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Edited Transcript of KAMN earnings conference call or presentation 5-Nov-19 1:30pm GMT

Q3 2019 Kaman Corp Earnings Call

BLOOMFIELD Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Kaman Corp earnings conference call or presentation Tuesday, November 5, 2019 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 & President

* Robert Daniel Starr

Kaman Corporation - CFO & Executive VP

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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 - Senior Equity Research Analyst

* George Anthony Bancroft

Morgan Group Holding Co. - Research Analyst

* Kenneth H. Newman

KeyBanc Capital Markets Inc., Research Division - Associate

* Peter John Skibitski

Alembic Global Advisors - Research Analyst

* Seth Michael Seifman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Kaman Corporation Third Quarter Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Vice President, Investor Relations, James Coogan.

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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 Third Quarter 2019 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 today's 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. The 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 third quarter 2019 results included on Form 10-Q and on the current report on Form 8-K filed yesterday evening together with our earnings release.

In addition, we will discuss the company's anticipated acquisition of Bal Seal Engineering, which was just announced this morning. The press release announcing the transaction can be found on the company's website, along with the presentation that provides an overview of the transaction. Some of the information discussed on today's call, therefore, will consist of forward-looking statements setting forth our current expectations with respect to the proposed transaction, the underlying risks and assumptions for which are set forth in the press release announcing the transaction.

We also expect to discuss certain financial measures and information that are non-GAAP measures as defined in applicable SEC rules and regulations. Reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K.

Finally, please note that in light of the recent sale of the Distribution segment, the focus of today's earnings discussion will be on the results of the continuing operations of the company.

With that, I'll turn the call over to Neal Keating.

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

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Thank you, Jamie. Good morning, everyone, and thank you for joining our third quarter 2019 earnings call. I'd like to begin today's call with a discussion of this morning's announcement relating to the anticipated acquisition of Bal Seal Engineering before moving to a discussion of our quarterly results from continuing operations and recent events. I will then pass the call over to Rob for a more detailed discussion of our financial results and expectations for the balance of the year.

Over the last few months, we've taken a number of steps to transform Kaman into a company solely focused on being a leading provider of highly engineered products. On August 26, we completed the sale of our Distribution business. And today, we are announcing the signing of an agreement to acquire Bal Seal Engineering, an industry-leading provider of highly engineered seals, springs and contacts.

Bal Seal's strong management team and its 500-plus employees around the globe work closely with premier customers in the medical, industrial, aerospace and defense markets, leveraging a unique combination of patented and proprietary technologies. Bal Seal's innovative solutions result from decades of engineering, manufacturing and material science know-how, enabling Bal Seal to manufacture and create critical precision components used in products operating in the most demanding environments.

The addition of Bal Seal enhances our position as a leading provider of highly proprietary engineered products, broadens our access to high-growth end markets such as medical technologies and industrial applications and delivers both margin expansion and cash accretion in year 1. We expect the deal to close late in the fourth quarter, subject to customary closing conditions and regulatory approvals, and we look forward to providing more information about the transaction during our fourth quarter earnings call in early 2020.

This is a meaningful next step in the process to transform Kaman, but it is not the last step. We will continue to seek appropriate M&A opportunities that fit well with our current capabilities and future direction. With approximately $700 million in cash and debt available to deploy, we have the financial capacity to acquire and integrate companies that will strengthen our current competitive position and provide improved long-term growth opportunities. But as you have come to expect, we will remain disciplined in our approach and patient in identifying opportunities that fit our strategy, culture and internal return metrics.

While we are excited about adding Bal Seal to our portfolio and look forward to welcoming their employees to the Kaman family, we continue to increase investment in our core operations to drive organic growth. We have increased our investments in new products and facility expansions to meet current customer demand and position us for future growth. These investments include the expansion of our unmanned capabilities and development of a new composite rotor blade for the K-MAX, a laser-guided, height-of-burst sensor and next-generation safe and arm technologies as well as new specialty bearing and engineered products. In addition, we continue to invest in facility expansions and upgrades in the U.S., Germany and the Czech Republic to meet future demand, reduce lead times and improve efficiency.

Finally, we have started to streamline our operations in order to achieve the $15 million to $20 million in annualized savings we highlighted in our last call. This estimate was based on our initial strategic planning process associated with the distribution divestiture. And today, we expect to be at the high end of the range and anticipate we will be able to identify additional opportunities for savings as we move through the process.

