Kaman Corp (KAMN) 2014 Q1 法說會逐字稿

(technical difficulty) earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Eric Remington, Vice President Investor Relations. Please proceed.

Good morning. Welcome to the Kaman Corporation first-quarter 2014 conference call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer; and Rob Starr, Senior Vice President and Chief Financial Officer.

Before we begin this morning, please note that some of the information discussed during today's call will consist of forward-looking statements setting forth our current expectations with respect to the future of our business, the economy and other future events. These include projections of revenue, earnings and other financial items; statements on the plans and objectives of the Company or its management; statements and 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 2013 annual report on Form 10-K and the current report on Form 8-K filed yesterday evening together with our earnings release.

In addition, in our press release and on this teleconference, we will discuss certain financial measures and information that are non-GAAP financial measures. Reconciliations to the comparable GAAP measures is included in the tables of our press release, which has been filed with the SEC and posted to the investor relations section of our website, which can be accessed at www.Kaman.com.

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

Thank you, Eric. Good morning, everyone, and thank you for joining us today. We were pleased to have opened 2014 on a strong note, with solid performance across both our aerospace and distribution businesses. In line with our expectations, sales were up in both segments and about 6.7% overall.

We also delivered a significant improvement in consolidated operating profit, registering a 52% increase over the prior year. Net earnings per share were up 62% to $0.42 per share from $0.26 in the prior period.

Next, I'd like to provide additional color on the performance of each of our segments. Beginning with aerospace, sales were up approximately 14%, driven by sales from our New Zealand SH-2 program, a higher volume of Joint Programmable Fuze deliveries and increased sales from various composite structure programs.

We continued our strong execution on the New Zealand SH-2 program and earlier this month achieved a significant milestone with the successful first flight of the aircraft.

The JPF program had a strong performance as well, with deliveries of approximately 5200 Fuzes, 600 more than last year. As expected, our mix of JPF sales shifted from last year, with 95% of the Fuzes delivered in the quarter going to the US government. We received $52 million in contract awards during the quarter, including the first order under option 11 of our Air Force contract and a direct commercial sale. These increased program backlog to $131 million.

Turning to other aerospace highlights. Our bearing product lines performed well, driven by strong sales and orders in Boeing and Airbus programs. The Boeing 747-8 wing-to-body fairing program is moving forward, and the tooling recently arrived in Jacksonville from Boeing's Winnipeg facility, and we remain on track to begin deliveries to Everett by the end of the year.

Our engineering services group began work for Boeing out of our new Charleston office and continues to actively pursue opportunities with other aerospace customers. And, we continue to make progress in a number of other new structure programs including the Learjet 85, passenger and over-wing exit doors, the fixed leading edge for the Bombardier G7000 and 8000, and the Gulfstream Q280 winglet program.

The last few months also saw the successful relocation of two facilities. During April, we completed the move to our new specialty bearing facility in Germany, and we have argued begun shipping product. This new plant significantly expands our capacity to meet the growing demand of our European customer base. And we also opened our new UK tooling facility, which will significantly expand our capabilities and enable us to compete for a broader array of tooling programs.

Most importantly, through the hard work and dedication of our employees, we were able to maintain a high level of customer service during these two relocations. Today, aerospace is firmly positioned to continue to improve operational performance, successfully execute new programs and win additional work to provide steady, long-term growth.

Moving on to distribution, consolidated sales per day were up 4.7% over the prior-year, with organic sales per day up about 2%. Sales in the quarter accelerated sharply in March as demand improved and weather-related disruptions we experienced in January and February receded.

Operating margin improved 240 basis point to 4.2%. Overall, we were pleased to see the second consecutive quarter of organic growth, which gives us increased confidence that the industrial economy continues to gain traction.

Looking at the quarter's performance by end market, we achieved higher sales growth in the MRO portion of our business, with solid growth from customers in the cement and aggregate industries which have benefited from improvement in construction and housing starts.

We also saw strong demand in food processing and on several infrastructure projects. Our OEM business delivered positive growth in the quarter as well, albeit at a slower pace relative to our MRO performance.

We remain keenly focused on increasing organic growth, and year to date we have made good progress on our efforts to hire an additional 50 to 60 account managers.

And last Friday, we closed the acquisition of B.W. Rogers, a critical transaction that will significantly strengthen our relationship with Parker Hannifin in the United States.

With the addition B.W. Rogers, we now have more than 40 locations authorized to distribute Parker product directly as well as an additional 200 locations through our national reseller agreement. This acquisition increases our exposure to end markets where we have previously been under-represented including steel, shale gas and automotive.

