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Kaman (NYSE:KAMN)
Q3 2019 Earnings Call
Nov 05, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Kaman Corporation third-quarter conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to vice president, investor relations, James Coogan.

James Coogan -- Vice President of Investor Relations

Good morning. I'd like to welcome everyone to Kaman's third-quarter 2019 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 third-quarter 2019 results included on Form 10-Q and on the current report on Form 8-K filed yesterday evening together with our earnings release. In addition, we will discuss the company's anticipated acquisition of Bal Seal Engineering, which was just announced this morning. The press release announcing the transaction can be found on the company's website, along with the presentation that provides an overview of the transaction.

Some of the information discussed on today's call, therefore, will consist of forward-looking statements setting forth our current expectations with respect to the proposed transaction, the underlying risks and assumptions for which are set forth in the press release announcing the transaction. 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, please note that in light of the recent sale of the distribution segment, the focus of today's earnings discussion will be on the results of the continuing operations of the company.

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

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

Thank you, Jamie. Good morning, everyone, and thank you for joining our third-quarter 2019 earnings call. I'd like to begin today's call with a discussion of this morning's announcement relating to the anticipated acquisition of Bal Seal Engineering before moving to a discussion of the quarterly results from continuing operations and recent events. I will then pass the call over to Rob for a more detailed discussion of our financial results and expectations for the balance of the year.

Over the last few months, we've taken a number of steps to transform Kaman into a company solely focused on being a leading provider of highly engineered products. On August 26, we completed the sale of our distribution business. And today, we are announcing the signing of an agreement to acquire Bal Seal Engineering, an industry-leading provider of highly engineered seals, springs and contacts. Bal Seal's strong management team and 500-plus employees around the globe work closely with premier customers in the medical, industrial, aerospace and defense markets, leveraging a unique combination of patented and proprietary technologies.

Bal Seal's innovative solutions result from decades of engineering, manufacturing and material science know-how, enabling Bal Seal to manufacture and create critical precision components used in the products operating in the most demanding environments. The addition of Bal Seal enhances our position as a leading provider of highly proprietary engineered products, broadens our access to high-growth end markets such as medical technologies and industrial applications and delivers both margin expansion and cash accretion in year one. We expect the deal to close late in the fourth quarter, subject to customary closing conditions and regulatory approvals, and we look forward to providing more information about all the transaction during our fourth-quarter earnings call in early 2020. This is a meaningful next step in the process to transform Kaman, but it is not a last step.

We will continue to seek appropriate M&A opportunities that fit well with our current capabilities and future direction. With approximately $700 million in cash and debt available to deploy, we have the financial capacity to acquire and integrate companies that will strengthen our current competitive position and provide improved long-term growth opportunities. And as you have come to expect, we will remain disciplined in our approach and patient in identifying opportunities that fit our strategy, culture and internal return metrics. While we are excited about adding Bal Seal to our portfolio and look forward to welcoming their employees to the Kaman family, we continue to increase investment in our core operations to drive organic growth.

We have increased our investments in new products and facility expansions to meet current customer demand and position us for future growth. These investments include the expansion of our unmanned capabilities and development of new composite rotor blades for the K-MAX, a laser-guided, height-of-burst sensor and next-generation safe and armed technologies as well as new specialty bearing and engineered products. In addition, we continue to invest in facility expansions and upgrades in the U.S., Germany and the Czech Republic to meet future demand, reduce lead times and improve efficiency. Finally, we have started to streamline our operations in order to achieve the $15 million to $20 million in annualized savings we highlighted in our last call.

This estimate was based on our initial strategic planning process associated with the distribution divestiture. And today, we expect to be at the high end of the range and that we anticipate will be able to identify additional opportunities for savings as we move through the process. Turning to a discussion of our results from continuing operations, we were very pleased with our strong third quarter performance with total sales growth of 16.3% to $182.7 million. This increase was driven largely by a higher volume of JPF DCS deliveries and stronger sales of our bearing products.