Turning to a discussion of our results from continuing operations. We were very pleased with our strong third quarter performance with total sales growth of 16.3% to $182.7 million. This increase was driven largely by a higher volume of JPF DCS deliveries and stronger sales of our bearing products.

Profitability was also a highlight in the quarter as operating income increased $22.6 million to $15.6 million in the quarter, and diluted earnings per share increased $0.70 to $0.36. On an adjusted basis, operating income more than doubled to $19.9 million, yielding $0.46 in adjusted earnings per diluted share compared to $0.14 in the prior year.

During the third quarter, we received an export license for and made initial deliveries on our $324 million JPF DCS contract. This enabled us to increase JPF deliveries to 11,750 units compared to 3,800 units in the prior year, and the higher DCS mix led to significantly improved profitability in the period. Demand for the JPF remains high, and during the quarter, we received our second significant JPF DCS order this year, adding $42 million to backlog in September.

Our specialty bearings product sales growth was in the high single digits in spite of considerable FX headwinds and was led by our self-lubricating bearings, where we had our second consecutive quarter of record incoming orders, and our aftermarket products. The higher volume and strong operational execution led to improved gross margins for these products, while strong incoming order rates in the quarter continued the trend we experienced in the first half of the year. Year-to-date orders have increased for these products, with an 11% increase in our self-lubricating bearing products when compared to the prior year.

Turning to the K-MAX. We were pleased to receive 2 new orders during the quarter, bringing our total backlog to 3 aircraft. In addition to the new aircraft orders, we continued to make progress on our unmanned system for the K-MAX. And during the quarter, we received our first 5 orders from commercial operators, demonstrating the opportunities they see for unmanned K-MAX operations. We are encouraged that we continue to add to the K-MAX fleet and remain very optimistic for the long-term military applications.

Moving to our structures programs. Revenue was up modestly in the period, while profitability improved substantially as a result of the actions we have taken to restructure and optimize our production. Initially, we had anticipated these actions would result in annual savings of $4 million. However, through the third quarter, we have achieved $7.1 million in savings and now expect these actions will result in full year savings in 2019 in excess of $8 million, which will contribute to a significant year-over-year improvement in the profitability of these programs.

With one quarter left in the year, we are positioned to finish 2019 on a strong note due to higher anticipated sales levels for the JPF, continued momentum in our bearings business, the improved profitability of our structures programs and the scheduled deliveries for K-MAX in 2019.

This year has also marked a meaningful turning point for us as a more focused and more profitable company that is setting the foundation for its long-term growth. As I mentioned in my opening remarks, our teams are focused on implementing an efficient and refined operating structure and deploying capital to enhance our portfolio of engineered solutions. I would like to thank all of our employees for their hard work during this exciting but demanding time at Kaman and congratulate our workforce for an outstanding third quarter result.

Now I'll turn the call over to Rob for a closer look at the numbers. Rob?

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [4]

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Thank you, Neal, and good morning, everyone. Before I discuss our performance for the quarter, I want to touch on the key terms of the transaction we announced this morning. The purchase price of $330 million values Bal Seal at 12.5x EBITDA when including estimated tax benefits and synergies, and we expect to fund the transaction with cash on hand. Sales for Bal Seal are expected to be $95 million in 2019 and will expand the EBITDA margin of our consolidated business. As Neal mentioned, after this transaction, we will still have approximately $700 million of cash and debt capacity to deploy toward our organic and inorganic growth initiatives. We expect a significant portion of this capacity will be deployed towards strategic acquisitions, and we will continue to focus on identifying additional opportunities to expand our product portfolio of highly engineered products in line with our long-term growth objectives.

Now I will turn to a discussion of our performance from continuing operations for the quarter and finish with an update on our 2019 outlook. Net sales for the second quarter increased to $182.7 million, an increase of 16.3% when compared to the prior year, resulting from increased sales of our JPF DCS product and commercial bearing products. Gross margin increased 320 basis points over the prior year period to 33.5%, largely benefiting from favorable mix driven by our JPF DCS program and specialty bearing products.

Operating profit of $15.6 million increased to $22.6 million over the prior year period, which was adversely impacted by a $10 million intangible impairment charge at our U.K. operations. On an adjusted basis, operating profit was $19.9 million or 10.9% of sales compared to the prior year period of $7.3 million or 4.6% of sales. The increase in adjusted operating profit was a result of several factors, including a favorable sales mix weighted towards JPF DCS and specialty bearing products and a significant improvement in the performance of our structures programs as we realize benefits from prior year restructuring initiatives.

