Kaman Corp (KAMN) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2018 Kaman Corporation Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to James Coogan, Vice President, Investor Relations. You may begin.

Good morning. I'd like to welcome everyone to Kaman's Third Quarter 2018 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 third quarterly report on Form 10-Q 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 Form 8-K.

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

Thank you, Jamie. Good morning, everyone, and thank you for joining our call today. Our results in the third quarter were impacted by a number of factors, which led to our lower operating profit, including the timing and mix of sales as well as a number of nonrecurring items.

Based on these results and the expected shift of additional sales into 2019, we are revising our outlook for the remainder of the year, which Rob will detail later in the call.

Starting with our results for the third quarter. The positive momentum we built at Distribution in the first half of the year continued as we focused on top line sales growth and improved operating margins. Sales at Distribution increased 6.8% to $285.9 million or an increase of 5.1% when measured on a Sales per Sales Day basis. Sales per Sales Day totaled $4.5 million for the quarter, our highest daily sales level since the third quarter of 2015.

Sales in the month of October have continued this positive trend with preliminary Sales per Sales Day up 8% over the prior year. We experienced broad-based strength with increases in 8 of our top 10 end markets with the remaining 2 end markets relatively flat compared to the prior year.

National Account activity increased almost 20% over the prior year as we continue to transition a number of new customers to Kaman. Sales increased on a Sales per Sales Day basis across all 3 of our major product categories, highlighted by fluid power sales growth of nearly 10% in the month of September. Our bearings and power transmission product platform experienced its fourth consecutive quarter of year-over-year sales growth, an especially encouraging sign as this is our largest product offering and provides the greatest opportunity for operating leverage moving forward.

Operating margin was 5.1% or 5.3% when adjusted for the approximately $450,000 in restructuring and severance costs recorded in the quarter. This is a 60 basis point increase over the second quarter of 2018 and similar to the second quarter, includes the continuing trend of higher group health care costs as well as the remaining costs associated with our onetime employee incentives. The impact of these 2 items on a year-over-year basis was $600,000 and $500,000, respectively. Absent these charges, our adjusted operating margin of 5.3% would have been approximately 40 basis points higher.

Aerospace ended the quarter with a record backlog of $870 million, up over 40% from year-end, highlighted by $488 million in new orders for the Joint Programmable Fuze and AH-1Z helicopter. In addition, demand across our specialty bearing products remains very strong with incoming order rates in the third quarter increasing approximately 20% over the prior year with a 29% increase in orders for our self-lubricating bearing products and a 34% increase in orders for our engine aftermarket components.

During the quarter, our engine aftermarket components miniature bearings and missile fuze programs, including Harpoon and Tomahawk, continue to deliver positive year-over-year performance. This was offset by JPF sales mix, which dramatically shifted to U.S. government sales compared to the prior year, which was almost entirely DCS sales. This shift was the primary contributor to the lower sales and adjusted operating margin in the quarter versus the third quarter of 2017.

In addition to JPF mix, aerospace sales for the quarter were also impacted by the timing of K-MAX and self-lubricating bearing products deliveries, which also shifted out of the quarter. Starting with the K-MAX. An aircraft delivery was delayed due to weather conditions, which prevented us from completing the required predelivery flight test planned for late October -- excuse me, late September.

The flight tests were completed in early October and our customer has taken delivery of the aircraft. Sales and margin for our self-lubricating bearing products were lower in the quarter as issues at 2 outside suppliers caused shipment delays. In one case, a supplier experienced a quality issue that has been resolved, but delayed shipments and led to higher period costs, including higher scrap.

Additionally, capacity constraints at a second supplier resulted in increased lead times, again, impacting deliveries in the quarter. In both instances, we've resolved the issues. However, a portion of the impact from these delays will continue into the fourth quarter with complete resolution expected in early 2019.

Turning to our U.K. operations. We have undertaken actions to improve the performance of this business, including the restructuring announced in the third quarter of 2017. These actions are resulting in improved operational performance. However, in the third quarter, we assessed the assets for impairment, which resulted in noncash charges in the period, which Rob will review later in the call.

During the quarter, we were very active in Corporate Development, including extensive due diligence on a significant specialty bearing company. In the end, we elected not to proceed with the acquisition, but continue to actively pursue opportunities to expand in the specialty bearings and engineered products markets.

