Kaman Reports 2012 Fourth Quarter and Full Year Results

Kaman Reports 2012 Fourth Quarter and Full Year Results

Fourth Quarter 2012 Highlights From Continuing Operations:

• Diluted earnings per share of $0.52 ($0.61 Adjusted*), up 40.5% (15.1% Adjusted*)

• Net sales $399.3 million

• Distribution operating margin: 4.5% (4.6% Adjusted*)

• Aerospace operating margin: 15.0% (17.8% Adjusted*)

Full Year 2012 Highlights From Continuing Operations:

• Diluted earnings per share of $2.03 ($2.18 Adjusted*), up 8.0% (8.5% Adjusted*)

• Record net sales of $1.6 billion and record net earnings of $53.9 million

• Distribution operating income up 7.8% on an 8.8% sales increase

• Aerospace operating income up 10.8% on a 6.1% sales increase

BLOOMFIELD, Conn.--(BUSINESS WIRE)-- Kaman Corp. (NYS: KAMN) today reported financial results for the fourth quarter and full year ended December 31, 2012.

Neal J. Keating, Chairman, President and Chief Executive Officer, stated, "2012 was a great year for Kaman. Distribution sales exceeded $1.0 billion for the first time in the history of this business, while Aerospace delivered operating margin of 15.3% for the year or 16.2% on an adjusted* basis.

Operating profit was higher in each of our businesses. At Distribution, operating profit from continuing operations was a record $50.6 million, a 7.8% increase, achieved in the face of declining industrial production. This decline was especially felt during the second half of the year, resulting in flat organic sales year over year. Despite this pressure, Distribution maintained an operating margin of 5.0%, consistent with the prior year.

We are pleased with the performance of the Joint Programmable Fuze during 2012. We delivered over 27,000 fuzes, of which 17,000 were delivered in the second half of the year. The impressive performance of the JPF, coupled with increased demand for our bearings products, more than offset lower deliveries of BLACK HAWK helicopter cockpits, reduced volume from our unmanned K-MAX® program, and lower missile fuzing sales.

During 2012, we completed strategic transactions that will offer additional opportunities and capabilities to our customers. This includes two acquisitions in our Distribution business that have strengthened our growing services offerings, increased our capabilities, and broadened our U.S. footprint. We also divested our Canadian operations and entered into a strategic alliance called Sourcepoint Industrial with the buyer that will allow each of us to focus on our home markets, while offering larger overall service capabilities to our customers. Within Aerospace we entered into a joint venture in India to capture offset opportunities in the significant Indian market. We also continued the ramp up of our Mexican aerostructures facility adding additional customers during the year. With these investments we have significantly expanded our offerings to customers, developed additional product lines and increased our global footprint.

We have built a strong company and we expect that 2013 will be another year of progress toward our long-term goals. While we anticipate some modest near term headwinds from both reduced DOD spending and industrial market conditions, our team at Kaman is prepared to manage through these issues, continuing to deliver long-term shareholder value."

Segment reports follow:

Distribution segment sales from continuing operations increased 8.6% in the 2012 fourth quarter to $248.3 million compared to $228.6 million a year ago. Acquisitions contributed $32.6 million in sales in the quarter (sales from acquisitions are classified as organic beginning with the thirteenth month following the acquisition). On a sales per sales day* basis, organic sales were down 6.5% from last year's fourth quarter (see Table 2 for additional details regarding the Segment's sales per sales day performance). Segment operating income from continuing operations for the fourth quarter of 2012 was $11.2 million, a 2.2% increase from operating income of $10.9 million in the fourth quarter of 2011. The operating profit margin from continuing operations for the fourth quarter of 2012 was 4.5%. In comparison, the operating profit margin from continuing operations was 5.0% in the third quarter of 2012 and 4.8% in the fourth quarter of 2011.

Segment sales from continuing operations for the full year 2012 were a record $1.01 billion compared to $930.1 million in 2011, an increase of 8.8%. Operating income from continuing operations for the full year 2012 was $50.6 million, an increase of 7.8% over $46.9 million in 2011. The increase in full year sales was a result of the contributions from acquisitions completed in 2012 and 2011. The operating profit margin from continuing operations for the full year was 5.0% (5.1% adjusted*) in 2012, the same as 2011. (See Table 7 for additional details regarding the Segment's adjusted operating profit margin.) The increase in operating income from continuing operations was a result of operating profit contributed by acquisitions completed in 2012 and 2011, offset by higher employee related costs, including group health insurance and increased expense associated with the implementation of our new ERP system.

