Kaman (KAMN) Tops Q4 EPS by 30c, Revenues Beat; Offers FY19 Revenue Guidance Below Consensus

Kaman (NYSE: KAMN) reported Q4 EPS of $1.22, $0.30 better than the analyst estimate of $0.92. Revenue for the quarter came in at $500.91 million versus the consensus estimate of $483.93 million.

• Diluted earnings per share of $0.84, or $1.22 adjusted*
• Year-to-date operating cash flow of $162.4 million; Free Cash Flow* of $132.5 million
• Consolidated backlog of $986.1 million, a 32.9% increase over 2017
• Distribution sales up 6.5% to $280.1 million; Operating margin of 4.1%
• Aerospace sales up 4.7% to $220.9 million; Operating margin of 18.9%, or 20.7% adjusted*

Neal J. Keating, Chairman, President and Chief Executive Officer, commented, “We ended 2018 with strong top line growth at both segments, increasing sales for the quarter by 5.7% to over $500 million and achieving consolidated gross margins of 30.3%. Diluted earnings per share in the fourth quarter of $0.84 exceeded expectations, in part due to the shipment of JPF DCS safe and arm devices in December. Our results included a number of one-time charges in the quarter. When adjusted for these items, our adjusted diluted earnings per share was $1.22, a 41.9% increase over the adjusted results in the fourth quarter of 2017.

At Distribution, we continued to see strong organic sales growth, with sales per sales day* in the quarter up 6.5% over the prior year. This was the highest fourth quarter daily sales rate since 2014 and helped drive our full year sales per sales day* growth of 5.0%. Operating margin was 4.1% for the quarter and we ended 2018 with full year operating margins of 4.5%, or 4.6% adjusted*. A number of items impacted our full year operating profit performance when compared to 2017, including higher group health costs, costs associated with our one-time employee tax incentive and higher freight costs, which in total had an impact of approximately 30 bps.

At Aerospace, sales increased 4.7% when compared to the fourth quarter of 2017. Sales for specialty bearings products were strong in the quarter, with performance benefiting from the work performed to overcome the supplier issues that impacted results in the third quarter. Prior to year-end we received government export approval for our $48 million JPF DCS contract, and shipped a portion of this order in December, with delivery of the balance of the order expected in the first quarter of 2019. Also, during the quarter we secured three new K-MAX® contracts and successfully delivered three aircraft in the period with a total of five for the year. Operating margin of 18.9%, or 20.7% adjusted*, for the quarter benefited from the sales mix, offset by a number of costs including costs associated with restructuring actions. These restructuring actions will help strengthen the performance at Aerospace through improved capacity utilization and operational efficiency.

We enter 2019 with positive momentum at both segments. Results at Distribution will benefit from the full year impact of recent corporate account wins and savings from the cost reduction actions taken in 2018. Aerospace enters 2019 with significant backlog and increased order rates across several of our products and programs and, when coupled with the actions we have taken to improve operating profit performance, is well positioned to benefit from its diverse mix of commercial and defense programs. And our cash flow performance for 2019 is expected to continue the recent trend of strong cash flow generation and we remain active in our corporate development activities.”

Chief Financial Officer, Robert D. Starr, commented, "In the fourth quarter we generated operating cash flows of $35.0 million, or Free Cash Flows* of $28.7 million, and ended the year with cash flows from operations of $162.4 million and Free Cash Flows* of $132.5 million. Although the full year result was slightly below expectations, 2018 Free Cash Flow* increased 154% over the Free Cash Flow* we generated in 2017. Our strong cash flow performance enabled us to make $30 million of discretionary contributions to our pension plan, up $20 million from the discretionary contributions we made in 2017, helping to improve the funded status of the plan.

In addition, we returned approximately $41 million in capital to shareholders during the year in the form of dividends and share repurchases, a 26% increase over 2017, while paying down over $100 million of debt. We enter 2019 with an extremely strong balance sheet and are well positioned to execute on our strategic goals.

Moving to our outlook for 2019, we expect overall improved results for the year due to an increase in operating margin at both segments, and strong top line growth at Distribution. The approximately 11% increase in the mid-point of expected segment operating income for 2019 is expected to be largely offset by a below the line reduction in non-cash pension and post-retirement benefit income.

At Distribution, we expect sales in the range of $1.19 billion to $1.22 billion, an implied growth rate of 6.0% at the midpoint of the range. Top line performance will benefit from our corporate account wins reaching their full-year run rate in 2019, as well as a number of other sales initiatives designed to increase market share. We expect operating margins for the segment in the range of 5.0% to 5.3%.

At Aerospace, we expect sales in the range of $720.0 million to $750.0 million, with operating margins of 16.5% to 17.0%. Aerospace sales performance at the mid-point will be relatively flat with the prior year, despite an approximately $45.0 million reduction in sales resulting from lower revenue on helicopter and metallic structures programs combined with the absence of sales from Engineering Services and Tooling businesses. Sales from the remaining Aerospace business is expected to increase approximately 6.0%, highlighted by increased sales for our specialty bearings and engineered products and JPF safe and arm devices. The expected increase in operating margin will be driven by expected sales mix in 2019 and the benefit from the sale of the Engineering Services and Tooling businesses.

We expect another strong year of cash flow generation in 2019, with cash flows from operations expected to be in the range of $105.0 million to $125.0 million, resulting in a Free Cash Flow* expectation in the range of $70.0 million to $90.0 million.

Moving to the cadence of earnings for the year, we expect less than 10% of earnings in the first quarter and approximately 40% in the fourth quarter. Similar to 2018, earnings for 2019 are expected to be largely driven by the timing of sales and profit for our specialty bearings products and JPF safe and arm devices."

GUIDANCE:

Kaman sees Q1 2019 revenue of $1.91-1.97 billion, versus the consensus of $2.01 billion.

2019 Outlook

The Company's 2019 outlook is as follows:

• Distribution:
  • Sales of $1.19 billion to $1.22 billion
  • Operating margins of 5.0% to 5.3%
  • Depreciation and amortization expense of approximately $16.0 million
• Aerospace:
  • Sales of $720.0 million to $750.0 million
  • Operating margins of 16.5% to 17.0%
  • Depreciation and amortization expense of approximately $21.0 million
• Interest expense of approximately $20.0 million
• Corporate expenses of approximately $58.0 million to $59.0 million
• Net periodic pension benefit of approximately $1.5 million
• Estimated annualized tax rate of approximately 24.0%
• Consolidated depreciation and amortization expense of approximately $41 million
• Capital expenditures of approximately $35.0 million
• Cash flows from operations in the range of $105.0 million to $125.0 million; Free Cash Flow* in the range of $70.0 million to $90.0 million
• Weighted average diluted shares outstanding of 28.1 million

For earnings history and earnings-related data on Kaman (KAMN) click here.

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