Moving briefly to our outlook, which Rob will cover in more detail. The primary change in our expectations for the year relates to our JPF DCS orders. In our prior outlook, we expected to make initial shipments in the fourth quarter. However, due to the uncertainty around the timing for receipt of U.S. government approvals and the limited shipment windows due to the nature of the product, we have elected to move this transaction out of 2018 and into 2019.

We are continuing to move forward with production and will ship in the fourth quarter of 2018, if possible.

Before I turn the call over to Rob, I want to note that I'm encouraged by the underlying fundamentals of each business, and although the shift in timing for certain sales at aerospace has reduced our full year outlook, the record backlog in aerospace, strong uptick in corporate account activity at distribution and the implementation of cost savings initiatives across both segments position us for strong performance in 2019.

Now I'll turn the call over to Rob to take you through the financials and our updated outlook for the year. Rob?

Thank you, Neal, and good morning, everyone. I will begin by discussing our performance for the quarter and finish with an update on our revised 2018 outlook.

Consolidated sales in the third quarter decreased 0.9% to $443 million over the prior year. Higher sales volume at distribution and the contribution of $10.8 million in sales from the adoption of the new revenue standard were offset by lower sales at Aerospace.

During the quarter, we generated consolidated gross margin of 29%, modestly lower than the prior year. Distribution gross margins remain at strong levels, while the gross margins at Aerospace were lower than the prior year due to Joint Programmable Fuze product mix and the production issues from the outside suppliers, which impacted the performance of our self-lubricating bearing products.

The sequential increase in our effective income tax rate for the third quarter was primarily due to the other intangible assets impairment charge we incurred in the current period with no associated tax benefit. This increase was partially offset by the tax benefit we received from the $10 million additional pension contribution made in the third quarter.

GAAP diluted earnings per share was $0.05 compared to $0.58 in the corresponding period in the prior year. The decrease was largely due to the noncash, non-tax deductible impairment and inventory charges we recorded for our U.K. operations as well as the lower operating profit at Aerospace. As discussed in our earnings release, we had a number of adjustments to our third quarter results and I would like to take a moment to review these items starting with the charges at our U.K. operations.

As Neal mentioned, we were required to assess the tangible and intangible assets for impairment in the period, resulting in 2 noncash, non-tax deductible charges totaling $10.7 million or approximately $0.39 per diluted share. These charges included a $10 million impairment charge related to acquired intangible assets and a $700,000 write-off of inventory.

Our restructuring actions continued in the third quarter where we recorded $1.7 million in expense or $0.04 per diluted share. Of this amount, we recorded approximately $450,000 of expense at distribution associated with the restructuring actions we announced on the second quarter call and $1.2 million of expense at Aerospace associated with our previously announced actions at our Composite Structures facilities in the U.S. and U.K.

In addition to these items, we accrued $1.3 million or $0.03 per diluted share associated with employee tax related matters at one of our foreign operations and incurred $2.2 million or $0.06 per diluted share of additional corporate expense in the third quarter associated with our Corporate Development activities.

The total of these adjustments led to adjusted diluted earnings per share for the period of $0.57, a decline of $0.12 from the adjusted diluted earnings per share of $0.69 recorded in the prior year.

Moving to our segment results for the quarter. Aerospace sales decreased 12.4% to $157 million compared to $179 million in the prior year period. The decrease in sales for the quarter was primarily due to lower direct commercial sales of our Joint Programmable Fuze to foreign militaries and lower K-MAX sales.

Operating margin for Aerospace was 4.6% or 13% adjusted primarily related to the 2 noncash, non-tax deductible charges recorded at our U.K. operations, the restructuring and severance expense and the employee tax related matter. The decrease in adjusted operating margin for the quarter was driven in part by the sales mix of Joint Programmable Fuze and lower profit on our self-lubricating bearing products, offset by increased profit on our missile fuze programs, our engine aftermarket components and miniature bearing products.

At Distribution, our sales increased 6.8% to $285.9 million compared to $267.6 million in the prior year period. Daily sales for the quarter totaled $4.5 million per sales day, a 5.1% increase over the prior year and our fourth straight quarter of year-over-year Sales per Sales Day growth.

Operating margin performance was 5.1% or 5.3% when adjusted for the approximately $450,000 of expense related to the restructuring actions recorded in the period. In addition to these restructuring costs, our operating performance was impacted by 40 basis points from the continued year-over-year increase in group health costs and the expense associated with our onetime employee incentive with an additional 30-basis point reduction coming from the change in pension accounting.

