Kaman Corporation
Q4 2014 Earnings Call Transcript

Published: 24 Feb 2015

[Operator:]

Good day and welcome to Kaman Corporation Fourth Quarter and Full-Year 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Eric Remington, Vice President, Investor Relations. Please proceed.

[Eric B. Remington:]

Good morning. Welcome to the Kaman Corporation fourth quarter 2014 conference call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer; and Rob Starr, Senior Vice President and Chief Financial Officer. Before we begin this morning, please note that some of the information discussed during today's call will consist of forward-looking statements setting forth our current expectations with respect to the future of our business, the economy and other future events. These include projections of revenue, earnings and other financial items, statements on the plans and objectives of the Company or its management, statements 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 2014 Annual Report on Form 10-K and the current report on Form 8-K filed yesterday evening together with our earnings release. With that, I'll turn the call over to Neal Keating. Neal?

[Neal J. Keating:]

Thank you, Eric. Good morning and thank you for joining us on today’s call. In 2014, we performed well across both of our segments as demonstrated by the 8% growth in our adjusted EPS to $2.43 for the full-year. Our Aerospace business delivered record sales and profitability for the full-year driven by continued strength in our bearings business, the New Zealand SH-2 program and improved performance in our composite unit. In our distribution business we achieved significant margin improvement in 2014 delivered organic growth in each quarter of the year and laid important ground work for further improvement during 2015. Now, I would like to provide more detail on the performance of each of our segments starting with aerospace. Full-year aerospace sales grew $633 million, an increase of 3% over 2013 with operating margin on an adjusted basis expanding by 20 basis to 17.2%. Our full-year margin results benefited from improved performance across our number of programs as well as a favorable products mix in the fourth quarter. The sales increase was due to the contributions of the New Zealand SH-2 program and a broad number of other programs across the segment including the AH-1Z and A-10. This sales increase was achieved despite headwinds during the year from several defense related structures programs with three programs the UH-60 BLACK HAWK, C-17 and Egyptian FHQ upgrade program accounting for a year-over-year revenue decline of $25 million and able to generate top line growth in the pace of such significant headwinds speaks to the strength of our business and the commitment of our team. We delivered just over 24,000 JP Fuzes in 2014 versus approximately 21,000 in the prior year with a higher proportion of lower margin U.S. government units. The JPF remains an important program and our year-end backlog of a $115 million reflects strong demand. At this time, we expect JPF volume this year to be similar to 2014 over the slightly higher mix of higher margin direct commercial sales during the year. Segment backlog ended the year at $518 million less than the prior year end. The lower backlog is largely attributable to two programs, our New Zealand SH-2G program and our UH-60 BLACK HAWK program. Backlog excluding these two programs has grown year-over-year and we are confident our business development efforts will support our base and provide additional organic growth opportunities in the future. We recently announced a number of key program wins and extensions that should maintain a stable revenue base for us going forward. These include extensions of agreements to supply Bell with both commercial and military rotor blade components, a new contract to supply fixed trailing edge assemblies to Boeing for both the 767 and 777 programs, a new contract for the fixed trailing edge assembly on the KC-46 tanker and the Peru SH-2 program. These programs combined a potential value of $200 million, the majority of which is not included in our current backlog figure. Overall, Aerospace has firmly positioned to continue improving operational performance, successfully execute new programs and win additional work to provide steady long-term growth. Moving on to distribution, 2014 was an important year for this segment as we continue to build momentum. Overall, we grew revenue nearly 12% over 2013 to $1.16 billion. Top line growth was driven by the combination of the B.W. Rogers acquisition and full-year organic growth of 3.2% our highest annual rate since 2011. Adjusted operating profit dollars grew 24% and outpaced our revenue increase as we were able to expand segment level margin by 50 basis points to 4.9% for the full-year excluding Mexico. 2014 in the early part of 2015 have marked an important period for distribution as we achieved a number of important milestones that will improve the competitive position of the business going forward. First, we completed two strategic acquisitions. B.W. Rogers, the largest acquisition in the segments history and G.C. Fabrication, Inc. B.W. Rogers added to our Parker franchise and provides additional scale to both our fluid power and automation control and energy platforms. In fact, Parker is now our largest supplier and we believe we are their second largest distributor in North America. G.C. Fabrication and Electrical Distributor for Kaman's commands Automation, Control and Energy platforms into the New York metro market, while meaningfully deepening our relationships with Schneider Electric. Next, we completed the process of hiring approximately 60 new sales resources to help drive organic growth by addressing identified market opportunities. The early indicators are encouraging with this initiative contributing positive sales, earnings and margin impacts in our fourth quarter. Third, we began the implementation of our new ERP system. A key element of our strategy to achieve operating margins in excess of 7%. Finally, in December 2014 we completed the divestiture of our Mexico distribution business Delamac. We reached the conclusion that this operation was subscale and based on the lack of suitable acquisition targets the business will be better positioned for success by being a part of RYASA the largest bearing and power transmission distributor in Mexico. Overall, we performed well in 2014 and entered 2015 on solid footing. I would like to turn the call over to Rob, to provide some more details on the numbers and our 2015 outlook. Rob?

