BLOOMFIELD, Conn. — Kaman Corp. reported financial results for the fourth fiscal quarter and full year ended December 31, 2017.
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
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.
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