restructuring costs. We expect to realize a portion of the benefit from
these restructuring actions in 2018 and this, when coupled with improved
leverage from the anticipated increase in organic sales, provides us
with confidence that operating margins will increase in the back half of
the year.

"Looking at the remainder of the outlook, we are revising our
expectations for Corporate expense and the effective tax rate for the
year. The trends in employee related and group health costs that
impacted Distribution are also impacting our expectations for Corporate
expense, which we now expect to be $60.0 million, $1.0 million higher
than our previous outlook.

"We are revising our expectations for the full year tax rate from 25.5%
to 26.5% to 24.5% to account for the discrete benefit we received from
the additional pension contribution in the second quarter. We are
evaluating the benefits of making another discretionary pension
contribution in the third quarter which would also allow us to receive a
favorable tax benefit. If we make this contribution in the third quarter
we would expect to record an additional discrete tax benefit in the
third quarter; however, the potential cash outlay in the third quarter
and the related tax benefit have not been included in our current
outlook for the year.

"Finally, we are making a minor revision to our expected weighted
average diluted shares outstanding from 28.0 million to 28.2 million."

2018 Outlook

The Company's revised 2018 outlook is as follows:

  • Distribution:
    • Sales of $1,135 million to $1,170 million
    • Operating margins of 4.8% to 5.0%, or 4.9% to 5.1% when adjusted
      for the $0.6 million of restructuring costs
    • Depreciation and amortization expense of approximately $15.0
      million
  • Aerospace:
    • Sales of $755.0 million to $775.0 million
    • Operating margins of 15.9% to 16.1%, or 16.6% to 16.8% when
      adjusted* for approximately $5.5 million in anticipated
      restructuring and transition costs
    • Depreciation and amortization expense of approximately $24.0
      million
  • Interest expense of approximately $20.0 million
  • Corporate expenses of approximately $60.0 million
  • Net periodic pension benefit of approximately $12.5 million
  • Estimated annualized tax rate of approximately 24.5%
  • 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 $185.0 million to $210.0
    million; Free Cash Flow* in the range of $150.0 million to $175.0
    million, which includes $20 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, August 9, 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: 1088169; 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:
1088169. 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 Six Months Ended

June 29,

 

June 30,

June 29,

 

June 30,

2018

2017

2018

2017

Net sales:
Distribution $ 289,523 $ 278,706 $ 573,455 $ 550,324
Aerospace 178,606   170,300   358,001   334,623  
Net sales $ 468,129   $ 449,006   $ 931,456   $ 884,947  
 
Operating income:
Distribution $ 13,546 $ 15,657 $ 25,380 $ 27,073
Aerospace 22,741 25,712 45,403 41,742
Net gain (loss) on sale of assets 1,525 (15 ) 1,588 5
Corporate expense (16,937 ) (14,828 ) (30,772 ) (28,805 )
Operating income $ 20,875   $ 26,526   $ 41,599   $ 40,015  
 
Table 3. Depreciation and Amortization by Segment (in thousands)
(unaudited)
  For the Three Months Ended   For the Six Months Ended

June 29,

 

June 30,

June 29,

 

June 30,

2018

2017

2018

2017

Depreciation and Amortization:
Distribution $ 3,428 $ 3,862 $ 6,934 $ 7,895
Aerospace 6,202 5,795 12,512 11,533
Corporate 834   896   1,679   1,881  
Consolidated Total $ 10,464   $ 10,553   $ 21,125   $ 21,309  
 

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 six-month fiscal periods ended June 29, 2018 and June
30, 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 Six Months Ended

June 29,

 

June 30,

June 29,

 

June 30,

2018

2017

2018

2017

Distribution
Net sales $ 289,523 $ 278,706 $ 573,455 $

550,324

 

Acquisition Sales        
Organic Sales $ 289,523   $ 278,706   $ 573,455   $ 550,324  
Aerospace
Net sales $ 178,606 $ 170,300 $ 358,001 $ 334,623
Acquisition Sales        
Organic Sales $ 178,606   $ 170,300   $ 358,001   $ 334,623  
Consolidated
Net sales $ 468,129 $ 449,006 $ 931,456 $ 884,947
Acquisition Sales        
Organic Sales $ 468,129   $ 449,006   $ 931,456   $ 884,947  
 

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 August 8, 2018.