[Robert D. Starr:]

Thank you Neal and good morning everyone. I would like to begin this morning by reviewing our financial performance for the fourth quarter and full-year for discussing our 2015 outlook. At a consolidated level, adjusted earnings from continuing operations were a diluted EPS of $0.76 in the fourth quarter and $2.43 for the year. There are number of non-recurring items included in our results and I would like to walk you through those in greater detail. First, in connection with divestiture of our distribution operations in Mexico we recorded a net loss on the transaction of $5.3 million. Mexico’s sales for the year were $23.5 million and the business recorded an operating loss of $2.8 million, these amounts are excluded from our continuing operating results. Also keep in mind that in the third quarter, we had severance cost and distribution and a charge related to the sale of our Moosup facility. These amounts totaling $2.7 million free cash flow also excluded from our adjusted results. Finally, during the fourth quarter we benefited from a number of discreet tax items and tax planning strategies that resulted in our full-year tax rate coming in at 31.8% or 300 basis points below the 2013 rate. The lower tax rate favorably impacted earnings per share by approximately $0.07 per share to both the fourth quarter and the full-year. Free cash flow performance in the quarter was excellent as we generated 57.9 million as our level of investment and capital expenditures moderated through the end of the year and we maintained our disciplined focus on improving working capital metrics. For the year, we generated nearly $81 million which was more than three times of prior year level and well ahead of our long-term target of 80% to 100% of net income. The higher cash generation has allowed us to significantly delever our balance sheet, brining our debt to capitalization ratio down to 35.2% inline with our year-end 2013 level. Our strong balance sheet coupled with our anticipated cash flow generation in 2015 provided excellent financial flexibility going forward. Yesterday, we announced a 12.5% increase in our dividend rate bringing our quarterly dividend rate to $0.18 per share; this increase reflects our commitment to creating value and returning cash to our shareholders. Taking a closer look at segment performance beginning at aerospace, we achieved sales of a $175.2 million for the quarter and $633 million for the year. Increase of 2.6% and 2.1% respectively over the prior year period as our broad range of programs enabled us to overcome some of the headwinds Neal mentioned earlier. Operating margin in the fourth quarter was 18.9% 290 basis point improvement compared to an adjusted 16% in the prior year. This was driven by contributions from New Zealand SH-2, strong results in bearing product lines and improved performance in our composite programs. For the full-year the operating margin was 17.2% versus 17% adjusted in 2013. Taking a look at distributions, we generated revenue of $302.7 million for the quarter and $1.16 billion for the year which is an increase of 16.3% and 11.8% respectively over the prior year. Distributions revenue growth benefited from a combination of continued organic growth and contribution from acquisitions included in the past 12 months. Our full-year adjusted operating margins from continuing operations was 4.9% a 50 basis point improvement over the prior year. Fourth quarter operating margin was 4.7%, an increase of 30 basis points over the prior year. The increase in operating margin was primarily due to leverage on high organic sales levels and higher rebate income. Turning now to our 2015 outlook and starting with aerospace. Our expectation at aerospace is for low single-digit revenue growth in 2015. We expect to achieve growth in a number of key areas including a solid pipeline increase in bearings and new structure programs are expected to ramp up this year including the AH-1Z, Peru SH-2 program and the 747-8 Wing-to-Body Fairings program. Offsetting this growth or a number of defense program headwinds as we expect fewer BLACK HAWK cockpit shipments and both the C-17 and Egyptian SH-2 programs have ended. We also expect to complete the New Zealand SH-2 program during the third quarter of 2015 although this will be partially offset by the start of the Peru program. The estimated year-over-year revenue reductions associated with these programs of $45 million. We are pleased however that despite these program declines we will achieve sufficient growth in our other programs to more than offset these headwinds. 2015 aerospace operating margins are expected to range from 16.8% to 17.2% as we continue to focus on operation execution across our programs. In summary, we are projecting another solid year for aerospace as we grow the top line and maintain strong margin performance. Moving on to distribution we expect sales growth between 8% and 10%. This breaks down to between 3% and 5% organic growth with the balance coming from the B.W. Rogers and G.C. Fabrication acquisitions. Our organic growth outlook reflects our expectations for continued moderate economic growth during 2015. On operating margins we are projecting a full-year range of 4.9% and 5.2% building on the progress we made in 2014 despite a number of headwinds as we will experience in 2015. Most notable of these expense increases are pension and ERP related. These two items combined are expected to have a 50 basis point negative impact of distributions margin in 2015 compared with 2014. Adjusting for those items we are projecting distributions underlying margins to expand by over 50 basis points in 2015. Overall, we expect to see pretax income growth in 2015 in excess of 16% at the midpoint of our various outlook ranges. A return to higher effective tax rate in 2015 will result in lower earnings per share growth relative to the growth we expect in pretax income. Similar to 2014 we anticipate quarterly earnings to increase sequentially throughout the year with approximately 60% to 65% of our full-year earnings in the second half. This reflects our expectations for incremental improvement largely driven by the expected timing of Aerospace program revenues and improved performance at distribution. We anticipate our 2015 full-year tax rate to be approximately 34% as many of the discrete items impacting our rate in 2014 are unlikely to recur. Finally, our full-year free cash flow expectation for 2015 to the range of $75 million to $90 million reflecting another year of strong cash flow generation with the conversion ratio to net income exceeding 100%. With that I will turn it back over to Neal. Neal?

