Kaman Corp (KAMN) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Kaman Corporation fourth-quarter and full-year 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-answer session.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Eric Remington, Vice President, Investor Relations. Please proceed, sir.

Good morning. Welcome to the Kaman Corporation fourth-quarter and full-year 2011 conference call to discuss our earnings results and presentation of our outlook for 2012. Conducting the call today are Neil Keating, Chairman, President, and Chief Executive Officer and Bill Denninger, Executive Vice President and Chief Financial Officer. Before we begin this morning, please be advised that this call may contain certain forward-looking statements, such as 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 any forward-looking statements made due to several important factors described in the Company's latest filings with the Securities and Exchange Commission. Additionally, I'll note that our discussion today will include preferences to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to our GAAP financial statements have been included in Table 6 of our earnings Press Release.

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

Thank you, Eric. Good morning and welcome to our call to discuss fourth-quarter and full-year 2011 results. Overall, we had a solid fourth quarter, which capped a great year in 2011. Over the course of the year, we made progress in our key strategies, improved our operational capabilities, and achieved our financial objectives. By nearly any measure, this was an excellent performance. To start, I'd like to share a few financial highlights from the year. Net sales for the year increased by 13.6% to $1.5 billion, with industrial distribution up a strong 14.3% and aerospace up an equally impressive 12.5%. In both of our businesses, growth was delivered by a balance of organic sales growth and contributions from acquisitions.

In industrial distribution, sales were a record $951 million, up from $646 million just two years ago. Operating profit returned on sales for the year was 5.1%, an improvement of 150-basis points over the prior year. Most impressively, operating profit dollars increased 59% on the 14% sales increase to $48.1 million. Aerospace also achieved a higher operating profit margin of 15.8% on an adjusted basis versus 15.6% last year. The combination of higher margin and volume drove a 15% increase in operating profit dollars to $86.6 million. We harnessed this segment performance to drive overall profitability and our full year earnings per-share growth was 36% on an adjusted basis to $2.01 per diluted share.

Now, for some additional color on each of our operating segments starting with industrial distribution. Industrial distribution's full-year sales growth of 14.3% was evenly distributed with organic sales per day up 7.4% and acquisitions adding the balance. Sales growth was broad-based across all regions in the US, and we experienced even stronger performance in Canada and Mexico. In addition, our national accounts business grew by about 7%. As expected, our rate of growth slowed in the fourth quarter as we came up against tough comparisons, but we are very encouraged by the trends we saw in January with overall sales per day up 14.6% and organic sales up 7.8% year-over-year. Beyond the operating performance of the business, we made significant strategic progress in 2011. Specifically, we acquired Catching Fluid Power and we entered into a national reseller arrangement with Parker Hannifan, the largest global manufacturer of fluid power products in the world.

We acquired Catching in mid December and this acquisition provides us with a strong entry into the Chicago market, generally considered to be one of the largest fluid, power and power transmission markets in North America. While we had a presence in Chicago prior to the acquisition, our position was primarily focused on material handling. Catching is a leader in the market and carries a full authorization for Parker Hannifan's major fluid power divisions. It is one of only a select number of Parker distributors with that broad line representation. The acquisition chartered new territory in that it was the first time that Parker agreed to transfer the distribution rights of one of its premier tri-motion technology distributorships to a large national distributor. We are very pleased to be aligned with Parker and have a Catching team on board.

Discussions with Parker over the acquisition of Catching involved the highest levels of both organizations and lead to a broad strategic alignment between our two companies that recognized command nationally as a Parker value-added reseller. This means that command now has access to a broad range of Parker products within three of its divisions; hydraulics, pneumatic products within automation and fluid connectors. This greatly expands commands catalog of products especially in hydraulics and fluid connectors and allows Kaman to represent Parker, the market leader in most key product categories.

With the acquisition of Catching and the Parker national reseller agreement along with our acquisition of Minarik in 2010, we can now support our customers across three major product platforms. These are our traditional bearing and power transmission business, motion control and automation, and fluid power. All three platforms are integral to the execution of our long-term strategic objectives. We made three other acquisitions within industrial distribution during 2011 as we continue to fill out our product offerings, add geographic coverage, and build scale. Overall, we are extremely pleased with the performance of our industrial distribution business in 2011. We have made clear and measurable improvement and are continuing to make progress toward our long-term objectives for this business.

