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Edited Transcript of KAMN earnings conference call or presentation 27-Oct-17 12:30pm GMT

Q3 2017 Kaman Corp Earnings Call

BLOOMFIELD Nov 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Kaman Corp earnings conference call or presentation Friday, October 27, 2017 at 12:30:00pm 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

* 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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And welcome to the Q3 2017 Kaman Corp. Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce your host for this conference to Mr. Jamie Coogan. 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 Third 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.

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 2016 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.

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 with a review of our third quarter results and provide an update on events from the quarter. I will then turn the call over to Rob for a closer look at the numbers before taking your questions.

We posted strong results for the third quarter, delivering the sequential quarter-over-quarter improvement we anticipated in our outlook for 2017. Diluted earnings per share were $0.58 or $0.69 adjusted, an 8% increase over the adjusted diluted earnings per share of $0.64 in the third quarter of 2016. GAAP operating profit dollars were relatively flat over the prior year at $30.3 million. Adjusting for the $4.6 million in costs associated with our Aerospace restructuring and senior executive retirement, we earned operating profit of $34.9 million, a 9% increase over the adjusted operating profit of $32 million in the third quarter of 2016.

Turning to segment performance. Aerospace sales increased slightly for the quarter, driven by initial deliveries on our JPF direct commercial sale order, the sale of an additional K-MAX helicopter as well as increased volume from our European bearings operation, which include high precision miniature ball bearings and traditional airframe bearings. We delivered approximately 6,800 JPF fuzes in the quarter compared to approximately 9,500 fuzes in the prior year. Despite the lower volume, we benefited from a higher mix of DCS fuzes and our performance during the third quarter positions us to meet our customer requirements in the fourth quarter of the year.

Looking ahead, we continue to see strong DCS demand from foreign militaries and are currently in negotiations for a number of substantial orders.

In addition, we are making progress on the finalization of Options 13 and 14 with the U.S. government, and we have been authorized to begin the procurement of long-lead materials. Combined, the U.S. government and DCS demand provide near-term opportunities of more than $100 million.

Sales of our bearing products were strong during the period, and as mentioned earlier, we saw increased sales levels at our European operations. GRW and EXTEX have continued their strong performance in 2017 and were important contributors to our results for the quarter. For the fourth quarter, we expect sequential improvement for our bearing products to continue as new order activity remains strong.

Moving to the K-MAX program. Our marketing efforts continue to go very well, and we are seeing strong interest from operators around the world. During the quarter, we delivered the first 3 aircraft off the production line and reached agreement with Columbia Basin, another new customer on the sale of an additional aircraft, bringing the total number of customer commitments to 10 aircraft.

For the past few quarters, we've talked about the operational improvements we've made to a number of our Aerospace structures programs. In order to further accelerate the benefits we have seen from these operational improvements, we announced a restructuring of our Aerospace segment during the third quarter. These restructuring actions include several production relocations and are expected to deliver annual cost savings of $4 million.

Domestically, we will transfer a number of composites programs to our facility in Wichita, Kansas, with the remainder of the affected programs shifting to our AVMRO division in Bloomfield, Connecticut. Internationally, we will exit our facility in Hyde, U.K., transferring the work to our composites facility in Darwen, also in the U.K. These actions were designed to further improve the operating performance of our structures product lines by increasing the capacity utilization for these facilities, while improving our fixed cost absorption.

At Distribution, sales for the quarter decreased 2.5% or less than 1% on a sales per sales day basis, as compared to the prior year period. Although, we're disappointed in the sales decline, we delivered an operating margin of 5% for the quarter. As discussed in recent calls, we've been focused on several key initiatives to improve our financial performance, some of which were designed, in part, to deemphasize certain product categories where we had lower relative profitability. In analyzing the results for the quarter, our year-over-year sales decline was largely due to reductions in these lower margin product categories, including MRO supplies and electrical contractor or project sales.