Adjusted EBITDA in the third quarter was $26.9 million or 14.7% of sales compared to $17.2 million or 10.9% of sales in the third quarter of 2018. Higher adjusted EBITDA was the result of stronger operating results across a number of our product offerings.

Diluted earnings per share from continuing operations of $0.36 increased significantly over the prior year loss of $0.34. The increase resulted from the absence of the intangible impairment charge recorded in the prior year, offset by a $3 million reduction in pension income period-over-period. Increased corporate development expense resulted from increased consultant spend associated with our G&A initiatives and M&A efforts. After adjusting for these and other similar items, adjusted diluted earnings per share from continuing operations was $0.46, up 229% compared to the prior year period, which speaks to the strength of the results from our operations in the quarter.

Beginning this quarter, we included additional line items in our income statement that are designed to segregate and identify the activity relating to the transition services agreement we entered into upon the sale of the Distribution business. Pursuant to the terms of the agreement, we have agreed to provide certain services such as tax, treasury, human resources and IT during the transition period of the Distribution business away from Kaman shared services. While most of these activities have already been transitioned, IT services will take approximately 1 year to fully separate, and we will continue to report both the cost and income on a quarterly basis. In total, we expect to incur a net expense of approximately $800,000 in 2019 and a total net expense of approximately $2 million to $3 million over the life of the agreement.

I would like to now discuss our cash generation performance for the quarter. Our approximate use of $6 million of cash during the quarter resulted primarily from the buildup of inventory for the JPF and specialty bearing product lines as we prepare for the steep ramp in sales that is projected through the balance of 2019. Also impacting was a delay in certain cash receipts that we had anticipated in the third quarter. We have begun to collect on some of the outstanding accounts receivable from earlier in the year and have a clear path to deliver strong cash flow generation for the full year.

Moving to our outlook. As we discussed in our June announcement of the sale of Distribution, we suspended our guidance with the exception of sales and operating income for the Aerospace segment for the balance of the year. We expect to provide a more fulsome outlook beginning in 2020. Based on the performance through the first 9 months of the year, we are maintaining our full year outlook, which calls for Aerospace sales in the range of $740 million to $760 million, with operating margins at Aerospace in the range of 16.7% to 17.2%.

With that, I will turn the call back over to Neal.

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

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Thanks, Rob. I would like to close by thanking our team across Kaman. I'm proud of our execution in third quarter despite the extraordinary efforts required to complete the sale of our Distribution segment and move forward with the acquisition of Bal Seal. For all of us as employees of Kaman, and for our shareholders, the path ahead of us is clear to maximize the earnings power of our business and to invest for the long term. We are excited about the opportunity ahead and look forward to updating everyone on our continued progress.

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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Certainly. Our first question comes from the line of Seth Seifman with JP Morgan.

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [2]

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Seth, are you on mute?

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [3]

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Yes.

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Neal J. Keating, Kaman Corporation - Chairman, CEO & President [4]

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Okay. We've been living with that for the last week, as you can imagine, Seth. So...

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [5]

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Yes. Yes. Absolutely. Okay. Very good. So just kind of -- yes, just kind of doing the math, it seems like the fourth quarter, the guidance in Aerospace kind of implies maybe a margin that was kind of like what we saw in the third quarter, maybe a little bit better. Could you talk about some of the puts and takes there and what the opportunities are that will kind of determine where that comes out?

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [6]

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Yes. No, that's a good question, Seth. When we look at our fourth quarter, as we have talked about really all year, we're expecting a strong fourth quarter on the premise that we will have significant JPF DCS deliveries during the quarter. That is a very key driver. We also expect to see continued improvement in our aero, structures group of product lines. And also, our Specialty Bearings & Engineered Products group really has lined up a very strong quarter ahead of them, and we have very good visibility to that.

So that's really what's driving the implied outlook. I think you're right. The margin range is going to be somewhere between 18% and 19%. That's the implied range. And it's going to come down to execution for us, and we have a great team who's prepared to do that.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [7]

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Great. Great. Okay. And then on the corporate expense and the initiatives that you guys are undertaking and getting to the high end of that $15 million to $20 million that you cited, should we think of the base there as being kind of the 2017, 2018 level in the high 50s as kind of the baseline from which to assess those savings?

