Kaman Corp (KAMN) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kaman Corporation Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to James Coogan, Vice President, Investor Relations. Sir, you may begin.

Good morning. I'd like to welcome everyone to Kaman's Fourth 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 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 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 2018 annual report on Form 10-K and the current report on Form 8-K, filed yesterday evening, together with our earnings release. In addition, we expect to discuss certain financial measures and information that are non-GAAP measures, as defined in applicable SEC rules and regulations. Reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K.

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

Thank you, Jamie. Good morning, and thank you for joining us on today's call. I'd like to begin today with a review of our fourth quarter results and provide an update on key events in each segment. I'll then turn the call over to Rob to discuss our financial results and outlook for 2019.

We finished 2018 with strong fourth quarter results, reporting net sales for the period of over $500 million, a 5.7% increase over the prior year. Top line growth at distribution continued through the quarter with sales per sales day up 6.5%, our fifth consecutive quarter of year-over-year sales growth.

Meanwhile, Aerospace benefited from higher Specialty Bearings and engineered product sales and the delivery of 3 K-MAX helicopters in the quarter as well as the shipment of a portion of our $48 million JPF DCS contract.

The top line growth we experienced and the sales mix in the period led to earnings per share of $0.84. This included a number of one-time items, primarily related to restructuring costs and the losses on the sale of our tooling and engineering services businesses. When adjusted for these items, we achieved diluted earnings per share of $1.22, which marks a 41.9% increase over the adjusted earnings per share achieved in the prior year.

We are very pleased with our fourth quarter results, which came in ahead of our prior expectations due to a number of factors. First, our Specialty Bearings business team worked diligently to resolve the supply-chain issues they encountered in the third quarter. And we were able to make up the missed volume from the third quarter, while also delivering on our fourth quarter customer commitments.

And as you know, on our third quarter call, we adjusted our outlook for the year, moving a portion of our shipments for the $48 million JPF DCS contract, out of 2018 and into 2019 due to the uncertainty around the timing of government approvals. However, these approvals were received allowing us to make a partial shipment in late December.

Moving to a closer look at our operating segments. Aerospace revenue in the fourth quarter was $220.9 million, up 4.7% compared to the fourth quarter in the prior year. Segment operating margin for the quarter was 18.9% or 20.7% when adjusted for restructuring and additional cost associated with an employee tax-related matter.

During the quarter, we delivered a record 17,467 JPFs, while marking an important program milestone with the delivery of the 300,000th unit in December. Since our first deliveries in 2004, we have provided the JPF to the U.S. and foreign allied militaries. We are proud of our performance on this program and look forward to continuing our long relationship with the U.S. Air Force and allied militaries around the world.

Demand for JPF remains very strong, and we ended the year with a backlog of over 100,000 units. As a result, in 2019, we anticipate delivering 40,000 to 45,000 units for the full year, and approximately 60% of those deliveries are expected to go to the U.S. government.

As we discussed in prior quarters, all DCS contracts are subject to government licenses and approvals prior to delivery. And we are currently in the process of securing these licenses and approvals for our projected 2019 DCS deliveries. In addition, we are in discussions for a number of new DCS orders that are expected to add to our backlog during 2019.

Sales of our bearing products grew 6% compared to the prior year, and order intake rates for these products remained very high, continuing a trend we saw throughout 2018.

Orders for our self-lubricating bearings were up 10.5%, while our engine aftermarket components saw orders increase more than 18% over the prior year.

Overall, our Specialty Bearings and engineered products finished the year with orders up 9.5% over the prior year, growing backlog to more than $120 million.

We continued to make good progress on our K-MAX program, and during the quarter we secured contracts for 3 new aircraft. We successfully delivered 3 in the fourth quarter bringing our total deliveries for 2018 to 5 aircraft. We have now delivered 9 of the 10 aircraft from our initial production run, and anticipate delivering the 10th in March. This will bring the total fleet size to 32 aircraft, an almost 50% increase since 2015. We remain positive on the outlook for the K-MAX and are continuing production to meet anticipated future demand.

Moving to Distribution, sales per sales day increased 6.5% in the fourth quarter with an equal number of operating days in the comparable period. This result was the highest fourth quarter sales per sales day since 2014.

