Kaman Corp (KAMN) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Nia and I'll be your conference operator today. At this time I would like to welcome everyone to the Kaman Corp. conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Russell Jones. Sir, you may begin your conference.

Thank you Nia and good morning, everyone. Russ Jones of Kaman Corp. I would like to welcome you to the Company's fourth quarter and full year 2006 conference call.

The conference is also being webcast over the Internet at www.command.com and an online archive of this broadcast will be available within within one hour of the conclusion of the call and will be available until March 9 at this site.

Conducting the call today are Paul Kuhn, Chairman, President, and CEO and Bob Garneau, Executive Vice President and Chief Financial Officer.

Before we begin, let me take a moment to reference the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This conference call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the Company. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, we can give no assurance that such expectations or any of these forward-looking statements will prove to be correct.

Important risk factors that can cause actual results to differ materially from those reflected in the Company's forward-looking statements are included in our earnings release filed yesterday and in the filings with the Securities and Exchange Commission. In addition, the information contained in this conference call is accurate only as of the date discussed. Investors should not assume that the statements made in this conference call remain operative at a later time. The Company undertakes no obligation to update any information discussed on the call.

Finally our discussion today will include certain non-GAAP measures related to Company performance. Reconciliation of this information is provided in the exhibits to this conference call and is available through the webcast section on our website.

With that please turn to exhibit 1 and I will turn the call over to Paul Kuhn. Paul.

Thank you, Russ, and good morning, everyone. Welcome to our conference call for the fourth quarter and full year 2006.

Yesterday Kaman Corp. reported net earnings for the fourth quarter of $9.6 million or $0.39 per share diluted, compared to $9.2 million or $0.38 per share diluted in the 2005 period. Net sales rose to 7.1% to 308.9 million. Driven primarily by strong sales growth in the aerospace segment.

For the full year Kaman reported net earnings of $31.8 million or $1.30 per share diluted compared to net earnings of $13 million or $0.57 per share diluted in 2005. Sales for the full year were up 9.5% to $1.2 billion in 2006 compared to $1.1 billion in 2005.

It is important to point out that various discrete charges and gains affected our results in the fourth quarter and full years of 2006 and 2005 making direct comparisons more of a challenge. Bob will walk through the GAAP reconciliation tables we have included in the conference call exhibits so you'll have the specific details.

From an operating standpoint the fourth quarter and the year mark yet another milestone in our progress, as we once again leveraged the continued favorable conditions we have seen in many of our end markets, generated good organic revenue growth in most of our benches businesses and maintained our focus on cost controls. There's a lot of financial detail in the press release that Bob will review later in the call. If you would now turn to exhibit two I will highlight the segment results.

The aerospace segment continued on the path of improving performance in the fourth quarter. Revenues rose 22.5% for the quarter and 13.2% for the full year of 2006, with good progress across the segment's operating units.

Sales for the Aerostructures Division grew 67.4% in the quarter and 43.2% for the full year 2006. Driving the growth within the segment is the continued improvement we have been able to generate at both our Jacksonville metals oriented facility and our Wichita composites oriented facility. In Jacksonville we have gotten through the operational issues that we were facing following our move from [Lucent], Connecticut.

Our cockpit work for Sikorsky on the BLACK HAWK helicopter is going well and should generate sales for us long into the future. We delivered 56 cockpits for this program over the course of 2006 and have delivered 72 from the inception of the program.

Another driver of the sales increase was higher shipments to Boeing. Most notably for the 777 program based on an increase in Boeing's commercial aircraft production.

Jacksonville also continued work on the C-17. During the third quarter call we mentioned that we had expected the program to conclude in mid 2007 but that we had received indications from Boeing that the program would run through 2008. We have now had confirmation that this will occur with a minimum of 22 additional shipsets giving us a bit more revenue visibility as we look outward.

At the Wichita facility, composite work continued to ramp up and we have new programs coming online related to the Boeing 787 Dreamliner and the Sikorsky MH-92 helicopter. We see prospects for continued growth in this business supported by favorable market conditions. Both facilities have a capacity to take on additional programs and have demonstrated the ability to compete effectively in that market.

Net sales within our Fuzing Division decreased 9.6% in the quarter, but for the year were up 10.9%. The decrease for the fourth quarter was due to lower sales from legacy fuze programs at Middletown, 40 mm product sales at Dayron and government-sponsored development programs. The Joint Programmable Fuze sales on the other hand were up for the quarter. The increase for the year was a result of higher full year production volume and shipments at the Middletown facility for our legacy fuze programs and higher Joint Programmable Fuze shipments at the Dayron facility in Orlando.