Profitability was also a highlight in the quarter as our operating income increased $22.6 million to $15.6 million in the quarter, and diluted earnings per share increased $0.70 to $0.36. On an adjusted basis, operating income more than doubled to $19.9 million, yielding $0.46 in adjusted earnings per diluted share compared to $0.14 in the prior year. During the third quarter, we received an export license for and made initial deliveries on our $324 million JPF DCS contract. This enabled us to increase JPF deliveries to 11,750 units compared to 3,800 units in the prior year, and the higher DCS mix led to significantly improved profitability in the period.

Demand for the JPF remains high, and during the quarter, we received our second significant JPF DCS order this year, adding $42 million to backlog in September. Our specialty bearing product sales growth was in high single digits in spite of considerable FX headwinds and was led by our self-lubricating bearings, where we've had our second consecutive quarter of record incoming orders, and our aftermarket products. The higher volume and strong operational execution led to improved gross margins for these products, while strong incoming order rates in the quarter continued the trend we experienced in the first half of the year. Year-to-date orders have increased for these products, with an 11% increase in our self-lubricating bearing products when compared to the prior year.

Turning to the K-MAX, we were pleased to receive two new orders during the quarter, bringing our total backlog to three aircraft. In addition to the new aircraft orders, we continued to make progress on unmanned systems of the K-MAX. And during the quarter, we received our first five orders from commercial operators, demonstrating the opportunities they see for unmanned K-MAX operations. We are encouraged that we continue to add to the K-MAX fleet and remain very optimistic for the long-term military applications.

Moving to our structures programs, revenue was up modestly in the period, while profitability improved substantially as a result of the actions we have taken to restructure and optimize our production. Initially, we had anticipated these actions would result in annual savings of $4 million. However, through the third quarter, we have achieved $7.1 million in savings and now expect these actions will result in full year savings in 2019 in excess of $8 million, which will contribute to a significant year-over-year improvement in the profitability of these programs. With one quarter left in the year, we are positioned to finish 2019 on a strong note due to have higher anticipated sales levels for the JPF, continued momentum in our bearings business, the improved profitability of our structures programs and the scheduled deliveries for K-MAX in 2019.

This year has also marked a meaningful turning point for us as a more focused and more profitable company that is setting the foundation for its long-term growth. And as we mentioned in my opening remarks, our teams are focused on implementing an efficient and refined operating structure and deploying capital to enhance our portfolio of engineered solutions. I would like to thank all of our employees for their hard work during this exciting but demanding time at Kaman and congratulate our workforce for an outstanding third-quarter result. Now I'll turn the call over to Rob for a closer look at the numbers.

Rob?

Rob Starr -- Executive Vice President and Chief Financial Officer

Thank you, Neal, and good morning, everyone. Before I discuss our performance for the quarter, I want to touch on the key terms of the transaction we announced this morning. The purchase price of $330 million values Bal Seal at 12.5 times of EBITDA when including estimated tax benefits and synergies, and we expect to fund the transaction with cash on hand. Sales of Bal Seal are expected to be $95 million in 2019 and will expand the EBITDA margin of our consolidated business.

As Neal mentioned, after this transaction, we will still have approximately $700 million of cash and debt capacity to deploy toward our organic and inorganic growth initiatives. We expect a significant portion of this capacity will be deployed toward strategic acquisitions, and we will continue to focus on identifying additional opportunities to expand our product portfolio of highly engineered products in line with our long-term growth objectives. Now I will turn to a discussion of the performance from continuing operations for this quarter and finish with an update on our 2019 outlook. Net sales for the second quarter increased to $182.7 million, an increase of 16.3% when compared to the prior year, resulting from increased sales of our JPF DCS product and commercial bearing products.

Gross margin increased 320 basis points over the prior year period to 33.5%, largely benefiting from favorable mix driven by our JPF DCS program and specialty bearing products. Operating profit of $15.6 million increased to $22.6 million over the prior year period, which was adversely impacted by the $10 million intangible impairment charge at our U.K. operations. On an adjusted basis, operating profit was $19.9 million or 10.9% of sales compared to the prior year period of $7.3 million or 4.6% of sales.

