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Kaman Corp  (NYSE:KAMN)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, welcome to the Kaman Corporation Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at the time. (Operator Instructions) As a reminder, this conference call is being recorded.

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

James Coogan -- Vice President, Investor Relations

Good morning. I'd like to welcome everyone to Kaman's fourth quarter 2018 earnings call. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer and Rob Starr, Executive Vice President and Chief Financial Officer.

Before we begin, I'd like to note that some of the information discussed during today's call will consist of forward-looking statements, setting forth our current expectations with respect to the future of our business, the economy and other future events. These include projections of revenue, earnings and other financial items, statements on the plans and objectives of the Company or its management, statements of future economic performance and assumptions underlying these statements regarding the Company and its business.

The Company's actual results could differ materially from those indicated in any forward-looking statements due to many factors, the most important of which are described in the Company's latest filings with the Securities and Exchange Commission, including the Company's 2018 Annual Report on Form 10-K and the current report on Form 8-K, filed yesterday evening together with our earnings release.

In addition, we expect to discuss certain financial measures and information that are non-GAAP measures as defined in applicable SEC rules and regulations. Reconciliations to the Company's GAAP measures are included in the earnings release filed with yesterday's 8-K.

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

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

We finished 2018 with strong fourth quarter results reporting net sales for the period of over $500 million, a 5.7% increase over the prior-year. Topline growth at distribution continued through the quarter with sales per sales day up 6.5%, our fifth consecutive quarter of year-over-year sales growth. Meanwhile, Aerospace benefited from higher specialty bearings and engineered product sales and the delivery of three K-MAX helicopters in the quarter, as well as the shipment of a portion of our $48 million JPF DCS contract.

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

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

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

Moving to a closer look at our operating segments; aerospace revenue in the fourth quarter was $220.9 million, up 4.7% compared to the fourth quarter in the prior year. Segment operating margin for the quarter was 18.9% or 20.7% when adjusted for restructuring and additional costs associated with an employee tax-related matter. During the quarter, we delivered a record 17,467 JPFs, while marking an important program milestone with the delivery of the 300,000th unit in December. Since our first deliveries in 2004, we have provided the JPF to the US and foreign allied militaries. We are proud of our performance on this program and look forward to continuing our long relationship with the US Air Force and allied militaries around the world.

Demand for JPF remains very strong and we ended the year with a backlog of over 100,000 units. As a result, in 2019, we anticipate delivering 40,000 to 45,000 units for the full year and approximately 60% of those deliveries are expected to go to the US government. As we discussed in prior quarters, all DCS contracts are subject to government licenses and approvals prior to delivery, and we are currently in the process of securing these licenses and approvals for our projected 2019 DCS deliveries. In addition, we are in discussions for a number of new DCS orders that are expected to add to our backlog during 2019.

Sales of our bearing products grew 6% compared to the prior year and order intake rates for these products remained very high, continuing a trend we saw throughout 2018. Orders for our self-lubricating bearings were up 10.5%, while our engine aftermarket components saw orders increase more than 18% over the prior year. Overall, our specialty bearings and engineered products finished the year with orders up 9.5% over the prior year, growing backlog to more than $120 million.

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

Moving to distribution; sales per sales day increased 6.5% in the fourth quarter with an equal number of operating days in the comparable period. This result was the highest fourth quarter sales per sales day since 2014. Taking a look at our end-market performance for the quarter, seven of our top 10 markets were up in the period led by pulp and paper, merchant wholesalers, durable goods, non-metallic mineral products and mining. Segment level operating profit of 4.1% decreased 20 basis points over the prior year on both the GAAP and adjusted basis. The slight margin decline when compared to the prior year was primarily driven by a higher mix of corporate accounts, an increase in incentive compensation on higher sales and higher freight costs.

For the full year, we achieved operating margin of 4.5% or 4.6% adjusted, which included higher group health costs, costs associated with our one-time employee tax incentive and higher freight costs. In total, these items had an impact of approximately 30 basis points on operating margin in the year. Additionally, this is the final quarter in which we will have the impact from the change in pension accounting, which had an approximately 30 basis point impact on distribution results for the year. Sales trends in distribution have consistently improved through 2018, driven by corporate account wins and favorable end-market conditions. We will continue to focus on execution, controlling costs and balancing price and volume to maximize total operating returns in the business.