During the third quarter, we recognized the remaining expense associated with our onetime employee incentives. Of this amount, in the quarter, approximately $500,000 was recognized at Distribution and $500,000 at Aerospace. There will be no further expense associated with these incentives going forward, providing a sequential benefit to the operating margin in each segment.

Our cash flow from operations were $33.7 million leading to free cash flow of $26 million in the quarter and bringing our year-to-date free cash flow to $104 million, a 333% increase over our free cash flow performance at the same time in the prior year. This result inclusive of $30 million of discretionary pension contribution was inclusive of $30 million of discretionary pension contributions we've made in 2018.

Moving to our outlook for the balance of the year and starting with distribution. With 3 months remaining, we are revising our sales and margin outlook. We now expect sales in the range of $1.135 billion -- excuse me, that's $1.115 billion to $1.155 billion and operating margin of 4.8% to 4.9 -- or 4.9% when adjusted for the restructuring and severance costs. Let me just make a correction, that is $1.135 billion, apologies.

At Aerospace, we are revising both our sales and profit outlook for the year and now expect sales in the range of $705 million to $725 million with operating margins of 12.4% to 12.7% or 14.9% to 15.1% adjusted. A significant portion of the downward revision in our sales and margin expectations is the result of a shift of product sales out of 2018 into 2019 most notably, DCS shipments, delayed shipments for our bearing products and the completion of our SH-2G program with Peru.

These items have an outsized impact on our operating margin performance for 2018 relative to their sales contribution. We are increasing our expectation for GAAP corporate expenses, $62 million or $60 million when adjusted for the $2.2 million of costs associated with our corporate development activities incurred in the third quarter.

The adjusted corporate expense number is consistent with our prior corporate expense outlook for the year. Also, we are increasing our expectation for our effective tax rate for the year to 27% to account for the 300 basis point impact on our full year 2018 tax rate from the noncash, non-tax deductible impairment and related charge at our U.K. operations.

Finally, during the third quarter, we made an additional $10 million contribution to our pension plan that we had discussed during the second quarter. As a result, we're slightly lowering our expectations for operating free cash flow through the year to $175 million to $200 million or free cash flow of $140 million to $165 million to account for the contribution.

Before I turn the call over to Neal, I wanted to note that as a result of our strong cash flow generation in the year, we have paid down over $90 million in debt, while reducing our debt-to-cap ratio by 630 basis points to 32.3% and ended the quarter with a 2x leverage ratio. With the strength of our balance sheet, we're well positioned to continue -- to make continued investments in our ongoing operations while seeking acquisition targets to expand our specialty bearing and engineered product offerings.

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

Thanks, Rob. In closing, I wanted to highlight that while we encountered several issues during the third quarter, we remain encouraged by our record backlog, higher incoming order rates, sequential improvement at distribution and strong cash flow. These factors, when combined with our strong balance sheet, put us in position to finish out 2018 and enter 2019 on a strong note.

Now I'll turn the call back to over to Jamie. Jamie?

Operator, may we have the first question, please?

Our first question comes from Pete Skibitski with Alembic Global.

Maybe we can start with the impairment in the U.K. Just some more color on that. Is that related to the composites business over there that's being restructured? And is that Brexit related? And -- there must be some sort of program that kind of drove that impairment. Can you give us some color on that?

Yes. Pete, this is Rob. As part of our normal process, we were reviewing the financial performance and other factors involving the U.K., which required us to evaluate our intangible assets at the U.K. And as a result of that, we did take the charge. The charge does relate to our composites business, primarily. I'm not really at liberty to talk specifics around what the customer or the program in terms of that significant customer, but certainly, had an impact on the business.

Okay. Okay. And then on the supplier issue with the bearings. I think one of the other guys in the space has mentioned some capacity issues with suppliers as well and they've actually talked about in-sourcing certain things like heat treatment and stuff like that. They -- have you guys considered that? Or are you confident at this point that the 2 supplies are just really 100% kind of rectifying the situation and won't have another issue. Because obviously, aerospace rates are going higher over the next couple of years, capacity is going to be tested for sure.

Pete, it's a good question. Actually, you're right. The -- some of the supply chain issues have rippled through a few of the companies in the industry and in the bearings industry, specifically. What we've done is twofold. One is that we've been able to certify an additional supplier, so we've been able to increase essentially our capacity through that. But also, we do have in our capital plans additional investment here in our Bloomfield campus to add or in-source some of that plating capabilities. So you're right, we would've liked to have -- we recognized that this was going to be an issue. As you know, we've been investing pretty heavily in our specialty bearing product lines both in capital and equipment space here. Also this year, we put in our new really state-of-the-art test rig for our flexible drive shaft product lines, and so, this was in our lineup of investments and probably a little bit later than we would have liked, given where we are today. But we are confident that we've been able to certify an additional outside supplier that will help us work through the near-term bottleneck.