The increase in adjusted operating profit was a result of several factors, including a favorable sales mix weighted toward JPF DCS and specialty bearing products and a significant improvement in the performance of our structures programs as we realize benefits from prior year restructuring initiatives. Adjusted EBITDA in the third quarter was $26.9 million or 14.7% of sales compared to $17.2 million or 10.9% of sales in the third quarter of 2018. Higher adjusted EBITDA was the result of stronger operating results across a number of our product offerings. The diluted earnings per share from continuing operations of $0.36 increased significantly over the prior year loss of $0.34.

The increase resulted from the absence of the intangible impairment charge recorded in the prior year, offset by a $3 million reduction in pension income period-over-period, increased corporate development expense resulted from increased consultant spend associated with our G&A initiatives and M&A efforts. After adjusting for these and other similar items, adjusted diluted earnings per share from continuing operations was $0.46, up 229% compared to the prior year period, which speaks to the strength of the results from our operations in the quarter. Beginning this quarter, we included additional line items in income statement that are designed to segregate and identify the activity relating to the transition services agreement we entered into upon the sale of the distribution business. So, pursuant to the terms of the agreement, we have agreed to provide certain services such as tax, treasury, human resources and IT during the transition period of the Distribution business away from Kaman shared services.

While most of these activities have already been transitioned, IT services will take approximately one year to fully separate, and we will continue to report both the cost and income on a quarterly basis. In total, we expect to incur a net expense of approximately $800,000 in 2019 and a total net expense of approximately $2 million to $3 million over the life of the agreement. I would like to now discuss our cash generation performance for the quarter. Our approximate use of $6 million of cash during the quarter resulted primarily from the buildup of inventory for the JPF and specialty bearing product lines as we prepare for the steep ramp in sales that is projected through the balance of 2019.

Also impacting was a delay in certain cash receipts that we had anticipated in the third quarter. We have begun to collect on some of the outstanding accounts receivable from earlier in the year and have a clear path to deliver strong cash flow generation for the full year. Moving to our outlook. And as we discussed in our June announcement of the sale of Distribution, we suspended our guidance with the exception of sales and operating income for the Aerospace segment for the balance of the year.

We expect to now provide a more fulsome outlook beginning in 2020. Based on the performance through the first 9 months of the year, we are maintaining our full year outlook, which calls Aerospace sales in the range of $740 million to $760 million, with operating margins at Aerospace in the range of 16.7% to 17.2%. And with that, I will turn the call back over to Neal.

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

Thanks, Rob. I would like to close by thanking our team across Kaman. I'm proud of our execution in the third quarter despite the extraordinary efforts required to complete the sale of our distribution segment and move forward with the acquisition of Bal Seal. For all of us as employees of Kaman, and for our shareholders, the path ahead of us is clear to maximize the earnings power of our business and to invest for the long term.

We are excited about the opportunity ahead and look forward to updating everyone on our continued progress. Jamie?

James Coogan -- Vice President of Investor Relations

Operator, may we have the first question, please?

Questions & Answers:


Operator

Certainly. Our first question comes from the line of Seth Seifman with JP Morgan. Your line is now open.

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

Good morning, Seth. Seth, are you mute?

Seth Seifman -- J.P. Morgan -- Analyst

Yes. Thank you.

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

OK. We've been living with that the last week, as you can imagine, Seth. So --

Seth Seifman -- J.P. Morgan -- Analyst

Yes. Yes. Absolutely. OK.

Very good. Thanks. So just kind of -- yes, just kind of doing the math, it seems like the fourth quarter, the guidance in Aerospace kind of implies maybe a margin that was kind of like what we saw in the third quarter -- maybe a little bit better. Could you talk about some of the puts and takes there and what the opportunities are that will kind of determine where that comes out?

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. No, that's -- good question, Seth. When we look at our fourth quarter, as we talked about really all year, we're expecting a strong fourth quarter on the premise that we will have significant JPF DCS deliveries during the quarter. That is a very key driver.