[Neal J. Keating:]

Thanks, Rob. Overall, 2014 was a successful year for Kaman. Our results reflect the successful execution of our long-term strategies across our segments and I remain confident that we will continue to deliver improved operational and financial performance in 2015. With that, I'll turn the call back over to Eric. Eric?

[Eric B. Remington:]

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

[Operator:]

[Operator Instructions] And the first question comes from Edward Marshall. Please go ahead.

[Edward J. Marshall:]

Good morning, guys.

[Neal J. Keating:]

Good morning, Ed.

[Robert D. Starr:]

Good morning, Ed.

[Edward J. Marshall:]

So I wanted to if I could talk about the industrial business, because you’ve had some pretty good growth there in the quarter and I just wanted to get a sense from you if I could, what the cadence maybe in the year so far has been 2015. And I mean your guidance looks like it’s been - it’s pretty strong, and then accordingly the ERP implementation I think there were some comments made about maybe some of the margin impact for that business move into 2015 as well?

[Neal J. Keating:]

Okay. Ed, how about if I start - I talk a little bit about the revenue cadence and then maybe turn it over to Rob on some of the headwinds year-to-year on ERP and other issues. We were really pleased with the uptick in organic sales to 4.8% in the fourth quarter. Partially that was impacted by some of the slowdown that we had with our ERP transition in the third quarter. So we got a little bit of benefit from that arguably a point to ourselves. So it was our fifth consecutive quarter of organic sales growth, so we are pleased with that and actually through the second and third quarters and fourth quarters adjusting for the ERP impacts in the third quarter. We had slight, but certainly noticeable uptick through the last three quarters of the year. As you know starting 2015 we always have some of the difficulties with weather et cetera, we’ve really looked at it on a year-to-date basis and we are up above 4% organically so far this year. So despite some of the bad weather we are pleased with that clearly some of the investments that we’ve made in expanding our sales force are paying off and also some of the markets that we participate in haven’t been impacted as some of our competitors have been. So we’ve been pleased with the organic growth cadence, but we recognize that we have still some work to do the balance of this year to get to the 5% expectation - 3% to 5% expectation for the year.

[Neal J. Keating:]

And then if I could just give a couple of data points on some of the expense headwinds, we do expect between pension and ERP about 50 basis point headwind at distribution, if you recall we did go live at our Minarik operation at the beginning of the third quarter and as a result of that we take the full depreciation on the investments that we make. So that is certainly probably about two-thirds of the drag of the 50 basis points. The remainder of that is primarily pension as I am sure most of you have read discount rates have came down or discount rate is down 80 basis points year-over-year from 4.6 to 2.8 and we also had an impact relating to a change in our mortality table as we highlighted in some of our public financial that we just issued. So the combination of those two are creating about a 50 basis point headwind. So when we look at really the core underlying performance of the business we are seeing a pretty strong year-over-year margin improvement at distribution.

[Edward J. Marshall:]

Okay. And the full-year expense and I guess I’m referring to both businesses with pension versus what it was last year?

[Neal J. Keating:]

Yes, we expect pension expense to go up by approximately $3 million year-over-year Ed, so last year it was about $2.7 million that will be somewhere around $7 million for the year.

[Edward J. Marshall:]

Okay. Great guys, thank you.

[Robert D. Starr:]

Thank you.

[Neal J. Keating:]

Thank you, Ed.

[Operator:]

Thank you. And the next question comes from the line of Matt Duncan, Stephens Inc. Please go ahead.

[Matthew Duncan:]

Good morning guys.

[Neal J. Keating:]

Good morning Matt.

[Robert D. Starr:]

Hi, Matt.

