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Edited Transcript of KAMN earnings conference call or presentation 28-Feb-18 1:30pm GMT

Q4 2017 Kaman Corp Earnings Call

BLOOMFIELD Mar 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Kaman Corp earnings conference call or presentation Wednesday, February 28, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James G. Coogan

Kaman Corporation - VP of IR

* Neal J. Keating

Kaman Corporation - Chairman, CEO and President

* Robert Daniel Starr

Kaman Corporation - CFO and EVP

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Conference Call Participants

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* Christopher M. Dankert

Longbow Research LLC - Research Analyst

* Edward James Marshall

Sidoti & Company, LLC - Research Analyst

* Peter John Skibitski

Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst

* Ryan Dale Cieslak

Northcoast Research Partners, LLC - VP & Senior Research Analyst

* Ryan Thomas Mills

KeyBanc Capital Markets Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Kaman Corporation Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jamie Coogan, Vice President, Investor Relations. Sir, you may begin.

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James G. Coogan, Kaman Corporation - VP of IR [2]

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Good morning. I'd like to welcome everyone to Kaman's fourth quarter 2017 earnings call. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer; and Rob Starr, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to note that some of the information discussed during the call will consist of forward-looking statements, setting forth our current expectations with respect to the future of our business, the economy and other future events. These include projections of revenue, earnings and other financial items, statements on the plans and objectives of the company or its management, statements of future economic performance and assumptions underlying these statements regarding the company and its business. Company's actual results could differ materially from those indicated in any forward-looking statements due to many factors, the most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the company's 2017 annual report on Form 10-K and the current report on Form 8-K filed yesterday evening, together with our earnings release. In addition, we expect to discuss certain financial measures and information that are non-GAAP measures as defined in applicable SEC rules and regulations, reconciliation to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K. Finally, we posted a Q4 2017 Earnings Call Supplement to our website that we will reference in this call and is designed to provide additional context around the impact to our 2018 outlook, resulting from the adoption of 2 accounting standards on January 1, 2018.

You can find this presentation at www.kaman.com/investors/presentations. With that, I'll turn the call over to Neal Keating. Neal?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [3]

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Thank you, Jamie. Good morning, and thank you for joining us on today's call. I'd like to begin today with a review of our fourth quarter results and provide an update on key events in each segment. I will then turn the call over to Rob to discuss our financial results and our outlook for 2018.

Consolidated sales in the fourth quarter increased 9.4% to $473.9 million as sales increased at both segments.

Sales at Aerospace increased 19.9%, while sales at Distribution increased 2.2%.

Diluted earnings per share of $0.49 included the impact of tax reform, restructuring and severance costs incurred in the quarter. When adjusted for these items, we achieved diluted earnings per share of $0.86, a 54% increase over the adjusted diluted earnings per share achieved in the prior year.

Turning to our segments. Aerospace operating profit in the quarter increased 34.3% to $45.2 million. The increase in operating profit was primarily due to higher volume of JPF deliveries in the quarter and the mix of deliveries between direct commercial sales and sales to the U.S. government as well as higher volume for our Specialty Bearing products. Beginning with JPF, we delivered more than 13,000 fuzes in the quarter, leading to record deliveries of almost 36,000 in the year compared to approximately 31,000 in 2017. Since 2015, deliveries of the JPF have increased by over 45%. As we look forward into 2018, we expect to see higher JPF sales and anticipate delivering 34,000 to 38,000 fuzes. However, the mix will shift to a higher proportion of U.S. government sales, which will provide a headwind to our expected margin performance in 2018. Before I move on, I want to recognize the efforts of Jerry Rickets and our JPF team and the supply base for their ability to meet this increased demand, while maintaining the high reliability and quality that our customers require.

As we've discussed throughout most of 2017, demand for the JPF continues to be very strong and since our last call, we were successful in closing $426 million in orders, including the $324 million direct commercial sale contract we announced in January. Deliveries for this contract are expected to begin in 2019 and continue through 2022. Orders received under option 13 of our U.S. government contract now total $102 million, and will go to support the U.S. government and 18 foreign militaries with additional orders under option 14, expected in 2018.

Looking ahead, we continue to see strong DCS demand and we look forward to the opportunity to support the U.S. government on options 15 and 16.

In our Bearings business, upper single-digit sales growth was the result of higher volume across our self-lube, traditional, rolling element airframe and miniature bearing lines.