We also expect continued improvement in the aero, structures group of product lines. Also, our Specialty Bearings & Engineered Products group really has lined up a very strong quarter ahead of them, and we have very good visibility to that. So that's really what's driving the implied outlook. I think you're right.

The margin range is going to be somewhere between 18% and 19%. That's the implied range, and it's going to come down to execution for us, and we have a great team who's prepared to do that.

Seth Seifman -- J.P. Morgan -- Analyst

Great. Great. OK. And on the corporate expense and the initiatives that you guys are undertaking and getting to the high end of that $15 million to $20 million that you cited, should we think of the base there as being kind of the 2017, 2018 level in the high 50s as kind of the baseline from which to assess those savings?

Rob Starr -- Executive Vice President and Chief Financial Officer

I think that's correct, Seth. I just would want to point out, we do expect there to be a continued noise in that number as we go through that effort, and as you can imagine, integrating these acquisitions. But as you think about the underlying base number, I would support that calculation, yes.

Seth Seifman -- J.P. Morgan -- Analyst

OK. Great. And then maybe just last one from me right now, can you guys size the synergy and tax benefit contribution to the deal?

Rob Starr -- Executive Vice President and Chief Financial Officer

Sure. I'll give you two. We talked about the unadjusted multiple, that two turns higher than the 12.5. About 75% of that difference is attributable to the tax, the rest is to operating cost synergies that we expect.

Seth Seifman -- J.P. Morgan -- Analyst

Great. OK. Excellent. Well, thanks very much.

Rob Starr -- Executive Vice President and Chief Financial Officer

Thank you very much.

Operator

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

Ken Newman -- KeyBanc Capital Markets -- Analyst

Hey. Good morning, guys. This is Ken Newman on for Steve. Thanks for taking my questions.

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

Oh, great. Good morning, Ken.

Rob Starr -- Executive Vice President and Chief Financial Officer

Good morning, Ken.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Good morning. Sorry if I missed it, but could you maybe just talk a little bit about how long you expect the integration of Bal Seal to take once the deal is closed? And it was good to hear that you see Bal Seal as a meaningful step and not the last step in M&A. So kind of give us an idea of how long you would look to integrate this and then maybe step back into the M&A pipeline.

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

Sure. This is Neal, Ken. The team obviously is -- have experience doing integrations, so we would expect that it would likely be about a six-month period of time for us to move through that process with the Bal Seal team. And we continue to be very active in M&A, as Rob kind of commented in his part of the prepared remarks.

And again, I think that you can expect that we will focus in the areas of the highly engineered products and that we will maintain the discipline that we have historically demonstrated in valuations.

Ken Newman -- KeyBanc Capital Markets -- Analyst

As I think about that last comment there, as we think about your M&A pipeline, are there deals similar to the one that you've just announced today or are you -- are there other targets in terms of either larger or smaller size or maybe different margin profiles?

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

I'll start and Rob can certainly chime in. There's a broad range. And I think that, as you would expect, when you have opportunities that come into that acquisition analysis phase, that they're going to be of various sizes. We're not as opposed at all to small acquisitions of smaller companies or product lines.

It would fit very nicely with what we currently also offer to our customer group. And certainly, we all know that there are larger companies that are out there today that may end up being available and would add significant scale to our operations. And so I think that we are open to either. I think now with the Bal Seal acquisition, we've demonstrated the ability to step up in size, and we could certainly do that again with the current strength of our balance sheet.

Ken Newman -- KeyBanc Capital Markets -- Analyst

That's good to hear. My follow-on question here is about the forward EBIT margin for Bal Seal. How do we think about how synergies can improve margins on a go-forward basis for that business? And maybe just talk a little bit about the customer mix and overlap for medical, A&D and industrial.

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

Ken, we'll talk about that and a lot more detail on our fourth quarter call. But obviously, as we've gone through the analysis, we see certainly some opportunities for increased sales at joint customers today, whether they're in the aerospace, defense, medical or even industrial markets. And we don't expect that there will be a lot of cross-selling, if you will, because the products are very different from what we have today, although highly complementary. But we certainly do think that we can leverage the strong relationships that Kaman will bring with that customer base to Bal Seal.