We exit 2018 on a strong note, and despite its challenges, it was a very successful year for Kaman. Overall consolidated sales grew by nearly 4% as sales trends improved at distribution and we executed well on a challenging JPF delivery schedule. As we look forward, we are entering the year with a solid backlog in aerospace and expect continued strong sales in distribution to set the stage for 2019.

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Thank you, Neal, and good morning, everyone. I will begin today by reviewing our performance for the fourth quarter before providing commentary on our 2019 outlook.

Consolidated fourth quarter sales were up 5.7% to $500.9 million compared to $473.9 million in the prior year period with increases at both operating segments. At aerospace, sales increased 4.7% to $220.9 million compared to $210.9 million in the prior year period. Higher sales during the period were primarily driven by higher bearings and K-MAX delivery volume, higher sales of missile safe and arm devices and higher USG JPF sales, which were partially offset by lower JPF DCS sales.

At distribution, sales increased 6% to $280.1 million compared to $263 million in the prior year period. Our corporate accounts program continues to ramp up and we are pleased with the growth we have seen thus far. Consolidated gross profit margin was 30.3% in the fourth quarter, our highest level of quarterly gross profit margin in '18. Gross profit dollars increased 2.3% to $151.7 million, compared to $148.3 million in the prior year period. Higher gross profit reflected increased sales in the period, partially offset by a moderation in margin from very strong quarter posted in the comparable period.

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

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

We've discussed our focus on free cash flow generation in the past and have been successful on achieving free cash flow conversion and excess of our long-term goal of 80% to 100% of net earnings over the past couple of years. For 2018, we delivered cash flows from operations of $162.4 million, which led to free cash flow of $132.5 million or over 160% of adjusted net earnings. This included $30 million of discretionary pension contributions, $20 million more than we had initially anticipated in 2018.

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

I'd like to focus the balance of my remarks on our outlook for 2019. Starting with aerospace, we expect sales in the range of $720 million to $750 million with operating margins of 16.5% to 17%. Sales at the midpoint are approximately flat with 2018, as aerospace faces an approximately $48 million headwind from lower sales in our helicopter programs for SH-2, Peru and K-MAX, lower volumes on our metallic structures program for AH-1Z and BLACK HAWK along with the absence of sales from tooling and engineered services. These declines are offset by growth of approximately 6% in the remaining business led in large part by higher sales for our JPF and specialty bearings and engineered products.

The anticipated growth in our JPF and specialty bearing products and the positive impact from the restructuring actions we have taken over the past 18 months will contribute to our stronger margin expectations in 2019. During 2019, we also anticipate investing in a number of new technologies designed to drive future growth opportunities at aerospace. This includes work on the new missile and bomb safe and arm device technology, next-generation air vehicle technology, new PMA components and the continued evolution of our self-lubricating and especially bearings technologies.

Moving to distribution, we expect sales to be in the range of $1.19 billion to $1.22 billion representing sales growth at the midpoint of 6% over 2018. The increase in sales will result from the full-year benefit of our 2018 corporate account wins and growth in the end markets we serve. Turning to operating margin expectations at distribution. We expect operating margins for 2019 to be in the range of 5% to 5.3%. Contributing to the improved margin performance is leverage from our higher sales volume, the absence of the one-time employee benefit paid in 2018 and higher vendor incentives. We estimate our 2019 tax rate to be approximately 24%, 400 basis points below 2018, which was negatively impacted by non-taxable foreign operating losses, which are not expected to recur.

Moving to the cadence of earnings for the year. We expect our earnings to be back half weighted with 10% of our full year earnings occurring in the first quarter and approximately 40% in the fourth quarter. As we have experienced in the past, the weighting of our earnings is largely the result of delivery schedules of specialty bearings and JPF fuse products. I would like to highlight that our 2019 expectations for the fourth quarter earnings is similar to 2018, where we earned 42% of our full year earnings in the fourth quarter.Our strong cash flow performance will continue into 2019, where we expect cash flows from operations of $105 million to $125 million and free cash flow of $70 million to $90 million.

