Kaman Corporation
Q3 2018 Earnings Call Transcript

Published: 2 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2018 Kaman Corporation Earning Conference Call. [Operator Instructions]. I would now like to turn the conference over to Jamie Coogan, Vice President of Investor Relations. You may begin.

[James Coogan:]

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?

[Neal Keating:]

Thank you, Jamie. Good morning 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 non-recurring 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 focus on topline 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 eight of our top ten end markets with the remaining two 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 three 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 cost 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 healthcare cost as well as the remaining cost associated with our one time employee incentives. The impact of these two 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 continued 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 products deliveries, which also shifted out of the quarter. Starting with a K-MAX, in aircraft delivery was delayed due to weather conditions, which prevented us from completing the required pre delivery flight test planned for 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 two 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 have 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 assess the assets for impairment, which resulted in non-cash 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 and 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 we'll 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 positioned 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?

[Robert Starr:]

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 at $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 diverse 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 non-cash, 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 two non-cash, 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 and 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 two non-cash, non tax deductible charges recorded at our U.K. operations, through restructuring and severance expense and the employee tax related matter. The decreased and adjusted operating margin for the quarter was driven in part by the sales mix of Joint Programmable Fuze and lower profit on a self lubricating bearing products offset by increased profit on a Missile Fuze Programs, our engine after and market components, and miniature bearing products. At Distribution, our sales increase 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, a5.1% increase over the prior year, and our fourth straight quarter of year-over-year sales for 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 were recognized the remaining expense associated with our one-time employee incentives. Of this amount, in the quarter, approximately $500,000 was recognized as 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 of each segment. Our cash flow from operations were $33.7 million leaving the 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 contributions 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 three months remaining, we are revising our sales and margin outlook. We now expect sales in the range of $1.115 billion, to $1.155 billion, and operating margin of $4.8 million to $4.9 million or 4.9% when adjusted for the restructuring of severance costs. Let me just make a correction. That is $1.135 million, 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 margin expectations is the result of a shift of product sells 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 of $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 non-cash, 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 are slightly lowering our expectations for operating free cash flows for 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 or reducing our debt-to-cap ratio by 630 basis points to 32.3% and ended the quarter with a two times leverage ratio. With the strength of our balance sheet, we are well-positioned to continue to make continued investments in our ongoing operations while seeking acquisition targets to expand our specialty bearing an engineer product offerings. With that, I will turn the call back over to Neal.

[Neal Keating:]

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 in 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 over to Jamie. Jamie?

[James Coogan:]

Operator, may we have the first question please?

[Operator:]

Our first question comes from Peter Skibitski from Alembic Global.

[Peter Skibitski:]

Yes, good morning guys. Let me start with the impairment in the U.K. Just some more color on that. Is that related to the composites business over there, it'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?

[Robert Starr:]

Yes, Pete, this is Rob. It's part of our normal process. We you know we were reviewing the financial performance and other factors involving the U.K. which required us to evaluate our tangible, 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 you know what the customer or the program in terms of that significant customer, but certainly had an impact on the business.

[Peter Skibitski:]

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. Have you guys considered that or are you confident at this point, that the two suppliers 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, and so capacity is going to be tested for sure.

[Neal Keating:]

Pete, it’s a good question. Actually no you're right. Some of the supply exchange 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 have 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 and space here. Also this year, we put in our new really state of the art test rig for our flexible drive shift 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.

[Peter Skibitski:]

Okay, so sounds like your plans aren't going away there. So that's great. My last question and I'll get back in queue. On the DCS fuzes, 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, these are big contracts. How could 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, some pretty tense relationships right now?

[Neal Keating:]

Pete, it’s Neal. I’ll answer that. First of all, I think we put it in our firm backlog when we have assigned 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 certainly I'm not atypical for what we have done historically. And I know that this a question that you have, Pete and a number of others do. So I’m going to answer it in as complete 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 in 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’ll repeat never been denied. Also, as we entered the year we are working a range of DCS opportunities and we 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 will only comment that the large multiyear contract we entered into early this year is not, I’ll 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 number 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 experience with Option 13, we expect an additional 15,000 units. So that will be a total of 35,000 units at Option 14. Also late last year public notice was given for both Option number 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 fulfill our contracts. But we also remain well-positioned to deliver solid performance based on both our current and expected orders with the US government until these approvals are granted.

[Peter Skibitski:]

Got it. I appreciate all that color very much, Neal, specially the comments on which customers it's not, which I think is important. I think you 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. Thanks, guys.

[Neal Keating:]

Okay. Thank you, Pete.

[Operator:]

Our next question comes from Seth Seifman with JPMorgan.

[Seth Seifman:]

Thanks very much and good morning.

[Neal Keating:]

Good morning, Seth.

[Robert Starr:]

Good morning, Seth.

[Seth Seifman:]

Guys, I wonder if you could talk a little bit and I realize that it’s probably not the easiest thing to talk about, but the transaction that you’ve explored in a 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 focus 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 got in the way here? Is it valuations or something else? And any additional color would be great?

[Neal Keating:]

Sure, Seth. You are exactly right. We've been very active in assessing what market opportunities we have, where the growth is across both 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've actually been the largest acquisition we would've 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 trans -- 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.

[Seth Seifman:]

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

[Neal Keating:]

We see the landscape is still pretty very attractive to us. There are certainly some very large players in those markets, but there is also a clearly a number of smaller midsize 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 healthcare 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.

