Q4 2020 Kaman Corp Earnings Call BLOOMFIELD Feb 27, 2021 (Thomson StreetEvents) — Edited Transcript of Kaman Corp earnings conference call or presentation Friday, February 26, 2021 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Ian K. Walsh Kaman Corporation – President, CEO & Director * James G. Coogan Kaman Corporation – VP of IR & Business Development * Robert Daniel Starr Kaman Corporation – CFO & Executive VP ================================================================================ Conference Call Participants ================================================================================ * Christopher M. Dankert Longbow Research LLC – Research Analyst * Peter John Skibitski Alembic Global Advisors – Research Analyst * Robert Benjamin Kirkpatrick Cardinal Capital Management, L.L.C. – Managing Partner and Portfolio Manager * Robert Stephen Barger KeyBanc Capital Markets Inc., Research Division – MD and Equity Research Analyst * Seth Michael Seifman JPMorgan Chase & Co, Research Division – Senior Equity Research Analyst ================================================================================ Presentation ——————————————————————————– Operator [1] ——————————————————————————– Ladies and gentlemen, thank you for standing by, and welcome to the Kaman Corporation Q4 2020 Conference Call. (Operator Instructions) I would now like introduce your host for today’s conference call, Mr. Jamie Coogan. You may begin. ——————————————————————————– James G. Coogan, Kaman Corporation – VP of IR & Business Development [2] ——————————————————————————– Good morning. I’d like to welcome everyone to Kaman’s Fourth Quarter 2020 Earnings Call. Conducting the call today are Ian Walsh, 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 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 fourth quarter 2020 results included on Form 10-K and the current report on Form 8-K filed yesterday evening together with our earnings release. We also 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. Finally, we posted an earnings call supplement to our website that is designed to provide additional context on our financial performance, key events for the period, additional information on the makeup of our sales and cost-savings actions and our outlook for 2021. You can find this presentation at www.kaman.com/investors/presentations. With that, I’ll turn the call over to Ian Walsh. ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [3] ——————————————————————————– Thank you, Jamie. Good morning, everyone, and thank you for joining our fourth quarter 2020 earnings call. I’ll start this morning by providing some highlights on the quarter and full year followed by an operational and business update before passing the call over to Rob for a more detailed discussion of our financial results for the quarter and our expectations for 2021. We closed our fiscal year on solid footing. And through our team’s dedicated efforts, we successfully navigated a difficult set of events in 2020. The pressure in some of our critical end markets notwithstanding, we delivered sales in 2020 of $784.5 million, which was up 3% compared to the prior year. Our higher sales were attributable to the acquisition of Bal Seal and higher volume for our joint programmable fuze, partially offset by a decline in sales in the more pandemic-sensitive end markets of commercial aviation, medical and, to a lesser extent, industrial. Turning to our profitability. Our adjusted EBITDA margin for the full year was 13.1%, which was on par with the prior year despite the sharp decline in sales for higher-margin commercial aviation medical markets. The ability to maintain our adjusted EBITDA margin was a result of strong profitability of our joint programmable fuze program and the quick and decisive actions we took to reduce our cost structure during the course of the year, combined with our G&A reduction efforts we began in 2019, the sale of our Distribution segment. The GAAP diluted loss per share from continuing operations of $2.54 for the year was impacted by significant noncash impairment charges. Our full year adjusted diluted earnings per share was $2.11, an increase of nearly 30% when compared to the prior year of $1.63. The Kaman team accomplished a lot in 2020, and I’d like to spend a few moments highlighting some of these items in detail. First and foremost, we kept the safety of our global workforce as a priority through our ongoing pandemic. We found new ways to work in this environment and continued to deliver essential products to our customers both on time and the consistent high quality that is expected from Kaman. Second, we integrated the acquisition of Bal Seal, achieving the cost targets we expected early in 2020. This transaction represents the largest acquisition in the history of our company, and we are proud of the team’s efforts while largely working on the integration remotely in the midst of this pandemic. The team worked hard to identify new product opportunities that will provide our customers differentiated integrated solutions. As we previously disclosed, Bal Seal was impacted by a ransom attack in December. I’m pleased to report that our team reacted quickly and effectively, restoring normal operations by mid-January without paying a ransom. While we do not anticipate any meaningful lost volume, some shipments were delayed at the end of 2020 and the first few weeks of 2021, which we are confident we will fully recover over the course of the year. Looking forward, we remain enthusiastic about the prospects for Bal Seal as part of our portfolio. The products and capabilities are right in line with our objectives for the future of Kaman, which is to focus on highly engineered solutions that are critical to our customers. While the pandemic delayed the visibility of its contribution in 2020, we are confident that it will be a core part of the Kaman story going forward. Third, subsequent to year-end, we made significant progress in our portfolio reshaping with the divestiture of our U.K. composites operations. After thoughtful analysis, we determined that our U.K. operations have historically underperformed and would be more appropriately suited with another owner. The divestiture will allow us to redeploy capital, resources and management time back to our core operations while improving our overall margin profile. Lastly, we architected and deployed a new operations excellence model across all our businesses, focused on margin expansion, improved cash generation and driving better ROICs over time. We are exiting the year in strong financial health, leaner and ready to grow as the market begins to recover. During the year, we continued our focus on our G&A reduction efforts, which began in 2019, and we acted decisively, implementing additional cost reductions as the effects of the pandemic materialized in the first quarter. As we move into 2021, we have a strong balance sheet and available capacity under our revolving credit agreement. This provides ample flexibility to continue our portfolio reshaping and make investments in new product technologies, which will