Okay. Okay. So it sounds like your plans are already underway there, so that's great. My last question and I'll get back in queue. On the DCS fuses, I guess, the -- number one, I thought most defense companies before they put these things in firm backlog, already get government approval first. Maybe I'm wrong on that, but could you speak to that? And I guess, number two, it's -- these are big contracts. How can you be sure that you're actually going to get government approval, and you're obviously in kind of -- with some of our international partners, in pretty tense relationships right now?

Pete, it's Neal. I'll answer that. First of all, I think that we put it in our firm backlog when we have a signed, completed contract. And I think that, that is typically what most defense companies will do. In fact, some put in contracts on expectation and we've never done that. So I don't think that our practice is atypical and it's certainly not atypical for what we have done historically. And I know that this is a question that you have, Pete, and a number of others do. So I'm going to try to answer it in as complete a way as I can, given as you understand that we have certain things that we know today and also that we have certainly some contractual constraints as to what we are allowed to say. So I'd start by saying, first, we -- remember, we are authorized by the U.S. government to market the JPF to the U.S. government and 36 foreign allied countries. So we are authorized to market this to 36 foreign countries. That authorization is an important first step. Second, through changing administrations and geopolitical situations over more than a decade, an export license for the JPF has at times been delayed or taken longer to go through the approval process, but it has never, I repeat, never been denied. Also as we entered the year, we were working a range of DCS opportunities and we've been successful with several of them. Two of them, as you know, were large enough that we actually issued press release, as is our practice. While we have limitations, I recognize exactly as you said, it's a challenging environment and we'll only comment that the large multi-year contract we entered into early this year is not, I repeat, not, with the Kingdom of Saudi Arabia. Third, as you know, our overall JPF pipeline is very strong. We will complete deliveries of 30,000 units under option #13 with U.S. government in early 2019. We'll then begin deliveries on Option 14 with an initial quantity of 20,000 units, which is -- and similarly to what we experienced with Option 13. We expect an additional 15,000 units. So that will be a total of 35,000 units on Option 14. Also late last year, public notice was given for both option #15 and 16. Both options have had the range of units required increased from an initial range of 10,000 to 25,000 units to a range of 10,000 to 40,000 units. So more in line with what we experienced with options 13 and 14. Those orders are expected in the first half of 2019. So this reflects demand into 2022 for existing U.S. government orders only. So, I think that clearly we remain confident that we'll receive the approvals required to fill our contracts, but we also remain well positioned to deliver solid performance based on both our current and expected orders with the U.S. government until these approvals are granted.

I appreciate all that color very much, Neal, especially the comment on which customers it's not, which I think is important, especially since I think you've got about $95 million in cash advances on that contract, so I think it's important to understand the situation. So I'll stop there and get back in queue.

Our next question comes from Seth Seifman with JPMorgan.

Guys, I wonder if you could talk a little bit and I realize it is probably not the easiest thing to talk about, but the transaction that you explored in the quarter, that didn't move forward. I think you talked in the past about opportunities for capital deployment, and I think we see that as -- M&A as a place where you're focused and the bearings business in particular. And so when you look out at the landscape now kind of what you see that's still out there. What kind of gets in -- what's kind of gotten in the way here? Is it valuations or something else? And I -- any additional color would be great.

Sure. Seth, you're exactly right. We've been very active in assessing what market opportunities we have, where the growth is across both our aerospace and distribution businesses for that matter. What we've really focused on within the aerospace business right now are those specialty bearings and engineered products companies where we think we can both add value with our existing capabilities and expand our business. This was a very good business. It would have actually been the largest acquisition we would have ever done as Kaman. And it was -- it actually did not turn out to be a valuation issue. There were other liabilities associated with the company and with the transaction that we did not feel comfortable accepting. So we have other opportunities, a very full pipeline that we're working on. We were disappointed. Again, if it had been a valuation issue, we would've been very clear today that it was a valuation issue. We've said that in other instances, Seth. We were comfortable with the actual valuation, but not the under -- some of the underlying liabilities.

Okay. Great. And as you look out there now, how do you see the landscape?

