Kaman to sell distribution unit

BLOOMFIELD, Conn.—Kaman Corp. will sell its distribution segment to affiliates of Littlejohn & Co. L.L.C. for total cash consideration of $700 million.

The transaction, which is subject to customary closing conditions and working capital adjustments as well as regulatory approvals, is expected to close in the third quarter of 2019, according to a Kaman news release. The deal is not subject to shareholder approval.

The total price is worth a value of 10.4 times trailing 12-month segment-adjusted EBITDA for the distribution segment, Kaman said. The segment reported GAAP operating income of $12.7 million for the quarter-to-date ending March 29 and $52.4 million for the trailing 12-month period, which also ended March 29.

Kaman expects its remaining aerospace segment to generate between $730 million and $760 million in revenue for 2019, it said. It will continue to design and manufacture critical components, structures and systems for commercial and military customers from its 14 global facilities, which support about 3,000 employees.

Kaman plans to receive about $600 million in net proceeds from the transaction and will allocate about $100 million in proceeds to pay down debt and accelerate new product developments, it said. The firm also will pursue strategic acquisitions in engineered product end markets and plans on returning capital to shareholders through its quarterly cash dividend and share repurchase programs.

Because of the sale, Kaman is discontinuing its current guidance outside of its aerospace outlook, and will provide more details about capital allocation with its second quarter 2019 results in August, according to Rob Starr, executive vice president and chief financial officer.

Creating efficiencies

Going forward, Kaman will evaluate its cost structure for efficiencies, and expects annualized savings of $15 million to $20 million, according to a presentation made during a company investors conference call.

The distribution segment operates about 220 locations across the U.S. and Puerto Rico, with roughly 2,200 employees, Kaman said. It generated about $1.1 billion in net revenue in 2018.

"The (distribution) business today is stronger and more diversified than at any time in its history," Neal Keating, Kaman chairman, CEO and president, said during the conference call. "Distribution's enhanced scale, profitability and deep customer relationships position the business for continued growth, and Littlejohn's acquisition of the business is validation of the great progress we've made."

The segment covers more than 6 million items in applications including electro-chemical, bearings and power transmission, among others. It also provides engineering, design and support for automation, electrical, linear, hydraulic and pneumatic systems. The group also offers belting and rubber fabrication, customized mechanical services, hose assemblies, repair, fluid analysis and motor management.

The sale will create a competitive, differentiated company focused on engineered products and increase its margin profile. While diversification has its merits, the greater opportunity for value creation comes from investing in highly engineered solutions across the aerospace, medical device and industrial markets, Keating said. Current market conditions create favorable timing for the sale, and it provides flexibility to pursue both growth opportunities and increases of scale of the company's engineered product business.

The sale process was initiated early in 2019, with multiple bidders involved over several months, Keating said. The distribution business has been improving and leveraging its product platform effectively in the marketplace. At the same time, in the long term it made more sense for shareholders to separate the business.

Driving growth

Keating said the differentiated portfolio of aerospace and defense products supported by strong end markets positions Kaman to drive long-term value creation. The company also will drive growth by accelerating internal investments, such as the completion of an expansion of its Bloomfield facility for specialty bearing products, the development of its K-Max uncrewed aircraft system, the advancements it has made in new fuzing technology and the expansion of its acquired GRW Bearing GmbH business in Germany.

"You can see from the growth of that (bearing) business how we continue to expand those capabilities into new product platforms and applications," Keating said. "That was one of the key things that we wanted to do as we expanded into the miniature bearing space through the acquisition of GRW. Because it provided us certainly some additional penetration with existing aerospace customers but it provided us expansion into new and growing markets like industrial and health care, which we really liked and we've benefited from."

Keating said one area Kaman has continued to grow is its joint programmable fuze product line, which is used by the U.S. Air Force in weapon design to allow weapons to be programmed on wing in flight.

"When we take a step back and think about today as the transformational step in the company, it really is a return to innovation and technology in aerospace and engineered systems," Keating said. "I think that we've never had a stronger lineup of products and technologies than we do right now. We're very excited about taking this next step."

Kaman's cash flow performance going forward will remain strong as the core aerospace product offerings generate significant cash flows, Keating said.

"For Kaman, this transaction represents an important milestone in our portfolio transformation and the culmination of a thorough strategic review undertaken by our board of directors," Keating said.

The company will further strengthen its balance sheet by paying down debt and will look to leverage the increased financial flexibility to grow the business and provide additional capital returns for shareholders, he said. Transitioning to a pure aerospace and engineered products company also makes Kaman's investment thesis clearer, so investors understand the value-driving aspects of the business.

Planning acquisitions

Looking forward to mergers and acquisitions activity in the range of specialty bearings and engineered products, "we see a strong landscape for potential acquisitions," Keating said. "They're not only in the existing markets that we participate in today, but to continue to expand into some new markets in both the industrial, the medical device area that we started through our acquisition of GRW, and we've been really pleased with the growth rates that we've experienced there."

While that segment of the market has seen some consolidation, Kaman will pursue acquisitions in that field, he said. It also will look for acquisitions that will accelerate its uncrewed aircraft program or provide a technology platform that would allow a broader application of the program.

"I think the key things we look at to begin with are whether it is a technology or a capability that we think we can both augment using existing capabilities or technologies that we have, provide us with opportunities for growth, and also entry into new markets in industrial or medical," Keating said. "That's where we've begun to expand through our GRW acquisition, and we've had very good results with that. I think those are our key areas."

Kaman isn't likely to go off target to markets not associated with its current business, Keating said.

During the transition period, which is expected to last through the end of 2019, Kaman will provide transition services to the new entity to help it run smoothly, while being reimbursed for those services, Starr said.

Based in Greenwich, Conn., Littlejohn is an investment firm that focuses on middle market companies. The company said it looks forward to investing in the distribution business to drive growth both organically and through acquisition.