Taking a look at our end-market performance for the quarter, 7 of our top 10 markets were up in the period led by pulp and paper, merchant wholesalers, durable goods, nonmetallic mineral products and mining.

Segment-level operating profit of 4.1% decreased 20 basis points over the prior year, on both the GAAP and adjusted basis. The slight margin decline when compared to the prior year was primarily driven by a higher mix of corporate accounts, an increase in incentive compensation and higher sales and higher freight costs.

For the full year, we achieved operating margin of 4.5%, or 4.6% adjusted, which included higher group health costs, costs associated with our onetime employee tax incentive and higher freight costs. In total, these items had an impact of approximately 30 basis points on operating margin in the year.

Additionally, this is the final quarter in which we will have the impact from the change in pension accounting, which had an approximately 30-basis-point impact on Distribution results for the year.

Sales trends in Distribution have consistently improved through 2018, driven by corporate account wins and favorable end-market conditions. We will continue to focus on execution, controlling costs and balancing price and volume to maximize total operating returns in the business.

We exit 2018 on a strong note, and despite its challenges it was a very successful year for Kaman. Overall, consolidated sales grew by nearly 4% as sales trends improved at Distribution and we executed well on a challenging JPF delivery schedule.

As we look forward, we are entering the year with a solid backlog in Aerospace, and expect continued strong sales in Distribution to set the stage for 2019.

And now I'll turn the call over to Rob.

Thank you, Neal, and good morning, everyone. I will begin today by reviewing our performance for the fourth quarter before providing commentary on our 2019 outlook. Consolidated fourth quarter sales were up 5.7% to $500.9 million compared to $473.9 million in the prior year period with increases at both operating segments.

At Aerospace, sales increased 4.7% to $220.9 million compared to $210.9 million in the prior year period. Higher sales during the period were primarily driven by higher bearings and K-MAX delivery volume, higher sales of missile safe and armed devices and higher USG, JPF sales, which were partially offset by lower JPF DCS sales.

At Distribution, sales increased 6.5% to $280.1 million compared to $263 million in the prior year period. Our corporate accounts program continues to ramp up, and we are pleased with the growth we have seen thus far.

Consolidated gross profit margin was 30.3% in the fourth quarter, our highest level of quarterly gross profit margin in '18. Gross profit dollars increased 2.3% to $151.7 million compared to $148.3 million in the prior year period. Higher gross profit reflected increased sales in the period, partially offset by a moderation in margin from a very strong quarter posted in the comparable period.

SG&A in the fourth quarter was $108.6 million or 21.7% of sales, compared to $106.7 million or 22.5% of sales in the prior year. The increase in SG&A relative to the prior year was primality due to costs incurred for employee tax-related matters at a foreign operation and cost associated with corporate development activities in the quarter, partially offset by the absence of approximately $800,000 in severance costs incurred in the fourth quarter of 2017.

Operating income in the fourth quarter was $34.2 million or 6.8% of sales compared to $41.4 million or 8.7% of sales in the prior year. Excluding one-time items, which primarily included restructuring and the loss on the sale of the tooling and engineered service businesses, adjusted operating income was $46.3 million or 9.2% of sales compared to $42.5 million or 9% of sales in the prior year.

We have discussed our focus on free cash flow generation in the past and have been successful at achieving free cash flow conversion in excess of our long-term goal of 80% to 100% of net earnings over the past couple of years.

For 2018, we delivered cash flows from operations of $162.4 million, which led to free cash flow of $132.5 million or over 160% of adjusted net earnings. This included $30 million of discretionary pension contributions, $20 million more than we had initially anticipated in 2018.

Additionally, we paid down more than $100 million of our debt, reducing our debt-to-cap ratio by 690 basis points in the year to 31.7%, and lowering our leverage ratios to the low end of our long-term range.

I'd like to focus the balance of my remarks on our outlook for 2019. Starting with Aerospace, we expect sales in the range of $720 million to $750 million with operating margins of 16.5% to 17%.