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [8]

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I think that's correct, Seth. I just would want to point out, we do expect there to be a continued noise in that number as we go through that effort, and as you can imagine, integrating these acquisitions. But if you think about the underlying base number, I would support that calculation, yes.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [9]

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Okay. Great. And then maybe just last one from me right now. Can you guys size the synergy and tax benefit contribution to the deal?

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [10]

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Sure. I'll give you 2. We talked about the unadjusted multiple's about 2x higher than the 12.5, about 75% of that difference is attributable to the tax, the rest is to operating cost synergies that we expect.

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Operator [11]

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Your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [12]

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This is Ken Newman on for Steve. Sorry if I missed it, but could you maybe just talk a little bit about how long you expect the integration of Bal Seal to take once the deal is closed? And it was good to hear that you see Bal Seal as a meaningful step and not the last step in M&A. So kind of give us an idea of how long you would look to integrate this and then maybe step back into the M&A pipeline.

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Neal J. Keating, Kaman Corporation - Chairman, CEO & President [13]

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Sure. This is Neal, Ken. The team obviously is experienced doing integrations, so we would expect that it would likely be about a 6-month period of time for us to move through that process with the Bal Seal team. And we continue to be very active in M&A, as Rob kind of commented in his part of the prepared remarks. And again, I think that you can expect that we will focus in the areas of highly engineered products and that we will maintain the discipline that we have historically demonstrated in valuations.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [14]

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As I think about that last comment there, as we think about your M&A pipeline, are there deals similar to the one that you've just announced today? Or are there other targets in terms of either larger or smaller size or maybe different margin profiles?

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Neal J. Keating, Kaman Corporation - Chairman, CEO & President [15]

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I'll start and Rob can certainly chime in. There's a broad range. And I think that, as you would expect, when you have opportunities that come into that acquisition analysis phase, that they're going to be of various sizes. We're not as opposed at all to small acquisitions of smaller companies or product lines that would fit very nicely what we -- with what we currently offer to our customer group. And certainly, we all know that there are larger companies that are out there today that may end up being available and would add significant scale to our operations. So I think that we are open to either. I think now with the Bal Seal acquisition, we've demonstrated the ability to step up in size, and we could certainly do that again with the current strength of our balance sheet.

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Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [16]

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That's good to hear. My follow-on question here is about the forward EBIT margin for Bal Seal. How do we think about how synergies can improve margins on a go-forward basis for that business? And maybe just talk a little bit about the customer mix and overlap for medical, A&D and industrial.

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Neal J. Keating, Kaman Corporation - Chairman, CEO & President [17]

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Ken, we'll talk about that in a lot more detail on our fourth quarter call. But obviously, as we've gone through the analysis, we see certainly some opportunities for increased sales at joint customers today, whether they're in the aerospace, defense, medical or even industrial markets. We don't expect that there will be a lot of cross-selling, if you will, because the products are very different from what we have today, although highly complementary. But we certainly do think that we can leverage the strong relationships that Kaman will bring with that customer base to Bal Seal. And similarly, Bal Seal will bring some very strong customer relationships to Kaman that we hope to exploit.

We'd really look back to what we've been able to achieve with the GRW acquisition. As you remember, we did that about 4 years ago now, and it had a -- at the time that we acquired them, only about 19% or 20% of their sales was in the aerospace and defense area, very similar to the Bal Seal acquisition. They had a bigger exposure in medical. We've been really pleased with how we've been able to leverage and increase sales at GRW in their A&D area, and we've really been pleased with the underlying growth that they've been able to drive in the medical markets that they serve today. And even though we've known Bal Seal for 7 years and been looking forward to today for about that long, we entered the relationship initially 7 years ago with A&D in mind, and now today, it's not just aerospace and defense but increasingly medical as well. So we were really pleased with the ability to come to an agreement with Peter Balsells and the management team at Bal Seal Engineering.

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Operator [18]

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And the next question comes from the line of Edward Marshall with Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [19]

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I just wanted to talk about -- I skipped out. I guess it's -- there's election day, so no juries today. So cash flow and margin expansion were the discussions about Bal Seal. And if I think about -- you didn't go as far to say that, that would be accretive to EPS in the first year. It's hard -- kind of looking at the math, it's hard to kind of think that it might not be. But is there something unusual -- you're probably still going through some of the deal accounting, but is there something unusual in that deal accounting that we should be aware of as we think about kind of Bal Seal and how you might integrate that into the business?