During 2006, we continued to experience production issues related to the JPF fuze; however, we believe most of these issues have been resolved. To date the total value of JPF contracts received from the U.S. government has reached $116.6 million. This is a significant program for us with attractive prospects for foreign sales.

Net sales in the helicopters division grew 30% for the quarter but are down 8.8% for the full year. For the quarter, the sales increase was due primarily to new work we received from Sikorsky on the BLACK HAWK helicopter, involving aircraft joining and installation work. Higher sales including spares related to the SH-2G program for Australia and higher sales related to our deep hole level maintenance work for the Egyptian SH-2G(E) helicopters. The full year decrease resulted primarily from the sale of four K-MAX helicopters in 2005 compared to the sale of the last available K-MAX in 2006.

During the quarter, we took a $1.9 million charge in relation to our Australian program to cover the costs needed to complete the program. At this point I am sure you are all aware of the program's details and there is extensive commentary on it, in both the 2006 fourth quarter press release and other releases and documents on our website.

I won't go into too much detail here, but would just point out a couple of key updates.

We have only a few remaining tasks to complete on our formal qualification testing of the ITAS System software. We have addressed the flight safety issue that arose from last year when we had an anomalous signal from an aircraft airspeed indicator. We successfully tested the modifications made to solve that issue and we are delivering the modified equipment to the customer.

We continue to work with the Australian government to address changes in aircraft certification requirements that are not covered by our original contract. A proposal has been submitted to the government with a scope change which involves modifications to software and hardware that could extend over a 29 month timeframe.

Meanwhile the Company is waiting for the results of a review by the Australian Minister of Defense, regarding the possibility of his pursuing an alternative for the [C Sprite] program. His decision is expected at any time. The program is receiving a lot of attention in the Australian press and by both parties within the government. Right now there are conflicting rumors, but at this point there has been no conclusive information.

Once, the minister (technical difficulties) his decision we will file an 8-K. Right now, we continue to work with the customer and we believe that this aircraft represents the best solution for the Australian Navy's needs.

The 2006 fourth quarter completed another strong year for our Kamatics and RWG businesses as continued strong conditions in the aerospace market drove net sales growth of 12% in the quarter and 15.2% for the full year. The business has now surpassed $100 million in annual revenues -- a record performance.

The slightly lower percentage growth in the fourth quarter compared to the full year this year was a function of product shipping schedules and timing of export paperwork on military programs. Conditions remain strong in the markets we serve and our products are well regarded as leaders in the market. In addition, we are benefiting from a growing reputation as a leader in providing shorter lead times for product delivery compared to many of our peers.

For the Industrial Distribution segment, economic conditions moderated during the year but remained in positive territory. Net sales increased 3.7% in the quarter and 7.0% for the full year to a record full year total of $665.4 million. The somewhat softer sales increase for the quarter reflects some moderation in the rate of growth in industrial production in the final months of the year along with some specific areas of declining activity, including the machinery manufacturing industry and nonmetallic minerals processing such as gypsum, wallboard manufacturing.

The sales increase for the year resulted from continued full year growth in all of our geographic regions and for most of the markets in which we participate. To give a few specifics we continued to see strong performance from the mining, chemical and energy sectors in the West region. In the Central and East regions, respectively, food processing and original equipment manufacturing drove the increases.

Our Industrial Distribution segment has been able to leverage the basic support of the underlying economy by winning new business and renewals of major multiyear contracts that were set to expire. One of the new account relationships won in 2006 is likely to become one of our largest when fully implemented.

The music segment experienced difficult market conditions. In the fourth quarter, net sales for this segment declined 3.6% compared to the prior year quarter due to a disappointing holiday selling season in 2006. Quotes for 2006 and 2005 fourth quarters included sales from Musicorp which was acquired in August of 2005. For the year, net sales increased 12.2% -- almost entirely due to a full year of sales from Musicorp.

The effect of higher fuel costs and the weakening housing market effected consumer purchasing decisions too much throughout the year. Nevertheless we made progress. We continued to work of building the value of our music business, taking steps to reduce our costs and positioning the segment for improved performance when demand recovers.

We completed the consolidation of Musicorp including systems integrations, personnel reductions and warehouse closing, all of which have proved to be a positive influence on 2007.