Sales at the midpoint are approximately flat with 2018, as Aerospace faces an approximately $48 million headwind from lower sales on our helicopter programs with SH-2, Peru and K-MAX, lower volumes on our metallic structures' programs for AH-1Z and BLACK HAWK, along with the absence of sales from tooling and engineered services.

These declines are offset by growth of approximately 6%, and the remaining business led, in large part, by higher sales for our JPF and Specialty Bearings and engineered products.

The anticipated growth in our JPF and Specialty Bearing products and the positive impact from the restructuring actions we have taken over the past 18 months will contribute to our stronger margin expectations in 2019.

During 2019, we also anticipate investing at a number of new technologies designed to drive future growth opportunities at Aerospace. This includes work on the new missile and bomb safe and armed device technology, next-generation air vehicle technology, new PMA component and a continued evolution of our self-lubricating and specialty bearing technologies.

Moving to Distribution, we expect sales to be in the range of $1.19 billion to $1.22 billion, representing sales growth at the midpoint of 6% over 2018. The increase in sales will result from the full year benefit of our 2018 corporate account wins and growth in the end markets we serve.

Turning to operating margin expectations at Distribution, we expect operating margins for 2019 to be in the range of 5.0% to 5.3%. Contributing to the improved margin performance is leveraged from our higher sales volume, the absence of the onetime employee benefit paid in 2018 and higher vendor incentives.

We estimate our 2019 tax rate to be approximately 24%, 400 basis points below 2018, which was negatively impacted by nontaxable foreign operating losses, which are not expected to recur.

Moving to the cadence of earnings for the year. We expect our earnings to be back-half weighted with 10% of our full year earnings occurring in the first quarter and approximately 40% in the fourth quarter.

As we have experienced in the past, the weighting of our earnings is largely the result of delivery schedules of Specialty Bearings and JPF fuze products.

I would like to highlight that our 2019 expectations for the fourth quarter earnings is similar to 2018 where we earned 42% of our full year earnings in the fourth quarter. Our strong cash flow performance will continue into 2019, where we expect cash flows from operations of $105 million to $125 million and free cash flow of $70 million to $90 million.

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

Thanks, Rob. As we exit 2018, I'm proud with the work we've done to continue to embody the spirit of the innovation that has defined Kaman for over 75 years.

Technological innovation is a critical driver for the future of Kaman's growth, and the recognition we received in 2018 from Airbus, as a strategic technology partner, demonstrates the extent to which our technologies are valued by the world's leading manufacturers each and every day.

Before we open the line for questions, I'd like to thank our investors for their interest and our 5,100 employees around the world for their dedication and commitment.

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

Operator, may we have the first question, please?

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

So I wanted to talk about 1Q if I could, noting that there is a portion of JPF that slid into 1Q. Looking at the sales margins on the JPF itself, how much the impact of that margin was in the fourth quarter, assuming some of that slipped into Q1? I'm a little bit surprised by the 10% -- roughly 10% weighting in Q1. Could you, kind of, talk to maybe what else might be happening? Are there losses in other businesses that might be absorbing some of that JPF? Or is it just an immaterial shipment that's in that $48 million?

Yes, this is Rob. It's a good question. While we do expect to shift the balance of that order in the first quarter, there are another -- a number of other impacts that we're seeing in the first quarter. I'll start with Distribution, Distribution typically has a lower margin expectation in the first quarter due to employee-related costs, just the timing that is really just got shifted to the back half of the year. So that's impacting the results. Also, really the biggest driver is going to be bearings, just based on the expected cadence of deliveries for the balance of the year, we do expect to see a relatively weaker quarter for them in Q1, really recovering in Q2 through to Q4, just based on customer demand and expected timing of shipments, so that's your largest contributor. And then, we're also expecting to see a significant improvement as the restructuring actions largely wind down in Aerosystems, as we expect that during the balance of the year to see improved profitabilities we move throughout the year there.

Got it. Got it, and you gave some outlook, about 60% of shipments of that 40,000 to 45,000 units for 2019 is to the U.S. government. I'm curious, do you have this -- do you have, kind of, how 2018 weighting shook out between, say, DCS and USG?

We have not provided that, Ed. But I can tell you that the weighting last year was weighted more towards USG than this year, our expectation for this year. So USG will represent a higher portion than 60% in '18.