In aerospace, we saw margin improvement due to a beneficial mix of commercial aerospace products as our bearing product lines grew at a very strong pace, rising double digits against last year, and we continue to experience strong incoming order rates early in 2012. Sales growth was also provided by revenue from the unmanned K-MAX program and contributions from the December 2010 acquisition of global aero systems. However, we fell short of our sales expectations for this segment, primarily due to lower shipments of JPF fuses. In the fourth quarter, we delivered just over 3700 fuses and just under 17,000 for the full year. While none of us are satisfied with the performance in the fourth quarter, the JPF remains a solid program as evidenced by the Air Force's recent additional order under Action 8, which extends our backlog through 2013.

In addition, the performance awards we received for in-service reliability, demonstrate that there is no doubt the stringent acceptance testing requirements ensure nothing but the highest quality fuses are delivered to our Armed Services. I was also pleased that the balance of our aerospace product lines were able to offset the JPF earnings shortfall. The two unmanned K-MAX aircraft in Afghanistan continued to perform very well. As of the last update we received, the aircraft had performed over 100 missions to four different forward-operating bases, carrying an average load of about 2,400 pounds and single loads of as much as 4,200 pounds.

This program has been an opportunity for Kaman and our partner Lockheed to showcase the capability of the aircraft and the unmanned cargo resupply concept in an active theatre. It is already demonstrating the ability to reduce supply convoys in dangerous areas of operation and, therefore, protect the lives of our men and women in uniform. This is a critical capability and one very few systems can provide. We continue to work towards establishing a program of record. And in the interim, we are prepared to provide additional unmanned K-MAX aircraft if called upon to do so.

Of course, defense spending is an area that we are all watching very closely, and we expect the Department of Defense budget will likely be under pressure for some time. However, we believe that defense will continue to be a core part of our aerospace segment for the foreseeable future. First, we are on the right programs. Blackhawk and JPF, while having reached peak production rates, will remain key components of our base for years to come, and we expect both will have significant foreign demand. The A-10 and AH-1Z provided needed capabilities and service life extension to the military, and we expect both programs to continue.

Next, our diversity will benefit us as we are not reliant on any large, single programs. Also, many of the programs that we are on, such as the F-35 are early in their production ramp-up and will provide incremental future revenue. Finally, we have also booked follow-on orders for our defense programs including the recent JPF award, which was an add-on to Option 8 of $24 million raising program backlog to $149 million. And Boeing recently finalized an order for another five C-17s securing that business for us through 2013. We are also actively engaged with industry trade groups, our customers, and members of Congress to ensure the importance of our programs is widely known.

In addition, we continue to win new commercial work to better balance our revenue mix. We recently received a five-year renewal from Spirit Aerostructures for structures work on the A-330 and our content on the A-350 continues to build and is now expected to exceed $300,000 per aircraft. Overall, I am very pleased with our performance in 2011, which gives us added confidence as we move into 2012.

I'd now like to turn the call over to Bill for some additional color on the numbers. Bill?

Thank you, Neal. I'd like to begin with highlights of our fourth-quarter performance. I will be discussing adjusted numbers, which are reconciled of the GAAP numbers in Table 6 of our earnings release. Diluted earnings per share was $0.53 for the fourth quarter, bringing in the year of $2.01. Consolidated sales reached $379 million for the quarter. This was a result of continued growth at distribution and essentially flat sales in aerospace due to lower JPF deliveries.

Distribution operating margin for the fourth quarter was 4.8%, the eighth consecutive quarter of year-over-year increases driven by continued improvement in gross margin, the leverage from higher sales, and continued accretion from acquisitions. Operating margin at aerospace in the quarter was 16.3%, compared to 22.4% in the prior year, which benefited from the second half catch-up of JPF deliveries. This year's fourth quarter saw strong comparisons over the prior year from our Barron product lines and the Egypt SH-2 maintenance and upgrade program. Acquisitions have helped to accelerate growth and earnings. Since 2008, we've completed 12 acquisitions adding almost $400 million in annual sales of about 70% of which has been in distribution with the balance in aerospace. We are pleased with each of these deals, and the most recent have been among our strongest.