And we enhanced our existing proprietary and exclusive product relationships becoming the exclusive U.S. distributor for Sabian Cymbal and early in 2007 for Elixir Strings.

Summing up, 2006 was a strong year for Kaman Corporation with significant progress across a number of fronts. Our Aerospace segment performed much better benefiting from both industry trends and our efforts to transform this business into a competitive leader in the marketplace. Our Industrial Distribution segment continued to leverage the positive economic environment by growing and increasing margins and further building its presence in the market for national account customers.

Music, on the other hand, had earnings that were somewhat lower for the year reflecting a general downturn in the market for musical instruments. However, the benefit of the work we have done to grow the size of this segment of the past several years should lead to good things when this market returns to more normal levels.

Financially, we are well capitalized and have a strong business platform for growth. A month ago we increased the size of our working capital borrowing facility to $200 million by activating a $50 million accordion feature. So we have even more flexibility to pursue our growth strategies going forward.

With that I will turn the call over to Bob who will review our financial results.

Thanks Paul.

If you would turn to exhibit 3, I will take you through our GAAP reconciliations for the fourth quarter.

Starting at the top you'll see the earnings as reported, which include earnings before income taxes of $15.7 million, net earnings of $9.6 million and net earnings per share diluted of $0.39 in the fourth quarter of 2006 compared to $0.38 per share diluted in the fourth quarter of 2005 and increase in net earnings for the quarter of 5.1%. Moving down through the columns you'll see the various factors that affected both periods.

For the fourth quarter 2006 we took a $1.9 million charge adding to the loss reserve for our helicopter program with Australia; and we incurred a $0.5 million in deductible and nondeductible stock appreciation rights expense. Tax effects and rounding factors also came into play. Without these items, we had earnings before income taxes of $18.1 million, net earnings of $11 million and net earnings per share diluted of $0.45 per share versus the $0.39 reported.

Moving over to the right hand columns for the fourth quarter of 2005 we took a $2.5 million charge for the Australian program and had $1.2 million in nondeductible expense associated with the recapitalization and a minimal effect from the stock appreciation rights.

We also had, however, a $5.1 million gain from recoveries on mounts previously written off on our M.D. helicopter program and a $1.9 million gain in the Industrial Distribution segment for the reversal of vacation accruals. Once again we have tax effects and rounding factors to consider due almost entirely to higher overall effective tax rates for the full year 2005, caused by the nondeductibility of our recapitalization expense and most of our stock appreciation rights expense that was incurred earlier in the year. Normalizing the effective tax rate for these items adds 8/10 to the quarter. Rounding factors account for the remaining penny.

Without these items, we had fourth quarter 2005 earnings before income taxes of $16.2 million, net earnings of $9.7 million and net earnings per share diluted of $0.40 for a 2006 over 2005 fourth quarter growth in net earnings, up 13.5%.

Moving now to exhibit four, we look at the reconciliation for the full year. Once again on the top, we reported full year 2006 earnings before income taxes of $52.3 million, net earnings of $31.8 million and earnings per share diluted of $1.30. During the year we took $9.7 million in charges for the Australian program, incurred $1 million of deductible and nondeductible stock appreciation rights expense and offset these with a $1.6 million gain from capitalizing inbound freight into inventory in the Industrial Distribution segment. And a $0.5 million recovery of nondeductible legal fees on the recapitalization.

Tax effects and rounding factors for the full year 2006 were minimal. Without these items we had earnings before income taxes of $61 million, net earnings of $37.1 million and net earnings per share diluted of $1.52.

For the full year 2005 we reported earnings before income taxes of $28.9 million, net earnings of $13 million and net earnings per share diluted of $0.57. For 2005 we took $16.8 million in charges related to the Australian program, incurred $3.3 million of nondeductible recapitalization expenses, $8.3 million of deductible and nondeductible stock appreciation rights expense and for offsetting amounts had $7.7 million in gains from recovers on previously charged-off amounts from MD Helicopters programs and net adjustments in Industrial Distribution segment of $0.4 million.

Tax effects and rounding factors were minimal. Without these factors, we had 2005 full year earnings before income taxes of $49.1 million, net earnings of $29.5 million and net earnings per share diluted of $1.28. For a 2006 over 2005 full year growth in net earnings of 25.7%.

If you would now turn to exhibit five I will very briefly go over segment performance.