In 2018, we expect to see continued growth in these product lines as we take advantage of our position on several growth platforms, while partnering with new customers on PMA opportunities. Sales for our structures programs declined over the prior year, in part due to lower sales on our K-MAX helicopter, Boeing 777 and also the A-10 program. The operating efficiencies we have gained over the year on our metallic structures programs held for the quarter, and for the full year, our performance improved significantly over 2016. In addition, we continue to work through the restructuring and transition steps announced in the third quarter.

For the year, we had anticipated approximately $4 million of restructuring expense. Of this amount, we incurred $2.7 million as the timing of certain actions have shifted into 2018. We currently expect restructuring and transition costs associated with these actions of $7 million to $8.5 million, slightly lower than our previous estimates of $8 million to $10 million. In reviewing the 2019 Department of Defense budget request, there are positive indicators for a number of our Aerospace programs. These include legacy programs such as the UH-60 BLACK HAWK, AH-1Z and A-10 as well as a number of our new programs, such as the CH-53K and combat rescue helicopter. As you would expect, we will continue to monitor the progress of the budget request as it moves through the legislative process.

Moving to distribution. Sales for the fourth quarter increased 2.2% over the prior year, or 0.6% on a sales per sales day basis.

Taking a look at our end-market performance for the quarter, 8 of our top 10 markets were up in the period, led by machinery, mining, fabricated metals and food. Segment level operating profit of 4.4% increased 220 basis points over the prior year or 40 basis points when adjusted for the costs associated with the productivity initiatives we incurred in the fourth quarter of 2016.

Also, I'm pleased to report that sales per sales day turned positive in November and have remained positive through the month of February.

As we look at the rest of the year, the underlying trends are improving, providing optimism for our sales outlook going forward. First, through February, we've seen a nice recovery in our run rate with our first quarter organic sales per day up more than 5%, and acceleration of the trend we saw in the latter half of the fourth quarter.

Second, we have recently secured a number of new national accounts and have begun the process of transitioning these customers and expect the contribution to our top line performance to increase as we move through the year. These trends provide a favorable backdrop for the year ahead and positions the business for continued improvement in 2018.

Overall, we are pleased with our finish to the year and are optimistic about 2018, given a robust Aerospace backlog, improving sales trends and distribution and the benefits from tax reform. And now, I'll turn the call over to Rob. Rob?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [4]

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Thank you, Neal, and good morning, everyone. I will begin today by touching on our performance for the fourth quarter before providing our outlook for 2018.

Our consolidated fourth quarter sales were up 9.4% to $473.9 million, compared to $433.1 million in the prior year period. The increase in sales were driven by a higher volume of JPF and bearing products and modest growth at distribution.

By segment, our Aerospace sales increased 19.9% to $210.9 million compared to $175.8 million in the prior year period. Distribution sales increased 2.2% to $263 million compared to $257.2 million in the prior year period, led by our bearing and power transmission and fluid power products.

Consolidated gross profit for the fourth quarter increased 9.9% to $148.8 million, compared to $135.4 million in the prior year period. The increase in gross profit was due to the sales mix of our JPF deliveries in the quarter and a higher volume of sales for our Specialty Bearing products. This favorable sales mix led to a record 31.4% gross margin for the quarter, compared to 31.3% in the prior year. SG&A in the fourth quarter was $106.4 million or 22.4% of sales, compared to $108.4 million or 25% of sales in the prior year. Lower SG&A relative to the prior year was primarily due to lower costs associated with our distribution and productivity initiatives, offset by increased costs relating to severance and restructuring expenses. Operating income in the fourth quarter was $42.3 million or 8.9% of sales, compared to $26.7 million or 6.2% of sales in the prior year, as both segments saw improved performance over the prior year.

Diluted earnings per share for the quarter was $0.49 or $0.86 when adjusted for the $9.7 million of expense associated with the revaluation of our net deferred tax assets due to tax reform and $1.1 million of pretax restructuring and severance expenses. This compares favorably to the $0.53 per diluted shares, or $0.56 adjusted, earned in the prior year. We have discussed our focus on free cash flow generation in the past and have been successful at achieving our free cash flow conversion in excess of our long-range goal of 80% to 100% of net earnings over the past couple of years.

For 2017, the timing of deliveries at year-end shifted cash receipts into 2018, despite the shift in timing, we delivered cash flows from operations of $79.9 million, which led to free cash flow of $52.3 million or 105% of net earnings.