[Seth Seifman:]

Great. Thank you very much.

[Neal Keating:]

Thank you, Seth.

[Robert Starr:]

Thank you, Seth.

[Operator:]

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

[Edward Marshall:]

Got it. And so, I think about switching gears to the acquisition and the letter of segments that’s been extended.

[Operator:]

It looks he might be on another call, do you want me to move to the next questioner.

[Robert Starr:]

Sure.

[Neal Keating:]

Yes, please.

[Operator:]

Our next question comes from Chris Dankert with Longbow Research.

[Chris Dankert:]

Good morning, guys. Thanks for taking my questions.

[Robert Starr:]

Good morning, Chris.

[Chris Dankert:]

I guess quick move to 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 picked up etcetera, just any update on price would be helpful?

[Robert Starr:]

You know, Chris, it hasn’t yet. We went through the analysis as you would expect in preparation for the call. We go through it on a monthly basis but we took it to a little bit few more decimal points. But we still see that in -- maybe the 1.52 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 basis point due to tariffs price combined.

[Chris Dankert:]

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

[Neal Keating:]

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 test.

[Chris Dankert:]

Okay, okay. But the plan is still to get to five or six for the year?

[Neal Keating:]

That’s correct.

[Chris Dankert:]

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

[Neal Keating:]

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 it continues to progress and certainly we would hope through the course of 2019 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.

[Chris Dankert:]

Thanks guys. I’ll hop back in queue here.

[Neal Keating:]

Thank you, Chris.

[Operator:]

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

[Ryan Mills:]

Good morning. This is Ryan Mills on for Steve.

[Neal Keating:]

Hey, Ryan. How are you?

[Ryan Mills:]

Good, good. 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, that’s early, but just curious if you could give a little bit of color on the cadence next year? Should we assume that $0.50 to $0.60 flows through in 1Q 2019, and I know typically the cadence is more back weighted. Should we assume that it's not to the degree it is historically next year?

[Robert Starr:]

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. We will definitely provide more an update on our fourth quarter call. But what I can tell you is -- about – when we look at the $0.50 or so cent 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 write more color on that.

[Ryan Mills:]

Okay. And then turning back to Distribution, nice sales growth, the incremental was about high single digit. 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?

[Robert Starr:]

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 cost, the impact that we’re still working on group health that drop to drop is more on the mid-teens, without group health that’s in the low-teens. So we think that’s a more normalized rate to consider. This is not the new normal.

[Ryan Mills:]

Okay. And then could you talk about monthly trends during the quarter? And what you're seeing so far in early 4Q 2018 in distribution?

[Neal Keating:]

Sure. 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.

[Ryan Mills:]

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

[Neal Keating:]

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 therein and we're glad to see that, the two that were kind of -- actually the one that was kind of if it was transportation, so the eight were up nicely and the other two kind of flat.

[Ryan Mills:]

Thanks for taking my questions.

[Neal Keating:]

Yes, great. Thanks Ryan.

[Operator:]

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

[Pete Skibitski:]

Hey, guys, two, three follow-ups. On SH-2 Peru language and the release I just want to understand is it the situation where you thought you’d complete the program this year and so recognize all the revenue, but for whatever reason, some of the revenues got pushed into 2019. Is that what’s going on?

[Neal Keating:]

That’s exactly right.

[Pete Skibitski:]

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

[Robert Starr:]

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 active.

[Pete Skibitski:]

Okay, okay, little too early. Understood, understand. And Neal, just a call from my point of view, previously you talked about a lot more DCS fuze opportunities out there or even beyond what you've already booked this year. Is that still the case? Is it still pretty active international quotation environment for the fuzes?

[Neal Keating:]

Yes, it is very active.

[Pete Skibitski:]

Okay, great. Thanks for the color, guys. Appreciate it.

[Neal Keating:]

Yes. Thank you, Pete.

[Operator:]

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

[Edward Marshall:]

Hey, good morning, guys. How are you?

[Neal Keating:]

Good. How are you?

[Edward Marshall:]

I’m okay. I’ve been in and out of the call, so I apologize. But I did hear who the JPF fuze was not. I'm curious, the customer that you’re like to ship to, is this a customer that you ship 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?

[Neal Keating:]

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 as you can imagine these are very critical contract for us and we are -- and we have certain limitations as to what we are allowed to say. And we felt that 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.

[Edward Marshall:]

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 that you could've shipped those -- these fuzes that would 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 pipe.

[Neal Keating:]

You know, actually Ed, I think that would've 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 supply 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.

[Edward Marshall:]

Got it. And I wanted to just talk about -- I'm assuming if there were JPF ready to be shipped, they would have some finish product inventory. I’m kind of thinking about cash flow in 2019. First I didn't see that kind of spike I would assume with JPF a lot sitting kind of 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?

[Robert Starr:]

No. Ed, this is Rob. So, in our cash flow outlook for the year, the cash flow associated with the deliveries that have been pushed into 2019. That cash flow was always going to be in 2019. So there's 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 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 payment for milestone and what you'll see is that uptick in our contract assets really does relate to our U.S. government contract where we basically have unbilled – call it unbilled receivables where we met our performance obligations and that show up in our balance sheet there.

[Edward Marshall:]

Got it. Appreciate your help, guys. Thanks very much.

[Robert Starr:]

Sure. Thank you, Ed.

[Operator:]

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

[James Coogan:]

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

[Operator:]

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.