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

   

 

  For the Three Months Ended For the Six Months Ended

June 29,

 

June 30,

June 29,

 

June 30,

2018

2017

2018

2017

 
Current period
Net sales $ 289,523 $ 278,706 $ 573,455 $ 550,324
Sales days 64   64   128   128  
Sales per Sales Day for the current period a $ 4,524   $ 4,355   $ 4,480   $ 4,299  
 
Prior period
Net sales from the prior year $ 278,706 $ 286,052 $ 550,324 $ 574,716
Sales days from the prior year 64   64   128   129  
Sales per Sales day from the prior year b $ 4,355   $ 4,470   $ 4,299   $ 4,455  
 
% change (a-b)÷b 3.9 % (2.6 )% 4.2 % (3.5 )%
 
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 six-month fiscal periods ended June
29, 2018 and June 30, 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 Six Months Ended

June 29,

 

June 30,

 

June 29,

 

June 30,

2018

2017

 

2018

 

2017

Adjusted EBITDA
Consolidated Results
Sales $ 468,129 $ 449,006 $ 931,456 $ 884,947
 
Net earnings $ 15,094 $ 13,458 $ 29,160 $ 19,749
 
Interest expense, net $ 5,002 $ 6,122 $ 10,354 $ 10,282
Income tax expense 3,457 7,881 8,134 11,797
Other expense (income), net 361 (69 ) 19 (228 )
Depreciation and amortization 10,464 10,553 21,125 21,309
Other Adjustments:
Restructuring and severance costs 1,954 3,647
Gain on the sale of land (1,520 )     (1,520 )    
Adjustments $ 19,718 $ 24,487 $ 41,759 $ 43,160
           
Adjusted EBITDA $ 34,812   $ 37,945     $ 70,919     $ 62,909  
Adjusted EBITDA margin 7.4 % 8.5 % 7.6 % 7.1 %
 

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 Six

For the Three

For the Three

Months Ended

Months Ended

Months Ended

June 29,

March 30,

June 29,

2018

2018

2018

Net cash provided by operating activities $ 93,742 $ 56,913 $ 36,829
Expenditures for property, plant & equipment (15,812 ) (6,422 ) (9,390 )
Free Cash Flow $ 77,930   $ 50,491   $ 27,439  
 
Table 9. Free Cash Flow - 2018 Outlook (in millions)   2018 Outlook
Free Cash Flow:    
Net cash provided by operating activities $   185.0 to $   210.0
Less: Expenditures for property, plant and equipment (35.0 ) to (35.0 )
Free Cash Flow $   150.0   to $   175.0  
 

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)  

June 29,

 

December 31,

2018

2017

Current portion of long-term debt $     8,125 $ 7,500
Long-term debt, excluding current portion, net of debt issuance costs 316,168   391,651  
Debt $     324,293   $ 399,151  
Total shareholders' equity 642,772   635,656  
Capitalization $     967,065   $ 1,034,807  
Debt to Capitalization Ratio 33.5 % 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 August 8, 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 Six Months Ended

June 29,

 

June 30,

June 29,

 

June 30,

2018

2017

2018

2017

Adjustments to Net Earnings, pre tax
Restructuring and severance costs at Aerospace $ 1,804 $ $ 3,497 $
Restructuring and severances costs at Distribution 150 150
Gain on the sale of land (1,520 )   (1,520 )  
Adjustments, pre tax $ 434   $   $ 2,127   $  
 
Tax Effect of Adjustments to Net Earnings
Restructuring and severance costs at Aerospace $ 451 $ $ 874 $
Restructuring and severances costs at Distribution 38 38
Gain on the sale of land (380 )   (380 )  
Tax effect of Adjustments $ 109   $   $ 532   $  
 
Adjustments to Net Earnings, net of tax
GAAP Net Earnings, as reported $ 15,094 $ 13,458 $ 29,160 $

19,749

 

Restructuring and severance costs at Aerospace 1,353 2,623
Restructuring and severances costs at Distribution 112 112
Gain on the sale of land (1,140 )   (1,140 )  
Adjusted Net Earnings $ 15,419   $ 13,458   $ 30,755   $ 19,749  
 
Calculation of Adjusted Diluted Earnings per Share
GAAP diluted earnings per share $ 0.53 $ 0.48 $ 1.03 $ 0.70
Restructuring and severance costs at Aerospace 0.05 0.09
Restructuring and severances costs at Distribution
Gain on the sale of land (0.04 )   (0.04 )  
Adjusted Diluted Earnings per Share $ 0.54   $ 0.48   $ 1.08   $ 0.70  
 
Diluted weighted average shares outstanding 28,349   27,842   28,258   28,370  
 

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 August 8, 2018.