We see the landscape as still very attractive to us. There are certainly some very large players in those markets, but there is also clearly a number of smaller mid-sized acquisitions that would fit really well with us. I think the best example we could point to, Seth, would be the acquisition of GRW now a few years ago. It really complemented our capabilities very well. It extended our reach into new markets like health care and automation. And as we commented earlier, the incoming order rates for that business have been really, really strong for us. So those are the kinds of opportunities we see out there and we just like to capitalize on a few more, and we certainly have the balance sheet strength to do it.

Our next question comes from Edward Marshall with Sidoti & Company.

Looks like he might be on another call, do you want me to move on to the next questioner?

Sure.

Yes, please.

Our next question comes from Chris Dankert with Longbow Research.

I guess, we quick move to the KIT for a moment. Any uptick there on pricing? I think initially you were looking for positive 1% or 2%. Has that changed as you moved through the year, inflation's picked up, et cetera, just any update on price would be helpful.

Chris, it hasn't yet. We went through the analysis as you would expect in preparation for the call. We go through it at a monthly basis, but we took it to a little bit a few more decimal points. But we still see that maybe the 1.5% to 2.25% range right now, but we wouldn't be surprised if we see that accelerate somewhat in the fourth quarter. But from the analysis that we've done, right now, we're still in that 150 basis points to maybe 2.25 (sic) [225] basis point due to tariffs, price combined.

Got it. Got it. And then, just kind of walking through the K-MAX, little bit of housekeeping, I guess, trying to make sure I've got it correct. So you had one shipment in the first quarter, I think, 2 shipments in the second quarter. Did you actually move an airframe in the third quarter?

Yes. Chris, we actually moved an airframe we expected to be delivered in the third quarter, which we touched on, that got moved to the first week of the fourth quarter just due to weather conditions limiting our ability to conduct the required flight tests.

Okay. Okay. But the plan is still then to get to 5 or 6 for the year?

That's correct.

Okay. Okay. And then if you can, obviously, Peru, the SH-2 program there wrapping up, great program. I guess, just any update on negotiations with Egypt and just kind of how their potential retrofit is progressing and negotiations there?

Chris, it continues to move forward. As you know, these programs take a while to come to fruition and get through the FMS process in this case. But we have had the representatives from Egypt in during the third quarter here and we have also had our team in country. So yes, it continues to progress and certainly, we would hope through the course of '19 that we would be able to solidify that contract. Because you're exactly right, it would be significant for us and those are really profitable programs for us.

Our next question comes from Steve Barger with KeyBanc Capital Markets.

This is Ryan Mills on for Steve. So when I look up at updated guidance, it looks like you pulled $0.50 to $0.60 forward into 2019. And I know you typically don't provide out your color this early, but just curious if you could give a little bit of color on the cadence next year? Should we assume that, that $0.50 to $0.60 flows through in 1Q '19. And I know typically, the cadence is more back half weighted. Should we assume that it's not to the degree it is historically next year?

Yes. Ryan, this is Rob. Good question. A couple of things. I'm not going to -- at liberty right now just to give a lot of information on cadence as it relates to 2019. I mean, we'll definitely provide more update on our fourth quarter call. But what I can tell you is, about -- when we look at the 50 or so cents that you're referring to, we look at about 75 or so percent of that is really kind of shifting into 2019. And based on what we know today, I think a good portion of that would likely occur in the first half. But as we get through the balance of this year and have more visibility, we'll be able to provide more color on that.

Okay. And then, turning back to distribution, nice sales growth. The incremental was about high single digits. So my question is, should we assume that's the new run rate? And was there any ramp up cost during the quarter with the new National Account wins?

Yes. No, a couple of things. Good question. Yes. So the plate number is, call it, 8% or so in terms of the drop through. But when you adjust for the employee incentive, severance costs, the impact that we were certainly working on group health, that drop through dropped, it's more in the mid-teens; without group health, it is in the low teens. So we think that's a more normalized rate to consider. Not -- this is not the new normal.

Okay. And then could you talk about monthly trends during the quarter? And what you're seeing so far in early 4Q '18 in Distribution?

Sure thing, Ryan, we saw consistent -- let me just move back here for a second. We saw consistent growth through the quarter from July through September. As we said, September was very strong for us. Actually, the strongest month since September of 2015. So obviously, very strong month in September and actually, we were -- we have preliminary numbers for October. We haven't closed that out fully yet. But our sales for October were actually up in excess of 8% over October of 2017. So we were really pleased to see the continued acceleration into the beginning of the fourth quarter.