enable us to continue to build Kaman. Turning to our product offerings and beginning with our specialty bearings products. As anticipated, sales were under pressure in the fourth quarter due to the continued impact of COVID-19 on commercial aviation. As we enter 2021, we are seeing an increase in order rates for our medical and industrial products, and we remain very optimistic on the long-term outlook for our bearings business and view it as critical to our long-term success. We benefit from the innovative nature of these products as they are some of the strongest-performing product offerings in our portfolio. For our joint programmable fuze program, 2020 was a record year for production and delivery. Our team worked tirelessly to deliver 40,749 JPFs, up more than 17% when compared to 2019. These deliveries were weighted toward our higher-profit DCS customers, leading to record profit contribution from this product during the year. We expect to deliver 30,000 to 35,000 JPFs in 2021. And while this is below 2020 peak deliveries, the volume is in line with historic delivery levels. We continue to see demand for this product albeit at lower levels than we have seen in the past. The recent change in administration has led to uncertainty on the timing of delivery for one of our key customers as the new administration has indicated its desire to review the sale of defense products to 2 Middle Eastern countries. The outcome of this review remains uncertain, and therefore, we have elected to temporarily remove a previously anticipated order from our current guidance, which will impact our full year outlook for 2021, as Rob will detail shortly. Our K-MAX program, we continue to see strong demand with the sale of an additional aircraft during the fourth quarter and the receipt of a new order in January from an aircraft delivery in the first quarter of 2021. For the full year, we expect to sell 4 new aircraft, and we continue to believe that K-MAX represents a unique value proposition to both commercial and military customers. We are enthusiastic about the product pipeline and very excited about the K-MAX unmanned deployment — unmanned development program, which continues on schedule for United States Marine Corps with an expected demonstration of the upgraded U.S. capability later this year. We have made a lot of progress over the past couple of years to reshape our business, beginning with the divestiture of Distribution, the subsequent acquisition of Bal Seal, and continuing with the recent divestiture of our U.K. composite structures business. As we exit 2020, with strong balance sheet and available borrowing capacity, we expect to pursue additions to our portfolio. While challenges clearly remain ahead as the pandemic continues to affect our business and incoming administration lays out its strategic objectives, we are very well positioned to emerge stronger, more profitable and more resilient. Now I’ll turn the call over to Rob for a closer look at the numbers. Rob? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [4] ——————————————————————————– Thank you, Ian, and good morning, everyone. Today, I will walk you through our fourth quarter results before turning to our outlook for 2021. During the fourth quarter, net sales from continuing operations were $185.3 million, down 22% when compared to $237.8 million in the prior year. As expected, our fourth quarter results were affected by the adverse effects of COVID-19 on our commercial aerospace and medical businesses. We also had a difficult comparison for our joint programmable fuze program that was partially offset by contributions from Bal Seal. Despite the lower deliveries of JPF in the fourth quarter, 2020 was a record year for the JPF program. Turning to our end markets. Defense, which has historically contributed about 50% of our sales mix, was down 23.6% in the fourth quarter of 2020 compared with the year ago period and down 25.3% sequentially. The sequential decrease was driven by fewer deliveries of our joint programmable fuze. Sales in our commercial business and general aviation markets, which historically contributed 30% of our sales mix, were 40% lower compared to the year ago period, as expected, but increased 6.4% sequentially. This sequential increase was driven by a 13.7% increase in sales to Boeing and Airbus and a 3.7% increase in sales for our general and business aviation products, which included the sale of one K-MAX aircraft. While we continue to expect sales of our commercial aviation products to be under pressure through the first quarter and we expect a more meaningful recovery in the back half of ’21, the diversity of our product offering and the broad range of platforms we support in general and business aviation is expected to partially offset these declines. In our medical end market, which accounts for about 10% of our historical sales mix, organic sales increased 1.3% from the year ago period. The second quarter performance for these products was the lowest point for the year, and while we’ve seen improvement, the rate of recovery has been uneven. We continue to expect that this market will rebound and that we will have the ability to recapture much of the missed volume during the course of the year, which will drive improved performance for these products in 2021. Finally, sales in our industrial end markets, which comprise about 10% of our historical sales mix, were up 37% from the year ago period as a result of the Bal Seal acquisition. Sequentially, sales were up 5.8%. We are seeing relatively better performance in this end market given the improvements in overall global economic conditions. Gross margin for the quarter was 29.3% compared to the 35 — 30.5% in the prior year period. The 120 basis point decline over the fourth quarter of 2019 was primarily driven by mix and reduced volumes for our commercial bearings. Investments continue to be a primary focus for us as we look to drive future organic growth. Spending in 2020 on IR&D and B&P, which is included in our SG&A line on the income statement, increased 11% over 2019 to $21.7 million. While SG&A as a percentage of sales increased in the fourth quarter and full year, the increase was largely due to the costs related to our acquisition of Bal Seal. SG&A as a percentage of organic sales was 22.1% for the full year, in line with 2019 despite the reduction in organic sales. Restructuring and severance expense in the period was $0.5 million compared to $1 million in the fourth quarter of 2019. In connection with the sale of Distribution in 2019, we committed to reduce our G&A expense by $15 million to $20 million on a run rate basis as we exited 2020, and our activities since then have allowed us to reach the high end of this range. Additionally, in response to the volume declines we have experienced due to COVID-19, we’ve been actively reducing our costs. In total, our activities in 2020 reduced costs by approximately $50 million on a run rate basis and demonstrates our ability to flex our cost structure. These actions resulted in approximately $26 million realized savings in 2020. Cost control remains