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Kaman Reports 2017 Fourth Quarter and Full Year Results

Fourth Quarter Highlights:

  • Net sales increased 9.4% to $473.9 million
  • Net earnings of $13.8 million, 8.8% decrease from the prior year
  • Adjusted EBITDA* increased 40.3% to $54.0 million, 11.4% of net
    sales
  • Distribution operating margin of 4.4%, a 220 basis point increase
    from the prior year
  • Aerospace operating margin of 21.4%, a 230 basis point increase
    from the prior year

BLOOMFIELD, Conn.–(BUSINESS WIRE)–Kaman Corp. (NYSE:KAMN) today reported financial results for the fourth
fiscal quarter and full year ended December 31, 2017.

Table 1. Summary of Financial Results (unaudited)
In thousands except per share amounts For the Three Months Ended
December 31, 2017 December 31, 2016 Change
Net sales:
Distribution $ 263,000 $ 257,218 $ 5,782
Aerospace 210,916 175,844 35,072
Net sales $ 473,916 $ 433,062 $ 40,854
Operating income:
Distribution $ 11,485 $ 5,711 $ 5,774
% of sales 4.4 % 2.2 % 2.2 %
Aerospace 45,153 33,631 11,522
% of sales 21.4 % 19.1 % 2.3 %
Net gain (loss) on sale of assets 39 (1 ) 40
Corporate expense (14,400 ) (12,677 ) (1,723 )
Operating income $ 42,277 $ 26,664 $ 15,613
Adjusted EBITDA*:
Net earnings $ 13,797 $ 15,127 $ (1,330 )
Adjustments 40,155 23,316 16,839
Adjusted EBITDA* $ 53,952 $ 38,443 $ 15,509
% of sales 11.4 % 8.9 % 2.5 %
Earnings per share:
Diluted earnings per share $ 0.49 $ 0.53 $ (0.04 )
Adjustments 0.37 0.03 0.34
Adjusted Diluted Earnings per Share* $ 0.86 $ 0.56 $ 0.30

Neal J. Keating, Chairman, President and Chief Executive Officer,
commented, “Performance for the fourth quarter and full year
demonstrates the strong execution on our key Aerospace programs and the
ability to drive operating profit growth at Distribution. Net earnings
for the quarter were lower than the prior year, primarily due to a $9.7
million charge resulting from tax reform and $1.1 million of pre-tax
restructuring and severance costs; however, Adjusted EBITDA* increased
40.3% to $54.0 million, 11.4% of Net Sales.

Distribution sales in the fourth quarter were up 2.2%, or 0.6% on a
sales per sales day* basis, with operating margins up 220 basis points,
to 4.4%. For the year, sales declined 2.3% to $1.081 billion; however,
operating profit increased 25.4% to $52.5 million. Sales per Sales Day*
turned positive in November, a trend which has continued into 2018,
where year-to-date Sales per Sales Day* are up more than 5.0% through
February. Additionally, we have been successful in securing a number of
national accounts, the largest of which was signed in the first quarter
of 2018. We have begun the process of transitioning these accounts and
expect the contribution to our top line performance to increase as we
move through the year. These trends give us confidence in our ability to
achieve our outlook as we enter 2018.

Aerospace performance in the quarter was highlighted by a continued
sequential sales increase for our specialty bearings products, as well
as the delivery of more than 13,000 joint programmable fuzes, leading to
almost 36,000 fuze deliveries in the year. Our Aerospace team delivered
operating margin performance of 21.4%, or 21.5% adjusted*, an increase
of 230 bps over the fourth quarter of 2016.

Entering 2018, prospects for both segments remain strong. At
Distribution, the team is working to drive sales growth across the
platforms, while maintaining the improvements we have made in operating
profit performance. At Aerospace, growth for our specialty bearings
products will continue into 2018 and we have recently received initial
orders for the Combat Rescue Helicopter, a continuation of our long
standing relationship with Sikorsky. In addition, we have secured more
than $425 million in JPF orders, led by the $324 million DCS award
announced in January, creating record backlog for this program. We
anticipate additional orders from the USG on Option 14, and look forward
to the opportunity to continue our relationship with the USG under
Options 15 and 16. The opportunities for this program remain strong and
we are encouraged by its longer term prospects.”

Chief Financial Officer, Robert D. Starr, commented, "The sequential
improvements we anticipated in 2017 continued into the fourth quarter,
where we delivered diluted earnings per share of $0.49, or $0.86
adjusted. Earnings for the quarter were driven by a 9.9% increase in
gross profit to $148.8 million, resulting in a record gross margin of
31.4%. The passage of the tax reform in late 2017 required us to revalue
our deferred tax positions resulting in a reduction to our net deferred
tax asset position of approximately $9.7 million, or $0.35 per diluted
share. While we incurred a charge in 2017, we anticipate future benefits
from tax reform due to the reduction in our corporate tax rate, which
for 2018 is anticipated to be in the range of 25.5% to 26.5%, inclusive
of state and local taxes.