However, we recognize the importance of sales growth to achieving our targets, and during the third quarter, began rolling out the number of new tools to our sales organization designed to help drive organic growth, including customer-specific cross product sales opportunities.

Overall, our efforts have delivered improved underlying profitability, and while we had slightly weaker-than-expected revenue in the third quarter, we anticipate a return to organic sales growth in the fourth quarter. And now I'll turn the call over to 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 providing some additional color on our financial performance before discussing our outlook for the remainder of 2017.

Consolidated sales for the quarter were $447 million, down 1.4% compared to the third quarter of 2016. The decrease in sales was attributable to lower sales volumes at our Distribution segment, which experienced a decline in organic sales per day of 0.9% and a 1.6% decrease for one fewer sales day during the period. Gross profit in the third quarter of 2017 was $138.9 million or 31.1% of sales, compared to $135.5 million or 29.9% of sales in the prior year.

Our gross profit improvement over the prior year was the result of favorable product mix in Aerospace related to our JPF program and structures programs. This is the second straight quarter where we have achieved gross margin percentages of greater than 30%, and I want to highlight that our margin performance was only 20 basis points below our gross -- our highest gross margin percentage performance to date. This was achieved by a strong gross profit contributions from both Aerospace and Distribution.

SG&A in the third quarter was $106.3 million or 23.8% of sales, compared to $104.1 million or 22.9% of sales in the prior year. Higher SG&A relative to the prior year was due to the $2.1 million cost associated with the retirement of a senior executive and lower employment-related benefit expenses in the third quarter of 2016, which did not repeat in the current period, partially offset by the reduction in costs associated with our productivity initiatives at Distribution.

As Neal mentioned earlier, we announced a restructuring in our Aerospace segment in the third quarter of 2017, which resulted in cost for the quarter of $2.5 million.

In total, we expect these actions to result in approximately $8 million to $10 million of charges, of which, approximately $4 million will be recorded in 2017. We expect ongoing cost savings to ramp up throughout 2018 and produce a full run rate annualized savings of approximately $4 million by 2019, while having a cash payback period of approximately 1.5 years.

Operating income in the third quarter was $30.3 million or 6.8% of sales, compared to $31.1 million or 6.8% of sales in the prior year period.

On a segment level, Distribution operating income increased in the third quarter, reflecting our continued focus on cost control.

At Aerospace, operating margin for the period increased 7.6% to $31.9 million or 17.8% of sales. Adjusted operating margin increased to 19.2%, an increase of 240 basis points over the adjusted operating margin in the third quarter of 2016.

This improved profitability resulted from a higher mix of JPF, DCS sales, strong contribution from our bearing product lines as well as improved year-over-year performance on structures programs.

Corporate expense was $15.2 million in the quarter, including a $2.1 million in costs associated with the previously mentioned senior executive retirement. As you may recall, corporate expense for the third quarter of 2016 benefited significantly from lower employee-related expenses, which did not repeat in the current year.

Our GAAP diluted earnings per share was $0.58 with the prior year level -- compared with the prior year level of $0.62. Our adjusted earnings per share for the third quarter was $0.69 compared with $0.64 in 2016.

On a consolidated basis, we are pleased with the performance for the quarter.

Before I turn the call over to Neal, I'd like to walk you through our updated outlook for 2017. Beginning with Distribution, based on the performance through the first 9 months, we are modestly lowering our expectations for sales and bringing down the top end of our expectations for operating margins for the remainder of '17. We now expect sales in the range of $1.08 billion to $1.1 billion and operating margin in the range of 5.0% to 5.1%.

For Aerospace, we are tightening the forecasted sales range to $730 million to $745 million and are raising our adjusted operating margin range to 16.8% to 17.1% after adjusting for the estimated restructuring charges of $4 million. The net result is our adjusted operating income for Aerospace is essentially unchanged from our prior outlook.