[Matthew Duncan:]

So Neal on the sales force edition at KIT, do you think there is anyway to quantify how much of those were adding to your growth rate and obviously I would think those guys are probably going to get more profitable and add more the top line as time goes forward and just curious how much of that was factored into the margin guide for KIT this year?

[Neal J. Keating:]

We expect that it will - in the fourth quarter it was about 1% Matt, so we’ve been tracking it pretty closely, we’re not able to allocate full cost et cetera, but it turned positive for us in the fourth quarter, we had plans to that and they were able to achieve that. We would expect that overall it would be perhaps 2% through 2015 as you know in any distribution business, you have a certain turnover in your sales organization, so we think we’re well prepared to handle that if it does occur and so we’re pretty pleased with it and its met our expectation so far in turning positive during the fourth quarter and we see a good contribution in 2015 as well.

[Matthew Duncan:]

Okay and then on aero space segment sales, Rob you mentioned that the earnings cadence is going to be such that back half is 60% to 65% of the full-year. I'm assuming part of that is because of the aerospace revenue flow and perhaps even maybe the aerospace margins are below the guide early and above the guide later. Can you give us a little help on how to think about sort of the trajectory of both aerospace revenue and margins to the year?

[Robert D. Starr:]

Sure, no, I think that’s a terrific question Matt. You are correct, we would expect to see the aerospace revenue more back half loaded, not dramatically, but certainly I would say north of 50% of the revenue will be expected in the third quarter and fourth quarter and in terms of the general margin cadence based upon the expected timing of shipments and programs, we do expect aerospace margins to increase during the course of the year with the first quarter being our lightest quarter from a margin perspective at aerospace.

[Matthew Duncan:]

Okay that helps. And then last thing just the M&A pipeline Neal, what's that looking like and with you guys paying down some good debt in the quarter, you got good free cash flow projection for the year, how are you thinking about acquisitions?

[Neal J. Keating:]

Matt, we continue to be very active in the M&A side of our business, obviously starting the year with the GC Fabrication acquisition that was a nice one for us to continue to build out our Automation, Control and Energy platform, clearly we continue to be interested on the distribution side of our business and as we’ve been saying for a while we really would like to be able to be more active in the aerospace side of our business as you know those multiples have been quite high for a number of years, but we would really like to be able to add to our bearings business and increasingly you are going to see us focus there whether we will be able to be successful or not as the question mark, but we are very active.

[Matthew Duncan:]

Okay thanks, guys.

[Neal J. Keating:]

Thank you, Matt.

[Operator:]

Thank you. And the next question comes from the line of Pete Skibitski, Drexel Hamilton. Please go ahead.

[Peter J. Skibitski:]

Hey good morning guys, nice quarter.

[Neal J. Keating:]

Yes, thanks Pete. Good morning.

[Robert D. Starr:]

Thank you, Pete. Good morning.

[Peter J. Skibitski:]

I guess to start on – I just want to ask about the BLACK HAWK I think over the summer you guys were anticipating on the order of 95 cockpits for 2014. And I guess it’s ramped down quite a bit here into 2015, what’s your sense - is that just your lower DoD requirements or Sikorsky kind of moving work around. And what’s your – what’s kind of your mid-term - your line of sight with that program, just continue to ramp down pretty meaningfully or how should we think about that?

[Neal J. Keating:]

Pete its really good question I think that it’s mainly a reflection of DoD requirements through Sikorsky. We do anticipate that will be down again in 2015 versus 2014 as you’ve probably seen I am sure you have see that the budget in 2016 begins to tick up a little bit more. So we would be certainly looking for this year to be the low point, but let’s keep in mind there is a lot of steps before the budgets approved, and that’s a 2016 budget. So any impact on us would be in our fourth quarter our calendar 2015.

[Peter J. Skibitski:]

Okay, very helpful. And then just a follow up, you know there is a lot of color in 10-K about start up of the K-MAX production line. Could you give us some sense of how you are thinking there in terms of timing and risk and maybe opportunity size, any color would be helpful on that point?

[Neal J. Keating:]

Sure, Pete it’s a really good question. We’ve been since November that the K-MAX team has been out actively working with current and potential new customers to get a significant indication of interest and in fact deposits new aircraft if you already go back into production. We think it’s probably a late second quarter, early third quarter kind of timeframe for us to make that decision. And it would really be based on a couple factors. The first would be sufficient commercial demand for us to effectively and economically restart to production line. And then clearly we also see that having a thought production line is important to us and being able to be better position to take advantage of any unmanned aircraft requirements from either the military services such as the Marine Corp army or certainly from the Department of Interior and Forestry now in the United States where we’ve gotten a lot of interest recently on unmanned firefighting capability. So it’s really a two-pronged approach, one is establishing sufficient commercial demand for us to economically restart the line and the second part is clearly how that better positions us for potential unmanned orders in the future.