Net sales in the Aerospace segment were $92.6 million, in the 2006 fourth quarter, up 22.5% from $75.6 million in the fourth quarter of last year as Paul had previously reported. Operating income, however, was down 4.7% for the fourth quarter of 2006 and operating margins were 16.9% compared to 21.8% in the fourth quarter of 2005. The decrease in the 2006 fourth quarter is the result of the Aerospace segment related adjustments to both quarters that we just talked about on the GAAP reconciliations that benefited the 2005 performance and reduced 2006 performance.

The Aerospace segment represented 30% of consolidated total sales in the quarter. Our Industrial Distribution segment net sales rose 3.7% to $157.6 million compared to $152 -- 2 million in the fourth quarter of last year. Segment operating income was down 11.5% for the fourth quarter of 2006 and operating margins were 4.1% compared to 4.8% in the fourth quarter of 2005.

Pointing again to the GAAP reconciliation, the 2005 fourth quarter had the benefit of a onetime gain that represents [dispensable] reason for the higher quarter a year ago.

Although not shown on the table, sales and operating income for the fourth quarter were also less than for the third quarter of 2006 following our normal pattern. With the holiday season there are fewer effective sales days in the fourth quarter and for the first three quarters of the year. The Industrial Distribution segment represented 51% of consolidated sales in the quarter.

Music segment sales declined 3.6% in the fourth quarter to $58.7 million compared to $60.9 million in the fourth quarter of last year due to a continuing soft market including a disappointing holiday selling season in 2006, as Paul had mentioned. Segment operating income was down 6.7% for the fourth quarter of 2006 and operating margins were 8.3% compared to 8.6% in the fourth quarter of 2005, in part, reflecting the effect of lower sales levels. We also had an increase in bad debt expense due to customer bankruptcies during the year, with one of these impacting the fourth quarter. The Music segment represented 19% of consolidated sales in the quarter.

Exhibit six provides similar data for 12-month periods, which I will ask you to turn to that now. For the year Aerospace and Industrial Distribution sales, operating income and margins were up compared to prior year period. For the Music segment, sales were up due to the Musicorp acquisition as Paul had said and yet operating income and margins were down. The reason I just gave for the fourth quarter apply but also the additional gross profits generated by the incremental sales from Musicorp were not sufficient to cover the incremental operating expenses that were incurred by them during the year, certain of which have been or will be eliminated as Musicorp is fully integrated into this segment.

We are often asked about our corporate expense figures for modeling purposes. If you would turn now to exhibit seven we have a table that we also have included on page 2 of the earnings release if you have that. In this table we present elements of the expense that do not tend to fluctuate a great deal on the topline by both corporate expenses before breakout items. Portions subject to periodic fluctuations or that are more difficult to predict represented as breakout items.

Among the breakout items from the top, the principal difference for the year was that the $8.3 million of stock appreciation rights expense incurred in 2005 was only $1 million in 2006; and that amount will tend to further diminish in future periods as there have been no new rights granted since 2003 and most of those previously granted have been exercised.

Moving down through the list last year (technical difficulties) .3 million of nondeductible expense related to the recapitalization. Approximately $5.5 million recovery of legal expenses only this year. There is no further effect of that transaction on corporate expenses. Pension expense retained by corporate was a little lower and will continue to be driven by general trends and interest rates and investment performance on the pension assets in future periods.

The new FASB pension rule requiring sponsors to book an additional liability and reduction of shareholders equity when defined benefit plan assets are not equal to or greater than the projected benefit obligations of such plans had only a minimal effect on the Company at December 31st, 2006 annual measurement date.

Our supplemental employee retirement plan is higher due in large part to the stock appreciation right payments made in 2005. Our long-term incentive plan expense and our incentive compensation, or bonus plan payments, were also higher in 2006 driven by improved performance.

Stock option expense is new in 2006 due to the new FASB 123R accounting rules. Most of these items are discussed in detail in the MD&A section of the annual report which is just being printed now.

Finally exhibit eight highlights certain balance sheet items and capital factors. Bank debt, notes payable and debentures outstanding were at 90. -- $97.7 million at the end of the third quarter of 2006. This was about $33 million higher than at the end of 2005 principally for the working capital to support a growing sales space plus dividends. At the end of the year borrowings were about $10 million higher than at the end of 2005 with a reduction from the end of the third quarter reflecting normal fourth quarter patterns for the Company.