Next, I would like to provide some details on the inputs to our tax rate. For the quarter, our tax rate was 63%. Adjusting for the impact of tax reform, our normalized rate would have been 36.9%, in line with our expectations. With the passage of tax reform in late 2017, we were required to revalue our net deferred tax asset position and as we mentioned earlier, this resulted in the charge of $9.7 million in the quarter.

Despite this one-time charge, we expect to see a significant reduction in our federal tax rate for 2018 and beyond. Although tax reform reduced the federal tax rate to 21%, there are a number of deductions we've previously utilized that will no longer be available under the tax code. The most significant of these are Section 199 domestic production deductions and Section 162(m) deductions for performance-based compensation paid to covered employees. Absent these deductions, we anticipate our effective tax rate for the year to be in the range of 25.5% to 26.5%, inclusive of state and local taxes.

I'd like to now focus the balance of my remarks on our outlook for 2018. Starting with Aerospace, we expect sales in the range of $750 million to $780 million with operating margins of 15.5% to 16.0%, or 16.2% to 16.7%, when adjusting for the approximately $5.5 million restructuring and transition costs. Sales were up in 2018 as primarily driven by higher volumes for our Specialty Bearings and engineered products, Composite Structures programs and the benefit from the adoption of the new revenue recognition standard. Operating margins will be lower than the prior year, primarily due to a higher mix of JPF USG sales and the change in accounting for certain pension costs, offset by growth in our Specialty Bearing product lines, improving in our Composite Structures program resulting from our restructuring and transition actions and the benefit from the adoption of the new revenue recognition standard.

Moving to distribution, we expect sales to be in the range of $1.1 billion to $1.15 billion, representing sales growth of 2% to 6% over 2017.

The increase in sales will result from both higher volume and pricing. While our higher sales volumes will improve our operating leverage, increased national account sales will add slight margin headwinds. As a result, we expect operating margins for 2018 to be in the range of 5.1% to 5.4%. As mentioned earlier, we will see a significant benefit from tax reform and estimate our 2018 tax rate to be in the range of 25.5% to 26.5%. Moving to the cadence of earnings for the year. Similar to last year, we expect earnings to increase sequentially through the year with 30% of our earnings occurring in the first half of the year. Over the last 4 years, our free cash flow conversion has averaged 127%, well in excess of our long-term goal of 80% to 100% of net earnings. This trend will continue into 2018 where a number of items will provide a benefit to our cash flow outlook for the year.

For 2018, we expect cash flows from operations of $185 million to $210 million or free cash flow of $150 million to $175 million. We will benefit from strong cash flow generation from the underlying businesses as well as cash received that were expected in 2017 that have shifted into 2018 and the receipt of an advanced payment under our JPF DCS contract. This morning, we posted a Q4 2017 Earnings Call Supplement to our website to provide some additional context on 2 accounting changes and the impact of these changes on our 2018 outlook. The first of these changes is the change in accounting for pension costs, which separates pension costs into 2 components and changes the classification of these costs in the income statement. For 2018, we anticipate a net benefit of $6.6 million from our pension plan, resulting from the actions we took to freeze the plan and the significant return on plan assets we experienced in 2017. The first component of this net benefit is $4.9 million pension expense for service costs, which is included in the calculation of operating income. The second component of this net benefit is an $11.5 million pension benefit, which is included below the calculation of operating income. Had the accounting for this item been consistent with 2017, the $11.5 million benefit would have been included in the calculation of operating income and resulted in a significant increase to our Aerospace and Distribution operating margins of approximately 90 basis points and 30 basis points, respectively. Additionally, our expectation for corporate expense of $59 million would have been lower by approximately $1 million. Despite the impact to the calculation of operating income, it is important to note that this change does not impact our expectations for net earnings for the year. The second accounting change is related to the adoption of the new revenue recognition standard. The adoption of this standard on January 1, 2018, is not expected to have a material impact to the future sales and earnings of distribution. However, Aerospace is expected to see a number of changes that will shift the timing of revenue recognition. The most significant of these changes are associated with our K-MAX commercial helicopter program, JPF USG program, UH-60 and AH-1Z structures programs. We estimate the impact from these changes to provide a net benefit to our 2018 Aerospace sales and operating income of approximately $15 million to $25 million and approximately $7 million to $9 million, respectively. For a summary of the net impact of these accounting changes and a pro forma of our 2018 outlook on a 2017 accounting basis, please see Slide 5 of the Q4 2017 Earnings Call Supplement. With that, I will turn the call back over to Neal.