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

Thanks, Rob. As we exit 2018, I'm proud of the work we've done to continue to embody the spirit of innovation that has defined Kaman for over 75 years. Technological innovation is a critical driver for the future of Kaman's growth and the recognition we received in 2018 from Airbus as a strategic technology partner, demonstrates the extent to which our technologies are valued by the world's leading manufacturers each and every day. Before we open the line for questions, I'd like to thank our investors for their interest, and our 5,100 employees around the world for their dedication and commitment.

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

James Coogan -- Vice President, Investor Relations

Operator, may we have the first question please.

Questions and Answers:

Operator

Thank you. (Operator Instructions) our first question comes from Edward Marshall with Sidoti & Company. Your line is open.

Edward Marshall -- Sidoti & Company -- Analyst

Hi, everyone. How are you? Good morning.

Neal J. Keating -- Chairman, President and Chief Executive Officer

Good morning, Ed.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Good morning, Ed.

Edward Marshall -- Sidoti & Company -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Yeah. Ed, this is Rob. It's good question. While we do expect to ship the balance of that order in the first quarter. There are another -- a number of other impacts that we're seeing in the first quarter. I'll start with distribution. Distribution typically has a lower margin expectation in the first quarter due to employee-related costs. Just the timing that has really just got shifted to the back half of the year so that's impacting the results. Also really the biggest driver is going to be bearings.

Just based on the expected cadence of deliveries for the balance of the year, we do expect to see a relatively weaker quarter for them in Q1, really recovering in Q2 through Q4 just based on the customer demand and the expected timing of shipments, so that's the largest contributor. And then we're expecting to see a significant improvement as the restructuring actions largely wind down in aerosystems as we expect that during the balance of the year to see improved profitability as we move throughout the year there.

Edward Marshall -- Sidoti & Company -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Edward Marshall -- Sidoti & Company -- Analyst

I'm sorry. It was higher in '16 then your anticipation for 2019?

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Edward Marshall -- Sidoti & Company -- Analyst

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

Ed, it's Neal. We have not received the approval yet for that large order, and the anticipation is that, that would be a three year shipment schedule -- four-year shipment schedule. So, we can break that up over four years beginning in 2019.

Edward Marshall -- Sidoti & Company -- Analyst

So, relatively even?

Neal J. Keating -- Chairman, President and Chief Executive Officer

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

Edward Marshall -- Sidoti & Company -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Edward Marshall -- Sidoti & Company -- Analyst

Got it, got it. I appreciate your comments, guys. Thanks very much.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Okay. Thanks, Ed.

Neal J. Keating -- Chairman, President and Chief Executive Officer

Thanks, Ed.

Operator

Thank you. Our next question comes from Seth Seifman with JPMorgan. Your line is open.

Michael S. Rednor -- JPMorgan -- Analyst

Hey, good morning. This is Mike Rednor for Seth.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Hi, Mike.

Neal J. Keating -- Chairman, President and Chief Executive Officer

Good morning.

Michael S. Rednor -- JPMorgan -- Analyst

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

Yeah. It's a good question. Ed if you recall -- sorry Mike. If you recall, we undertook a very extensive set of productivity initiatives to really start driving or improved margins in the business and by and large, if you adjust for pension and others, we have improved the margin granted not necessarily in a very linear fashion each quarter. So, really for us, it's going to be around scale. You know long-term sales growth is important to really leverage our fixed cost infrastructure, but then also we are going to be rolling out the productivity initiatives to our fluid power product line this year. So there's a lot of work still ahead of us to really optimize our infrastructure, optimize a lot of the productivity initiatives in terms of how we service our customers and how we manage logistics and so forth.

So there is definitely a path, scale will be important toward that. But we do have a number of levers still available to us to reach toward that 7% long-term target.

Michael S. Rednor -- JPMorgan -- Analyst

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

Yeah, great question Mike. This year, we're not expecting to make any pension contributions this year, given the level contributions we've made in 2018. I would say going forward, it's probably going to be similar to what we've done in the past, somewhere in that $10 million or so range. That will all be determinant on the required funding as well as just the future performance of the pension. But I would think that's a reasonable model expectation.

Michael S. Rednor -- JPMorgan -- Analyst

Okay, great. Thanks guys.

Neal J. Keating -- Chairman, President and Chief Executive Officer

Thank you, Mike.

Operator

Thank you. Our next question comes from Chris Dankert with Longbow Research. Your line is open.