Table 12. Adjusted Net Sales and Adjusted Operating Income
(In thousands) (unaudited)  
For the Three Months Ended   For the Six Months Ended

June 29,

 

June 30,

June 29,

 

June 30,

2018

2017

2018

2017

DISTRIBUTION SEGMENT OPERATING INCOME:
Net Sales $ 289,523 $ 278,706 $ 573,455 $ 550,324
GAAP Operating income - Distribution segment 13,546 15,657 25,380 27,073
% of GAAP net sales 4.7 % 5.6 % 4.4 % 4.9 %
Restructuring and severance costs 150     150    
Adjusted Operating Income - Distribution segment $ 13,696 $ 15,657 $ 25,530 $ 27,073
% of net sales 4.7 % 5.6 % 4.5 % 4.9 %
AEROSPACE SEGMENT OPERATING INCOME:
Net Sales $ 178,606 $ 170,300 $ 358,001 $ 334,623
GAAP Operating income - Aerospace segment 22,741 25,712 45,403 41,742
% of GAAP net sales 12.7 % 15.1 % 12.7 % 12.5 %
Restructuring and severance costs 1,804     3,497    
Adjusted Operating Income - Aerospace segment $ 24,545 $ 25,712 $ 48,900 $ 41,742
% of GAAP net sales 13.7 % 15.1 % 13.7 % 12.5 %
CORPORATE EXPENSE:
GAAP Corporate Expense (16,937 ) (14,828 ) (30,772 ) (28,805 )
CONSOLIDATED OPERATING INCOME:
Net Sales $ 468,129 $ 449,006 $ 931,456 $ 884,947
GAAP - Operating income 20,875 26,526 41,599 40,015
% of GAAP net sales 4.5 % 5.9 % 4.5 % 4.5 %
Restructuring and severance costs at Distribution 150 150
Restructuring and severance costs at Aerospace 1,804 3,497
Gain on the sale of land (1,520 )   (1,520 )  
Adjusted Operating Income $ 21,309 $ 26,526 $ 43,726 $ 40,015
% of GAAP net sales 4.6 % 5.9 % 4.7 % 4.5 %
 

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

Low End of

   

High End of

Adjusted Operating Income - Outlook

Range

Range

Distribution
Net Sales - Outlook $ 1,135.0   to $ 1,170.0  
 
Operating income - Outlook 54.5 to 58.5
GAAP operating margin - outlook 4.8 % to 5.0 %
Restructuring and transition costs 0.6   to 0.6  
Restructuring costs as a percentage of sales 0.1 % to 0.1 %
Adjusted Operating Income - Outlook $ 55.1   to $ 59.1  
Adjusted Operating Margin - Outlook 4.9 % to 5.1 %
 
Aerospace
Net Sales - Outlook $ 755.0   to $ 775.0  
 
Operating income - Outlook 119.8 to 124.7
GAAP operating margin - outlook 15.9 % to 16.1 %
Restructuring and transition costs 5.5   to 5.5  
Restructuring and transition costs as a percentage of sales 0.7 % to 0.7 %
Adjusted Operating Income - Outlook $ 125.3   to $ 130.2  
Adjusted Operating Margin - Outlook 16.6 % to 16.8 %
 

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 Second
Quarter Form 10-Q filed August 8, 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 Six Months Ended

June 29,

 

June 30,

June 29,

 

June 30,

2018

2017

2018

2017

Net sales $ 468,129 $ 449,006 $ 931,456 $ 884,947
Cost of sales 332,486   314,513   661,706   626,108  
Gross profit 135,643 134,493 269,750 258,839
Selling, general and administrative expenses 114,339 107,952 226,092 218,829
Restructuring costs 1,954 3,647
Net (gain) loss on sale of assets (1,525 ) 15   (1,588 ) (5 )
Operating income 20,875 26,526 41,599 40,015
Interest expense, net 5,002 6,122 10,354 10,282
Non-service pension and post retirement benefit cost (income) (3,039 ) (866 ) (6,068 ) (1,585 )
Other expense (income), net 361   (69 ) 19   (228 )
Earnings before income taxes 18,551 21,339 37,294 31,546
Income tax expense 3,457   7,881   8,134   11,797  
Net earnings $ 15,094   $ 13,458   $ 29,160   $ 19,749  
 
Earnings per share:
Basic earnings per share $ 0.54 $ 0.49 $ 1.04 $ 0.72
Diluted earnings per share $ 0.53 $ 0.48 $ 1.03 $ 0.70
Average shares outstanding:
Basic 27,971 27,557 27,911 27,351
Diluted 28,349   27,842   28,258   28,370  
Dividends declared per share $ 0.20   $ 0.20   $ 0.40   $ 0.40  
 