a focus and is a primary driver for our ability to hold adjusted EBITDA margins in 2021 despite the lower sales volumes and product mix we expect for the year. On a consolidated basis, against a backdrop of lower sales, we recorded an operating loss of $38.2 million compared to the operating income of $14.8 million in the fourth quarter of the prior year. On an adjusted basis, operating profit was $5.6 million or 3% of sales compared to the $30.2 million or 12.7% of sales in the prior year period. As we have mentioned previously, with the sale of Distribution, we agreed to provide certain services such as tax, treasury, human resources and IT during the transition period. We plan to complete these activities during the first quarter of 2021. Adjusted EBITDA from continuing operations in the fourth quarter was $17.3 million or 9.3% of sales compared to the $36.7 million or 15.5% of sales in the fourth quarter of 2019. We recorded a diluted loss per share from continuing operations of $1.13 compared to diluted earnings per share of $1.22 in the prior year. Adjusted diluted earnings per share was $0.41 in the quarter compared to the $0.80 adjusted diluted earnings per share in the fourth quarter of 2019. The primary adjustments in the current quarter included the impairment loss on the sale of the U.K. assets held for sale and Bal Seal acquisition-related expenses. During the quarter, we generated free cash flow of $65.3 million, reducing our free cash flow usage for the year to $1.3 million. Cash flow performance for 2020 was impacted by a delay in the collection of a significant joint programmable fuze DCS receivable. Moving to our outlook for 2021. We expect sales in the range of $725 million to $745 million, and we expect to deliver adjusted EBITDA margin at the consolidated level in the range of 11.7% to 13%. This anticipated moderation in adjusted EBITDA compared to 2020 is due to the expected sales mix in the year, the continued impact of COVID-19 and the decision to remove an expected JPF DCS order from our 2021 outlook. For the full year 2021, we currently expect earnings per diluted share to be in the range of $1.55 to $1.87. It is important to note that we have removed a previously expected JPF DCS order from all of our guidance ranges as the new administration and the Department of State assess foreign military sales. This volume was in our original plan, and a favorable outcome in 2021 would increase our expected sales and diluted earnings per share above 2020. We expect GAAP cash flow from operating activities from continuing operations in 2021 to be in the range of $25 million to $35 million, leading to adjusted free cash flow of $30.1 to $40.1 million and includes a $10 million discretionary pension contribution. GAAP operating cash flow for 2021 will include a $25.1 million payment to Bal Seal employees and has been accounted for as compensation expense to Kaman under ASC 805 in 2020. This amount represents a portion of the purchase price we pay for Bal Seal, and we will adjust this out of our cash flow results for 2021. Additionally, we will see net periodic pension benefit of approximately $26.3 million, expect interest expense for the year of approximately $16.4 million and estimate our annualized tax rate at approximately 24%. Finally, and consistent with prior years, we expect the cadence of earnings to be weighted towards the second half of 2021, with approximately 30% of earnings in the first half and approximately 70% of our earnings in the second half of 2021. In conclusion, we are well positioned to continue to execute on our strategy and manage the business throughout this rapidly changing operating environment. With that, I will turn the call back over to Ian. ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [5] ——————————————————————————– Thanks, Rob. 2020 was a challenging year, and I’m very proud of the work the team put forward to support each other and our customers. We see positive signs as markets stabilize and begin to recover, and we are excited about the work we have done to position the business for growth in the near future. Before we open the lines for questions, I wanted to share 2 pieces of exciting news. First, 3 of our businesses — business units had the honor to provide technologies that contributed to the successful landing of NASA’s Perseverance rover and Ingenuity helicopter on Mars. We are proud to have participated in the program, and our solutions are playing a part of this historic mission. And second, we were recently recognized by Forbes as one of America’s Best Midsize Employers. Forbes ranked 500 midsize employers by surveying 50,000 Americans working for businesses with at least 1,000 employees. Kaman ranked 127 out of 500. This is a testament to the strength of Kaman and to our core values of respect, excellence, accountability, creativity and honor that we strive to achieve every day. With that, I’ll now turn the call back to Jamie. ——————————————————————————– James G. Coogan, Kaman Corporation – VP of IR & Business Development [6] ——————————————————————————– Thanks, Ian. Operator, may we have the first question, please? ================================================================================ Questions and Answers ——————————————————————————– Operator [1] ——————————————————————————– (Operator Instructions) Our first question comes from Steve Barger with KeyBanc Capital Markets. ——————————————————————————– Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division – MD and Equity Research Analyst [2] ——————————————————————————– Ian, given the revenue guidance, I just want to start on how Kaman goes forward from here. On the last call, you’ve talked about 3 focus items, organic growth, executing M&A, deploying a focused operating system. Can you talk about what you intend to do to drive organic growth from here? ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [3] ——————————————————————————– Yes. Sure, Steve. I think that’s a fair question and something that I’m excited to talk a little bit about. On the first kind of objective, if you will, organic growth, I mean, I’ll start out by saying this was a challenging year for everybody. All our markets, end markets were down. Technically, it’s like — it was for a lot of folks. But — well, I am — when I came aboard here and worked hard in the last quarter with our teams is really trying to understand where opportunities were. And so we agreed that the best time to really double down, if you will, on product development is when you’re in a down cycle. And that’s exactly what we’re doing. So we’ve increased our IRAD and B&P this year. And from there, we’re doing a lot of work to accelerate our new product development processes at each of the BUs. We’re strengthening our engineering capability and just talked about this with our Board recently. All of that, to me, is designed to kind of position us for this accelerated kind of “profitable growth” when the markets do return. And I’ll just give you a couple of examples. Bal Seal, for example, great business, probably 2 of the nicest plants I’ve ever seen, really high-end