In addition to fluid power, B.W. Rogers brings machine control and integration operations that align well with our automation, control and energy product platform. Today, we have the opportunity to welcome all the members of the B.W. Rogers team to Kaman, and we look forward to the contribution you will make to our collective success going forward.

In summary, we are off to a good start in 2014, driven by strong performance at aerospace, and are encouraged by the improving trends of distribution. Given our current momentum, coupled with the acquisition of B.W. Rogers, we are well-positioned execute on our long-term strategy.

Now, I'd like to turn it over to Rob to provide you with some additional details and color. Rob?

Thank you, Neal, and good morning, everyone. As Neal highlighted, 2014 has begun well, with both segments delivering year-over-year revenue and earnings growth. Our continued focus on operational performance led to our 160-basis-point improvement in our consolidated operating margins; 80 basis points after adjusting for the impact of the 2013 distribution restructuring charge.

At aerospace, revenues increased 13.9% to $149 million, and operating income increased 5% to $22 million. As expected, operating margins at aerospace were modestly lower than the prior year. The primary factors affecting the year-over-year margin comparisons were an increased sales mix of lower-margin aerostructure programs, lower levels of nonrecurring retrofit bearing projects and expenses associated with the opening of our new facilities in Germany and the UK.

We expect aerospace margins to improve through the course of the year driven by higher specialty bearing product line sales, and more favorable mix of JPF sales and improving margins for our aerostructure programs.

Distribution posted a solid quarter, with sales increasing 3% over the prior year to $265 million. Contributing to our margin improvement was continued organic growth in the absence of last year's $3 million restructuring charge.

I would like to address our balance sheet and liquidity position in light of the B.W. Rogers acquisition. At the end of the first quarter, our debt-to-capitalization ratio stood at 35.9%, relatively flat with our year-end position as we saw improved year-over-year cash flow and earnings.

We funded the acquisition with proceeds from our revolving credit facility and, post the transaction, continued to maintain a conservative financial profile.

Free cash flow in the quarter improved by $22.8 million over the prior year, driven by higher earnings and lower working capital requirements. This improvement was partially offset by higher pension contributions of $5 million as we completed our full-year funding of $10 million during the quarter.

Capital expenditure levels were in line with our [limitations] as we continue our infrastructure and ERP investments during 2014.

I would like to turn to our outlook, which has been updated to reflect the B.W. Rogers transaction. Starting with revenues, we expect B.W. Rogers to contribute between $65 million and $70 million in 2014. On a GAAP basis, we anticipate B.W. Rogers' operating profit margin to be neutral to our base business. However, built into this assumption are $1.5 million of one-time acquisition-related items and $1.7 million in non-cash, intangible amortization expense we expect to incur in 2014.

Our increased interest expense projection reflects increased debt levels associated with the transaction. And lastly, we expect B.W. Rogers to contribute approximately $3 million of free cash flow during the year.

The transaction is expected to be modestly accretive on a GAAP basis and highly accretive after excluding one-time and future non-cash expenses. Pro forma for the acquisition, we continue to maintain our view that approximately 60% of our full-year consolidated net earnings will be recorded in the second half of the year, with earnings billed in sequentially throughout the year.

Overall, we are pleased with our start to the year and are confident we will deliver on our outlook.

With that, I will turn it back over to Neal. Neal?

Thanks, Rob. In closing, I'd like to say that we are pleased with our first-quarter results and believe they provide the foundation for improved performance as we move through the balance of the year.

With that, I'll turn the call back over to Eric. Eric?

Thanks, Neal. Operator, may we have the first question, please?

(Operator Instructions) Arnie Ursaner, CJS Securities.

The obvious question is you mentioned that March saw a dramatic acceleration. Can you comment on April?

Sure, Arnie. Good morning, it's Neal. We did have a significant acceleration in March, as we commented. We haven't finished April yet; we finished our month on Monday. We don't have final results. But we're up in the 2% to 3% organic growth range. Again, not final results, but we were pleased with the continued strength that we saw through April.

Okay. And my second question or follow-up is you on the last call mentioned the build-out of your sales force targeting 50 to 60 during the course of the year. How many have we added so far? And maybe give us your best sense of how this will build during the year.

Arnie, good question. We finished -- in mid-April, we had added about 15 to 17 people. So we were about on track. We would expect it to be linear through the year; probably completing in early fourth quarter just so that we can bring people on in a staged basis and bring them through the on-boarding process, the training process effectively, and get them out and get them effective. You know, that may vary a little bit obviously based on if we find somebody that's clearly very talented and can add to our expertise in the field; we will go out and get those people right now.