[Peter J. Skibitski:]

Okay. That’s helpful, thanks. I’ll get back in queue.

[Neal J. Keating:]

Thank you, Pete.

[Robert D. Starr:]

Thanks, Pete.

[Operator:]

Thank you. Okay and the next question comes from the line of Jeff Hammond, KeyBanc Capital Markets. Please go ahead.

[Jeffrey D. Hammond:]

Hey, good morning guys.

[Neal J. Keating:]

Good morning, Jeff.

[Robert D. Starr:]

Good morning, Jeff.

[Jeffrey D. Hammond:]

Just on you mentioned kind of the ERP headwind on distribution margins and some of the top line headwinds abating, when do you think we get to an inflection point where ERP is a tailwind to both top line and margins?

[Neal J. Keating:]

That’s an excellent question, Jeff. Based on the current view of the program we would anticipate ERP reaching that inflection point sometime towards the middle part of 2016 or somewhere in the third quarter of 2016 just based on the current project plan.

[Jeffrey D. Hammond:]

Okay, perfect. And then you mentioned a number of defense headwinds I think adding up to $45 million of headwind, but I think you mentioned some offsets, can you talk about what kind of the tailwinds net out to against that the $45 million and then maybe just touch on how are you thinking about Kamatics growth or commercial growth in general in 2015?

[Robert D. Starr:]

Sure. If you take a look at the $45 million headwind, we have roughly about $60 million of programs across the Aerospace platform that would offset that decline across the programs we’ve referenced creating that $45 million headwind. Amongst those we certainly expect AH-1Z revenues to increase this year. We have a number of programs online and the programs at the UK, a lot of tooling projects, commercial bearings is expecting a strong year this year high single-digit growth that will certainly help both the top line and bottom line. We talked about Peru ramping up, Wing-to-Body Fairings also ramping up. So we have a number of programs, we also recently announced our win, recent win with Rolls Royce. So there is a lot of what we terms our single and doubles out there that are going to help fill the void. On the commercial side, we do anticipate pretty good growth this year. The aerospace cycle continues to be strong. Probably the most important platform there for us in the near-term will be the A350 ramp up most notably at bearings.

[Neal J. Keating:]

Jeff, it’s interesting because if you think about the Aerospace business today, the revenue increase from year-to-year in 2013 to 2014 at about 3% really did offset $25 million of headwind and while it’s a little bit frustrating that the top line growth is not higher. I think when we look at the teams ability to offset that $45 million revenue headwind and really accommodate that and still generate growth is a real testament to the diversity of different platforms that they run. And you do the math and it’s between 9% and 10% growth from year-to-year when you look at the $45 million coming out and then you kind of triangulate to the midpoint of our revenue guidance. So a little bit frustrating when you see that the top line growing slowly, but a tremendous number of moving parts underneath the surface.

[Jeffrey D. Hammond:]

Okay, that’s really helpful. If I could sneak one more and from a margin trajectory in aero I think you kind of saying flat to slightly down, it seems like with good commercial growth maybe better mix in JPF maybe some of these defense, classic defense programs are running obviously you maybe see more of a positive mix shift?

[Neal J. Keating:]

Jeff, you are right, those are all the positive ones that you hit on, where we will see significant revenue growth as well as Rob outlined is in the AH-1Z which is our lower margin structures program in particular as we are still in the relatively early units of that, we have the Wing-to-Body Fairing again still relatively early in that A-10. So again while we’re on in that it’s a lower margin structure programs. So we really do look at the growth in some of our higher margins product lines enabling us to sustain relatively constant margins despite higher revenue contribution from our lower margin structures business.

[Robert D. Starr:]

Yes, Jeff, if I may the other comment I would make there is as you are seeing on a EBITDA basis improved performance at aerospace as we continue to invest in our Evercore system, so we are incurring additional depreciation and amortization also relating to some of the investments we made earlier this year at our facilities in the UK and Germany. So when you look at on EBITDA basis we are expecting aerospace to improve year-over-year.

[Jeffrey D. Hammond:]

Okay. Thanks guys.

[Neal J. Keating:]

Thanks Jeff.

[Robert D. Starr:]

Thanks Jeff.

[Operator:]

Thank you for your question. The next question comes from Steve Levenson, Stifel. Please go ahead.

[Neal J. Keating:]

Steve.

[Operator:]

Make sure your line is un-muted.

[Stephen E. Levenson:]

Sorry about that. Have mute on. Good morning everybody.

[Neal J. Keating:]

Good morning.

[Robert D. Starr:]

Good morning Steve.