I'm sorry, it was higher in '16 than your anticipation for 2019?

Yes. That's correct. The USG percentage in '18 was higher than the expected USG percentage for '19.

Got it. Got it. And so when I think about that $324 million JPF order that you -- first, have you received approvals for that order yet? And the shipment rate from 2019 to 2022, is that back-end weighted? How do I think about, kind of, how that rolls through?

Ed, it's Neal. We have not received the approval yet for that large order. And the anticipation is that, that would be a 3-year shipment schedule, so -- or 4-full year shipment schedule. So we can break that up over 4 years beginning in 2019. You know depending on...

So relatively even?

I'm sorry. Depending on customer demand we can't say that it's going to be linear across those 4 years, though.

Got it. Got it. And then, finally, is that -- is the margin profile of that business similar, I mean, given the size, I just -- I know you don't comment too directly, but given the size, I thought maybe we could look at the size that of that -- is it -- can we relate it to, maybe, the $48 million contract? And are they similar? Or how do I think of the margin profile on that business?

I would say that we haven't provided any specific commentary. DCS orders, certainly, as we've -- as we talked about are significantly higher margined. But even within DCS orders, between different customers that profitability rate does differ. There are a lot of other costs that I -- agent costs and other things that factor into that. But certainly, relative to USG, it's more profitable. But I -- we're not going to give a lot of guidance for really competitive reasons, the relative profitability of that order versus other DCS orders that we get.

Our next question comes from Seth Seifman with JPMorgan.

This is Mike Rednor on for Seth. I just want to talk about Distribution a little bit. You, kind of, have this longer-term target out there for 7% margins in the business. I was just wondering what actions or levers are still available to you to, kind of, improve that margin and move it higher?

Yes. No, it's a good question -- Ed, if you recall -- Mike -- I'm sorry. Mike, if you recall, we undertook a very extensive set of productivity initiatives to really start driving improved margin in the business and by and large, if you adjust for pension and others, we have improved the margin, granted not necessarily in a very linear fashion each quarter. So really for us, it's going to be around scale. Long-term sales growth is important to really leverage our fixed-cost infrastructure. But then also, we are going to be rolling out the productivity initiatives to our fluid power product line this year. So there is a lot of work still ahead of us to really optimize our infrastructure, optimize a lot of the productivity initiatives in terms of how we service our customers and how we manage logistics and so forth. So there is definitely a path, a scale will be important towards that. But we do have a number of levers still available to us to reach towards that 7% long-term target.

Okay. And one last one. Pension contribution should be minimal in 2019, what can you say about kind of longer-term outlook or funding plans there?

Yes. No, a great question, Mike. This year, we are not expecting to make any pension contribution this, given year the level of contributions we made in 2018. I would say, going forward it's probably going to be similar to what we've done in the past, somewhere is that 10 or-so-million dollar range. That will all be determinant on the required funding as well as just the future performance of the pension. But I would think that's a reasonable model expectation.

Our next question comes from Chris Dankert with Longbow Research.

First, I will say congrats on the record JPF shipments and on the K-MAX deliveries in this production run, it's a busy quarter for you guys. I guess, just a kind of quick circle back to the KIT, could you give us any sense of what pricing was in the fourth quarter? And kind of, what you built in for 2019 here?

Christopher, I'll go to 2019 to begin with. We anticipate probably a 1 to 1.5 of price through the year of 2019, relatively consistent with what we saw in probably the second half to maybe the last 4 months of 2018. As you know, we've talked about price increases, they tended to come through beginning about the middle of the year. And it was one of the reasons that we had slightly lower margins in the fourth quarter. Because as you know, when you get a price increase from a supplier and you have fixed-term contracts and fixed price contracts with your end customer, it takes you a little while to pass those through. So we expect to see that 1.5 of benefit in 2019, though.

Got it, got that. That's helpful. And then, kind of sticking with the guide here, can you kind of give us the number of K-MAX shipments you're resuming in the guide right now? Is it, kind of, that similar 4, 5 range?