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [20]

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Yes. I wouldn't -- yes, Ed, great question. And what I'll say is, we're still working through, as you would appreciate, the purchase accounting adjustments that we'll need to make. This transaction will carry with it a potentially, I would call it, unusual, not in a bad way, but just a purchase accounting feature that would limit the GAAP EPS accretion in year 1. This deal is significantly cash-accretive right out of the gate. And then in year 2, on a GAAP basis, we would expect it to be kind of a mid-single-digit type accretion just based on our early math. So adjusting for some of the purchase accounting adjustments, clearly, GAAP-accretive right out of the gate in year 1. So we're very pleased to be able to partner with Bal Seal, and we think this transaction will provide a lot of benefits, not just for Kaman but our shareholders as well as employees of Bal Seal.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [21]

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Got it. And the second question I had was looking at the Q and seeing that you've shipped to roughly 26,000 fuzes to date, the math suggests 14,000 to 19,000 in the fourth quarter, which generally carry pretty high margins. And looking at the margin guidance for aero, it looks a little light. So I just wanted to get your sense as to maybe is it a mix thing or something that might be going through on the -- with that implied movement from fuze.

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [22]

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Yes. No, good question, Ed. I mean keep in mind, in particular on the USG side, that's an overtime calculation. So when we talk about the units delivered, in particular in USG, there's not always a correlation between what's impacting the revenue. So what I can tell you is that while we're still expecting significant DCS deliveries in the fourth quarter, a good portion of what we're going to deliver in the fourth quarter is also USG, where we've recognized a portion of that revenue. So in terms of the margin guide, once again, we're trying to be balanced in what we're forecasting for the quarter just given that we have to execute to deliver it. So do we think there is potential for upside? Sure, if things all fall into place. But we're really trying to be balanced just given where we are in the year.

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Operator [23]

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(Operator Instructions) Our next question comes from the line of Tony Bancroft with Gabelli Funds.

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George Anthony Bancroft, Morgan Group Holding Co. - Research Analyst [24]

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Nice work. You've mentioned a couple of times, talking about the unmanned heavy lift area where you have a core competency. Could you just maybe sort of -- just sort of maybe high level talk about what potential -- other potential M&A opportunities out there? What do they look like? And would you be interested in that space? And sort of what would drive you to be more interested in doing M&A in that space?

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

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Tony, it's a good question. We look at that quite often. We think we have a very unique air vehicle in the K-MAX today that's proven its capability in whether it's military logistics applications or a broad range of commercial applications, from humanitarian relief to construction to logging to firefighting. We are working currently, obviously, on our own unmanned capability or system to put on that, and we were really pleased to get our first 5 orders from commercial operators.

We're focused on that right now. But clearly, that informs us on what we both think the market is and what the capability of our aircraft for further expansion or where a complementary airframe might fit. So I think that the biggest thing for us right now is that we have opportunities ahead of us that we want to capitalize and then bring that experience and what we can learn about the applications and the capabilities and have that really inform both internal development or any acquisitions that we might do in that area.

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Operator [26]

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And our next question comes from the line of Chris Dankert with Longbow Research.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [27]

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My apologies, I jumped on a little bit late here. Walking through some of the numbers, it seems like synergies are pretty significant. My back of the envelope math here says $5 million to $6 million. Is that in the right ballpark for the deal?

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [28]

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Yes. No, Chris, that is well north of what's implied in the numbers that we've given. I don't want to go at length to say what that number is, but you're fairly well north. We'll be able to provide more details on this when we get onto the year-end call once we've closed the transaction. But the significant opportunity really is about 75% of that difference in the implied multiple is really around the tax -- expected tax step-up benefit. So on the operation side, what we've dialed in right now is pretty modest. We're really -- it's low-hanging fruit, if you will.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [29]

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Got it. Okay. That's very helpful. And then maybe it's a bit early, but I'll give it a stab anyway. Obviously this year, JPF shipments on track for a really impressive number, [a record] if I'm remembering right. But as we look into 2020, is there any kind of sense you can give us, is this a repeatable figure? Should we be similar to 2019 next year? Just any thoughts on JPF shipments, big picture.