We are revising our full year consolidated tax rate guidance from 34.5% to 37% as the rate will be impacted by losses at our U.K. operations, and to a lesser extent, our Puerto Rican operations at Distribution. A portion of the higher-than-anticipated losses at our U.K. operations resulted from the restructuring actions we undertook in the third quarter. Based on the nature of these actions and the resulting benefit we expect in future periods, we do not anticipate these operations to continue to negatively impact our tax rate in 2018.

Through the first 9 months of the year, we have spent approximately $20 million on capital expenditures. Based on anticipated expenditures in the fourth quarter, we are revising the expectations for CapEx for the full year to $30 million.

Turning to cash flow. We generated $44 million of operating cash flows in the quarter or $39 million of free cash flow. We are reaffirming our free cash flow guidance between $70 million and $100 million, approaching or exceeding 100% of net income, once again this year, though a portion of our free cash flow outlook for the year may shift into 2018 due to timing of cash proceeds from customers associated with deliveries in the fourth quarter.

The timing of our cash flow has shifted further into the second half of the year, resulting in higher average borrowings for the year, and as a result, we are increasing our outlook for interest expense from $19 million to $20 million.

With that, I will turn it back over to Neal for his closing comments.

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

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Thanks, Rob.

Despite several challenges, we delivered the sequential quarter-over-quarter improvement we expected in the third quarter and are well positioned to deliver continued improvement in the fourth quarter. Before we close the call, I wanted to address the hurricanes that impacted the United States, Puerto Rico and our Distribution business in the quarter. Although we experienced a number of lost sales days, due to branch closures, I'm thankful that none of our employees were injured in these storms.

We are back online in the affected areas in the U.S. and continue to work our way towards full recovery in Puerto Rico. I want to thank our employees in the affected areas for their hard work to minimize the disruption for our customers and to the employees across Kaman for their outpouring of support to our employees and communities across Texas, Florida and Puerto Rico.

And now I'll turn the call back over to 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 Ryan Cieslak with Northcoast Research.

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Ryan Dale Cieslak, Northcoast Research Partners, LLC - VP & Senior Research Analyst [2]

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First, on Distribution, that is maybe if you could give some color on how the sales trends progressed through the quarter? And then, what you are currently seeing here so far in October?

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

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Sure, Ryan. Actually, from July through September, our average sale -- excuse me, our average daily sales increased 5%, so we had a weak start to the quarter and finished with a very strong September. In fact, September was the high -- the highest sales per day month so far in 2017. And actually, it was the highest since September of last year. And you may remember that September of 2016 was the highest month in all of 2016.

So a relatively difficult month-to-month comp there. So we were certainly pleased with the growth through the quarter. Although, obviously, not pleased with the top line performance overall.

And obviously, we're still in October. We're pretty much flat month-to-date. Usually the last few days of the month are the highest days, as you would expect.

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Ryan Dale Cieslak, Northcoast Research Partners, LLC - VP & Senior Research Analyst [4]

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Okay. So Neal, just to make sure I understand, so flat year-over-year in October or sequentially with what you saw coming out of the run rate with September?

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

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Flat year-to-year at this point in the quarter -- at this point in the month.

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Ryan Dale Cieslak, Northcoast Research Partners, LLC - VP & Senior Research Analyst [6]

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Okay. And then take us just back, sort of dovetail into my second question, the guidance you guys have out there now for -- implied for the fourth quarter suggested daily sales run rate in Distribution is up sequentially, I think, historically; it's usually down from the third to the fourth and the year-over-year, obviously, guidance is the midpoint is up mid-single digits or so. What -- how do I think about what's the drivers there to get you there, following what's been a couple of quarters now of maybe below expectations? What's going on that give you the confidence to get to that guidance range?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [7]

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Sure, Ryan. I'll take it in 2 parts.

The first is, if we look at -- we've actually had relatively consistent sales in each of the last 3 quarters, a little bit softer in the third quarter than the second, but just a little bit. If you were to look at our daily sales rate for the third quarter, that -- if we achieved that rate, it actually gets us slightly above the low end of our revenue outlook. So what we're really looking at is finishing the year with relatively flat daily sales against -- as compared to the third quarter and that would get us above the low point of our range. So it is, on a year-to-year basis, up. But again, the fourth quarter was a very weak revenue quarter for us last year.