[Stephen E. Levenson:]

I'm just paying close attention to the questions and answers. On the K-MAX IMD unmanned fire fighting and other applications there have been I guess some preliminary FAA regulations about operating unmanned systems. Would the fire fighting be exempt from those or would that come under it and do you think that would be an impediment or help to potentially selling more for commercial purposes.

[Neal J. Keating:]

Steve, the fire fighting applications are always done in controlled aerospace when the fire fighters go in there is a zone declared that is controlled aerospace, so its not applicable in that respect. I think that right now and for the next several years any unmanned K-MAX applications that we would have would be government related and would be regulated outside of the recent FAA unmanned regulations that came out.

[Stephen E. Levenson:]

Got it thanks and I don’t know you don’t breakout the different portions of the aerospace segment the way you used to, but can you tell us if the Kmatcis the bearings business margins are similar to the way they have been historically, if they are above or if they have come in at all and if so if its related to pricing pressure.

[Neal J. Keating:]

Steve what I would say there is that that team continues to do an extremely good job of implementing new technologies to enable them to respond to customer pricing pressures and never disappoint us on the margins they deliver.

[Stephen E. Levenson:]

Got it thank you and last one is, with some of these programs in decline, are there any possibilities to consolidate the footprint in aero structure or do you need all the space you have still got?

[Neal J. Keating:]

Steve we keep telling our business development people we’ve got plenty of space around to fill, so we’re looking at that as appose to reducing footprint right now.

[Stephen E. Levenson:]

Got it. Thank you very much.

[Neal J. Keating:]

Thank you Steve.

[Operator:]

Thanks for your question. The next question comes from Jack O'Brien, CJS Securities. Please go ahead.

[Jack O'Brien:]

Good Morning.

[Robert D. Starr:]

Good morning Jack.

[Neal J. Keating:]

Welcome Jack.

[Jack O'Brien:]

Given the initial success Kaman has had with the sales force build out in 2014, can you elaborate on any plans to continue to hire new reps in 2015 and the potential end market opportunities for additional reps?

[Robert D. Starr:]

Sure, certainly the sales force imitative that we’ve put in place in the second half of last year was successful to this point, we continue to evaluate whatever market opportunities may present themselves Jack, but we really want to take a little bit of time with this to make sure that against the traction that we expect from the full program to make sure that we fully exploit the market opportunities that we identified when we rollout these 60 folks before investing in another batch of sales force and resources. Certainly if opportunity presents itself will act on it, but we are trying to be somewhat measured on that.

[Jack O'Brien:]

Okay and then just as a quick follow up. As the [indiscernible] being to offset their cost in Q4. Do you have any timeline for when you expect them to no longer be dilutive to margin?

[Neal J. Keating:]

Yes, sure I mean in the fourth quarter Jack, the sales force initiative was roughly neutral to our overall distribution margins in the fourth quarter. So we actually achieve that as we excited out of the 2014 period. So we would anticipate in 2015 to certainly continue the contribution from the sales force initiative, hopefully at least a segment or maybe even better than segment average.

[Jack O'Brien:]

Okay. Great thank you very much.

[Neal J. Keating:]

Thank you, Jack.

[Operator:]

Thank you for your question. [Operator Instructions] And your next question comes from Eli Lustgarten, Longbow. Please go ahead.

[Eli S. Lustgarten:]

Good morning everyone.

[Neal J. Keating:]

Good morning, Eli.

[Robert D. Starr:]

Good morning, Eli.

[Eli S. Lustgarten:]

Can we talk a little bit about the fluid power business since you’ve made a huge acquisition and as to what you are seeing as we go through 2015 expectations for that business, and talk about the profitability it should be materially more profitable than a regular distribution business, and is it being weigh down by acquisition cost or is that a potential to enhance the profitability of that segment as we go out over the next couple of years.

[Neal J. Keating:]

Eli couple of things I think as we look at the business overall we are extremely pleased with the growth of our fluid power business. And our ability to effectively acquire a number of really premier Parker distributors over the last couple of years and move to the position where on a run rate basis its about 25% of our overall revenues. And as we commented Parker has now moved into the position as our number one supplier for our distribution group. We think that we are their second largest distributor in North America and certainly we would like to move into the number one spot here over the next couple of years. It is a higher margin business for us you are exactly right, it’s one of the reasons that we’ve targeted that it is much more engineering intensive and certainly as we are able to focus all of our resources around Parker as the premier brand we are able to get slightly higher margins as well. But as you said, we do encounter all of the amortization of intangibles associated with those acquisition. So its one of the reasons that we think the EBITDA tables that we now provide in our releases can give you a good understanding of the underlying contribution of those acquired businesses.

[Eli S. Lustgarten:]

Can you talk a little bit about the outlook you have for that business in 2015 better than your guidance?