Chris Dankert -- Longbow Research -- Analyst

Hey, morning, guys.

Neal J. Keating -- Chairman, President and Chief Executive Officer

Good morning, Chris.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Good morning, Chris.

Chris Dankert -- Longbow Research -- Analyst

First off, I want to say congrats on the record JPF shipments and on the K-MAX deliveries in this production run, it's a busy quarter for you guys.

Neal J. Keating -- Chairman, President and Chief Executive Officer

I appreciate it.

Chris Dankert -- Longbow Research -- Analyst

I guess just a kind of quick circle back to the KIT, could you give us any sense of what pricing was in the fourth quarter, and kind of what you've built in for 2019 here?

Neal J. Keating -- Chairman, President and Chief Executive Officer

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

Chris Dankert -- Longbow Research -- Analyst

Got it, got it. That's helpful. Thank you. And then kind of sticking with the guide here, can you kind of give us the number of K-MAX shipments you're assuming in the guide right now, is that kind of at similar four or five range?

Neal J. Keating -- Chairman, President and Chief Executive Officer

Actually, Chris, we're anticipating delivery of three aircraft in 2019. So, down a little bit from '18, which we're trying to figure out in the last few days. Five aircraft may actually have been a record for us even going back to the production days. We're not quite sure of that, but it was a big year for us and obviously a big fourth quarter for us. As you know, and as we stated, we're going to deliver the 10th aircraft so the last of our initial production run in March of this year and we've continued production for at least another 10 aircraft.

So we anticipated that we would have a slowdown in deliveries this year simply because of the relative timing of that increased production rate. So it was not unanticipated for us to go down to three this year, but we feel very good about; a, the fact that we've almost increased the fleet -- almost doubled it since 2015 and what that will mean for us longer term in service and support revenues, and also the response that we're getting for continued demand.

Chris Dankert -- Longbow Research -- Analyst

Yeah, yeah, absolutely understandable and thanks for the color there. And one last one from me if I could. I applaud the discipline on M&A, but have we seen any change in prices that kind of peaks your interest or things still just expensive, expensive?

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Chris Dankert -- Longbow Research -- Analyst

Understood. Thanks so much guys. Congrats again.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Thank you.

Neal J. Keating -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Ryan Cieslak with Northcoast Research. Your line is open.

Avi Danda -- Northcoast Research -- Analyst

Hey, guys. This is Avi on for Ryan. Thanks for taking my question.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Hi, Avi.

Avi Danda -- Northcoast Research -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Avi Danda -- Northcoast Research -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Yeah, I think in terms of relative -- as we would view kind of share again, we think we've been very successful in particular as it relates to the corporate account area based on our high level of service and customer focus that we've been able to secure a number of accounts that really just perhaps felt that they weren't being serviced as adequately by some of the -- their existing service providers.

But in terms of 2019, we continue to focus on corporate account development, but we are also managing -- we want to have a balanced book of accounts, because clearly while corporate accounts are helpful for rebates and other things, our core accounts are also critically important to the success and future of the business.

Neal J. Keating -- Chairman, President and Chief Executive Officer

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

Avi Danda -- Northcoast Research -- Analyst

Okay, OK, that's helpful. And then I guess last question if I could. How is distribution sales growth trending so far in 1Q? Thanks.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Avi Danda -- Northcoast Research -- Analyst

Awesome, guys. Thank you.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Okay. Thank you, Avi.

Neal J. Keating -- Chairman, President and Chief Executive Officer

Thank you, Avi.

Operator

Thank you. Our next question comes from Steve Barger with KeyBanc Capital Markets. Your line is open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys.

Neal J. Keating -- Chairman, President and Chief Executive Officer

Good morning.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Good morning, Steve.

Steve Barger -- KeyBanc Capital Markets -- Analyst

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

Sure can.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

That's no problem. So when we look at the year-over-year growth in October, November, December; October was up high-single digits same with November and then December was up low-single digits year-over-year kind of accumulating in a 6.5% for the quarter.