Actually, Chris, we are anticipating delivery of 3 aircraft in 2019. So down a little bit from '18, which we're trying to figure out in the last few days, 5 aircraft may actually have been a record for us even going back to the production days. We're not quite sure of that, but it was a big year for us and, obviously, a big fourth quarter for us. As you know, and as we stated, we're going to deliver the 10th aircraft, so the last of our initial production run in March of this year. And we've continued production for at least another 10 aircrafts. So we anticipated that we would have a slowdown in deliveries this year, simply because of the relative timing of that increased production rate. So it was not unanticipated for us to go down to 3 this year, but we feel very good about; a, the fact that we've almost increased the fleet, almost doubled it since 2015, and what that will mean for us longer term in service and support revenues; and also the response that we are getting for continued demand.

Yes. Absolutely understandable. And one last one for me, if I could. I applaud the discipline on M&A, but have we seen any change in prices that kind of piques your interest? Or are things still just expensive, expensive?

Yes, Chris, I would say that the market multiples remain elevated. We certainly are actively searching for appropriate acquisition opportunities. But I would say, the pricing environment, in spite of the debt market collapse in December, remains very strong. So there are a scarcity of assets and a lot of folks chasing them. So we're being disciplined, and we're very much in the game, but it's still pricey.

(Operator Instructions) Our next question comes from line of Ryan Cieslak from Northcoast Research.

This is Avi on for Ryan. My first question is on Distribution. Is there any way to quantify how additive the new national account wins will be in terms of 2019 sales guidance? And then, could you provide some color on what end market they're focused in?

Sure. Avi, this is Rob. So I would approximate that probably a little shy of about half of the growth that we're expecting in 2019, represents kind of the full year ramp-up impacts from the corporate accounts that we have secured during '18. In terms of -- I think you're asking around some of the end markets that they're focused on, it's a pretty broad range. Certainly paper has been a beneficiary, a good end market for us as a result of corporate account wins. We're also seeing, in food and bev, that's another area where we've seen pretty considerable attraction in our corporate account initiative.

Awesome. That's helpful. And my next question, could you provide some detail on these share-gain initiatives that you've seen at Distribution, that you highlighted in the release? Is there anything specific that you're doing or incremental than what you did in 2018? And can you talk about the success you've had in that, in 2019 so far?

Yes, I think in terms of relative -- as we would view, kind of, share gain, we think we've been very successful, in particular, as it relates to the corporate-account area based on our high level of service and customer focused that we've been able to secure a number of accounts that really just, perhaps, felt that they weren't being serviced as adequately by some of their existing service providers. But in terms of 2019, we continue to focus on corporate-account development. But we are also managing -- we want to have a balanced book of accounts. Because clearly, while corporate accounts are helpful for rebates and other things, our core accounts are also critically important to the success and future of the business.

Avi, we've -- I think that, one of the real pluses for us is the overall industrial market growth in the U.S. right now. And certainly, we're pleased with our corporate-account success, but across the board, in all of our 220 facilities across the U.S. -- we're seeing a reflection of the growth that's -- that we've had for the last 5 quarters. So we're really pleased with the combination of both being able to take advantage of the market uptick certainly, that's always important as well as some specific wins in corporate accounts.

Okay, okay. That's helpful. And then, yes, I guess, last question, if I could. How is Distribution sales growth trending so far in 1Q?

Yes. So for January, we were up mid-single digits year-over-year, however we have not finalized February's results yet. There's still a number of adjustments to work through as we finalize closing the books for our fiscal month of February. But certainly, as it relates to our internal expectations we are very much on track.

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

Going back to the comment on January being up mid-single digits, can you tell us how the quarter progressed by month last quarter?

We sure can.

Yes, sure. No, that's no problem. So when we looked at the year-over-year growth, October, November, December, October was up high single digits, same with November. And then, December was up low-single digits year-over-year, kind of, accumulating in a 6.5% for the quarter.

Got it. And I just want to go back to the earnings cadence question. From a modeling standpoint, are we thinking mid-single-digit revenue decline year-over-year in Aerospace and low double-digit margin, meaning a fairly big ramp through the year? It just -- am I thinking right about that?

You want to think about quarter-over-quarter in terms of the Aerospace?