[Robert D. Starr:]

Sure. Eli, this is Rob. We certainly anticipate in that business similar types of growth that we have projected for the overall segments, I don’t think we are projecting anything that would be terribly dissimilar there. And to answer your other question, we certainly would expect fluid power as time goes on to certainly be an above segment average, which is why we are investing in those lines of business to improve the overall profit margin of distribution.

[Eli S. Lustgarten:]

As a follow-on, your sales force initiative which seem to be working out very well, and I understand your question, but this is not unique to Kaman, it’s basically being done by every major distribution company that now we look at I mean I guess we have five that I know we are doing it and they are all doing for the same reason, because it’s tough to get growth, we can open more stores - some companies are putting more feet on the street to enhance the growth. Do you see that as a competitive issue that you have to be adding more sales people? What do you think you can do it more selectively, because as I said everybody is doing it that we look at?

[Neal J. Keating:]

Eli, I think that with every distribution business as I said earlier there is always some inherent turnover in your sales organization. I think what we did differently was simply to scale of it for a business of our size. So I think that it was important to us especially if you look at the context we came out of 2012 with a very tough revenue environment, beginning of 2013 like some other companies had a restructuring and reduced some of our headcount. Through 2013 we clearly identified some areas that we were under resourced and also as we built out our automation control and energy and fluid power platforms those were really different experiences and skill sets then we had in our base KIT business. So for us it was also required for us to be able to get the right resources with the right experience in training into the markets that we had some opportunity. So I think you are right, every company does that to some degree I think for us as a percentage of our overall outside sales force it was significantly higher.

[Eli S. Lustgarten:]

Got it. And thanks - can you talk a little bit about e-commerce in your businesses whether your investments percentage and what you have to whether it becoming a more important part of our business and we don’t have much commentary on that here?

[Robert D. Starr:]

Sure, e-commerce is a pretty important part for distribution. I think it’s an area where we continue to make investments, we probably have some catching up to do perhaps to some - relative to some of our competitors who are further down the road on that, but certainly we recognize the importance of e-commerce as way of reducing transaction costs and gaining additional market share going forward.

[Eli S. Lustgarten:]

How much of your business is e-commerce at this point?

[Robert D. Starr:]

We haven’t really disclosed that, but it’s - I would say it’s fairly small.

[Eli S. Lustgarten:]

Thank you.

[Robert D. Starr:]

Thank you, Eli.

[Operator:]

Thank you for your question. [Operator Instructions] And the next question comes from Scott Graham, Jefferies. Please go ahead.

[R. Scott Graham:]

Hey, good morning very nice quarter.

[Neal J. Keating:]

Thank you Scott, good morning.

[Robert D. Starr:]

Thank you, Scott.

[R. Scott Graham:]

Couple of questions from me the backlog in aerospace. You guys have an idea of how much you expect to ship in 2015 of the backlog?

[Neal J. Keating:]

Yes, Scott, we typically the general rule of thumb we typically expect to ship roughly I think about 80% plus of the backlog during the course of the year, somewhere in that range is what we would expect in 2015.

[R. Scott Graham:]

Okay, I’m going to sort of triangulate here to a question about how the earnings flow in 2015. It looks to me from at least from my math and please correct me if I’m wrong that based on your comments in distribution that our first quarter earnings per share will probably be down given that sort of 60%, 65% second half. So I guess my simple question is based on the shipments schedule that you see in your backlog right now obviously that’s going to take some wins to and some sort of run rate business to get to the revenue number in aerospace. How confidence are you in that aerospace sales guidance?

[Neal J. Keating:]

I think Scott there is always some variability because you’re right there are orders that you anticipate winning during the course of the year and being able to convert into shipments during the year. The ratio for us this year is not a typical from what we’ve had over the last three or four years. So that gives us confidence in our ability to hit the sales outlook and also as we commented in our prepared remarks we had a number of programs that we closed recently that we see providing some upside for us to able to hit that outlook during the course of the year. So you’re absolutely right, you do the math and it require us to win in convert orders during the course of the year. We track that pretty closely and it’s not an A typical percentage for us.

[R. Scott Graham:]

Yes, okay great. Last question is the wins that you talked about the Bell, 767, 777 the Tanker, you said about $200 million, most of it is not in the backlog, could you tell us how much is and how much expect or when do you expect the rest upon to hit the backlog.

[Neal J. Keating:]

Yes, I’m going to take the second half of the question. First, because it’s a little bit easier for us as we look at what the current backlog is by couple of those programs, but we did close those orders late in the fourth quarter or early here in the first quarter so we would anticipate that a fair amount of it would come in during the first quarter Scott, the thing to keep in mind is that in some of these incidences we will enter into a contract, but it will be based on a series of purchase orders and for us we have a tight policy that it has to be PO for us to be able to put it into our backlog. So for us, we currently have only about…

[Robert D. Starr:]

Its about $40 million Scott, roughly give or take that’s in our backlog today that related to those programs.