Steve Barger -- KeyBanc Capital Markets -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah, just given the decline that we're talking about now. Last year 1Q was 20% of earnings, this year it's 10%. So obviously there is a pretty big variance.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Yeah, you know that's fair. And I would just highlight that the earnings cadence we expect in '19 is actually very similar to what we experienced in 2017. So we've broken this path before. But to answer your question Steve, yes we would expect aerospace sales in the first quarter of '19 to be down relative to '18, and then as we kind of track through, it kind of recoups that negative variance as we go through the balance of the year.

Steve Barger -- KeyBanc Capital Markets -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Steve Barger -- KeyBanc Capital Markets -- Analyst

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

Yeah, I would say, certainly technology and the application of the tools that we've developed across the remainder of the business as well as continued refinement and execution of those can drive a considerable margin expansion, and we certainly have been working toward the overall branch network optimization. So, we have done facility consolidation where appropriate and where it can better serve our customers in local markets that continues to be an opportunity.

We also are continuing to look at opportunities in terms of just general logistics. That is an area where I think there is -- I think the team is certainly focused on it, opportunities to improve the performance that we've demonstrated to this point.

Steve Barger -- KeyBanc Capital Markets -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Steve Barger -- KeyBanc Capital Markets -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Well, there's the couple of things. The absence of of employee incentives, certainly the customer mix is also going to to help to drive some of that margin expansion, and really just also the sales growth and leveraging our fixed cost infrastructure.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

We're expecting to see considerable growth and we have a very tight controls on our G&A.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Okay, and then last question from me. Just longer term on meeting scale to hit that 7% target, rough numbers, what kind of quarterly revenue run rate do you need to hit that?

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Yeah, Steve. I mean I would say it's north of where we are. I'm not trying to be evasive, but we have a little ways to go to get to that scale where that scale alone is going to drive us to a 7%, and that's where we're working toward and we're going to continue to go down that path.

Steve Barger -- KeyBanc Capital Markets -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Steve Barger -- KeyBanc Capital Markets -- Analyst

You bet. Appreciate it. Thanks for the time.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Robert Kirkpatrick with Cardinal Capital. Your line is open.

Robert Kirkpatrick -- Cardinal Capital -- Analyst

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

Sure thing, Rob. It's Neal. The headwind you could probably model around plus or minus $8 million. And really the basis for Rob is the markets had really changed since the time frame that we bought both of those businesses, those were acquired back in 2008 and 2010. Tooling came as part of the acquisition that we made over in the UK and actually we benefited from it pretty nicely in the initial several years both -- we had a nice external business and also they helped us tremendously with our programs on the A-10, the AH-1Z, a number of programs. But overall, the tooling market has gone down by about 50% in the last three years. And so it was one where we were not going to wait for that market to come back, we didn't felt when we needed to or it was the best investment for us at that point in time and we had a willing buyer in the UK.

So we felt that, that was the right approach for us there because of the change in the market. And then we acquired our engineering services group back in 2010 and it was really two-folded. It provided us engineering services as a external contracting business and Boeing at that point time was our biggest customer, but we felt it also positioned us to participate in a broader design and build structures market that back in 2010 looked attractive. We used the engineering services, they were a great help to us internally again on our repurposing the Australian SH-2s for New Zealand, also worked with us on the Peru conversion as well. But the design and build environment really didn't evolve the way we had originally thought. Quite frankly those contracts came with contract terms that were very onerous.

And the risk in revenue sharing requirement for being part of that really didn't meet our returns on a risk adjusted basis. So I think in that case for engineering services, we gained some benefit from it for a number of years. But as you can tell from our approach in recent years, probably the last five, we have not been focused on design and build in the structures market. We just don't think the economics work and we think the risk revenue sharing requirements of anybody participating in that are just too onerous for Kaman.

Robert Kirkpatrick -- Cardinal Capital -- Analyst

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

Sure. We've been very successful with the relaunch of the K-MAX, those are things that we wanted to do there. We want to do a new all-composite blade for us, which we think will help the performance of the aircraft and make it attractive to a broader range of customers and also can be used as going into our rotable spares for the existing fleet. And also, we will be investing on an unmanned program ourselves which is a very important step for us. Also, in our safe and arm fuzing area, we will be investing in a number of new programs there as well.

We've talked some about the microelectronic machine systems before we will continue to invest there, but there's also some new technologies in the safe and arm fuzing area that we're very interested in and we've been investing at a lower level in recent years already. And certainly, we want to continue to invest in new developments for PMA products in our specialty bearings and engineered products area.