Yes. Just given the decline that we're talking and how last year 1Q was 20% of earnings. This year it's 10%. So obviously, there's a pretty big variance.

Yes, no that's fair, and I would just highlight that the earnings cadence we expect in '19 is actually very similar to what we experienced in '17. So we've broken this path before. But to answer your question, Steve, yes, we would expect Aerospace sales in the first quarter of '19 to be down relative to '18. And then, as we kind of track through -- kind of recoup that negative variance as we go through the balance of the year.

The total guidance is negative 2 to plus 2 if I'm remembering right. So but -- so the range will be wider than that, right?

Yes. The range -- yes, we therefore provided a range. I was speaking to the midpoint, Steve.

Understood. On the productivity initiatives you talked about, are those driven by improvements in technology? Or new equipment? Or facility consolidation? Can you just talk about the big drivers that can benefit your operations in terms of margin expansion?

Yes. I would say, certainly technology in the application of the tools that we've developed across the remainder of the business as well as continued refinement and execution of those can drive considerable margin expansion. And we have certainly have been working towards the overall branch network optimization. So we have done facility consolidation, where appropriate and where it can better serve our customers in local markets. That continues to be an opportunity. We also are continuing to look at opportunities in terms of just general logistics. That is an area where, I think, there is -- I think the team is certainly focused on it. Opportunities to improve the performance that we've demonstrated to this point.

Okay. And just thinking about your comment on the contract customers from last year, and how that flows into this year. From a mix standpoint, it seems like your guidance assumes the mixed headwind won't be a problem. So are you mixing up those contract customers? Or are smaller customers growing fast enough to overcome that? Just trying to get a sense.

Yes, I think the -- certainly as we go through '19 of course the noncontract customer growth is important, we're focused on that. And then, the contract customers Neal alluded to, there is a little bit of price stickiness for a period of time, but ultimately, we are able to press -- pass through price increases appropriately to those customers. So as we go through '19, we would expect to see that issue alleviate as we went through the year.

Right. Is more of the margin expansion driven by mixing up the contract customers? Or by growth in the smaller segment?

It's -- well, there's the couple of things. The absence of employee incentives. Certainly, the customer mix is also going to help drive some of that margin expansion. And really, just also the sales growth and leveraging our fixed-cost infrastructure. We're expecting to see considerable growth, and we have very tight controls on our G&A.

Okay. And then, last question for me, just longer term on needing scale to hit that 7% target. Rough numbers, what kind of quarterly revenue run rate do you need to hit that?

Yes, Steve, I mean -- I'd say it's north of where we are. I am not trying to be evasive, but we have a little ways to go to get to that scale where that scale alone is going to drive us to a 7%. And that's what we're working towards. And we're going to continue to go down that path.

This is a hard question to ask because nobody can really predict the future. But do you expect that, that can happen this cycle, given where you think we are in the cycle? Or is this longer term?

I -- it will be hard for us to really make a comment on that. Because I think there's a lot of conjecture about really where we are in the cycle. I mean, there's a lot of discussion around whether or not we're going to enter into a recession. And every time that anyone's made that prediction, lately, there've been incorrect. So we're certainly prepared, should we see a downturn. But certainly, all the indications we have from order rates, (inaudible) and so forth continue to support a pretty robust industrial economy at this point. And I would also just point out that our exposure to auto is quite low. And that's probably been the one industrial area that certainly, in my reading, has been certainly at the front line of a potential slowdown.

Our next question comes from Robert Kirkpatrick with Cardinal Capital.

Could you talk a little bit about the decision to exit the tooling and engineered services business? And could you quantify what that headwind would be in terms of 2019 results, please?