So that's how we're viewing it. But the second part that I wanted to talk about is just to make sure that we are very clear that none of us were satisfied with the top line performance that we delivered in Distribution. We expected to show year-on-year organic growth in the third quarter and we fell short of that target.

Second, we've talked about it, but we've improved the profitability of the business despite the lower revenue. And in part, that's been the result of our efforts to deemphasize some lower profit product lines. We even talked about that in our prepared remarks. We were down $6.7 million from year to year in the third quarter. $6.2 million of that decline came from 2 product categories; MRO supplies and electrical contractors or project business. So that part of our plan has worked so far.

But we recognize that we have to increase the top line and we've been working to identify growth opportunities. And actually, in the third quarter, we began to roll out a number of new tools to our sales organizations that -- we're still in the very early efforts, but we're providing some very clear analysis that enables them to identify both new opportunity accounts as well as additional cross-selling opportunities at existing accounts. So we are not satisfied. This is my responsibility and we will do better on the top line sales.

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Ryan Dale Cieslak, Northcoast Research Partners, LLC - VP & Senior Research Analyst [8]

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Okay, that's good color. I appreciate it.

And then, just thinking about the Distribution margins going forward. And I would agree, a really nice job to see where they're at today. I think it's close to, or if not, the highest level of operating margin that we've seen out of that segment. Going into 2018, is there additional internal initiatives that you guys have that can still impact the margins favorably or is, at this point, it's just a matter of starting to cover the top line and just leveraging the current SG&A that you guys have?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [9]

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Ryan, we have a -- as we put this in place, as you know, we've built up an organization within the Distribution group to enable us to provide some of the more sophisticated data analytics, so that we can work on things from our pricing, our product locations, we've talked about that. During this year, that team has also shifted to identifying new opportunities for us, as I talked about just a little bit earlier. So we do anticipate a return to organic growth in the fourth quarter and continuing that growth into 2018.

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Ryan Dale Cieslak, Northcoast Research Partners, LLC - VP & Senior Research Analyst [10]

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Okay. And then my last question and then I'll jump back into the queue. The $100 million that you called out on the JPF program, I just want to make sure, that would be incremental, then, with what's currently in the backlog? I know maybe it's not completely concrete. But how do we think about the timing of that into next year? Is that something that you think can start to contribute early on? Or is it more gradual as that rolls out?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [11]

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Sure, Ryan, thank you.

You're exactly right. That's $100 million incremental to what's in the current backlog. And the reason that we wanted to provide that visibility is that we're on our call today, but we are in the final stages of negotiation on Options 13 and 14 with the U.S. government for the JPF. And we have gotten authorization for long lead items. So we clearly feel comfortable that we will be able to conclude the final negotiations and add that into the backlog. And we continue to have very strong interest from a number of -- on a number of very large orders from foreign governments as well.

And obviously, we are finishing up in the fourth quarter, and perhaps, early into the first quarter of next year, the current large DCS orders that we've talked about, and those are the kinds of magnitude that some of these orders are. So we feel that we will have good backlog going into 2018, and actually have quite a bit of product in the works right now.

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Operator [12]

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Our next question comes from Christopher 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, we've seen a really brutal fire season out in the Western U.S. this year. I guess, just could you comment whether that's kind of delayed some of the K-MAX marketing push out there or if it's conversely kind of stimulated some increased interest in the platform? Just kind of any comments you could give us there?

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

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Chris, that's a really good question. And you're exactly right: our operators are absolutely committed to and busy fighting a number of the fires both here, actually they were in Peru earlier in the year. I believe they were in Portugal as well. And also shifting some of the resources from some of the early fires up in the Northwest, down to Houston for some of the humanitarian aid.