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [5]

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Thanks, Rob. As we close out another year, we continue to benefit from our investments across our businesses and enter 2018 with very positive momentum. I'd like to thank our investors for their interest and support, and each of our more than 5,300 employees for their dedication and commitment to delivering world-class products and services to our customers every day. Now I'll turn the call back over to Jamie. Jamie?

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James G. Coogan, Kaman Corporation - VP of IR [6]

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Operator, may we have the first question please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Edward Marshall with Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [2]

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So I didn't want to focus too much on the fourth quarter because of the guidance being so good. But what I wanted to ask is, if you shipped what was remaining on the foreign DCS in the quarter, or did some of that slip into 2018? Just trying to get a sense as to kind of the JPF cadence throughout the year?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [3]

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Yes, Ed, good question. Yes, a portion of the previous DCS order has moved into 2018. We expect to ship that in -- most likely in the first half of the year.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [4]

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Got it. And when we talk about the pension, I want to understand, just a second. First, I know you froze the pension. I believe it's still in an unfunded position yet. It looks like you're getting about $6.6 million of income. I guess 2 questions, why -- how does the income kind of flow through, and maybe that's a question for later. But secondly, will you break that out as a separate line in the other income going forward. Is that what you said?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [5]

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Yes, so -- yes, Ed. We expect about $6.5 million pension benefit in '18. And as we've touched on in both the supplements and our prepared comments, the service cost, which is really just a [PBCC] premium. I want to be clear that there is no active service being accrued. That service ended at end of 2015. But certainly, given the magnitude of the $11.5 million credit, which will be below other income, we are likely to put that in a separate line, just given the magnitude of that item.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [6]

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Got it. And just to elaborate on the second. Did the service costs grow slower than maybe the premiums that you're seeing kind of on the remaining portions of the counting and that's why there's a premium -- or a benefit coming back? Is that the way I see it? Because you froze that many years ago?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [7]

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Yes -- no. When you look at the service cost and we will be retrospectively accounting for this as we move through 2018, Ed. So you'll see that the service cost from '17 to '18 was basically flat. And what you're seeing is the real change in the credit, there's a couple of items, but in particular, the expected return on assets assumption that is done every year, we expect to see a significant improvement in that number, just based, in particular, around the strong performance we had this year. We generated, and it's in our footnote, roughly 17% return on our pension assets this year, in '17. That really helps the calculation in '18.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [8]

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Got it. And there was no change into the actuarial assumptions that went into your pension plan before?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [9]

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Nothing material. I mean, interest rates change, mortality assumptions sometimes move a little bit; there are demographic assumptions. But by and large, really pretty consistent assumptions year-to-year.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [10]

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One more quick one, if I could. Backlog, I know there's a portion of -- some companies are seeing some changes with revenue recognition. Any changes that we should assume for 2018 as you report 1Q on any of your backlog assumptions?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [11]

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No. No, Ed. Actually, we've always reported our backlog based on firm POs, which is really now the requirement under the new standard. So we're not expecting any material changes in our backlog at all, because that's the methodology we've always used.

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Operator [12]

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Our next question comes from Chris Dankert with Longbow Research.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [13]

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I guess, first off, I saw you had a press release as far as the expected shipments for K-MAX in March, I guess, that's a pretty big month. What are we building in for the full year as far as K-MAX shipments? Is it 5 or 6? Any color there would be really helpful.

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [14]

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Yes, we actually are looking at -- we're planning for about 6 aircraft deliveries during the course of 2018, Chris. And we will have a big first quarter with anticipating delivering 3 during the first quarter. And as you know, one of them came over from the fourth quarter of 2017.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [15]

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Right, right. And I guess, just to be clear, I didn't see an announcement, but has there been any new orders or signings or anything along those lines?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [16]

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No, we're working on it. Number of contracts, we're in negotiations right now, Chris, but we don't have anything -- any additional orders to announce at this time.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [17]

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Got you. And then, I guess kind of with the K-MAX and some of the DCS JPF moving into the first quarter, first half of the year. Is it fair to assume the shape of the year looks a bit more even than kind of the typical back half loaded earnings cadence?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [18]