Aerospace segment sales for the fourth quarter of 2012 were $151.0 million, an increase of $5.7 million from sales of $145.3 million in the fourth quarter of 2011. Operating income for the fourth quarter of 2012 was $22.7 million, compared to operating income of $17.5 million in the fourth quarter of 2011. The operating margin in this year's fourth quarter was 15.0% (17.8% adjusted*) as compared to 12.0% (16.3% adjusted*) in the comparable period in the prior year (see Table 7 for additional details regarding the Segment's adjusted operating profit margin). Fourth quarter 2012 operating income increased as compared to the prior year due to higher deliveries under the company's Joint Programmable Fuze ("JPF") program and higher demand for our bearings products. During the fourth quarter of 2012 the Company delivered more than 7,000 JPFs as compared to slightly more than 3,700 in the fourth quarter of 2011. These increases were offset by decreases on our legacy fuze programs, and lower contribution from our Egyptian SH-2(G) maintenance and upgrade program. Additionally, we recorded a write-off before tax of $3.3 million related to the resolution of a program related matter, which resulted in a reduction of net income of $2.5 million or $0.09 per diluted share.

For the full year 2012 segment sales were $580.8 million, an increase of 6.1% from $547.4 million in 2011. Full year operating profit rose $8.7 million or 10.8% to $89.1 million from $80.4 million in the prior year. The sales increase was primarily attributable to increased shipments of the JPF, an increase in sales volume on our bearing products, and the incremental contribution of sales from the acquisition of Vermont Composites in 2011. These increases were partially offset by lower shipments under our Sikorsky BLACK HAWK helicopter cockpit program due to lower customer requirements, a lower volume of work on our unmanned K-MAX aircraft system, a decrease in sales volume on our legacy fuze programs, a decrease in sales volume on our SH-2 helicopter aftermarket programs and decreased volume on our blade erosion coating program. Operating profit was higher as a result of the increased sales volume noted above and the absence of expenses associated with the FMU-143 settlement and the related legal fees recorded in the prior year. These increases were offset by the lower sales of the items noted above and the resulting impact on gross profit as well as the $3.3 million of net loss before tax related to the resolution of a program related matter during the fourth quarter.

Outlook

The Company's expectations for 2013 are as follows:

• Aerospace segment sales of $620 million to $635 million, up 6.7% to 9.3% over 2012

• Aerospace segment operating margins of 16.0% to 16.5%

• Distribution segment sales of $1,080 million to $1,115 million, up 6.7% to 10.2% over 2012 (sales from continuing operations)

• Distribution segment operating margins of 5.2% to 5.6%

• Interest expense of approximately $13.0 million

• Corporate expenses of approximately $50 million

• Tax rate of approximately 35%

• Capital expenditures of $40 million to $45 million

• Free cash flow* of $35 million to $40 million

Chief Financial Officer, William C. Denninger, commented, "2012 delivered the improved cash flow performance we have indicated is a focus for us. Our free cash flow* was $52.0 million for 2012, an increase of 345.7% when compared to 2011 and represented a conversion rate of 96%. This was higher than our previous expectation due primarily to improvements in our working capital management. We delivered adjusted diluted earnings per share* of $2.18 for the year through continued focus on the bottom line. At Aerospace, 2013 should see higher sales as we move closer to full rate production on several ramp up programs. At Distribution, we will continue to monitor market conditions, and will adjust our cost base as necessary to support profit margins."

Please see the MD&A section of the Company's SEC Form 10-K filed concurrent 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 26, 2013, at 8:30 AM ET. Listeners may access the call live by telephone at (888) 396-2386 and from outside the U.S. at (617) 847-8712; (passcode: 47112042); or, via 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 enhance investors' ability to review the Company's business from the same perspective as management and facilitate comparisons of this period's results with prior periods. 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 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 organic 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 organic sales per sales day using "Net sales: Distribution" from the "Segment Information" footnote in the "Notes to Consolidated Financial Statements" from the Company's Form 10-K filed with the Securities and Exchange Commission on February 25, 2013. Sales from acquisitions are classified as organic beginning with the thirteenth month following the acquisition.

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 consolidated statements of cash flows.

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 consolidated balance sheets included in this release.

Non-GAAP adjusted net earnings and Non-GAAP adjusted net earnings per common share diluted - Non-GAAP adjusted net earnings and Non-GAAP adjusted net earnings per common share diluted are defined as net earnings and diluted earnings per share, less items that are not indicative of the operating performance of the business for the period presented. These items are included in the reconciliation below. Management uses Non-GAAP adjusted net earnings and Non-GAAP adjusted net earnings per common share diluted to evaluate performance period over period, to analyze the underlying trends in our business and to assess its performance relative to its competitors. We believe that this information is useful for investors and financial institutions seeking to analyze and compare companies on the basis of operating performance.

The following table illustrates the calculation of Non-GAAP adjusted net earnings and Non-GAAP adjusted net earnings per common share diluted using "Net earnings" and "Diluted earnings per share" from the "Consolidated Statement of Operations" from the Company's Form 10-K filed with the Securities and Exchange Commission on February 25, 2013.