And similarly, Bal Seal will bring some very strong customer relationships to Kaman that we hope to exploit. We'd really look back to what we've been able to achieve with the GRW acquisition. As you remember, we did that about 4 years ago now, and it had a -- at the time that we acquired them, only about 19% or 20% of their sales was in the aerospace and defense area, very similar to the Bal Seal acquisition. They had a bigger exposure in medical.

We've been really very pleased with how we've been able to leverage and increase sales at GRW in their A&D area, and we've really been pleased with the underlying growth that they've been able to now drive in the medical markets that they serve today. And even though we've known Bal Seal for seven years and been looking forward to today for about that long, we entered the relationship initially seven years ago with A&D in mind, and now today, it's not just aerospace and defense but increasingly in medical as well. So we were really pleased with the ability to come to an agreement with Peter Balsells and the management team at Bal Seal Engineering.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Perfect. Thanks for the time.

Rob Starr -- Executive Vice President and Chief Financial Officer

Thank you, Ken.

Operator

Thank you. And the next question comes from the line of Edward Marshall with Sidoti & Company. Your line is open.

Edward Marshall -- Sidoti and Company -- Analyst

Good morning, gentlemen.

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

Good morning, Ed. [Inaudible]

Edward Marshall -- Sidoti and Company -- Analyst

I just want to talk about -- I skipped out. I guess that's -- there's election day so no juries today. So cash flow and margin expansion were the discussions about Bal Seal. And if I think about -- you didn't go as far to say that, that would be accretive to EPS in the first year.

It's hard -- kind of looking at the math, it's hard to kind of think that it might not be. But is there something unusual -- you're probably still going through some of the deal accounting, but is there something unusual in that deal accounting that we should be aware of as we think about kind of Bal Seal and how you might integrate that into the business?

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. I wouldn't -- yes, Ed, great question. And what I'll say is, we're still working through, as you would appreciate, the purchase accounting adjustments that we'll need to make. This transaction will carry with it a potentially, I would call it, unusual, and not in the bad way, because a purchase accounting feature to that would limit the GAAP EPS accretion in year 1.

This deal is significantly cash-accretive right out of the gate. And then in year two, on a GAAP basis, we would expect it to be kind of a mid-single-digit type accretion just based on our early math. So adjusting for some of the purchase accounting adjustments, clearly, GAAP-accretive right out of the gate in year one. So we're very pleased to be able to partner with Bal Seal, and we think this transaction will provide a lot of benefits not just for Kaman but our shareholders as well as employees of Bal Seal.

Edward Marshall -- Sidoti and Company -- Analyst

Got it. And the second question I had was looking at the Q and seeing that you've shipped at roughly 26,000 fuzes to date, the math suggests 14,000 to 19,000 in the fourth quarter, which generally carry pretty high margins. So, looking at the margin guidance for aero, it looks a little light. So I just wanted to get your sense as to maybe is it a mix thing or something that might be going through on the -- with that implied movement from fuze.

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. No, good question, Ed. And keep in mind, in particular on the USG side, that's an overtime calculation. So when we talk about the units delivered, in particular in USG, there's not always a correlation between what's impacting the revenue.

So what I can tell you is that while we're still expecting significant DCS deliveries in the fourth quarter, a good portion of what we're going to deliver in the fourth quarter is also USG, where we've recognized a portion of that revenue. And so in terms of the margin guide, once again, we're trying to be balanced in what we're forecasting for the quarter just given that we have to execute to deliver it. Do we think there is potential for upside? Sure, if things all fall into place. But we're really trying to be balanced just given where we are in the year.

Edward Marshall -- Sidoti and Company -- Analyst

Perfect. Thanks, guys, very much for your comments.

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

Great. Thanks, Ed.

Rob Starr -- Executive Vice President and Chief Financial Officer

Thank you, Ed.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Tony Bancroft with Gabelli Funds.