Sure thing, Rob. It's Neal. The headwind you could probably model around plus or minus $8 million. And really, the basis for it, Rob, is the markets had really changed since the time frame that we bought both of those businesses. Those were acquired back in 2008 and 2010. Tooling came as part of the acquisition that we made over in the U.K. And actually, we benefited from it pretty nicely in the initial several years both -- we had a nice external business, and also, they helped us tremendously with our programs on the A-10, on the AH-1Z, a number of programs. But overall, the tooling market has gone down by about 50% in the last 3 years. And so it was one where we were not going to wait for that market to come back. We didn't felt we needed to, or it was the best investment for us at that point in time. And we had a willing buyer in the U.K. So we felt that, that was the right approach for us there because of the change in the market. And then, we acquired our Engineering Services group back in 2010, and it was really two fold. It provided us Engineering Services as a external contracting business, and Boeing at that point in time was our biggest customer. But we felt it also positioned us to participate in a broader design and build-structures market, that back in 2010 looked attractive. We used the Engineering Services, they were a great help to us internally, again, in our repurposing, the Australian SH-2s for New Zealand, also worked with us on the Peru conversion as well. But the design and build environment really didn't evolve the way it -- we had originally thought. Quite frankly, those contracts came with contract terms, that were very onerous. And the risk and revenue-sharing requirement for being part of that really didn't meet our returns on a risk-adjusted basis. So I think, in that case for Engineering Services, we gained some benefits from it for a number of years. But as you can tell from our approach in recent years, probably the last 5, we have not been focused on design and build in the structures market. We just don't think the economics work. And we think the risk-revenue-sharing requirements of anybody participating in that are just too onerous for Kaman.

Great. And without tipping your hand obviously, could you comment more broadly on the -- in planned investment in a number of technologies at Kaman Aerospace that you just briefly mentioned as you ran through your prepared remarks?

Sure. We've been very successful with the relaunch of the K-MAX and there's things that we want to do there. We want to do a new all-composite blade for us, which we think will help the performance of the aircraft and make it attractive to a broader range of customers. And also, can be used as it -- going into our roadable spares for the existing fleet. And also, we will be investing on Unmanned program ourselves, which is a very important step for us. Also, in our safe and arm fuzing area we will be investing in a number of new programs there as well. We've talked some about the microelectronic machine systems before, we will continue to invest there. But there is also some new technologies in the safe and arm fuzing area that we're very interested in. And we've been investing at a lower level in recent years already. And certainly, we want to continue to invest in new developments for PMA products, in our Specialty Bearings and engineered products area.

Okay. And then, maybe a broader question about the way the earnings cadence of the business seems to be structured. Is there anything we can do to, perhaps, smooth that out somewhat? As opposed to being so dependent on an end-of-the-year rush to get fuzes out the door or bearings out the door? Or is it really just completely out of our control? And really driven by customer requirements? And if so, why are the customer requirements so much oriented towards the end of the year?

Rob, I think it's certainly not totally out of our control. But what we do run into or we have historically run into is that it is surprising to us that the demand for our Specialty Bearings product tend to be so heavily weighted in the third and fourth quarter. To be honest, it just doesn't seem to make a lot of sense. But if we're to talk about our on-time deliveries, our on-time delivery performance is very high, which reflects that the demand is in the third and fourth quarter. That would -- that's not a perfect way to run a manufacturing facility, I would agree with you. And then, I think on the DCS orders, we are typically waiting for a government approval. And then, ready to go, and I don't know what if the September 30, end of the fiscal year for the U.S. government has anything to do with it or not, but we tend do get those approvals later in the year. So we would -- with the JPF, we're able to build and have inventory and be ready to go when we get those approvals. As you could see from the over 17,000 fuzes delivered in the fourth quarter. So we're able to have a little bit more smooth manufacturing cadence for our JPF line than we currently are able to get to in our Specialty Bearings, and in particular, in the Kamatics facilities.

Okay. And speaking of bearings, I think you said that the sales were up 6% versus the prior year. Was that a quarter or a year number? And if quarter, what was the year number?

That was the quarter number, Rob. And the year, give me one sec.

It's just the mid-single digit.

Yes about -- almost -- about the same.

Our next question comes from Peter Skibitski with Alembic Global.

Neal, I think I heard you say that the UK tooling business had raised about $8 million in 2018. Did that include engineering services as well? Or was that a separate revenue stream?

That was -- No, that was the combination of the 2 businesses.

Okay, okay. Got you. And then, what the other source of revenue headwind for Aerospace in 2019? I think, helicopters and a couple of other items?