KAMAN CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

 
 

June 29,

 

December 31,

2018

2017

Assets
Current assets:
Cash and cash equivalents $     27,640 $ 36,904
Accounts receivable, net 250,293 313,451
Contract assets 125,204
Contract costs, current portion 3,487
Inventories 291,058 367,437
Income tax refunds receivable 3,692 2,889
Other current assets 32,173   27,188  
Total current assets 733,547   747,869  
Property, plant and equipment, net of accumulated depreciation of
$264,224 and $252,611, respectively
188,160 185,452
Goodwill 348,487 351,717
Other intangible assets, net 108,998 117,118
Deferred income taxes 22,998 27,603
Contract costs, noncurrent portion 12,847
Other assets 27,157   25,693  
Total assets $     1,442,194   $ 1,455,452  
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt, net of debt issuance costs $ 8,125 $ 7,500
Accounts payable – trade 136,140 127,591
Accrued salaries and wages 45,491 48,352
Contract liabilities, current portion 9,928
Advances on contracts 8,527
Income taxes payable 1,517
Other current liabilities 54,462   52,812  
Total current liabilities 254,146   246,299  
Long-term debt, excluding current portion, net of debt issuance costs 316,168 391,651
Deferred income taxes 7,738 8,024
Underfunded pension 97,356 126,924
Contract liabilities, noncurrent portion 76,330
Other long-term liabilities 47,684 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;
29,498,470 and 29,141,467 shares issued, respectively
29,498 29,141
Additional paid-in capital 195,749 185,332
Retained earnings 596,270 587,877
Accumulated other comprehensive income (loss) (117,349 ) (115,814 )
Less 1,492,623 and 1,325,975 shares of common stock, respectively,
held in treasury, at cost
(61,396 ) (50,880 )
Total shareholders' equity 642,772   635,656  
Total liabilities and shareholders' equity $     1,442,194   $ 1,455,452  
 

KAMAN CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands) (unaudited)

 
  For the Six Months Ended

June 29,

 

June 30,

2018

2017

Cash flows from operating activities:
Net earnings $   29,160 $   19,749
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Depreciation and amortization 21,125 21,309
Amortization of debt issuance costs 899 1,103
Accretion of convertible notes discount 1,282 2,091
Provision for doubtful accounts 445 511
Net gain on sale of assets (1,588 ) (5 )
Loss on debt extinguishment 137
Net loss (gain) on derivative instruments 467 (337 )
Stock compensation expense 3,817 3,707
Deferred income taxes 7,297 6,131
Changes in assets and liabilities, excluding effects of
acquisitions/divestitures:
Accounts receivable 32,836 (34,666 )
Contract assets (42,737 )
Contract costs (5,480 )
Inventories 1,782 3,987
Income tax refunds receivable (803 ) 1,031
Other current assets (6,299 ) (1,641 )
Accounts payable - trade 7,455 1,774
Contract liabilities 74,865 246
Advances on contracts (8,042 )
Other current liabilities (3,172 ) (2,171 )
Income taxes payable (3,049 ) (414 )
Pension liabilities (23,887 ) (10,312 )
Other long-term liabilities (673 ) (4,362 )
Net cash provided by (used in) operating activities 93,742   (174 )
Cash flows from investing activities:
Proceeds from sale of assets 1,712 253
Expenditures for property, plant & equipment (15,812 ) (15,196 )
Acquisition of businesses (net of cash acquired) (1,365 )
Other, net (635 ) (763 )
Net cash used in investing activities (14,735 ) (17,071 )
Cash flows from financing activities:
Net (repayments) borrowings under revolving credit agreements (71,383 ) (53,431 )
Debt repayment (3,750 ) (3,125 )
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 2,578 575
Proceeds from exercise of employee stock awards 5,274 4,681
Purchase of treasury shares (8,824 ) (2,718 )
Dividends paid (11,149 ) (10,312 )
Debt and equity issuance costs (7,348 )
Other (439 ) (235 )
Net cash (used in) provided by financing activities (87,693 ) 2,497  
Net decrease in cash and cash equivalents (8,686 ) (14,748 )
Effect of exchange rate changes on cash and cash equivalents (578 ) 1,309
Cash and cash equivalents at beginning of period 36,904   41,205  
Cash and cash equivalents at end of period $   27,640   $   27,766  
 
Supplemental disclosure of noncash activities:
Value of common shares issued for unwind of warrant transactions $ 7,583 $ 30,279

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