But we actually have had customers that have not been able to enter into negotiations for additional aircraft, but I think that, clearly, given the type of fire season, that unfortunately we've endured here and another parts of the world this year, it provides an opportunity for us once things calm down a little bit. And we are seeing very strong interest. And as you know, we now have between firm contracts and one deposit, we've sold out the first 10 aircraft run that we've put in place, and now have extended our production at least into 2019.

The other interesting part of your question is that we're having a little bit softer support and spares for our K-MAX product line right now, simply because they're not bringing the aircraft down from maintenance because they're flying them so much. So we're hoping that as we get into more of the winter months here, we'll see a little bit of an uptick in some of our sales and support as we take care of the aircraft after a very tough fire season.

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

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Perfect. That's great color. And I guess, just kind of shifting to a bit of a different program, any comments on the SH-2 as far as -- there was like a depot build-out in Egypt, and there were some negotiations as far as retrofit there? Just any commentary on kind of how that program is progressing?

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

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We've been working with them on establishing an in-country depot. But right now, I think that we will...

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [17]

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Chris, sorry, this is Rob. The folks from Egypt were in, just a few weeks ago, to really get to another level of discussions as it relates to the depot maintenance, but also, clearly, discussions around the refurbishment of their existing aircraft as well as the rebuild of the ones they took out of the desert.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [18]

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Got it. Got it. And then just last one before I kind of hop in the queue. Historically, KIT has been a very strong value add for the enterprise. I was just kind of hoping you could put some color around some of the comments or the push to divest that business and just kind of how you view it strategically?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [19]

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Chris, I think that we've been pretty clear in a number of our public dialogues that we believe that both of the businesses together today have historically made a lot of sense. We've also been very clear that our board examines that on an annual basis and will continue to do that and determine what they feel in conjunction with our shareholders is the best way to add value for our shareholders. But we like both businesses, but we will certainly listen to shareholders as they have views on that and our board will continue to deliberate that question, as you would expect a board would, at least, annually.

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Operator [20]

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

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

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So you mentioned the $100 million order, I jumped in the call late. Was that related to Options 13 and 14, or was that something different?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [22]

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It was related to Options of 13 and 14, Ed, but not solely 13 and 14.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [23]

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Got it. Got it. Okay, so I guess my question is, the JPF makes up a significant amount of the profits of the Aerospace business for 2017. And as we kind of look into the next year, not having that higher profit DCS order there -- and this is a sizable one that you plan to ship -- I'm curious about how the year-over-year comps might start to look, absent that order, unless you're successful of getting something of significance.

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [24]

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Sure, Ed, this is Rob. I understand your perspective, but we are certainly, at this stage, confident that we anticipate getting a number of DCS orders that we would have in the pipeline, into backlog. And we're certainly very comfortable and confident in the JPF backlog outlook as we sit here today.

We'll give more details on our fourth quarter call as we get into February as it relates specifically to the outlook.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [25]

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Okay. And when you refer to that, are you referring to revenue? Or are you referring to the profitability of the business or both?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [26]

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We feel that there are significant opportunities both in USG that we've touched on as well as in DCS. So in terms of the overall product mix, we would expect that to be pretty consistent going forward.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [27]

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Got it. And then the second question was related to revenue recognition procedures that are coming down the pipe for the next year. I'm just curious about, we're seeing a pretty lumpy year with your business, with the new revenue recognition laws. Will that smooth out your earnings profile from quarter-to-quarter and reduce some of the lumpy and choppiness that we see? Or how do I think about that?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [28]

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Yes. No, that's a good question. Certainly, Ed, we're still going to have some lumpiness because our DCS sales will remain point in time. Certain other programs will move cost to cost and you would anticipate to see that be a bit smoothed out.

So it really comes down to the mix. I think by and large, I think it's safe to say, it'll be probably a bit smoother on the Aerospace side. And when it is lumpy, it'll be easier to highlight what's causing that lumpiness. But certainly, overall, I think that's a fair point that, broadly speaking, it may be a bit smoother.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [29]

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Okay. It's going to be a fun ride.