Tony Bancroft -- Gabelli Funds -- Analyst

Good morning, gentlemen. Nice work. Thanks for taking my questions. You've mentioned a couple of times -- you're talking about the unmanned heavy lift area where you have a core competency.

Could you just maybe sort of -- strip behind -- maybe high level talk about what potential -- are there potential M&A opportunities out there? What do they look like? And would you be interested in that space? And sort of what would drive you to be more interested in doing M&A in that space?

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

Tony, it's a good question. We look at that quite often. We think we have a very unique air vehicle in the K-MAX today that's proven its capability in whether it's military logistics applications or a broad range of commercial applications, from humanitarian relief to construction to logging to firefighting. We are working currently, obviously, on our own unmanned capability or system put on that, and we were really pleased to get our first five orders from commercial operators.

We're focused on that right now. But clearly, that informs us on what we both think the market is and what the capability of our aircraft for further expansion or where a complementary airframe might fit. So I think the biggest thing for us right now is that we have opportunities ahead of us that we want to capitalize and then bring that experience and what we can learn about the applications and the capabilities and have that really inform both internal development or any acquisitions that we might do in that area.

Tony Bancroft -- Gabelli Funds -- Analyst

Great. Thanks, gents. Appreciate it.

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

Great. Thanks, Tony.

Rob Starr -- Executive Vice President and Chief Financial Officer

Thank you, Tony.

Operator

Thank you. And our next question comes from the line of Chris Dankert with Longbow Research. Your line is now open.

Chris Dankert -- Longbow Research -- Analyst

Hey. Good morning, guys.

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

Hey, Chris.

Chris Dankert -- Longbow Research -- Analyst

My apologies, I jumped on a little bit late here. Walking through some of the numbers, it seems like synergies are pretty significant. My back of the envelope math here says $5 million to $6 million. Is that in the right ballpark for the deal?

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes. No, Chris, that is well north of what's implied in the numbers that we've given. I don't want to go at length to say what that number is, but you're fairly well north. We'll be able to also provide more details on this when we get onto in the year-end call once we've closed the transaction.

But the significant opportunity really is about 75% of that difference in the implied multiple is really around the tax -- expected tax step-up benefit. So why -- on the operation side, what we've dialed in now is pretty modest. We're really -- it's a low-hanging fruit, if you will.

Chris Dankert -- Longbow Research -- Analyst

Got it. OK. That's very helpful. And then maybe this is -- it's a bit early, but I'll give it a stab anyway.

Obviously this year, JPF shipments on track for a really impressive number, a record if I'm remembering right. But as we look into 2020, is there any kind of sense you can give us? Is this a repeatable figure? Should it be similar to 2019 next year? Just any thoughts on JPF shipments, big picture?

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

Chris, we would expect that we would be in a similar range. We -- it is a little bit early for us. We will talk more about that at the fourth quarter call. But I think there's two things: you can see that we have very strong backlog and combine that with a really good team doing production.

So we think we can support volume in this range into next year. But again, we'll talk about that in more detail at the fourth-quarter call.

Chris Dankert -- Longbow Research -- Analyst

Got it. Thanks for the color, though. And then one final one for me. Any update on either the autonomous Marine program, kind of how that work is going? Any update on autonomous firefighting? Just any thoughts around that program would be appreciated.

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

Chris, as we mentioned, we actually received orders, five orders from customers that are all commercial today. And the primary goal of those orders is for them to be prepared for unmanned firefighting capability when we're able to get authorization to do that. So our operators are looking ahead, and we're teaming with them to make sure that we and they are both prepared to meet that demand when it occurs. And also, we remain very encouraged with the unmanned program within the U.S.

Marine Corps as well. So we'd like to -- we got a lot of hard work ahead of us, but there's a few things that are coming together quite nicely for both the commercial and military unmanned programs for the K-MAX.

Chris Dankert -- Longbow Research -- Analyst

Got it. Sorry a little full on the uptake, but very exciting stuff. Thanks, guys.