[R. Scott Graham:]

Okay and then with the signings and as these things hit the backlog and I definitely applause you for the conservative approach you take. Would we expect to see the backlog lies sequentially in the first and second quarters?

[Neal J. Keating:]

No, we would expect to see the backlog improve over the year Scott, some of it does relate in terms of how they place their POs and the timing of when they do that. So really comes down to on some extent just the customer demand in terms of how they place the fields relative to the rate of sales and that does fluctuate at times.

[R. Scott Graham:]

I'm with you. Thank you.

[Neal J. Keating:]

Thanks Scott.

[Robert D. Starr:]

Thank you Scott.

[Operator:]

Thank you for your question. And the next question comes from Robert Kirkpatrick, Cardinal. Please go ahead.

[Robert B. Kirkpatrick:]

Good morning. Is the ERP operation at Minarik now working as expected after the disruption earlier in the year when it was put in place?

[Robert D. Starr:]

I would say it Rob, there are still some things that we’re doing to optimize the performance of the system and also some things that we’re doing to modify some of our processes to make sure that we can be more efficient, but we took a big step up in the fourth quarter and cleared a lot of the backlog that we built and we’re not able to - because we weren’t able to ship it in the third quarter. We actually just had our board meeting last week, and the ERP team gave an overview for the board and I would say that Minarik is back in operating well. But there is still some improvements that we can make, since it’s was our first go live. We certainly had a number of items on our lessons learned list.

[Robert B. Kirkpatrick:]

Thank you. When is the next cut over expected to happen. And which operation will be cut over?

[Neal J. Keating:]

We anticipate that it will be in the – probably early in the third quarter Rob. And it will be one of our more recent acquisitions. We think it will be Florida Bearing and the reason that we have elected to go live. Then is that you know it gives us a full quarter to go through all of our Sarbanes Oxley, testing and compliance. So typically we will do go lives at the beginning of a quarter.

[Robert B. Kirkpatrick:]

Okay. And then you talked about the sales force expansion effect for the quarter. But I was wondering if you could give us any color on the amount of investment that netted out for the year?

[Robert D. Starr:]

When you say that the investment Rob, are you speaking to the net P&L impact?

[Robert B. Kirkpatrick:]

Yes the net P&L impact.

[Robert D. Starr:]

Yes. For the year it did have a negative impact for the year it probably had in the neighborhood of about a 10 basis point impact for the full-year.

[Robert B. Kirkpatrick:]

Super. Thank you so much.

[Neal J. Keating:]

Thanks Rob.

[Robert D. Starr:]

Thanks Rob.

[Operator:]

Thank you for your question. And the question comes from Peter Skibitski, Drexel Hamilton. Please go ahead.

[Peter J. Skibitski:]

Yes, few follow-ups guys for Neal or Rob I guess I’m trying to understand better the aerospace margin guidance, try to understand why margins would be kind of flat to down in 2015 on at least flat volumes for your guidance and although better mix, right, you talked about better mix at JPF as well as higher bearing sales. So is it a pension or something else could you just help us there.

[Robert D. Starr:]

Yes, Pete good question. There are couple of things that are really working to keep them the margin relatively flat year-over-year. You are absolutely correct, we are expecting a slightly better mix on our JPF orders, although it’s not that dramatic, in bearings we expect an improvement really offsetting that. There is a number of things in particular the significant ramp up in AH-1Z as we mentioned, as Neal mentioned that’s an early rate production, so that will be at much lower margins. We also expect there will be pension headwind there as well similar to distribution just given some of the change in our pension assumptions. So it’s really a mix of some ramp up on lower margin products offsetting growth and some of the higher margins, so when you kind of net it all out we’re pretty much out of an expected flat margin environment year-over-year.

[Peter J. Skibitski:]

Okay, got it. And then that the $45 million revenue headwind to aerospace you talked about from the four programs, is that roughly kind of 25% impact from all of those or one significantly greater headwind than another?

[Robert D. Starr:]

Yes. Pete, terrific question. No it is not 25% across all of them, we do expect a larger impact from the reduction in the New Zealand SH-2 program, is that winds down in the third quarter of this year. The remaining programs are fairly equivalent and their impact, but we would expect New Zealand to be the larger contributor there. End of Q&A

[Operator:]

Thank you for your question. I would now like to turn the call over to Eric for closing remarks.

[Eric B. Remington:]

Thank you for joining us for today’s conference call. And we look forward to speaking with you again in a couple of months when we report our first quarter.

[Operator:]

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