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [30]

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I mean I would just say, as an additional color, most likely, most of our bearing products will remain point in time. So certainly, given some of the seasonality that we sometimes see in that business, that would continue.

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Operator [31]

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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 [32]

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This is Ryan on for Steve. Just want to go back to the nice margins you had at Distribution. I'm assuming there's some strong cost control in there. How should we think about those costs if they have to come back not as volumes ramp up? I'm just trying to get a sense of how we should think about incrementals as volume picks up?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [33]

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Sure. Certainly, we would anticipate leveraging our fixed infrastructure at Distribution. We certainly have some infrastructure costs that would be able to be leveraged in increasing sales. And certainly on the selling side, you would expect to see a bit of a linear relationship there, with increased commissions, with increased sales.

But by and large, certainly, we expect to benefit quite a bit. We expect our drop-throughs to be, certainly, let's call it, 20% to 30%, in that range on the upside, which we've seen historically. And I think, really the difference for us in the last year or so is that we've really been able to mitigate the dropout rates. So on lower sales, we're still able to deliver the margin.

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Ryan Thomas Mills, KeyBanc Capital Markets Inc., Research Division - Associate [34]

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Okay. And then can you give an update on what you're seeing in the pricing environment in Distribution?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [35]

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Sure. Ryan, we are starting to see some level of pricing come through the channel. I would call it, selectively, low- to mid-single digits. And that really, depending on the type of customer contract that we're working with, some of those we're able to pass through to the customer pretty quickly. And certainly, for distributors, as we all know, inflation in the channel is a good thing.

There are certain contracts where we do have a fixed price for a period of time and in those cases, we are working with our suppliers to help provide some level of relief for Kaman as we work through those pricing adjustments.

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Ryan Thomas Mills, KeyBanc Capital Markets Inc., Research Division - Associate [36]

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Okay. And then going back to Distribution, can you maybe talk a little bit more about the products you're trying to add that are helpful to margin? Or what's happening with the mix there?

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Robert Daniel Starr, Kaman Corporation - CFO and EVP [37]

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Sure. As Neal touched on, there's certainly some areas that we are deemphasizing just based on where we think we can add the most value to our customers and to our shareholders. Our strategy has been really to focus on the value-added opportunities as well and to really provide that level of inventory availability and readiness to our customers.

So there really isn't, Ryan, a specific product category that we're trying to emphasize. I think there are some that we, clearly, are being less aggressive towards, just given the margin profile of those products. But there really isn't a specific one that I can highlight to. It's really, ultimately, improving our customer service levels and the value that our customer gets out of the relationship with Kaman.

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Ryan Thomas Mills, KeyBanc Capital Markets Inc., Research Division - Associate [38]

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Good. And then my last question, you guys have been having good traction with the K-MAX, as you start to get more orders. Can you maybe talk about the aftermarket opportunity there?

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Neal J. Keating, Kaman Corporation - Chairman, CEO and President [39]

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Ryan, it's another good point. If you think about it, we have about 19 aircraft flying before the 3 that we just added to the fleet. So over the -- between now and probably the end of next year, when we deliver the first 10 aircraft, it's not going to be linear, but we would expect, over time, likely, a significant uptick in our sales and support activities.

Many times, people use a 5% to 10% level, so if you take 5% to 10% of the purchase price of the aircraft that, that many times can be about what you will have in terms of annual ongoing maintenance and support. Obviously, as the aircraft are new in the fleet, that will be at the low end of that. But it will certainly build up to those kinds of levels over a 3- to 5-year time frame.

So it's clearly, what one of the real opportunities for us as a result of growing that fleet is to have that ongoing service and support annuity, which is very profitable business for us. So clearly, a key consideration when we reopen the line to serve our customers, certainly, but also to increase the fleet size and take advantage of that aftermarket opportunity.

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Operator [40]

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And I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

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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 does conclude today's presentation. You may now disconnect, and have a wonderful day.