The acquisitions we made in 2010 contributed approximately $0.20 and earnings per share for 2011 results. Free Cash Flow was $19.9 million for the fourth quarter and $16 million for the year. The full-year number includes capital expenditures of $28.8 million, which is higher than historical levels as we continue to invest for growth. It also includes a payment of $15 million to the Australian government. I would now like to move on to our outlook for 2012.

After significant improvement in 2011, we are projecting further improvement in 2012 despite headwinds from higher pension and medical expense. We expect sales in our aerospace segment of between $605 million and $625 million, up 11% to14% over 2011. This sales growth is driven by a full year of contribution from Vermont Composites, higher JPF volume, further growth in bearing product lines, and in the second half, ramp up of revenue from the A-10 and AH-1Z programs. Our outlook for operating margins is between 15.7% and 16%, including the higher pension medical expense and lower margin from programs in the start-up phase. Where in the industrial distribution, we expect to reach sales of between $1.03 billion and $1.06 billion, up 8% to 11%.

Sales growth will be provided by a relatively even split of organic growth and the contributions of acquisitions completed in 2011. Operating margin is expected to be between 5.4%, 5.6%. We're planning interest expense to run about $13.5 million and corporate expenses of $44 million to $46 million. With respect to taxes, we expect a full-year rate of approximately 35%. We should generate free cash flow in 2012 of between $30 million and $35 million. This is after capital expenditure investments of about that same amount. Also included of the settlement payment to the FMU-143 litigation of $4.75 million, our second of three payments to the Australian government of $6 million and pension contributions of $10 million. In summary, we believe that we are well-positioned to drive the business forward and realize another year of solid sales and earnings growth in 2012.

Thank you and I'll now turn the call back over to Neal. Neal?

Thanks, Bill.

In 2009, we established long-term objectives for each of our businesses. These objectives included very clear sales and profit goals for each of our segments. I'm pleased to report that at this stage in our progression towards 2014, we continue on a plan to meet these objectives. In industrial distribution, we have been able to achieve balance between organic and acquired growth. The added scale has provided operating-profit leverage and our margins have increased accordingly. And these acquisitions have allowed us to build three major product platforms from which to service our customers and drive further growth.

In aerospace, we have increased our exposure on commercial programs including the 777, 787, and A-350, as well as enhancing our capabilities to differentiate our offerings and better serve our customers. I am proud of the performance of our entire team in 2011, and that has set the stage for our 2012 outlook, which Bill reviewed a few minutes ago. We continue to make investments in the future of our Company and are making clear progress towards our 2014 goals.

I'll now turn the call back over to Eric. Eric?

Thank you. Operator, may we have the first question please?

Sure. Your first question comes from the line of Arnie Ursaner from CJS Securities.

Hi, good morning. I wanted to make sure I fully understand the full impact of the JPF. If I eliminate -- you had done on the Q-3 conference call mentioned 11,000 shipments, you ended up shipping about, called it 3,700; is it right to think of this as losing about 8,000 shipments at $3,500 or so a pop or roughly $28 million of revenue?

Arnie, there's a couple of tradeoffs there. One is that I think in the call, we said 11,000 would be optimum, but we thought we would be closer to the 7,000 to 9,000 range. And we still fell short of that, no question. But we also did have some significant offset because of higher shipments in the missile fusing product lines and were able to balance the workload and the resources. So I'd say we'd probably be closer to a$ 7 million to maybe $8 million shortfall.

Okay, thank you. And the margins on that typically at least on the JPF are above the aerospace segment average margin, correct?

Yes, they are, right.

Okay. So again, if I had built that back in, your margin in the quarter would have been in excess of the $16.3 million adjusted number that you showed. Which kind of leads to my next question. When I look at your view for the upcoming year for margin guidance, you did mention two specific things, pension and the beginning rollouts of two key military aero structures contracts. Can you attempt to quantify the margin hit from those two factors?