Neal Keating -- Chairman, president, and Chief Executive Officer

Yes -- no. Thank you, Chris.

Rob Starr -- Executive Vice President and Chief Financial Officer

Thanks, Chris.

Operator

Thank you. And our next question comes from the line of Pete Skibitski with Alembic Global. Your line is now open.

Pete Skibitski -- Alembic Global -- Analyst

Good morning, guys. Nice quarter. Apologies, I got on late as well.

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

That's OK.

Pete Skibitski -- Alembic Global -- Analyst

I guess to start, maybe for Rob. Rob, on the inventory build year-to-dates, I think JPF and the bearings have been a part of that. Does that start to wash out in the fourth quarter here? Do you get to a one-time conversion on free cash and net income for the full year? Or are you going to carry some inventory into 2020? Just wondering how that's going to flow.

Rob Starr -- Executive Vice President and Chief Financial Officer

Yes -- no, I would say this, we do expect to see a meaningful improvement in the inventory number in the fourth quarter based on our expected shipments. What I can tell you is in terms of the cash conversion, some of this will be hung up on AR likely at the end of the year, just depending on time of those sales, depending on how much of that moves into December given the payment terms. What I can tell you is we have line of sight. We have collected on some of the, call it, and outstanding receivables with some of our foreign customers.

So we are seeing some good progress early here in the fourth quarter. Long term, we have terrific visibility and confidence in delivering really strong cash flows, Pete, yes.

Pete Skibitski -- Alembic Global -- Analyst

OK. Great. A couple of questions on Bal Seal. Is there anything to turn around here? It looks like the margins are pretty solid.

I'm just curious, when I think about the 55% medical exposure, to me, not being a medical expert, but I kind of think of consumer staple type of a market where sales growth is low to mid-single digits. But it's pretty sticky, not particularly volatile and performance is typically consistent. Is that the right way to kind of characterize kind of what you guys have seen in the historical for Bal Seal?

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

I'll start, Pete, by saying it is certainly not a turnaround. This is an extraordinary company at every phase, whether it's design, manufacturing, their sales and their marketing organization. We were extraordinarily impressed not only with the design capability that they have but the absolutely world-class processes that they have in place. So great management team, terrific employees.

So as you rightly said, the profitability of that company demonstrates how strong they are across all of those facet to our operation. Actually, we've -- historically, they've been strong mid-single digits under private ownership. And we think that in yes -- in particular, if we get a little bit of help and recovery in the such markets, that we can be in the high single digits, the 8% to 10% growth range in that over time. So of course, we'll need a little help with recovery in industrial, but we feel very good about strong growth with this business over time as we come together.

Pete Skibitski -- Alembic Global -- Analyst

And that's great color. That's great. I appreciate it. Just one quick follow-up.

Do you guys just intend to operate it as kind of a stand-alone unit within Aerospace? Is that right?

Rob Starr -- Executive Vice President and Chief Financial Officer

I would say we're still working through -- toward how we're going to operate it within our Aerospace portfolio of companies. But needless to say, it's going to have a lot of attention from our management team, working closely with the Bal Seal management team to make sure that the teams are integrated appropriately and the employees are in a good place to continue doing the work that they've been doing the whole time under private ownership.

Pete Skibitski -- Alembic Global -- Analyst

OK. Appreciate the color, guys.

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

Great. Thanks, Pete.

Operator

I am showing no further questions at this time. I will now turn the call back over to VP of investor relations, James Coogan, for closing remarks.

James Coogan -- Vice President of Investor Relations

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

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

James Coogan -- Vice President of Investor Relations

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

Rob Starr -- Executive Vice President and Chief Financial Officer

Seth Seifman -- J.P. Morgan -- Analyst

Ken Newman -- KeyBanc Capital Markets -- Analyst

Edward Marshall -- Sidoti and Company -- Analyst

Tony Bancroft -- Gabelli Funds -- Analyst

Chris Dankert -- Longbow Research -- Analyst

Pete Skibitski -- Alembic Global -- Analyst

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