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Actually, Chris, it doesn't. We anticipate delivering about 30% of our earnings in the first half of the year. So it's actually similar to last year as well, and that is predominantly driven by increased DC -- excuse me, increased JPF shipments in the second half of the year as well as continued ramp-up in the bearings business.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [19]

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Got it. Got it. And then just one more, if I could. Just any commentary on pricing at KIT, both fourth quarter and kind of outlook. I mean, are things getting a bit firmer there now?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [20]

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They are getting a bit firmer, Chris. We didn't see a lot in the fourth quarter. We anticipate seeing, through the course of 2018, between 1%, maybe as much as 2% that will be lower in the beginning of the year. Obviously, we encounter a little bit -- actually a margin squeeze between the timing of announcements of our suppliers increases to us and the timeframe with which we can pass those on to our customers due to our contractual arrangements. But it is certainly a much more favorable pricing environment than we've had in recent years.

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Operator [21]

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Our next question comes from Ryan Cieslak with Northcoast Research.

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Ryan Dale Cieslak, Northcoast Research Partners, LLC - VP & Senior Research Analyst [22]

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First, I just wanted to focus on Aerospace, and just to be clear, in the fourth quarter, the revenue top line I think was a little bit below the range you guys gave. What really was sort of the miss versus maybe what you were expecting? It sounds like maybe there were some orders on the JPF size as well as K-MAX getting pushed out. I just want to make sure we're all clear on that?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [23]

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Sure, Ryan. It was -- we -- there were -- we were short from our low-end about $5 million. And to be frank, that was K-MAX. We had anticipated signing that contract in December, and we are still negotiating it. So that was, there were obviously little gives and takes across the balance of the business. But the big one, at more than $5 million, would've been K-MAX.

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Ryan Dale Cieslak, Northcoast Research Partners, LLC - VP & Senior Research Analyst [24]

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Okay. And then, when you look at the outlook for 2018 on Aerospace and you strip out some of the benefit on the revenue recognition side, it looks like top line growth is trending maybe towards the lower end of what you historically talked about, in terms of that 3% to 6% range. Just talk a little bit about, why there, why not maybe higher, and is this may be some -- 2018 should be viewed as may be more of a transitional year for you guys, as certainly the backlog is building and the budget looks like it's inflecting higher, maybe just -- what are some of the puts and takes there?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [25]

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Yes, sure, it's a good question, and thanks for asking it. It is -- I think it's probably fair to characterize it, as you have, Ryan, as a little bit of a transition year for a couple of reasons. One, certainly we have the impacts from year-to-year of the new revenue recognition standards, which really impact the Aerospace side of our business. In addition from year-to-year, as you know, we had very strong DCS shipments, in particular in the second half of 2017. We're going to transition to a lower end mix of DCS product for JPF. So that's going to have a significant impact year-to-year, but that will reverse in '19 as we begin to ship against the $324 million DCS order that we announced just in January. So JPF end customer mix has had a significant impact from year-to-year. In addition, as you know, the 777 rates are down significantly from a couple of years ago before they transition to the 777X, and that's impacting not only our Bearing business but also our Structures business, where [we redo] the fix trailing edge for the 777 aircrafts. So that has a significant impact, again, negative from '17 to '18. But as we begin deliveries for the new 777X, probably in the second half of '19 or in the last 3 quarters of '19 to support a 2020 delivery of the first aircraft out of Boeing, that should reverse. And also, year-to-year, lower BLACK HAWK volumes are impacting us, and while we do hope that, that may be reversed somewhat through the course of '18 because of the plus-up in the Department of Defense budget, we can't count on that yet but would expect higher volumes in 2018. So actually, we probably could've used your transition word in our script a little bit when we looked at outlook. So we'll -- we might call you next time.

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Ryan Dale Cieslak, Northcoast Research Partners, LLC - VP & Senior Research Analyst [26]

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No, that's extremely helpful and I appreciate the color. And then, just maybe switching to Distribution. The top line looked like in the quarter it was towards the lower end of the range, but the operating margins in the segment were actually below. I know that in the fourth quarter, it's lower sales to begin with and there could be some deleveraging there. But was there anything else running through the P&L in the fourth quarter that was one-time in nature that's impacted the operating margins? And I don't want to harp too much because you guys have done a really good job, certainly through the year, in bringing those up. I just was curious to know if there's anything unusual in the quarter.