The margin hit for the rollout is essentially flat margins year-over-year at aero structures, otherwise we would have seen an increase. What is impacting the overall aerospace margin, if that's your question, Arnie, are a number of factors. The first is in helicopters. We have the unmanned K-MAX program in 2011, that does not repeat, and that was $20 million and reasonable margin. We also had higher sales on the Egypt upgrade program, which will not repeat in 2012. And especially bearings, we expect to see a slight margin decline due in part to product mix, and we also see bearings growing at a slightly lower rate than the rest of the aerospace group, which also impacts the overall group return. The third factor is new facility start up in Jacksonville and again impacting their ROS with start-up costs. And finally pension expense is going to be up significantly this year up almost 40% year-over-year. Put all those together, and you've got around 100-basis point impact on 2012.

That's exactly what I wanted. Thank you, Bill.

(Operator Instructions) Your next question comes from Matt Duncan, Stephens, Inc.

Good morning, guys.

Good morning, Matt.

The first question I've got is just if we could get a little bit more detail on exactly what's going on with JPF flight acceptance testing? I know you guys thought you'd be back in acceptance testing some time in November. It sounds like you did get that done, but then maybe you had a problem again later in the quarter. So sort of where does that process stand today? And then on the guidance for 2012 for the aerospace segment, what level of JPF shipments are assumed in that guidance?

Okay. Matt, we ended up getting back into production or lab testing later than we anticipated. We talked at the beginning of November, and we thought we would be in the following week. We didn't get an official restart in Middletown until mid November and actually it was early December for Orlando. So we were able to ramp up testing. We had continued in production and get the 3,700 through lat. We did have a failure late in the quarter. It probably had a slight impact, but it occurred so late in the quarter actually, Matt, that not a huge impact because we have to go through and get the product load and pack, the last operation and then also DD-250 by the government before we can deliver it. That had a small impact in the fourth quarter.

After a run of 21 consecutive lats, we did encounter another failure. At these volumes and with this product, we do expect that we will have failures. We are back in lat in Orlando now. We also continue to have very high field reliability. In fact, in the fourth quarter, we received another financial incentive award from the US Air Force because of the in-service performance of the product. As we've looked at 2012, obviously, what we would like to do is to have a more level load and more consistent product flow through the factories. So we've taken a step back, looked at it, and from the 16,500 or so fuses we delivered in 2011, Matt, we're going to step that up to about, we're going to plan for about 20,000 for 2012. We'll have that approximately 5,000 per quarter, a little bit below our peak levels. And that also will allow us to flex up to accommodate any additional FMS or DCS orders that we might get through the year. So we would like to be at about 20,000 base level, and if we can add something above that through either better production or additional orders that we need to meet for our demand, that's how we are going to look out at it for 2012.

And Neal, that begs the question, your production capability is 6,000 a quarter, you're 7100 fuses behind if you add up third quarter into fourth quarter, so that would put you over 30,000 fuses in 2012. Are you seeing demand slow, or are you really just sort of being conservative given the recent issues? And is the potential there for you to deliver the normal 6,000 a quarter plus, which you missed out on '11?

Well, I don't think that there's an ability for us to deliver much in excess of a maximum of 24,000, Matt. Obviously, we've worked with customer to determine demand. We are not seeing a slowing of demand, but we can fulfill US government demand at the levels that we just talked about. And then if we do have FMS or DCS, we can put that in the mix as well. But from running a factory, Matt, as you can imagine, it doesn't make a lot of sense for us to try and plan for 7,000 units one quarter and then 3,000 the next, 6,000 the following quarter and 5,000 the quarter after that. What we would like to do is be able to have more consistent production. We went for four quarters with fairly consistent production. That's what we want to focus on and get back to. And also, we take the commitments that we make pretty seriously. And we don't want to say that we're going to be at 6,000 or 7,000 a quarter, when we feel more comfortable that the probabilities that we're going to be closer to 5,000.

Okay. And then my last question, and I'll hop back in queue is over at KIT, if I look at what you guys are seeing in January with obviously very nice organic growth, and I do the math on the acquisitions you made in '11, it looks to me like the organic growth guidance assumption is only about 2% to 5% in 2012. That seems awfully low. Are you being conservative given that clearly, the demand in January was much better than that? Or is there something else going on there?