Really nice to hear that. My last question. Neal, I believe in your prepared remarks, you said 8 out of your 10 end markets were up and 2 were flat. Can you provide some color on that?

Yes. Sure. We actually had paper, was very strong for us. We had OEM, was very strong for us. So we're seeing some of that ripple through because of the combined capability of our bearings and power transmission, fluid power and automation together and how they're able to package those for OEMs in particular. Food had a nice uptick for us. So that -- we're really strong there and we're glad to see that. The 2 that were kind of -- actually, the one that was kind of iffy was transportation. So the 8 were up nicely and the other 2 kind of flat.

(Operator Instructions) Our next question is a follow-up question from Pete Skibitski with Alembic Global.

Guys, 2 or 3 follow ups. On SH-2 Peru language and the release, I just want to understand, is this a situation where you thought you'd complete the program this year and so recognized all the revenue, but for whatever reason, some of the revenue's gotten pushed into '19, is that what's going on?

Yes.

That's exactly right.

Okay. Okay. So that's good. And then on the A-10, obviously, we've got this money appropriated by Congress for the wings. I think I read that Boeing has an RFQ out. I just wanted to get a sense of the timing when you think Boeing might make an award? I don't know if it's a wide open RFQ or you guys are sole-sourced or not, but any other color there?

What we're comfortable saying, Pete, is that we are the incumbent supplier to Boeing for that, as you know. We are currently working very closely with Boeing to support their efforts with the government. And we are very active, but we can't really say when that will finally hit, but it's very, very active.

Okay. Okay. Little too early, understood. Understood. And then Neal, just a close from my point of view. Previously, you talked about a lot more DCS fuse opportunities out there, even beyond what you've already booked this year. Is that still the case? Is it still pretty active international quotation environment for the fuses?

Yes, it is. Very active.

Our next question comes from Edward Marshall with Sidoti & Company.

I've been in and out of the call, so I apologize. But I did hear who the JPF fuse was not. I'm curious, the customer that you like to ship to, is this a customer that you shipped to before? Have they received government approvals under the JPF previously? And are there other awards aside from the one that you're shipping or plan to ship with this customer in your backlog?

Ed, I appreciate the question and I appreciate that you're really trying to do your job as well as you can, and I have to do the same for my job. And we, as you can imagine, these are very critical contracts for us and we are -- and we have certain limitations as to what we are allowed to say. And we felt it was important to clarify who the customer was for our large orders, simply because of the materiality to our company. But I'm not going to comment any further on any other -- any of our other DCS contracts.

Got it. Now also the question regarding the shift to next year. I'm curious, JPF is somewhat interchangeable in the DCS world. And I'm curious if you -- why we didn't see a kind of another contract kind of step into the third quarter which you could have shipped those, these fuses that would have been produced under the contract to them? I'm just trying to get a sense, unless there are delays on multiple kind of DCS awards coming down the pipeline.

Actually, Ed, I think that would have been a fair expectation. It's not exactly how it worked out just because of the timing of inspection and other things throughout the production process, but your point is a good one. We -- the JPF product that we provide to the U.S. government is the same JPF product that we've supplied to foreign customers. There are different inspections that are required to fulfill the contractual requirements for each. So sometimes, we're not able to shift as quickly between orders as we would like to, but the product is the same and it can be shifted from U.S. government to DCS orders.

Got it. And I wanted to just talk about, I'm assuming if there were JPF ready to be shipped, they would have some finished product inventory. I'm kind of thinking about cash flow in '19. First, I didn't see the kind of spike I would have assumed with JPF a lot sitting kind of in -- on the balance sheet ready to be shipped. But second, I'm curious about how the cash might work if that product is shipped and what we might expect from the inventory.

Yes. No, Ed, this is a Rob. So in our cash flow outlook for the year, the cash flow associated with deliveries that have been pushed into '19, that cash flow was always going to be in '19. So there is really no impact to the 2018 cash flow forecast. So the way to think about it is, depending on the contract, we have different contractual arrangements with different customers as to payment terms. And we're certainly not at liberty to discuss that. On the U.S. government side, we do receive progress payments or milestone. And what you'll see is that uptick in our contract assets really does relate to our U.S. government contracts where we basically have unbilled receivables where we've met our performance obligation and that shows up in our balance sheet there.

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

Thank you for joining today's conference call. We look forward to speaking with you again when we report our fourth quarter results.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.