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [27]

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There really wasn't anything unusual in the quarter, Ryan. We did have a couple of projects out of our engineering systems group where we went actually past due at the end of the year. We were not able to deliver it, but it was -- it really impacted us more on the operating income side than it did, really, on the revenue side. But there were no significant one-time events in the fourth quarter.

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Ryan Dale Cieslak, Northcoast Research Partners, LLC - VP & Senior Research Analyst [28]

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Okay. And then my last one, really good to see the sales at the top line in Distribution starting to inflect higher. I think, the up 5%, I think you said, is higher than what I was expecting here in the first quarter. Maybe just break out, I mean I'm assuming maybe February is above that. And when you look at the guidance you laid out, at least on a daily sales basis, it still assumes the full year as low single digits. So I know the comps could maybe get a little bit more difficult, but is there some conservatism you're baking in there? What's -- how you think about the rest of the year, as maybe some of the internal initiatives in leadership start to really impact you guys?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [29]

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Ryan, we have seen a significant acceleration through the course of this year so far. I think it's clearly, with a short cycle business like this, too early to say whether we're being conservative. We don't think that we are. We know that we have our new leadership in place. We know that we've also benefited from a number of the programs that we've put in place in the second half of last year to drive additional organic growth and they are starting to take hold. So we feel confident in our outlook for the year. And the other thing, as I'd like to highlight is that, as Rob mentioned in his prepared remarks, we have different accounting standards for the pension this year, and outside of that, we would have had a top end of our guide of 5.7%, which I think is more in line with the kind of progress that we're anticipating from year-to-year.

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Operator [30]

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(Operator Instructions) Our next question comes from Pete Skibitski with Drexel Hamilton.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [31]

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Let me start with Distribution. In the fourth quarter, the margin -- was that a mix issue also in the fourth quarter for Distribution. I know the ACE unit is kind of your highest margin business. And I was wondering -- it looked like that was down more than the others for the full year, so I'm curious if it impacted the fourth quarter there. And then going forward for 2018, through February and in your guidance, is there any mix issue ongoing or are all 3 of those distributions kind of coming back, kind of in line with each other?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [32]

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Yes, no, Pete. Yes, I think you are correct. In the fourth quarter we did have a little bit of a margin challenge at our automation business. They delivered good margins, but a little bit below what we were expecting for the for the quarter, so that definitely had an impact in Q4. As we move into '18, the relative sales growths have been positive across all of our product platforms, but I would say that fluid power has, certainly in February, exhibited the strongest level of growth and KIT, our bearings and power transmission business, has also shown very strong growth as well. So we're really pleased in the early signs in '18, as Neal indicated. Certainly, we're early in the year, but being above 5% growth year-to-date gives us an increased level of confidence in our forecast. But we certainly don't think we're being conservative at this point, too early to tell.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [33]

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Got it. Okay, that's fair. And then, one question on '18, for either one of you guys. On the JPF guidance for '18, Neal, you touched on it but can you quantify in any general way that the mix between DCS fuzes and U.S. government fuzes for '18?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [34]

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It's going to be a much higher mix of USG sales then we saw in 2017. Pete, the $324 million contract that we signed and announced in January is really focused on beginning deliveries in 2019. So we -- as we see the profile of shipments right now, it will be very heavily weighted towards U.S. government and that's actually what's impacting us some on the margin from year-to-year, as Rob outlined, because of the lower price that we sell to the U.S. government.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [35]

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Sure, sure. And that leads me to the next question, which is, Neal, this $324 million order, I don't remember you guys getting an order that big and for it to be DCS, simply pretty attractive margin rates. Does this give you some of the best visibility you've had in years in Aerospace between this order and the bearings business? I mean, you've got to be feeling pretty good about Aerospace, particularly going in '19 and beyond?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [36]

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I think you're right, Pete. It was certainly the largest order that we've had since I joined the company and we probably go back more than 10 or 12 years. We'd have to probably go back to the time when Charlie was running the company and we took the Australian SH-2 order. So I think that if we look at 2017, we had our best incoming order rate for Aerospace in the 10 or 11 years that I've been here, so we feel very good about that. We think that we've had a strong start to 2018, obviously with the $324 million DCS order, which as you pointed out, is typically very profitable work for us. So we feel very good about the backlog that we've built and the profile of the backlog that we've built in Aerospace with strong DCS, JPF orders and also very strong Bearings backlog across all of our different product lines.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [37]