Our 2012 plan at KIT is some 6% organic growth. And that's based on manufacturing increase during the year of about 2%, 2.5%.

Yes. So we would like to be twice that, Matt, and then gain some share and maybe have one point from price to get us to about that 7%, so--

Guys, I guess that means you're only expecting about 40 million acquired sales, Catching is 43 million by itself, and target was made in the third quarter. What am I missing here?

It's actually closer to 50 million, Matt. We did book some sales at Catching. We had a quarter or so of sales from target. Eric can run through those numbers with you, but it was 6% organic growth.

Okay. Thanks guys.

(Operator Instructions) Your next question comes from Brett Lindsey, KeyBanc Capital Markets.

Hi. Good morning, guys.

Good morning, Brett.

In terms of organic growth within industrial distribution, that seemed to come at a little bit light verse some of the peers during the quarter. Have you seen any impact resulting from the Catching acquisition and changes in fluid power vending relationships? And then maybe any expectations for 2012 in terms of potentially replaced business?

Brett, to begin with, when you look at our business mix versus a couple of the competitors that you probably look at, as we commented, we saw very strong growth in both Canada and Mexico. In fact, double-digit growth in both of those markets. However, those make up a much smaller percentage of our overall business than our two larger competitors. The second is that our strongest markets historically have been the food processing market and also the beverage market. And the relative growth in those markets has been slower than some of the heavy industries, whether it's heavy steel or automotive that again both of our larger competitors are stronger than we are. So that's impacted the mix as well.

In fluid power, obviously, Catching came in at the right at the end of the year. We closed that December 15, so we've seen very little impact of that in 2011. During 2012, in particular during the first half of the year, we will be going through a transition of our fluid power product lines as we align to Parker as our sole supplier. So there will be, we expect some transition and probably slower growth. We would like to see that accelerate in the tail-end of this year.

Okay, great. And then in terms of organic sales trends progressing through the quarter at KIT, I mean you guys gave some good color in January. Has that pattern persisted into February as well?

Yes.

Okay, great. Thanks guys.

Your next question comes from the line of Steve Levenson of Stifel.

Thanks, good morning, everybody.

Good morning, Steve.

You talked about your content on the A-350. Is it possible to break it down a little bit, how much is bearings, how much is other stuff?

Sure. It's strongly bearings though, I can tell you that. But we have that right here so if you could give us a second?

Okay, I'll ask a K-MAX question then if you don't mind.

No, go right ahead.

Obviously, I'm glad that the military is having good success in Afghanistan, but there seems to be a fair amount of demand for fire fighting Rotocraft. Are you seeing of that for K-MAX? Do you think that would be enough to potentially get the line going again, or do you really need to wait for military business?

I think that, Steve, we really need to wait for military business, and we would certainly utilize the line once we're up for military production to provide additional aircraft for the fire fighting role as well. In fact, you are absolutely correct, though. Our operators are -- a very high percentage of them are now under long-term contracts for fire fighting. So we hope to see that, that will actually have some favorable impact in our service and support revenues for K-MAX.

And does that include international customers too or could that be additional?

That could be additional. I don't have a good -- as good a handle on the international operators.

Okay, thanks.

And on the A-350 it's about 80% bearings or content.

Great. Thank you. I'll ask one more. On A-10, can you give us an idea of what the schedule is? I see the first one has been delivered to the Air Force. What's next?

Actually, that's going to be mainly third and fourth quarter of 2012. We are looking at about 25 ship sets for 2012 right now, Steve. And again, that would be primarily in the third and fourth quarter, ramping up from that maybe double that in 2013.

Great. Thank you very much.

Your next question comes from Arnie Ursaner of CJS Securities.

Hi. Two quick follow-ups. Can you give us an update on the Blackhawk program, please?

Sure. Blackhawk continues to do well. After 177 cockpits last year, we did 163 this year, and we anticipate that we'll probably be in the 140 to 150 range this year. That's about what we said in this call last year, Arnie. And we had a few additional aircraft that came in during the course of the year, but right now we're putting it in the 140 to150 range.