Moving to our outlook for 2018, we expect Aerospace sales to be up 4.0%
to 8.0%, with operating margins in the range of 15.5% to 16.0%, or 16.2%
to 16.7% when adjusted* for restructuring and transition costs.
Operating margin performance is expected to be lower in 2018 due in part
to the mix of JPF deliveries and the shift of restructuring costs out of
2017 into 2018. At Distribution, we expect sales growth of 2.0% to 6.0%,
with operating margins in the range of 5.1% to 5.4%.

Previously we have discussed the actions we took to freeze our pension
plan, and, over time, these actions have resulted in lower pension
expense. For 2018, we anticipate a net benefit of $6.6 million
associated with our pension plan compared to a net pension expense of
$1.0 million in 2017. Prior to 2018, this benefit would have been
included in the calculation of operating income; however, due to the
adoption of a new accounting standard, we are required to reclassify a
portion of this benefit below operating income. As a result, $4.9
million of pension expense will be included in calculation of operating
income, while an $11.5 million pension benefit will be reclassified
below operating income. It is important to note that had the treatment
of this benefit been consistent with the prior year presentation, we
would have expected our outlook for Aerospace and Distribution operating
margins to increase by 90 basis points and 30 basis points, respectively.

In addition, with the adoption of the new revenue recognition standard
on January 1, 2018, we have evaluated the anticipated impact on our
outlook for the year. Based on our analysis, the adoption of the new
standard will shift the timing of recognition of revenue for certain
programs from the point of delivery to a cost-to-cost basis; while other
programs will change from cost-to-cost recognition to the point of
delivery. The most significant program level changes resulting from the
adoption are associated with our K-MAX® Commercial Helicopter program,
Joint Programmable Fuze USG program and UH-60 and AH-1Z structures
programs. In 2018, the net impact of the new revenue standard for
Aerospace is a sales increase in the range of $15.0 million to $25.0
million and an operating income increase in the range of $7.0 million to
$9.0 million.

Despite the changes in timing for the recognition of revenue, the new
standard does not change the timing of cash receipts or payments. In
2017 we generated cash flows from operations of $79.9 million, leading
to Free Cash Flow* for the year of $52.3 million. During the fourth
quarter a number of deliveries occurred later than we had previously
anticipated, shifting cash receipts into 2018. With the shift of these
cash receipts, the receipt of advances on our JPF DCS contract, and
improved performance in the underlying business, we anticipate cash
flows from operations of $185.0 million to $210.0 million, or Free Cash
Flow* of $150.0 million to $175.0 million for 2018."

2018 Outlook

Our 2018 outlook is as follows:

  • Distribution:

    • Sales of $1,100.0 million to $1,150.0 million
    • Operating margins of 5.1% to 5.4%
    • Depreciation and amortization expense of approximately $15.0
      million
  • Aerospace:

    • Sales of $750.0 million to $780.0 million
    • Operating margins of 15.5% to 16.0%, or 16.2% to 16.7% 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 $59.0 million
  • Net periodic pension benefit of approximately $11.5 million
  • Estimated annualized tax rate in the range of approximately 25.5% to
    26.5%
  • 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
  • Weighted average diluted shares outstanding of 28.0 million

Please see the MD&A section of the Company's Form 10-K 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, February 28, 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: 4173569; 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:
4173569. 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. In addition, a supplemental presentation
relating to the fourth quarter and full year 2017 results will be posted
to the Company’s website immediately prior to the earnings call at http://www.kaman.com/investors/presentations.

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 Twelve Months Ended
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
Net sales:
Distribution $ 263,000 $ 257,218 $ 1,080,965 $ 1,106,322
Aerospace 210,916 175,844 724,944 702,054
Net sales $ 473,916 $ 433,062 $ 1,805,909 $ 1,808,376
Operating income:
Distribution $ 11,485 $ 5,711 $ 52,482 $ 41,859
Aerospace 45,153 33,631 119,889 115,005
Net gain (loss) on sale of assets 39 (1 ) 256 (11 )
Corporate expense (14,400 ) (12,677 ) (58,452 ) (50,930 )
Operating income $ 42,277 $ 26,664 $ 114,175 $ 105,923
Table 3. Depreciation and Amortization by Segment (in thousands)
(unaudited)
For the Three Months Ended For the Twelve Months Ended
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
Depreciation and Amortization:
Distribution $ 3,548 $ 3,980 $ 15,083 $ 16,107
Aerospace 6,128 5,889 23,717 23,584
Corporate 876 941 3,671 3,702
Consolidated Total $ 10,552 $ 10,810 $ 42,471 $ 43,393