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That's great, that's great. Just two more quick ones from me, if that's okay. Maybe, Rob, on the K-MAX in 2018, you're going to deliver 6 of them. The revenue on that, is it as simple as 6 helicopters times may be $8 million-or-so per plane? Or is it going to be, kind of, quite a bit different because of the new rev rec rules?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [38]

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Yes, no, Pete, for K-MAX, we are going to move to units of delivery on the K-MAX. So I think you're a little bit high at $8 million, but you are correct in terms of expected revenue during the course of the year for K-MAX. You're in the neighborhood.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [39]

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Okay, got it. And the last one, guys, on some of the filings in the fall on potentially a vote in the April meeting for splitting up the company. Do you expect that to be on the ballot at the shareholder meeting and do you guys have a position on that?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [40]

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Pete, we certainly will include it in the proxy. I think we'd start by saying that, as you know, that was filed by AMCO. And AMCO has been a very, very supportive longtime holder of Kaman's stock. We have extraordinary respect for the organization, led by Mario Gabelli there. We will be responding to that. It will be on the ballot and our response will be included in our proxy, which we expect to file Friday or so -- Friday or the beginning of next week. And we defer any further content until that becomes public.

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Operator [41]

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Our next question comes from Steve Barger with KeyBanc Capital Markets.

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Ryan Thomas Mills, KeyBanc Capital Markets Inc., Research Division - Associate [42]

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This is Ryan on for Steve. Just going back to the Distribution guidance, it implies about 15% incremental. Should we assume that's the new run rate in a low to mid-single-digit environment or do you see room for improvement there?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [43]

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Yes, Ryan, we've talked in the past that we expect drop-through to be between 15% and 20%. So do we think there's room for improvement there? I think that will depend on where ultimately that growth comes from and the type of work that generates it by product. But I think that's -- I think, 15% is a reasonable number to go out with -- for at this point in the year.

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Ryan Thomas Mills, KeyBanc Capital Markets Inc., Research Division - Associate [44]

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Okay. And then, just one revisit at Kaman's capital allocation strategy and what you're seeing in the M&A pipeline.

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [45]

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Ryan, we were very active, probably more active than we've been in the last 18 to 24 months. We feel very good about the last 2 acquisitions that we did that tucked into our Specialty Bearings product lines. We're getting exactly what we'd anticipated from those businesses and more. So we're ready to be able to look at the next one. So again, very -- actually, as I said, more active now that we have been in the last 1.5 year to 2 years.

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Operator [46]

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Our next question is a follow-up from Chris Dankert with Longbow Research.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [47]

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Just 2 quick ones here. Thinking about the SH-2 program, I guess, Peru is supposed to wrap up this year, if I'm not mistaken. I guess, if you could just comment on maybe a little bit of timing or your expectations on the impact for 2018? And just any movement on Egypt or opportunities there?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [48]

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Good question, Chris. We are anticipating closing off the Peru contract, likely during 2018. And, right, and we also did announce the ongoing life support with New Zealand through life support contract. But we are -- we continue to be very active with Egypt. As you know, they took between 7 and 8 aircraft out of the excess defense articles from the U.S. government in 2017 -- or late 2016. So we certainly do anticipate that they will move those towards depot-level maintenance and upgrade to the current configuration of aircraft that they have flying today, and it's simply a matter of timing. So hopefully, it will tuck in at -- certainly during -- be able to close that, perhaps, in '19 and tuck in beginning in 2020.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [49]

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Got it, I think that's really helpful. And then, just the last one. I know, it's obviously early for the program but congratulations on the combat rescue helicopter win. I guess, is it too early to know what the content looks like for that or just kind of any comments on that program?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [50]

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I think we'd like to defer a little bit, as you know, we are in the early number of deliveries to Sikorsky. We think it's going to be a very good program for us, but we're going to wait to see how much of the content that we can actually integrate at our Jacksonville facility. As you know, we've had a very long relationship with Sikorsky on the UH-60, various models of the UH-60 and certainly on their rotor blades as well. So we were very pleased to be able to team with them on the combat rescue helicopter and we certainly like to maximize our content on that. So we'd hope to have some good news on that later in the year.

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Operator [51]

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And I'm currently showing no further questions at this time. I'd like to turn the call back over to Jamie Coogan for closing remarks.

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James G. Coogan, Kaman Corporation - VP of IR [52]

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Thank you for joining us on today's conference call. We look forward to speaking with you again when we report our first quarter results.

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Operator [53]

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Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.