Similar dollar content?

Yes, pretty close.

Okay, and then going back to Catching and the distribution side and you obviously mentioned that you have this national reseller agreement with Parker Hannifin. My sense is that's not that normal for them to give these out. Maybe you could expand a little bit about how you can take this national reseller agreement in Catching, and expand their business and perhaps their opportunities for you to do things with other distributors as part of your overall acquisition strategy. Maybe you could talk a little bit more about that.

Sure, absolutely. You're exactly right, Arnie. It is not only atypical, it is unique. This is the first time that Parker Hannifin has allowed one of the national distributors to acquire one of their premier tri-motion distributors meaning their distributors that have all three technologies. It took us well over a year of working very closely with Parker Hannifin, as we said in our prepared remarks at all levels. Steve Smidler worked with up through their Vice President and President level, and I worked with Don Waskowitz, their CEO. We really put together what we thought was a compelling value proposition for Parker Hannifin that they responded to. We were willing to forego all of the current fluid power product lines that we had offered and go to a sole source for Parker Hannifin, which I think they were pleased with. We demonstrated that we were willing to make the investment to make sure we could get all of our people trained, and also that we could invest in making sure that we could introduce their new products effectively to the marketplace.

What made sense for us was that the ability for them to offer us a national reseller agreement, enables us to train all of our people on Parker Fluid Power Products to market those products and sell those products in literally almost every geography in the US. And hopefully, move some share for Parker. Certainly improve our fluid power sales, and also to develop those relationships with local Parker distributors, and hopefully over time, demonstrate that we can deliver value and expand the number of distributor locations that we have for Parker.

Thank you, great answer. Bill, a real quick one for Bill. On the accounting side for the acquisitions you made, did you have either unusual amortization expenses or mark-ups of inventories that affected margin in Q4?

Yes, the markup on distribution is very minimal. We do tend to have high amortization on the aerospace acquisitions. I think our amortization expense this year is about $6 million in total. So yes, they are a factor.

Thank you.

Your next question comes from a follow-up of Matt Duncan, Stephens, Inc.

Hi, guys. Just sticking with Catching for a minute, can you talk a little bit about the margin differences of a Parker sale through the Catching footprint versus and other geographies where it's part of that national reseller agreement?

You know, the margins, Matt, will be lower on the resale portion of those sales; however, the return on invested capital should be quite attractive because we won't be holding the inventory.

Okay. Is there anyway to give us an order of magnitude difference or is that something you can keep under your hat?

We don't have an experience yet to know that even, Matt, and then we can decide whether we keep it under our hat.

Fair enough. On the aerospace guidance, I'm curious, Bill, if you can maybe walk through the growth-rate assumptions of your commercial business versus your military business in that aerospace segment guide for 2012.

I think the best way, Matt, to think about it is if you look at production rates on the commercial side, we would track them pretty well primarily in the bearings business. On defense, it comes down to which programs were on. We've got the two ramp ups, as you know, the A-10 and the AH-1Z, Neal gave the numbers on the cockpits, JPF, you've got those numbers. So I think you can put together a pretty good picture.

Okay, thanks. And then last thing I've got is the acquisition pipeline. Maybe if you could just give us a bit of an update on where that is today? How soon we might see you guys do another deal? And then sort of what's your appetite in 2012? Is it changing at all, or are you still pretty aggressively pursuing acquisitions?

Matt, we're still aggressively pursuing acquisitions. I think we've been really pleased with the acquisitions that we've made in recent years. And Bill commented on the relative contribution of those acquisitions to earnings. But I think that as you looked at the acquisitions that we did last year, Matt, you saw a number of them, all of them were really in the last four months of the year. And that was because we did maintain a very disciplined approach towards the valuation, and what we thought the available synergistic to us would be. So I can assure you that right now, we are very active, but we are also very disciplined.

Okay, thanks for the update.

(Operator Instructions) There are no further questions. I'd now like to turn the call back over to Mr. Eric Remington.

Well, thank you for joining us for today's Conference Call. We look forward to speaking with you again when we report our first Quarter results in May.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.