Kaman (KAMN) Tops Q1 EPS by 21c, Revenues Miss; FY19 Revenue Mid-Point Guidance Above Consensus

Kaman (NYSE: KAMN) reported Q1 EPS of $0.57, $0.21 better than the analyst estimate of $0.36. Revenue for the quarter came in at $457.39 million versus the consensus estimate of $465.2 million.

First Quarter Highlights:

• Increases Full Year Outlook
• Diluted earnings per share of $0.50, or $0.57 adjusted*
• Distribution sales up 2.5% or 4.1% on a sales per sales day* basis to $291.0 million
• Aerospace operating margin increased 340 bps to 16.0%
• Year-to-date operating cash flow of $22.6 million; Free Cash Flow* of $15.2 million
• Consolidated backlog of $949.3 million

Neal J. Keating, Chairman, President and Chief Executive Officer, commented, “We were pleased to start 2019 with very strong first quarter results. Diluted earnings per share for the quarter of $0.50, or $0.57 adjusted*, resulted from sales and operating profit growth at Distribution and improved profitability at Aerospace.

At Distribution, sales increased 2.5%, or 4.1% on a sales-per-sales day* basis to $4.6 million, our 6th consecutive quarter of sales-per-sales day* growth and our highest first quarter daily sales rate since 2015. Higher sales growth increased our ability to leverage our fixed cost base and contributed to operating margin of 4.4%, an increase of 20 bps over the first quarter of 2018 and 30 bps over the fourth quarter of 2018. Highlighting Distribution performance was top line growth across all three product platforms and year-over-year growth in a number of our end markets, including paper manufacturing, merchant wholesalers durable goods, primary metal manufacturing, and food processing. In addition, during the quarter we increased our backlog 5%. Overall this is a strong start to the year and provides us confidence in our 2019 outlook.

Aerospace's operating profit increased 17.4% to $26.6 million. We ended the quarter with operating margins of 16.0%, or 16.1% adjusted*, a 340 bps increase over the 12.6% operating margin in the first quarter of 2018. The increase in operating margin resulted from the mix of sales in the period and improved performance resulting from our prior period restructuring actions. Lower sales in the quarter primarily resulted from a shift in the delivery of the tenth new build K-MAX® aircraft into the second quarter, the sale of our tooling and engineering services businesses, and a $2.5 million foreign currency headwind. Also during the quarter, we announced a number of investments at Aerospace and continue to make progress in those areas where we see a significant opportunity for growth. One area in particular is the development of our next generation K-MAX® unmanned aircraft system for use in commercial and military applications.

Through the balance of the year, we expect continued growth from Distribution with increased profitability as we continue to benefit from improved fixed cost leverage. Aerospace operating profit performance is expected to remain strong due to the sales and profit mix of our specialty bearings and JPF products and the continued realization of the benefit from our restructuring actions. In addition, increased order activity for our bearings products and our recently announced JPF DCS award give us the confidence to increase our Aerospace outlook for the remainder of the year."

Chief Financial Officer, Robert D. Starr, commented, "We generated operating cash flows of $22.6 million, and Free Cash Flows* of $15.2 million during the first quarter, further reducing our debt levels while ending the quarter with a debt to capitalization ratio of 30.7%, a 100 bps reduction from the fourth quarter of 2018 and leverage at approximately 1.9x. We are well positioned to meet our full year cash flow forecast and our strong balance sheet allows us to continue to make investments in key projects that support the long term growth of the business while seeking strategic acquisition targets that continue to broaden our engineered product offerings.

Our outlook for 2019 has improved. For Distribution, we are maintaining our prior outlook as the strong start to the year provides us confidence in achieving our full year expectations. At Aerospace, performance for the year is ahead of our prior expectations and, based on the progress we have made to date, we are increasing our outlook for sales and operating profit for the remainder of the year. We now expect sales in the range of $730.0 million to $760.0 million and operating margin in the range of 16.7% to 17.2%, a 20 basis point increase over our prior expectations.

Additionally, we are lowering the full year expectation for net periodic pension benefit from $1.5 million to $0.4 million to reflect the finalization of our pension assumptions for 2019.

Finally, our first quarter earnings were ahead of expectations and we note that approximately 50% of this was due to a shift in earnings previously expected in the second quarter, with the remainder representing incremental earnings for the year. We continue to expect nearly 40% of our full year earnings in the fourth quarter. As previously discussed, the back half weighting of our earnings is largely dependent on the timing of sales and profit for our specialty bearings products and JPF DCS units."

GUIDANCE:

Kaman sees FY2019 revenue of $1.92-1.98 billion, versus the consensus of $1.94 billion.

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

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