A quick follow-up if I can. What margin impact or negative impact from this build this embedded in your guidance for this year?

Hi Arnie. This is Rob. In terms of our guidance, as we talked about on our year-end call, we expect hopefully hit about a break-even run rate on this initiative as we exit 2014. So it will have a negative drag. We haven't quantified how much, but it will certainly be a negative drag on margins in 2014. And we're hoping to turn that in late 2014 or 2015 to [break] given an obviously positive going on beyond that.

Thank you very much.

Matt Duncan, Stephens Inc.

Neal, just looking at the organic growth at KIT, I know you guys have commented on the last call that it was tracking, I believe, negative in January and February. You said you were up 2% to 3% so far in April. A couple of things to dig in here. How much was March up? And do you think there's any kind of drag in the month of April due to the timing of the Good Friday and Easter holiday falling in April this year versus March last year?

I'll start with how we saw it trend through the first quarter. We were down slightly in January. We were down mid-single digits in February on an organic basis year to year mainly in the South, Southeast and Northeast. So, again, we attribute a lot of that to the harsh weather conditions.

We were up strong single digits in the month of March, and that's what brought us to that 2% positive organic growth for the quarter. And -- actually this morning, I was thinking about whether or not the Good Friday-Easter holiday may have impacted us. Matt, it may have a little, but I don't know that we can really attribute much to that in the month of April.

Okay, fair enough. Rob, just a couple of things on the guidance. It sounds like you're still expecting a pretty good ramp as we move through the year really in both segments; especially in aerospace because I know in distribution typically just organic sales will be down a little bit in 4Q from a 3Q.

Can you help us maybe on the aerospace side looking at the ramp in your operating margin especially from the 14.8% you had this quarter? How should we think about how quickly you can get into the guidance range for the full year? And I'm assuming, then, that the fourth quarter is probably going to be above that full-year guidance of 16.5% to 17%. I'm just trying to get a little bit of help if I can on sort of how that ramp is going to look.

Sure, no, that's a very good question. To your point, we've maintained the guidance for the full year for aerospace between [$640 million] and [$660 million] revenue and 16.5% and 17% margin. So clearly the math is fairly clear that we have to average about 17.5% over the remainder of the year to achieve our outlook -- or the mid-range of the outlook. And we do anticipate in aerospace based upon anticipated increased sales of bearing products as we go through the year as well as timing on JPF DCS sales that we will see the margins increase sequentially over the remainder of the year.

There will certainly be higher margins in the second half of the year, which is why we're estimating 60% of our consolidated net revenues will be earned in the second half -- consolidated earnings.

Okay. Thanks, Rob.

Ed Marshall, Sidoti & Company.

So, I wanted to ask about the Jacksonville facility and the construction that's going on in the wing-to-body program in Jacksonville. I'm just curious where we are on that, what the drag is potentially on the margin, and when that will subside.

Ed, we just received the tooling from Boeing Winnipeg into our Jacksonville facility during the month of April. So we will begin placing it, et cetera, in the second quarter. We don't anticipate making our initial deliveries until the fourth quarter of 2014. So we will have some operational drag and some overhead impact but very little revenue that would be realized in 2014.

I think that what we can anticipate is as we begin to ramp that up through 2015, it would likely have somewhat of a negative impact on aerospace margins in the first half, perhaps in 2015, as is typical when we have lower margins as we start up new programs. But I wouldn't really expect any significant impact from either a revenue or an earnings headwind in 2014 simply because of the timing of when we'll be starting up.

And the AH-1Z that's running through that program as well?

The AH-1Z is actually in the same facility in Jacksonville as well. That has begun to ramp up pretty nicely. I think actually we're in subassembly of aircraft number 10, so we should begin hitting some fairly consistent delivery rates of about one month going in towards the tail end of 2014.

So the guidance here -- just to kind of clarify, you expect gradual improvement throughout the year. One is based on mix, but also as you start to get down the learning curve on some of these particular programs that you signed on over the last few years and that we should gain some good momentum heading into 2015, albeit you'll be carrying in some of that 747-A (multiple speakers).

I think that that's right. And we should think about it, Ed, in two ways. We'll have certainly some continued acceleration in our underlying structures programs -- AH-1Z, Lear 85, the G280 winglet -- but also a big contributor to the increased margins in the third and fourth quarter. And aerospace will be the mix change as well as we have stronger bearing sales and also a higher percentage of our JPF product going to direct commercial customers at a higher margin.