Shareholders equity has grown normally principally through the growth of retained earnings. Our debt to capitalization ratio remained moderate at 20.1% and there is nothing in particular to note there. We generally like to keep our capital expenditures in balance with our depreciation and amortization; but this year have increased that amount modestly to deal with growth in the business and will likely see at least another year of somewhat higher spending to to the plan purchase of the Bloomfield and Able facility.

For a final point that might be helpful, our effective tax rate for 2006 was 39.2% compared to 54.8% in 2005. A higher 2005 rate reflects that nondeductibility of our recapitalization expenses and much of our stock depreciation expense a year ago. The effective tax rate for 2007 should not vary greatly from the 39.2% level in 2006.

That concludes the financial discussion and with that I'll turn the call back to Russ.

Thanks, Bob. That wraps up our prepared remarks and we will now open the line for questions. Operator, may we have first question, please?

(OPERATOR INSTRUCTIONS). Arnie Ursaner of CJS.

Couple of questions to ask you starting with music. You mentioned that you had a bad debt item in Q4 but I don't think you quantified that. Could you give us that number, please?

I don't have that number in front of me on that. I mean it was one of our customers and one that I think we might have indicated at the time, but I don't have that number in front of me.

Well Brass and Woodwinds is a major retailer, I'm assuming it was them because they went bankrupt in Q4. Is it several hundred thousand dollars? Any sense of magnitude?

It would be more like that than it wouldn't yet -- more like that. Yes.

And in your prepared remarks you mentioned you have been or will be taking actions to reduce the cost related to Musicorp. Given that you've had a year and a half what do you still have to do to get their cost down?

We have been taking cost out as the year goes by and so during the course of the year expensive expenses have come out and we've done most of the things that we are going to do.

You mentioned today you will be still taking some cost out. What's left to do?

Yes the last one of the -- we added a warehouse to our original plant to shut down and that concludes this month. So that's really the final shoe. We've gone from six warehouses down to one. We've taken out about 1/3 of the people and we've moved all of the backroom activities to our music corporate activity or office. So all of those things have already been accomplished. We have a few more people that we plan to look at but for the most part it's complete.

And typically you are a key driver of the music business. It's post the holiday season, reorders and other items to kind of replenish the stores. You did mention that the Christmas selling season was not quite as strong as you thought it would be. Could you comment a little bit about reorder activity we have seen in the first quarter of the year?

Yes. It's been mild. It's not, again, reflecting the fact that the whole industry did not have a good selling season. So we would not expect to have a tremendous inflow of orders in January, February because of the store activity was not as good as anyone had expected.

It was just -- it was mild. It was normal. A little bit better than we had last year, but nothing to write home about.

Shipping, there's a little bit to the Aerospace side. You mentioned I think in your prepared remarks you have 56 BLACK HAWK cockpits that you shipped in '06. If I recall the contract you had, I put you had 80 that had to be done by November and then they expanded that. Was there some delay in getting out some of the BLACK HAWK cockpits in the year?

We delivered at the on release requirements from Sikorsky so there was kind of a pull type of system. And we delivered everything that they had requested of us. We have a capacity -- kind of a search capacity capability down there to do about ten a month and we expect based on discussions and orders that we had, that the average output would be somewhere seven to eight a month.

I will jump back in queue and give some others a chance.

(OPERATOR INSTRUCTIONS). I would now like to turn the floor back over to management for any closing remarks.

I think we had somebody back in the queue if you want to hop back in.

(OPERATOR INSTRUCTIONS). Steve Wortman. Lord Abbett.

Just on the Industrial Distribution side. We did see a deceleration end Q4 it was up but I think it was the weakest year-over-year comparison for the year. What does that sort of point? What are you saying in the first part of '07 and what are some expectations you could throw out there for that business?

I think what we're seeing is the same kind of things that we are reading about in the paper and hearing on television. There seems to be an issue with the OEMs. The production levels seem to be down a little bit. That's affecting the part of our business that we call our OEM side. The MRO, the maintenance side of it is not doing all that bad. I think that our attitudes here mirror what we hear from [Fernanke] that says that there is a little bit of an inventory issue that have got to be worked through the larger manufacturers and that that should work its way through the first half. And we should expect to see a little bit of a recovery in the second half. I think anecdotally we are kind of hearing and feeling the same thing.

(OPERATOR INSTRUCTIONS). It appears we have no further questions.

Well, if that is the case, then, thanks for joining us for today's conference call. We will look forward to speaking with you again in the future.

Thank you. This concludes today's conference call. You may now disconnect your line at this time and have a wonderful day.