Kaman Reports 2010 Second Quarter Results

BLOOMFIELD, Conn., Aug. 5 /PRNewswire-FirstCall/ -- Kaman Corp. (Nasdaq: KAMN) today reported financial results for the second quarter ended July 2, 2010.  

Neal J. Keating, Chairman, President and Chief Executive Officer, stated, "As previously announced, we experienced issues in our Aerospace segment during the second quarter that affected our financial performance.  The largest issue, with our Joint Programmable Fuze (JPF) program, was the failure of a supplied component during acceptance testing.  In cooperation with our supplier and customer, we have analyzed, tested and verified the root cause and have developed a plan for introduction of key product improvements.  Consequently, we resumed JPF production earlier this week.  As we expected, sales of our bearing product lines were lower than a year ago but operating margin remained strong.  Aerospace benefited from higher sales from our various BLACK HAWK programs and a variety of other programs. We were most encouraged by the performance of our Industrial Distribution segment during the quarter, where market conditions continued to improve.  We have completed three acquisitions in this segment in 2010 and each is exceeding our expectations for revenue and profitability.  With our growth in revenues and the profitable contribution from the acquisitions, we were able to expand our Industrial Distribution operating margin significantly.  Our free cash flow* in the quarter was excellent at $22.3 million as a result of a company-wide focus on cash generation."

Segment reports follow:

Industrial Distribution segment sales increased 35.2% in the 2010 second quarter to $210.9 million from $156.0 million a year ago.  Acquisitions contributed $27.7 million in sales in the quarter.  On a sales per sales day* basis, organic sales were up 15.6% over last year's second quarter (see table for additional details regarding the Company's sales per day performance).  Segment operating income for the second quarter of 2010 was $7.7 million, a 151.6% increase from operating income of $3.1 million in the second quarter of 2009.  The operating profit margin for the second quarter of 2010 was 3.7% compared to 2.7% in the first quarter of 2010 and 2.0% in the second quarter of 2009.  

Industrial Distribution segment sales for the second quarter of 2010 reflect growth from acquisitions made in 2010 and healthier market conditions for the segment compared to the same period in 2009.  Improved market conditions were broad based across all geographies, customers and end markets.  Sales were higher on a sequential basis in the second quarter due to the contribution from acquisitions and improved market conditions.  The operating margin was higher on a sequential basis as a result of the higher sales volume, and the contributions from acquisitions.

Aerospace segment sales were $106.2 million, a decrease of 22.7% from sales of $137.3 million in the second quarter of 2009. Operating income for the second quarter of 2010 was $12.1 million, compared to operating income of $21.6 million in the 2009 second quarter.  The operating margin in this year's second quarter was 11.4% as compared to 15.7% in the comparable period in the prior year.  The reduction in sales and profit was primarily attributable to the lower than anticipated deliveries under the JPF program, lower sales of bearing product lines, which carry higher margins than the company's other product lines, lower sales under the Egyptian SH-2G(E) maintenance and upgrade program, and cost adjustments on other programs.  These reductions were partially offset by increased sales and profit from Sikorsky BLACK HAWK programs, including erosion coating work for rotor blades, and various other programs.

Outlook

Due to disruptions in JPF production, the company is adjusting its full year sales outlook to reflect lower anticipated sales of JPF fuzes in 2010 offset by higher anticipated BLACK HAWK cockpit deliveries.

The company's revised expectations for 2010 include:

• Aerospace segment sales of $480 million to $490 million
• Aerospace operating margins of 14.0% to 14.5%
• Industrial Distribution organic sales growth of 10% to 13% yielding sales in a range of $800 million to $815 million when combined with previously announced acquisitions
• Industrial Distribution segment operating margins of 3.0% to 3.3%
• Interest expense of approximately $9.6 million (net interest expense will be approximately $3.0 million as a result of a one-time look-back interest benefit)
• Quarterly corporate expenses on average of $9.0 million to $10.0 million

Aerospace expectations include $60 million of sales in the second half of the year from the JPF program, but do not include potential opportunities related to either the sale of SH-2G(I) inventory or deployment of the unmanned K-MAX aircraft.