What exactly is creating the seasonality in 1Q in aerospace that we've seen play out maybe over the last two to three years? Is it mix, and is it just timing of shipments? And was there a shift in customer demand -- or rather customer that you had that pulls demand a little bit differently? What's causing the first quarter to kind of shift on mix?

You know, in Rob's comments, Ed, he tried to highlight a couple of those. But if we were to look year to year, the biggest change probably impacting our -- well, there were three that Rob identified. But the biggest one was probably the non-recurring specialty bearing retrofits that we had in the first and second quarter of last year.

I think we commented last year that we had something on the order of $10 million to $12 million of non-production retrofits that went through the facilities in the first half of last year. And while we get some of that each year, Ed, without question, that was a very high number for us.

And also, one of the risks that we had coming into 2014 clearly was the relocation of the two facilities -- our new specialty bearing facility in Germany as well as our new tooling facility in UK. We moved into each of those in the first quarter. We're ramping up production now during second quarter. So, again, that naturally causes us some headwind in the first quarter of this year as well.

Okay. Thanks.

Jeff Hammond, KeyBanc.

So just to be clear on the margin in aero, it's going to be much -- you'll have some improvement into 2Q, but it's going to be much more second-half weighted?

Yes, Jeff, I think that's a fair assessment. We will see some improvement, we expect, in the second quarter, but certainly the bulk of the uptick in margin will be seen in the second half.

And then the growth rate you had in the first quarter, obviously very good in aero relative to your full-year guidance. Is that just kind of timing around the SH-2G? Or how should we think about cadence of growth rates in aero for the balance of the year?

I think the way to think about it is we will see some slight improvement quarter over quarter in the aerospace top line. Certainly, the larger acceleration will be on margins just due to product mix.

Okay, okay. And then on distribution, I think you said March was high single digits and April was low single digits?

That's right (multiple speakers).

Do you think there was some catch-up in March from January and February, and the underlying growth rate trend is kind of in that low single digits? Or how should we think about that?

You know, I think you're right, Jeff. I think there had to be some catch-up in March. And our return to low single digits is probably right. If you think about our outlook for the year, it's between 3% and 6% organic growth, so that's kind of -- you know, that's clearly our expectation.

Okay, okay. Great. And then any other kind of puts or takes within your aero forecast, or is at all kind of falling in line with how you thought the year would shape up?

Jeff, I would say, given the number programs that we're involved, there's always some puts and takes during the course of the year. Especially as it relates to timing because sometimes it's difficult to tell when something will ship due to unforeseen circumstances. But I would say overall the year is progressing so far as we had anticipated.

Okay, great. Thanks guys.

Scott Graham, Jefferies.

Neal, I was hoping you would be able to kind of give is that typical walk-through you give us on sort of updating you on programs that you're working on, things that you are hoping can potentially book in 2014 or 2015 both on the commercial and defense side.

Well, Scott, it's a good question. The key things for us are, one, as we've talked about, the Boeing 747-8 wing-to-body fairing bid that we've recently been awarded is probably the best example of our effort to bring together the combined capabilities of our engineering, our composites in metallic detailed parts manufacturing as well as complex assembly.

So for us to be able to work more effectively with Boeing and win additional outsource work from them is probably our highest priority right now. We've also, as you know, opened a new engineering facility in Charleston, so we were very pleased to be able to win additional work with our engineering surfaces business with Boeing as well.

And clearly, within our specialty bearings business we continue to work across a broad range of platforms. In particular, our work with Airbus continuing to grow content on A350 and actually a number of their helicopter programs now both in the US and Europe.

And then as we kind of pick through some of the programs that we've won but we expect to see ramping up, they would include the Boeing P-8. We've commented on the success of the Gulfstream G280, and that continues. And then we also have recently worked with Boeing to extend our Boeing 767 and 777 content.

So those are the kinds of programs -- and then of course the K-MAX, both unmanned and potentially manned as well. We've targeted likely a range of 10 to 15 new orders to restart the line. We continue to work to see if there's sufficient market demand for us to do that and work with our partner Lockheed Martin on the unmanned program as well. So a pretty broad list of programs. I think that that's probably the strength of our portfolio of capabilities.

That's all I had. Thank you.

Steve Levenson, Stifel.

Just a follow-up on K-MAX, I guess there was a demo recently; an unmanned demo with at least one other helicopter. Can you give us an update on that and where you think that might lead?