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Neal J. Keating, Kaman Corporation - Chairman, CEO & President [30]

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Chris, we would expect that we would be in a similar range. We -- it is a little bit early for us. We will talk more about that at the fourth quarter call. But I think there's 2 things: you can see that we have very strong backlog and combine that with a really good team doing production. So we think we can support volume in this range into next year. But again, we'll talk about that in more detail at the fourth quarter call.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [31]

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Got it. Got it. Thanks for the color, though. And then just one final one for me. Any update on either the autonomous Marine program, kind of how that work is going? Any update on autonomous firefighting? Just any thoughts around that program would be appreciated.

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Neal J. Keating, Kaman Corporation - Chairman, CEO & President [32]

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Chris, as we mentioned, we actually received orders -- 5 orders from customers that are all commercial today. And the primary goal of those orders is for them to be prepared for unmanned firefighting capability when we're able to get authorization to do that. So our operators are really looking ahead, and we're teaming with them to make sure that we and they are both prepared to meet that demand when it occurs. And also, we remain very encouraged with the unmanned program within the U.S. Marine Corps as well. So we'd like to -- we've got a lot of hard work ahead of us, but there's a few things that are coming together quite nicely on both commercial and military unmanned programs for the K-MAX.

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Operator [33]

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And our next question comes from the line of Pete Skibitski with Alembic Global.

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [34]

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Nice quarter. Apologies, I got on late as well. I guess to start, maybe for Rob. Rob, on the inventory build year-to-dates, I think JPF and the bearings have been a part of that. Does that start to wash out in the fourth quarter here? Do you get to a one-time conversion on free cash and then income for the full year? Or are you going to carry some inventory into 2020? Just wondering how that's going to flow.

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [35]

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Yes. No, I would say this, we do expect to see a meaningful improvement in the inventory number in the fourth quarter based on our expected shipments. What I can tell you is in terms of the cash conversion, some of this will be hung up on AR likely at the end of the year, just depending on the time of those sales, depending on how much of that moves into December given payment terms. What I can tell you is we have line of sight. We have collected on some of the, call it, outstanding receivables with some of our foreign customers. So we are seeing some good progress early here in the fourth quarter. Long term, we have terrific visibility and confidence in delivering really strong cash flows, Pete.

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [36]

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Okay. Great. A couple of questions on Bal Seal. Is there anything to turn around here? It looks like the margins are pretty solid. I'm just curious, when I think about the 55% medical exposure, to me, not being a medical expert, but I kind of think of consumer staple type of a market where sales growth is low to mid-single digits but it's pretty sticky, not particularly volatile and performance is typically consistent. Is that the right way to kind of characterize kind of what you guys have seen in the historical for Bal Seal?

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Neal J. Keating, Kaman Corporation - Chairman, CEO & President [37]

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I'll start, Pete, by saying it is certainly not a turnaround. This is an extraordinary company at every phase, whether it's design, manufacturing, their sales and marketing organization. We were extraordinarily impressed not only with the design capability that they have but the absolutely world-class processes that they have in place. So great management team, terrific employees. So as you rightly said, the profitability of that company demonstrates how strong they are across all of those facets of the operation. And actually, we've -- historically, they've been strong mid-single digits under private ownership. And we think that in particular, if we get a little bit of help and recovery in the industrial markets, that we can be in the high single digits, the 8% to 10% growth range in that over time. So of course, we'll need a little help with recovery in industrial, but we feel very good about strong growth with this business over time as we come together.

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Peter John Skibitski, Alembic Global Advisors - Research Analyst [38]

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That's great color. That's great. I appreciate it. Just one quick follow-up. Do you guys just intend to operate it as kind of a stand-alone unit within Aerospace? Is that right?

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Robert Daniel Starr, Kaman Corporation - CFO & Executive VP [39]

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I would say we're still working towards how we're going to operate it within our Aerospace portfolio of companies. But needless to say, it's going to have a lot of attention from our management team, working closely with the Bal Seal management team, to make sure that the teams are integrated appropriately and that the employees are in a good place to continue doing the work that they've been doing the whole time under private ownership. So...

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Operator [40]

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I am showing no further questions at this time. I will now turn the call back over to VP of Investor Relations, James Coogan, for closing remarks.

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James G. Coogan, Kaman Corporation - VP of IR [41]

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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 fourth quarter results.

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Operator [42]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.