CFO William C. Denninger commented, "Looking ahead to the second half of the year, recent economic data suggests that a recovery in the economy is likely to be gradual. However, at the same time, we are optimistic about the potential for improvement in our end markets for both Industrial Distribution and Aerospace. The strong second quarter performance of our Industrial Distribution segment provides us with confidence in our ability to meet our full year outlook for this business. In Aerospace, we are working diligently to implement the JPF product improvements developed from our root cause analysis and have resumed production.  While sales of our bearing product lines were soft in the second quarter, as we anticipated, order intake is improving, which helps support our outlook for higher sales in the second half of the year. Overall, we believe we are well positioned to benefit from gradually improving market conditions, which should in turn result in improved second half performance."

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 the quarter's results and various company programs.

A conference call has been scheduled for tomorrow, August 6, 2010 at 8:30 AM EDT.  Listeners may access the call live over the Internet through a link on the home page of the company's website at http://www.kaman.com.  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 investors with 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 per Sales Day – Organic sales per sales day is defined as GAAP "Net sales from the Industrial Distribution segment" less sales derived from acquisitions, divided by the number of sales days in a given period.  Sales days are essentially business days that the company's branch locations are open for business and exclude weekends and holidays.  Sales days are provided as part of this release.  Management believes sales per sales day provides investors with an important perspective on how net sales may be impacted by the number of days the segment is open for business.  

Management uses sales per sales day as a measurement to compare periods in which the number of sales days differ.  The following table illustrates the calculation of sales per sales day using "Net sales: Industrial Distribution" from the "Segment 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 5, 2010 (in thousands, except days):

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 investors with 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 cash flow statement (in thousands):

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 investors with 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 balance sheets (in thousands):

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; 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 centers and five distribution centers across North America.  Kaman offers more than 3.5 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 release contains forward-looking information relating to the company's business and prospects, including the Aerospace and Industrial Distribution businesses, operating cash flow, and other matters that involve a number of uncertainties that may cause actual results to differ materially from expectations. Those uncertainties include, but are not limited to: 1) the successful conclusion of competitions for government programs and thereafter contract negotiations with government authorities, both foreign and domestic; 2) political conditions in countries where the company does or intends to do business; 3) standard government contract provisions permitting renegotiation of terms and termination for the convenience of the government; 4) domestic and foreign economic and competitive conditions in markets served by the company, particularly the defense, commercial aviation and industrial production markets; 5) risks associated with successful implementation and ramp up of significant new programs; 6) potential difficulties associated with variable acceptance test results, given sensitive production materials and extreme test parameters; 7) management's success in increasing the volume of profitable work at the Aerospace Wichita facility;  8) successful negotiation of the Sikorsky Canadian MH-92  program price; 9) successful resale of the SH-2G(I) aircraft, equipment and spare parts; 10) 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; 11) satisfactory resolution of the company's litigation relating to the FMU-143 program; 12) continued support of the existing K-MAX helicopter fleet, including sale of existing K-MAX spare parts inventory; 13) cost estimates associated with environmental remediation activities at the Bloomfield, Moosup and New Hartford, CT facilities and our U.K. facilities; 14) profitable integration of acquired businesses into the company's operations; 15) changes in supplier sales or vendor incentive policies; 16) the effects of price increases or decreases; 17) the effects of pension regulations, pension plan assumptions and future contributions; 18) future levels of indebtedness and capital expenditures; 19) continued availability of raw materials and other commodities in adequate supplies and the effect of increased costs for such items; 20) the effects of currency exchange rates and foreign competition on future operations; 21) changes in laws and regulations, taxes, interest rates, inflation rates and general business conditions; 22) future repurchases and/or issuances of common stock; and 23) other risks and uncertainties set forth in the company's annual, quarterly and current reports, and proxy statements. Any forward-looking information provided in this release should be considered with these factors in mind. The company assumes no obligation to update any forward-looking statements contained in this release.

SOURCE Kaman Corp.