Non-GAAP Measures Disclosure

Management believes that the Non-GAAP (Generally Accepted Accounting
Principles) financial 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:

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 twelve-month fiscal periods ended December 31, 2017, and
December 31, 2016. 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 Twelve Months Ended
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
Distribution
Net sales $ 263,000 $ 257,218 $ 1,080,965 $ 1,106,322
Acquisition Sales 490 5,171
Organic Sales $ 263,000 $ 256,728 $ 1,080,965 $ 1,101,151
Aerospace
Net sales $ 210,916 $ 175,844 $ 724,944 $ 702,054
Acquisition Sales 10,065 63,483
Organic Sales $ 210,916 $ 165,779 $ 724,944 $ 638,571
Consolidated
Net sales $ 473,916 $ 433,062 $ 1,805,909 $ 1,808,376
Acquisition Sales 10,555 68,654
Organic Sales $ 473,916 $ 422,507 $ 1,805,909 $ 1,739,722

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-K filed with the
Securities and Exchange Commission on February 27, 2018. 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 the change in Organic Sales per Sales Day.

Table 5. Distribution – Organic Sales Per Sales Day (in
thousands, except days) (unaudited)
For the Three Months Ended For the Twelve Months Ended
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
Current period
Net sales $ 263,000 $ 257,218 $ 1,080,965 $ 1,106,322
Acquisition sales 490 5,171
Organic sales 263,000 256,728 1,080,965 1,101,151
Sales days 62 61 252 253
Organic Sales per Sales Day for the current period a $ 4,242 $ 4,209 $ 4,290 $ 4,352
Prior period
Net sales from the prior year $ 257,218 $ 265,706 $ 1,106,322 $ 1,177,539
Sales days from the prior year 61 60 253 253
Sales per sales day from the prior year b $ 4,217 $ 4,428 $ 4,373 $ 4,654
% change (a-b)÷b 0.6 % (4.9 )% (1.9 )% (6.5 )%
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 – During the third quarter of 2017, we modified
our definition of Adjusted EBITDA to eliminate items that are not
indicative of the operating performance of the Company's segments or
corporate function for the periods presented. Management believes this
modification to the definition of Adjusted EBITDA will provide greater
consistency with the other Non-GAAP measures used by the Company,
specifically, Adjusted Operating Income, Adjusted Net Earnings and
Adjusted Diluted Earnings Per Share. As modified, 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 year ended December 31, 2017, and December 31, 2016. Prior
period amounts have been adjusted to conform to our revised definition.
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 Twelve Months Ended
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
Adjusted EBITDA
Consolidated Results
Sales $ 473,916 $ 433,062 $ 1,805,909 $ 1,808,376
Net earnings $ 13,797 $ 15,127 $ 49,826 $ 58,854
Interest expense, net $ 5,035 $ 3,787 $ 20,581 $ 15,747
Income tax expense 23,518 7,521 44,552 30,850
Other expense (income), net (73 ) 229 (784 ) 472
Depreciation and amortization 10,552 10,810 42,471 43,393
Other Adjustments:
Acquisition transaction and integration costs 295 5,145
Senior executive separation costs 768 2,882
CAS 413 pension closeout 333 333
Restructuring and severance costs 355 341 2,855 1,032
Adjustments $ 40,155 $ 23,316 $ 112,557 $ 96,972
Adjusted EBITDA $ 53,952 $ 38,443 $ 162,383 $ 155,826
Adjusted EBITDA margin 11.4 % 8.9 % 9.0 % 8.6 %

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 Twelve Months Ended For the Nine Months Ended For the Three Months Ended
December 31,
2017
September 29,
2017
December 31,
2017
Net cash (used in) provided by operating activities $ 79,885 $ 43,834 $ 36,051
Expenditures for property, plant & equipment (27,631 ) (19,874 ) (7,757 )
Free Cash Flow $ 52,254 $ 23,960 $ 28,294
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” and "Temporary 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)
December 31,
2017
December 31,
2016
Current portion of long-term debt, net of debt issuance costs $ 7,500 $ 119,548
Long-term debt, excluding current portion, net of debt issuance costs 391,651 296,598
Debt $ 399,151 $ 416,146
Temporary equity, convertible notes 1,797
Total shareholders' equity 635,656 565,787
Capitalization $ 1,034,807 $ 983,730
Debt to Capitalization Ratio 38.6 % 42.3 %

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.

Contacts

James Coogan
V.P., Investor Relations
860-243-6342
[email protected]

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