Robert Kirkpatrick -- Cardinal Capital -- Analyst

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

Rob, I think it's -- it's certainly not totally out of our control. But what we do run into -- or we have historically run into is that, it is surprising to us that the demand for our specialty bearing products tend to be so heavily weighted in the third and fourth quarter. To be honest it, it just doesn't seem to make a lot of sense, but if we were to talk about our on-time deliveries, our on-time delivery performance is very high, which reflects that the demand is in the third and fourth quarter. That would -- that's not a perfect way to run a manufacturing facility, I would agree with you.

And then I think on the DCS orders, we are typically waiting for a government approval and then ready to go and and I don't know if the September 30th end of the fiscal year for the US government has anything to do with it or not, but we tend to get those approvals later in the year. So we would -- with the JPF, we're able to build and have inventory and be ready to go when we get those approvals as you could see from the over 17,000 fuzes delivered in the fourth quarter. So we're able to have a little bit more smooth manufacturing cadence for our JPF line than we currently are able to get to in our specialty bearings, and in particular, in the Kamatics facilities.

Robert Kirkpatrick -- Cardinal Capital -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

It's just a mid-single digit.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Yeah, about -- almost, about the same.

Robert Kirkpatrick -- Cardinal Capital -- Analyst

Okay, that's great. Thank you very much, gentlemen.

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Okay, great. Thanks, Rob.

Operator

Thank you. Our next question comes from Peter Skibitski with Alembic Global. Your line is open.

Peter Skibitski -- Alembic Global -- Analyst

Good morning, guys. I apologize, I got on really late. Neal, I think I heard you say that UK tooling business business had raised about $80 (ph) million in 2018. Did that include engineering services as well or was that a separate revenue stream?

Neal J. Keating -- Chairman, President and Chief Executive Officer

No, that was the combination of the two businesses.

Peter Skibitski -- Alembic Global -- Analyst

Okay, OK, got you. And then what's the other source of revenue headwind for aerospace in 2019? I think helicopters and a couple of other items?

Neal J. Keating -- Chairman, President and Chief Executive Officer

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

Peter Skibitski -- Alembic Global -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Peter Skibitski -- Alembic Global -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Peter Skibitski -- Alembic Global -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Neal J. Keating -- Chairman, President and Chief Executive Officer

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

Peter Skibitski -- Alembic Global -- Analyst

And I appreciate it. A very last one for me. So I think in the guidance for aero, I mean, it's pretty clear, given aero structures down, I guess bearings up. Could you finish -- do you expect fuzes up, down or flat for '19?

Neal J. Keating -- Chairman, President and Chief Executive Officer

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

Peter Skibitski -- Alembic Global -- Analyst

Got it, OK. Thanks so much guys.

Neal J. Keating -- Chairman, President and Chief Executive Officer

Okay. Thank you Pete.

Operator

Thank you. Our next question is follow up from Ryan Cieslak with Northcoast Research. Your line is open.

Avi Danda -- Northcoast Research -- Analyst

Hey, guys, Avi. Just one more from me. Could you provide an update on where you're at with the ERP rollout at distribution and is there going to be a notable step down or step up in 2019 in terms of that rollout? And then is that baked into your segment guidance somewhat or not at all?

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Avi Danda -- Northcoast Research -- Analyst

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

Robert D. Starr -- Executive Vice President and Chief Financial Officer

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

Avi Danda -- Northcoast Research -- Analyst

Okay, thank you.

Operator

Thank you. And I'm currently showing no further questions at this time. I would like to turn the back over to James Coogan for closing remarks.

James Coogan -- Vice President, Investor Relations

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

Operator

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

Duration: 54 minutes

Call participants:

James Coogan -- Vice President, Investor Relations

Neal J. Keating -- Chairman, President and Chief Executive Officer

Robert D. Starr -- Executive Vice President and Chief Financial Officer

Edward Marshall -- Sidoti & Company -- Analyst

Michael S. Rednor -- JPMorgan -- Analyst

Chris Dankert -- Longbow Research -- Analyst

Avi Danda -- Northcoast Research -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

Robert Kirkpatrick -- Cardinal Capital -- Analyst

Peter Skibitski -- Alembic Global -- Analyst

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