Sure. There was. It was the (inaudible) program. In fact, we were very pleased with our performance on that program. We got the aircraft back a couple of weeks ago. We are actually bringing it down for maintenance and refitting it for additional demonstrations in the future.

You know, obviously we -- there's been some recent press about competition. Competition is a good thing. It proves to us that there's a market for it. And we think that the unique capabilities from a cost -- both acquisition cost and operating cost clearly from a performance perspective in terms of heavy lift. And finally, its proven track record in Afghanistan puts us in a pretty good position on those competitions.

Okay, thank you. Can you give us a little update, too, on the outlook for BLACK HAWK? Is that sort of a volatile program these days?

You know, I -- you are right, Steve. It's an interesting one because over the past few years, while our aerospace business overall has grown pretty nicely, the unit output of BLACK HAWK has gone from about 177 back a couple of years ago to probably on the order of 100 this year. And that business continues to grow. So I think it underscores the strength of the diversity of capabilities in that business again.

You know, we think we're going to be in the 100-ish range and probably will be for 2014. It might gradually go down over the course of the next couple of years, but we feel very good about that program. We've recently in the last couple of quarters -- end of last year shipped our 1000th unit. I think it proves that we are a really strong partner for Sikorsky. And clearly that remains the aircraft of choice for the US services.

Steve, if I could -- Steve, just one other point that I'd like to make there is we certainly play close attention to what's happening in a lot of these end markets, which is why we've invested in our regional sales director model that we talked about on prior calls. That we have a very active pipeline to basically absolute replenish those areas where we see potential declines in future demand.

Thank you very much.

(Operator Instructions) Arnie Ursaner, CJS Securities.

Hi. Going back to the JPF for a second, you mentioned 95% of the sales in Q1 were to the US government, which is your lowest margin business. As you look to the balance of the year, do you have any better feel for how the mix will likely shape up for the next couple of quarters?

Sure. Arnie, this is Rob. Going forward, we do have a number of expected shipments later in the year on the [DCS], so we would expect that mix to obviously come down from 95%. It won't be as high as last year based on current outlook, but certainly the mix in the forward quarters will be perhaps more similar to what you've seen in some of the quarters last year.

Okay. And Sikorsky recently demonstrated an unmanned BLACK HAWK. How do you see that perhaps playing out for you as an opportunity for you?

Arnie, that's interesting. We obviously were also very interested when we read that release. There's two parts of that. One, I would go back to our earlier -- my earlier comment that I think it demonstrates that there's a number of companies, Sikorsky is one of them, that realizes there's opportunity for unmanned cargo resupply.

The BLACK HAWK is unique because, for us, we also build that aircraft in Jacksonville. So as they are successful with the US government for either manned or unmanned programs, that hopefully will be good for us as well. And also as they continue to effectively market that aircraft internationally, if some of that demand is met by US production, that's a positive for Kaman as well.

I don't know if you mentioned it or not. Did you discuss the actual revenue from the SH-2G in the quarter?

No, we didn't.

We shipped 21 sets in the first quarter, Arnie. (multiple speakers) Oh SH-2, I apologize. I thought you meant (inaudible).

Though we have an annual revenue goal, what was the revenue in the quarter?

It was fairly in line with the guidance that we provided, Arnie, of about roughly $10 million quarter.

Okay. Thank you.

Robert Kirkpatrick, Cardinal Capital.

What are you going to do with the C-17 assets now that it looks like production is going to ramp completely down?

You know, Rob, another obviously good question. Two parts to it. One, we've got some really good mechanics that work on the C-17 line today. And the good news for us is that, with the ramp-up of the AH-1Z, we are able to transition a number of them over to AH-1Z line, which is just clearly a positive.

We're trying to determine how we can best utilize the floor space that will become available in the facility as we ramp down the C-17. It's not an enormous amount of floor space, as you can imagine, because we have been doing that for a long time and it really leaned out the area. But, again, we're working really hard to win new work to put into that -- into the Jacksonville facility. And we feel pretty confident about the pipeline that we have there.

So it's not a lot of floor space. We've got really talented folks that we can use on other programs. We may be able to utilize the equipment in another area. But, overall, we have anticipated that going away for a while, Rob. And while we had hoped originally for 10 ship sets, the fact that it comes in at seven for us for the year is not something that we're going to lose a lot of sleep over.

Great. Thank you so much.

Gentlemen, there are no further questions. I would now like to turn the call back to Mr. Eric Remington for closing remarks.

Okay. Thank you, Dave, and thank you all for joining us for today's conference call. We look forward to speaking to you again when we report second-quarter earnings in July.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.