Yes, you are exactly right. There is a few, and Rob will probably chime in here as well. But we're down year-to-year on K-MAX deliveries from 5 to 3, so that obviously impacts us. We're down in our legacy Missile Fuzing business from year-to-year, so that impacts us. Our Peru program will complete in the first quarter or early second quarter of this year, so that's a headwind. We also have a headwind currently on the UH-60. We have a lower number of aircraft from year-to-year in UH-60 and also AH-1Z. So those, I think, are the primary components of the, about, $48 million headwind from year-to-year.

Okay. Okay. That's very helpful. Then, just 320 -- I'm sorry, if I missed this, but the $324 million fuze program, do you have any of that factored into your guidance for 2019? And any other sense on the timing of the approval? And just I'm wondering if U.S. government approval is holding it up or negotiations with the country over or the offset agreement is holding it up?

We currently do not have -- we are waiting for final government approval for that. We have a signed contract with our customers. So that is now in the internal government approval area. And we do have a portion of it in our 2019 outlook. But as we commented in our prepared remarks, we also have a number of other DCS orders that we are working on that if need be, we believe, could mitigate part of that shortfall.

Okay. Okay. Yes. So I think when the release first came out -- I think one easy way to break up that $300 million contract would have been $80 million per year from kind of '19 through '22, it sounds like you don't think you'll have $80 million of it this year, and so that'll get maybe pushed to the out years to a degree. Is that a fair statement?

Yes, Pete. I mean, it's really over 4 years. So it's really '19, '20, '21 and '22. So -- and certainly, our expectation is, assuming, that the timing works out, that we would see deliveries on that order this year, but it's going to be back-half weighted. And that's also contributing to the earnings cadence for the year. And then, I think, to your point, it's fairly straight line, over a period of 4 years from there. But certainly, that all depends on customer requirements as well. I mean, we have a schedule, but ultimately, the customer will dictate when we deliver.

Right. Okay, okay. And then, just one item I want to clarify, the $48 million DCS fuze order. Could you guys just tell us how much you delivered on that in the fourth quarter versus how much is the left for the first quarter?

Yes, Pete, this is Rob. I mean, I would say we don't want to provide that level of visibility for competitive reasons. But certainly, when you think about the over performance in the fourth quarter, the majority of that was really as a result of the partial shipment -- our performance relative to expectations.

Yes, Pete. As we went into our third quarter call, as you well remember and, God, we do, we made the decision to pull that out of our outlook for the year, although, we did state, we think very clearly that, if we did receive approval that we would ship against that contract. And that's exactly what happened, so we did make a partial shipment. And as Rob said, it pretty much made up the over performance against our outlook. So I think that's the best way for you to think about it.

I appreciate it. A very last one for me. So taking the guidance for Aero, I mean, it's pretty clear, Aero structures down, I guess, bearings up. Could you finish -- do you expect fuzes up, down or flat for 2019?

Fuzes, overall, will be up on top line. So really, kind of, just offset by the headwind, which is really predominantly as we've talked in the structures part of the business.

Our next question is a follow-up from Ryan Cieslak with Northcoast Research.

It's Avi. Just one more for me. Can you provide an update on where you're at with the ERP rollout at Distribution? And is there going to be a notable step-down or step-up in 2019 in terms of that rollout? And then, is that baked into your segment guidance somewhat? Or not at all?

Avi, we currently, as you know, have gone from 13 ERP systems down to 4, we had a major upgrade of our SXE platform in 2018, which went very well for us. So currently, we are anticipating our next transition of portions of our KIT business onto SXE likely beginning in the third quarter of this year.

Okay. And then, so I guess, in -- is there any -- there's no change in that rollout in 2019, so is that -- is there any disruption, sort of, baked into segment guidance at all?

You know there isn't, Avi. We had a very smooth transition to the latest version of SXE in 2018. And obviously, when we've gone from 14 or 13 systems down to 4, we've got a group of people that get pretty good at doing this, and they are pretty good at doing it. So we are not anticipating any disruptions in our business because that's one of the key things, if we feel that we are not ready to take on a go live because it's going to impact our customer service levels, we'll delay it.

Thank you. And I'm currently showing no further questions at this time.

I'd like to turn the call back over to James Coogan for closing remarks.

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

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.