technology, they’re doing a lot of automation with their processes right now to drive cost out. They’ve got some really exciting, new product developments on the brain and neurotransmitter side of things. Shifting over to where we’re going with UAS and K-MAX or the Marine Corps and some spiral opportunities there, very exciting to include some work we’re doing, for example, with height of burst and KPP. We’ve talked in the past, we just certified our first sale at Kamatics around titanium-diffused hardening. EXTEX, which is a small part of the business but extremely profitable business, just got a PMA, Pratt & Whitney Canada authorization. So there’s a lot of things going on, and we’re really trying to fuel that kind of — that innovation side of things and doubling down, like I said, on the engineering side, and really thinking about our front-end part of the business, which, again, goes back to the operating model IL talk about here in a second. So the organic piece to me is so critical for us. And we’re all kind of living through this pandemic, and we can talk more about the end markets and we’re seeing here. But the organic growth piece is huge because, as you guys all know, we’ve got a really solid chunk of our business that has tremendous contribution margins. And it hurts us when the markets go down, but it’s just fantastic when those markets recover, and that’s what we prepared to do and really even chip away more at the total cost structure. On the inorganic side, real quick, no question about it, we’ve done a bunch of things to think about where we want to go and leveraging our balance sheet. So for example, we’ve created a standard meeting every week, which we now start to cycle through and look at what those M&A opportunities are — should be. We’ve added — we’re adding resources to our M&A team. We talked about that last time. And we’ve actually gone back and revamped some of the criteria by which we’re looking at certain M&A. And that’s in line with an effort that we started last year to really understand the drivers of this business. And we want to make sure that, that next acquisition, which we’re very excited to make, is the right one and drives the right results. And the last one, which, again, is in play right now, is this operating — or OpEx model. And Russ Bartlett is here now, and the team is complete. He’s actually down working with our businesses this week. We’ve rolled that out. We’ve deployed it. We’ve got 5 pillars around it. We’ve got new operating reviews around it month-to-month to really drive the margin expansion from across the entire value stream for each business. And just on top of that, to put a fine point, that — all of that I just talked about, certainly, the operating model is designed to understand where each of our businesses sits today and where they need to be in a short period of time to hit top-quartile performance. And that’s what that operating model is designed to do. ——————————————————————————– Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division – MD and Equity Research Analyst [4] ——————————————————————————– Really appreciate that comprehensive answer. When you think about the organic opportunities you talked about and the M&A strategy and you just think longer term, how do you envision the mix here? Does it make sense to be so heavy to defense? Or what direction do you want to push the company? ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [5] ——————————————————————————– Yes. It’s — we are absolutely aligned with the strategy that we had, which was to leverage the capital we have to go after businesses that sit in the highly engineered side of the house. Now what that means then, which is interesting and I’m sure you guys know this and I — again, in the last 6 months, I feel very comfortable, have got my arm and heads around this business. We had a lot of end customers. But fundamentally, it’s driving towards that higher end, higher — highly engineered parts that then play a role in a lot of those end markets. Defense, arguably, I think, is probably going to shift down a little bit just by the nature of what we’re trying to do. And the commercial side, medical, industrial, those are businesses that we think are going to have some nice upside for us. ——————————————————————————– Operator [6] ——————————————————————————– Our next question comes from Pete Skibitski with Alembic Global. ——————————————————————————– Peter John Skibitski, Alembic Global Advisors – Research Analyst [7] ——————————————————————————– I just want to understand 2021 revenue guidance a little bit better. On the sale of the U.K. composites business, I guess that’s the Brookhouse Holdings unit. And so that’s about a $20 million headwind to revenue guidance for 2021. Is that correct? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [8] ——————————————————————————– That’s correct, about — yes, about $22 million, Pete. ——————————————————————————– Peter John Skibitski, Alembic Global Advisors – Research Analyst [9] ——————————————————————————– Okay. And then the loss that you talked about, is that a normal operating loss? That does not include the impairment? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [10] ——————————————————————————– Yes. The — yes. That is correct. That excludes the asset impairment as a result of the asset held for sale accounting treatment. ——————————————————————————– Peter John Skibitski, Alembic Global Advisors – Research Analyst [11] ——————————————————————————– Okay. It includes the impairment? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [12] ——————————————————————————– No, no, does not include the impairment. ——————————————————————————– Peter John Skibitski, Alembic Global Advisors – Research Analyst [13] ——————————————————————————– Does not include impairment. ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [14] ——————————————————————————– I mean if you’re referring to the $7 million. ——————————————————————————– Peter John Skibitski, Alembic Global Advisors – Research Analyst [15] ——————————————————————————– Right. ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [16] ——————————————————————————– Yes. No. That is an operating loss. ——————————————————————————– Peter John Skibitski, Alembic Global Advisors – Research Analyst [17] ——————————————————————————– Okay, okay. And then on the 7,000 fuzes, is that part of the large order from back in early 2018, the $324 million order that was a multiyear order? Or is that something separate? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [18] ——————————————————————————– Yes. No. Pete, that is a separate order, unrelated to the $324 million order. ——————————————————————————– Peter John Skibitski, Alembic Global Advisors – Research Analyst [19] ——————————————————————————– Okay. So losing 7,000 fuzes on a DCS, I’m — ballpark, I’m guessing that’s about a, I don’t know, $40 million headwind, something like that? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [20] ——————————————————————————– Yes. Just a couple of things. I mean I wouldn’t say — we took it out of guidance. I wouldn’t say we’re losing it. I think really, what we’re saying is just given the current environment, it’s uncertain as to when we’ll be able to fully book that into backlog given the granting of export licenses fee. But we did take it out as a guide. But what it shows is that there’s continued demand for our unit and as you can appreciate, no different than a Raytheon or others. We’re just working — we’re working as best as we can to understand the environment in Washington. The one thing to just keep in mind when you think about the ’21 guide, and I think we alluded to it, is that had we been in a slightly different environment and we’re able to include that just business as usual, both our top line and our bottom line would have been higher year-over-year. So no question, it has a temporary meaningful impact on where we are, but we’re certainly going to do our best to get that sell-through. ——————————————————————————– Peter John Skibitski, Alembic Global Advisors – Research Analyst [21] ——————————————————————————– Got it. Okay. Just a couple more from me. Are those particular fuzes, those 7,000, are they already in work in process? Are they kind of sitting there in inventory right now? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [22] ——————————————————————————– Yes, yes. Pete, I would say this. Certainly, it’s part of our production plan. We want to make sure that should we receive an export license and that goes quicker than we think that we’re able to support the customer. ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [23] ——————————————————————————– Yes, yes. And Pete, let me — yes. Let me just shed some color, too, just because this is such an important part of what’s going on. And first of all, I hope you saw we did receive our $52 million cash payment literally just yesterday, and we sent an 8-K out on that. So that was very exciting to get in. But relative to this order, to your point, that contract is in work. We literally work in the final Ts and Cs. Pricing is all done. We’re just at that point where — with what’s happening with the State Department and what Biden said and if you look at the news this morning, they may help me push things along, but we’ll see. But the idea is to say that the March time frame is kind of what we were trying to get done by. We’ll see if that gets pushed through. If it doesn’t, then from a production perspective, we kind of work our way through the remainder of this year to see, a, if it doesn’t come now, it will come later. It may push to 2022. If it comes in the near term, then there’s some upside for us this year. ——————————————————————————– Peter John Skibitski, Alembic Global Advisors – Research Analyst [24] ——————————————————————————– Okay, okay. And just if I could squeeze one last one. The $25 million for Bal Seal, was that the last Bal Seal payment? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [25] ——————————————————————————– Yes, Pete. That just represents our contractual obligation. This is all part of their retention program that was in place when we bought them. So moving forward, you’ll see a lot less purchase accounting adjustments as it relates to Bal Seal. ——————————————————————————– Operator [26] ——————————————————————————– Our next question comes from Seth Seifman with JPMorgan. ——————————————————————————– Seth Michael Seifman, JPMorgan Chase & Co, Research Division – Senior Equity Research Analyst [27] ——————————————————————————– So I just wanted to ask a little more about the fuzes and sort of thinking about where — as we think out maybe 2 to 3 years beyond the delivery guidance that you’ve given now, where that might sit. And we see where the backlog is for fuzes for JPF versus 2 years ago kind of down significantly. And we can look at the sales contribution back in like the middle of the decade and where that was. And I guess even if you add in the 7,000, still down year-on-year. I guess it would be more to like maybe the 2019 level in terms of deliveries. So what’s kind of a — what do you think of as kind of a sustainable level of fuze deliveries going forward? ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [28] ——————————————————————————– Yes. Seth, I’ll start and let Rob chime in. It’s an important question for sure. A couple of things. One is the JPF has just been — again, coming in and looking at the history, just been a tremendous program for us. Second part is it’s really exciting to know what the team did last year and hitting that kind of record level. It’s hard when you have a record level to sustain that, quite frankly. But what is, I think, important to understand is when you look at the kind of opportunity we have this year, the orders that we’ve got in, the orders that we know for next year, 30% to 35%, it sits at kind of that historic level. And what we’re seeing right now — and there’s a lot of chatter, and we’re doing our due diligence to know where the 152 stacks up and what’s going on with 139 and all that good stuff. But the bottom line is that on the U.S. government side, there’s still work to be done. And what that means for us is there’s plenty of opportunities still with our DCS and even FMS on the 152. And so without having solid orders necessarily, we just know the opportunities are still very real there. So I’m relatively optimistic. Now is it going to last forever? No. And we’re working hard right now with our strategic plans and our investments and thinking about where we’re taking the business to really fill that gap over time. But I do feel we’ve got a nice window right now with what we’re looking at. ——————————————————————————– Seth Michael Seifman, JPMorgan Chase & Co, Research Division – Senior Equity Research Analyst [29] ——————————————————————————– Okay. Great. And then I guess, in thinking about the margin guidance and kind of where it came in for ’21 and kind of the work that you guys have done in getting the margins up through sequential improvement in Q2, sequential improvement in Q3, is it kind of the — is there a way to think about just sort of maybe a back-of-the-envelope way that having wherever you kind of thought the EBITDA margin, what that trajectory was headed around the middle of the year on a lower base of fuze sales just for mix reasons that takes things down by some level of basis points? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [30] ——————————————————————————– Yes. So Seth, just to make sure I understand. You’re referring to our guide for next year? ——————————————————————————– Seth Michael Seifman, JPMorgan Chase & Co, Research Division – Senior Equity Research Analyst [31] ——————————————————————————– Yes, yes. And comment on sort of the [all of those] level. ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [32] ——————————————————————————– Yes. I mean I think the way to think about it, if you look at our guide, the midpoint EBITDA margin is around 12.5%, a little over — compared to 13% in prior years. And that does reflect certainly a considerable reduction in our JPF book of business. I mean I think that — and as we’ve talked about in the past, certainly, that is a very profitable program and can move our margin. So what I would say is when you look at the rest of our business, based on the uptick we expect in the back half of the year, most notably in our bearings group of businesses, as well as continued focus on cost control, we’re looking at roughly $40 million kind of on a run rate basis in ’21 versus $26 million that we realized in ’20. So we’re getting about $14 million of incremental savings year-over-year, which is worth about 200 basis points in margin. So I — to make a long story short, Seth, most of the reduction that you’re seeing in the guide really is kind of a result of lower JPF volumes because the rest of the business is going to pick up and improve just based on all the structural changes we’ve made. ——————————————————————————– Seth Michael Seifman, JPMorgan Chase & Co, Research Division – Senior Equity Research Analyst [33] ——————————————————————————– Cool. No. That’s very helpful. And then maybe if I can… ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [34] ——————————————————————————– Seth, just one last point. When we talk about the $40 million, keep in mind that’s roughly split 50-50 between cost of sales and G&A. ——————————————————————————– Seth Michael Seifman, JPMorgan Chase & Co, Research Division – Senior Equity Research Analyst [35] ——————————————————————————– Okay. Great. And then maybe if I could just sneak in one last one. The company has been pretty proactive in recent years in terms of pruning out stuff from the aerospace business that wasn’t profitable and took another step in that direction with the U.K. composites divestiture. When we think about the aerospace — the commercial aerospace business for ’21, how much is left that’s kind of not bearings? I know you probably don’t want to give an exact dollar number, but is there like, I guess, the ballpark way to think about the percentages in terms of what’s thought that isn’t bearings? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [36] ——————————————————————————– Yes. I mean, Seth, we haven’t really provided that level of detail. I mean needless to say, certainly, we’re very optimistic, especially as we get to the back half of the year, on the commercial side within our bearings group of businesses. But keep in mind, we do have some other programs across other parts of our business that are commercial-based. And we’ve done a lot of work to take a lot of the cost out. So once again, those are good sets of business for us with very decent levels of backlog that we’re going to continue to execute on. ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [37] ——————————————————————————– Yes. Seth, this is Ian. I’ll just also add, just to be honest, I think building the plan this year and looking at decisions we made relative to that one order we talked about, the fact that we sold U.K. and looking where it would have been have we not pulled that out and things like that, we do have some conservatism. We — I always believe you’re going to have 2 paths to get to where you need to go. And I think the OpEx model that we’ve got going in place right now, the work that’s getting done right now and the reviews and the focus we have on that, I’m excited to see that bear some nice fruit this year relative to that overall EBITDA performance. ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [38] ——————————————————————————– Yes. And Seth, just one last thing. I mean certainly, K-MAX is an important program for us. And most of those sales, as you would imagine, right now are focused on commercial opportunities. So that’s going to also represent some nice growth expected year-over-year as we continue to work the sales leads on K-MAX. ——————————————————————————– Operator [39] ——————————————————————————– (Operator Instructions) Our next question comes from Chris Dankert with Longbow Research. ——————————————————————————– Christopher M. Dankert, Longbow Research LLC – Research Analyst [40] ——————————————————————————– I guess to keep it on K-MAX, I mean I saw the announcement earlier in the quarter. I guess what’s the opportunity for K-MAX sales in Brazil? And then kind of tangential to that, is the first delivery of the year expected to be in Brazil and kind of as a result of that approval? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [41] ——————————————————————————– Yes. Chris, this is Rob. A couple of things. Certainly, the authorization in Brazil is important. It is a large untapped market for us. But as you can imagine, it takes a little time to work those leads. But it’s critical to get that. The first sale is really domestic-based, unfortunately not in Brazil. But we certainly are very optimistic that when we think about expanding our global set of opportunities, Brazil will play an important role down the road for us. ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [42] ——————————————————————————– Yes. And the K-MAX, it’s — again, I really dove into that program and looking at the markets. I do feel much better this year than when I came in last year knowing what they were working against. We’ve got 4 in the plan. We’ve got upside there. We’ve got a fifth that we’re building. We’ve got customers lined up for those first 4, which is exciting. And then we’ve got some exciting news from the U.S. Forest Service and the program there and what they’re looking, in fact, for K-MAX. So I feel this year is going to be a decent year for K-MAX, for sure. And then on top of that, of course, we’ve got UAS development, which is also a huge opportunity with us, the Marine Corps. I’ve had several meetings already in the Pentagon, and there are some very positive reactions to the K-MAX today with the upgraded UAS and the demonstration we got later this year and some other opportunities that the Marine Corps and the Army are looking at for cargo UAS. ——————————————————————————– Christopher M. Dankert, Longbow Research LLC – Research Analyst [43] ——————————————————————————– Got it. And I guess to follow up, I mean looking at the guide for the year, seeing commercial inflect positively in ’21 in 2 through 4Q, I guess can you give us any kind of sense of what level of rebound you’re baking in? Obviously, the comps are fairly easy here, but any sense for magnitude would be really helpful. ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [44] ——————————————————————————– Yes, no, no. Certainly. A couple of things there. When we think about our broader commercial business in general aviation, our ’21 is still below 2020. I just want to be clear that we’re going to see sequential improvement, in particular in the back half of the year, but we are expecting a challenging first half. Where we’re going to see some year-over-year improvement relative to the prior year, in particular, are going to be in our medical and industrial markets. We’re going to see some considerable growth there. And then also, even in some of our defense offerings as well as — in particular even within our bearings group of businesses, we are seeing some nice levels of opportunity. And just as way of background, our bearings group of businesses, their order rate sequentially, fourth quarter over third quarter was up nearly 10%. And we saw some terrific order improvement at our PNA business, up nearly almost double. So we are seeing some very positive signs. Some of our industrial order rates and our miniature bearings companies are also very solid right now. So it really gives us some hope. And certainly, we understand things can change, but based on what we’re seeing, we’re very confident in seeing a nice back half of the year next year. ——————————————————————————– Christopher M. Dankert, Longbow Research LLC – Research Analyst [45] ——————————————————————————– Got it. Got it. And I guess just one last one from me, if I could. Speaking of medical, I guess can you give us what the organic medical growth was in the quarter and kind of what the order rates would maybe imply as we start out the year here? ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [46] ——————————————————————————– Yes. So actually, Chris, medical was like flat to slightly down in the fourth quarter in kind of looking at that market. But as we kind of move into next year, we’re going to start seeing some sequential growth. And that really — especially as we all expect — as the pandemic starts to ease, we are seeing some very good order rates out of Bal Seal. So — as well as GRW on the medical side. ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [47] ——————————————————————————– Yes. Their January order rates were actually at record levels, just to put a fine point on that. ——————————————————————————– Operator [48] ——————————————————————————– Our next question comes from Robert Kirkpatrick with Cardinal Capital. ——————————————————————————– Robert Benjamin Kirkpatrick, Cardinal Capital Management, L.L.C. – Managing Partner and Portfolio Manager [49] ——————————————————————————– Could you talk about the ability of Kaman to reroute those 7,000 fuzes to a different buyer, the DCS ones are slightly from the USG ones? And then I have a couple of follow-ups. ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [50] ——————————————————————————– Yes. Rob, this is Rob. Certainly, the construction process is largely identical. There are different levels of inspection and differences in the process. But really, the key is if we start building a fuze that’s designated for USG given the milestone payments, it’s difficult to reroute those, but it’s much more easy — it’s much easier to go from a DCS to — depending on where the stage is built. But that’s something we track very carefully, Rob. We’re very careful as we’re building the inventory to make sure that we don’t put ourselves in a position where we have, call it, trapped inventory relating to a specific sale. ——————————————————————————– Robert Benjamin Kirkpatrick, Cardinal Capital Management, L.L.C. – Managing Partner and Portfolio Manager [51] ——————————————————————————– Okay. And then secondly, can you maybe give us a little bit more of a potential time line for trying to get K-MAX into a program of record? I know it’s been a long journey, but it does seem as though there is some traction these days. ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [52] ——————————————————————————– Yes. I can talk to that. That’s clearly the goal that we have. And there are some interesting, I think, opportunities that can come from the path that we’re currently on. So for example, the 2 aircraft we have right now, again, that we are in the process of upgrading the UAS systems for a demonstration with the Marine Corps later this year, the meetings I just had, the — just to again give you guys probably more information than you know, but the Marine Corps capabilities and the senior leadership under General Berger has mapped out and they actually currently just restructured their whole aviation department. They’re mapping out the capabilities map. And I would tell you that in my experience, having worked these channels for many years, a, there is a solid demand signal. They are absolutely going down a path of looking at leveraging UAS capabilities. More and more Congress is behind it. There’s going to be money flowing to it. And what is so exciting for us here at Kaman is that we’ve got 2 proven platforms. And they’re kind of like the Ford F-150 and the fact that they are heavy — they’ve got a heavy useful load 6,000 pounds. So the Marine Corps is trying to figure out how does that capability sit in the spectrum of the UAS capabilities they want to bring to bear, especially in the PACOM region. The second part of this, which is there’s also — and they just announced a demonstration yesterday for a small drone that carried 30 pounds. But there’s also a bigger opportunity that sits in the kind of the 500-, 800-pound payload and having the shipboard ops and easy to use and really leverage that UAS capability. And that’s something that’s directly in our wheelhouse. And there’s requirements being worked right now. We’ve got upcoming meetings to talk with senior leaders about those requirements. So I get very excited when I think about where this could be for us and, quite frankly, where we are today and some thoughts and designs and things like that. ——————————————————————————– Robert Benjamin Kirkpatrick, Cardinal Capital Management, L.L.C. – Managing Partner and Portfolio Manager [53] ——————————————————————————– Okay. Great. And then perhaps maybe a final question around capital allocation. And I guess the question is, with you coming in, Ian, has there been a hiatus on looking at this as you got your arms around the existing businesses and the existing opportunities? Or how should we think about that? ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [54] ——————————————————————————– Yes. No. Rob, it’s — I wouldn’t say hiatus, but I will tell you that as the new CEO, one of the first things that I think is really important is to understand what’s going on before being understood. And I think that the team has done a nice job helping me get snapped in and certainly working with Neal and the Board, getting all the businesses, understanding where the capabilities are today, where the gaps are. We’ve got a very exciting opportunity here in May, where we’ve got deep-dive strategic reviews coming up, which is something I’m excited to do. I will tell you that there’s no question we are 100% committed to pulling the trigger, for example, on the right acquisition, on the highly engineered parts side of the house with our new criteria aligned with the trajectory we’ve set for each of the businesses. And it’s going to be the right one. We want to be thoughtful about it. We want to make sure it fits for all the right reasons. And that will happen. I am absolutely 100% committed to that. So we’re not just going to pull the trigger for figure’s sake. We really want to think smartly about that. And we’ve got — like I said, our banks are energized. They’re coming to us with opportunities. We’re screening through those things. So that’s going to be a nice opportunity for us. And then organically, it’s getting back to what is really important. It’s really driving that growth as the markets recover. We’ve lowered our breakevens. Like I said, we’ve got a great backlog. We’re starting to see nice upticks in orders. Second half is going to be, I think, exciting for us. We’ve just gotten through a whole bunch of solid actions last year with paying down debt and selling our U.K. business and flattening out our leadership team and backfilling. And so I just feel really excited about where we are right now and where we’re headed. ——————————————————————————– Operator [55] ——————————————————————————– Our next question is a follow-up question from Steve Barger with KeyBanc Capital Markets. ——————————————————————————– Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division – MD and Equity Research Analyst [56] ——————————————————————————– As we’ve gone through earnings season, we’re hearing more about input cost inflation. Is your pricing strategy and purchasing organization where they need to be? And can you stay on the right side of price cost in an inflationary environment? ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [57] ——————————————————————————– I can start. Yes. Well, I’ll start with the cost side of the house. Part of this operating model that I’ve talked about, this operations excellence model we’re deploying, like I said, looks at the entire value stream of the business. And so there’s a front-end piece to it, which gets right into the value pricing element. I do feel that there are opportunities still for us, especially on the higher-end part side where we sit. Knowing though that it’s a delicate balance with the pushouts in backlogs and inventory burn down that, for example, commercial aviation has got to go through, supply chains are being looked at differently now, and we’re seeing that on our structures businesses. So trying to be an extension of these OEMs versus just being just lowest-priced kind of competitor is — to me is not as meaningful as really being closer to our end customers on that and showing the value that we provide and meeting schedules and quality and all that good stuff. So again, I think there is some upside for us, and we’re taking a hard look at it. And we’re also watching for — if you’re talking about materials and other things on the demand side, I’ve been surprised — pleasantly surprised that we haven’t had, knock on wood, any major supply chain disruptions. But we again continue to look at that very carefully as part of our OpEx model. And I will say that we have a war going on internally on net working capital. This is a huge part of what I talked about when I first got here. And the 3 primary metrics that really drive the most value creation for us is that EBITDA margin, that cash flow generation and those ROICs. And having the businesses understand the levers that they have to pull — EBITDA, I think, gets a lot of focus and — but it’s moving off the OI to the EBITDA side and then getting the businesses to really understanding the levers they have around cash. And that flows right into our net working capital process improvements, and that fundamentally drives better ROICs. And that’s what we’re trying to get to, and we will. ——————————————————————————– Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division – MD and Equity Research Analyst [58] ——————————————————————————– Great answer. And just a last one, the Bal Seal ransom attack didn’t sound that material, but how did that happen? And what steps have you taken to protect the rest of the company? ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [59] ——————————————————————————– Yes. It’s funny. Again, full disclosure here. It was random. There was a lot of activities. I’m sure you guys saw at the end of the year with all these threat actors out there spamming and doing stuff. And we had the classic e-mail that came in that was compromised and planted and activated. And the good news part was it wasn’t even close to what we thought in terms of its exfiltration of any data or things like that. Team did a marvelous job countering for it with the backups we had and the third parties that we had that came in that helped us. We learned that — a lot about, a, how does that thing happen, how do we react. We have plans in place. We’ve adjusted those plans. We’ve debriefed them. We’ve got better security, quite frankly, in place today at Bal Seal, which matches what we had here at Kaman as part of the integration effort. But there were some things that — I think that we could have done better and relative to just basic training that we do every day. I mean the employees are the last line of defense. Every business is exposed. Again, we were lucky in the sense that it really wasn’t even close to as bad as we thought it could have been. But we took all the right steps, and we’re stronger for it based on the protection and detection devices that we have now in place. ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [60] ——————————————————————————– Yes. And Steve, I would just say one more comment on that whole event. I really can’t say enough for the team. We had our colleagues at Bal Seal and here in Connecticut working around the clock. And we did have, as Ian mentioned, a very formal plan to react to that. I mean it wasn’t that we hadn’t heard about ransomware, but I really think it’s a testimonial to the effort and the expertise across the staff to get us back so quickly and really with insurance, the financial impact at the end of day is going to be very minor. So once again, when we think about where Bal Seal is today, they’re back to full production and a lot of lessons learned, as Ian mentioned. So we’ll — in some respects, we’ll be better for it. ——————————————————————————– Ian K. Walsh, Kaman Corporation – President, CEO & Director [61] ——————————————————————————– Yes. And I went out to the site personally to assess and understand where they were and what was going on. And I’d tell you I was, just like Rob said, just incredibly impressed with the work effort to recover not just their systems but production. And again, we — like I said, we’re trying to be as realistic as possible. But I do feel extremely confident, not just this quarter but through the year, those folks are going to overperform just by the nature of the business, what we’ve learned. And again, most importantly, having gone through this as an entire company, we are way better prepared. ——————————————————————————– Robert Daniel Starr, Kaman Corporation – CFO & Executive VP [62] ——————————————————————————– Yes. Remember, Steve, just don’t click on the link. ——————————————————————————– Operator [63] ——————————————————————————– And I’m not showing any further questions at this time. I’d like to turn the call back to Jamie. ——————————————————————————– James G. Coogan, Kaman Corporation – VP of IR & Business Development [64] ——————————————————————————– Thank you for joining us on today’s conference call. We look forward to speaking with you again when we report our results for the first quarter. ——————————————————————————– Operator [65] ——————————————————————————– Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.
Edited Transcript of KAMN.N earnings conference call or presentation 26-Feb-21 1:30pm GMT
