On Nov. 1, Kaman Corp., Bloomfield, CT, reported third-quarter sales of $359.5 million. A key driver behind that sales growth was Kaman Industrial Technologies, the power transmission, bearing and motion control distribution arm of Kaman Corp., which posted a year-over-year sales increase of 37 percent in the quarter.
Steve Smidler recently took on the role of president at Kaman Industrial Technologies when T. Jack Cahill retired after serving in that post for 17 years. Smidler and Vice President of Marketing David Mayer spoke with MDM Associate Editor Jenel Stelton-Holtmeier at the Power Transmission Distributors Association 50th Anniversary Industry Summit in Phoenix about Kaman’s goals and the outlook for the industry.
MDM: As the new president of Kaman Industrial Technologies, what are your goals for the company, and how will your experience help you attain those goals?
Steve Smidler: Jack Cahill did a great job putting the company in a position to grow, and I hope to be able to capitalize upon that base as we move forward.
I come from a manufacturing background, and a lot of our product went to market through a variety of distribution channels. Even though we were selling electrical product, it went to market through IT equipment channels, fluid power, power transmission. One of the things I bring is the experience of having worked with a wide diversity of distributors.
And because of that experience, it’s relatively easy for me to kind of put myself in the shoes of the suppliers and understand what’s making them tick. Hopefully, I can use that to our advantage within Kaman, make us a better organization and a better distributor partner for a lot of our key suppliers.
Additionally, our CEO Neal Keating has said that he wants some diversity on the management team with regards to international experience. I lived in Europe for four years and traveled the world extensively working on the manufacturing side. There definitely is a role for distribution, or a level of distribution-related services, internationally.
My experience has been value-add distribution doesn’t exist in the same form and function in a lot of the major economic countries around the world as it does in the U.S. China is dramatically different in terms of how they move product through multiple tiers of distribution; Japan is the same way. Even Europe, in the bearing and power transmission sector, tends to be singularly brand-focused. It’s not the same mode that you have here. And it’s the same with the electrical and the automation side.
Other countries have different levels of value proposition for distribution. So, it’s great to say you want international experience, but I don’t think the Kaman value proposition in its current form would work around the world. Having said that, there are a lot of things that we do in terms of value-added services that we should replicate in other parts of the world.
MDM: Does Kaman have international expansion plans in the works right now?
Smidler: Well, you have to think about corporate priorities. Right now, we don’t have the level of coverage in the U.S. and Canada that we would like to have. So if we woke up tomorrow and had the opportunity for two different $100 million acquisitions, one in Brazil and one in Kansas, we would pick Kansas because we’re not distributed there and there’s minimal overlap. We want to make sure we have our core base on a sound foundation.
But that doesn’t mean that if the Kansas opportunity weren’t there, we wouldn’t look at Brazil, a major economic market. We continue to expand in Mexico; we completed another acquisition in Mexico earlier this year. We’ve done some realignment in Canada, and I think we can definitely continue to improve and grow in Canada. And in 2008, we acquired into Puerto Rico.
Right now, as far as international exposure goes, I would say we’re currently international-lite, which is Canada, Mexico and Puerto Rico.
David Mayer: International expansion is not a high priority right now, but it’s not an area we’re afraid of or unwilling to consider. Having Steve and a senior management team at Kaman with international experience gives us the ability to do it when it makes sense.
Smidler: We always monitor both competitive pressure and customer pressure to see what they’re looking for, and interestingly enough with our newest acquisition Minarik, they are getting some pressure for support installations in Asia – Singapore, China. Some companies that have moved there have been used to the type of value-add distribution support models found in North America, and they don’t find it in the same form in some of those countries. They would like to have that from us. But we still have to evaluate if it makes business sense to make that move. Can we get paid for it? That’s really the challenge.
MDM: Speaking of Minarik, could you provide an update on how the acquisition and integration have gone?
Smidler: Very good. The acquisition already has been accretive and at least successful from the short-term financial side of things.
The plan is Minarik will stay a separate selling operation, but there are other components of integration, some of the back office integration, where we’d like to try and gain some efficiencies. We’ve done some freight things, but we didn’t have a lot of back office cost savings short-term dialed into the integration because Minarik’s business model is so different.
Most of where we’re trying to do incremental value creation through synergies is through cross-selling. Kaman Industrial Technologies introduces the Minarik salespeople to some of their key accounts and vice versa. That’s really the foundation of where the incremental value was.
By itself with the business recovery in the OEM sector, Minarik was a great acquisition. Very complementary, minimal overlap. We will continue to look for ways to expand both our classic bearing/PT/fluid power segment and our motion control and automation.
MDM: How about the Allied Bearing integration? How’s that gone?
Smidler: Allied Bearing was about as seamless an integration as you can get.
Mayer:: It’s a great company in a market where we had very limited coverage. So it filled an immediate hole very quickly for us.
Smidler: And the products they sold were really a subset of the broader offering from Kaman but with minimal product brand conflict. The brands they were selling were the brands we were selling. They picked up immediate leverage and expanded their portfolio immediately.
On the freight contracts with UPS alone, we picked up significant savings on day one because now they have the ability to pull from a large distribution center of Kaman resources they just didn’t have before.
Mayer: And we were able to complete the system integration in approximately four months. That’s fairly unique and a strong accomplishment for our IT team to pull that off. And that really gets the synergies and the integration accomplished quickly.
MDM: Any other acquisition plans coming up?
Smidler: We’re happy to say we have renegotiated our revolving line of credit as part of Kaman. We have plenty of capacity to buy companies if they fit as part of our overall strategy. We’re very bullish in that we do have plans to grow via acquisition. And we have the financial capability to get it done.
MDM: What are the primary goals behind the acquisitive moves that Kaman has been making? Are you looking for product expansion, geographic expansion, or end-market diversification?
Smidler: Probably everything you said except for product diversification. We’re pretty diverse already.
The first goal for acquisitions would just simply be geographic expansion in our core business. Product line expansion: If they’re complementary technologies to Minarik on the automation and motion control side, we’ll definitely look at those. We recognize the fluid power segment as being a very attractive marketplace and a good fit for what we’re doing on the automation side.
MDM: Your second- and third-quarter results were pretty positive. Are you optimistic that this growth trend is going to continue?
Smidler: That’s a good question. I hope so.
I’ve talked to a lot of manufacturers, and everyone’s kind of in that planning mode. Of the suppliers that I’ve talked to, most people are talking into the 8 to 10 percent growth ranges going into 2011. If that were to occur in a relatively steady fashion, most of us would be pleased.
For full year 2010, we expect organic sales growth of 10 to 13 percent.
That said, there have been some recovery pains of certain suppliers on deliveries through this latest ramp-up.
MDM: “Recovery pains”? Have there been specific challenges that you attribute to recovery?
Smidler: This has probably been a world-record year in terms of price increases because everybody was devoid of increases back in 2009. So when you have fixed price contracts with customers, you’re trying to get protections or price adjustments or just absorbing the margin impact to some of these price increases and changes, and it just ripples through the organization.
Do you have your data files up to date? Do you have your pricing matrices up to date? There’s been this very, very large ripple effect. I don’t think I’ve ever seen a year with this magnitude and frequency of price increases.
Mayer: In addition, the housing-related industries have not fully recovered. We’re still seeing softness in markets that would supply construction, both residential and nonresidential.
MDM: How’s the year going so far?
Smidler: By anybody’s definition, this has been a good year. Everybody expected a recovery, but I don’t think anybody expected this level of recovery. Pretty much anybody you talk to, whether they are distributors or manufacturers, has seen a good healthy recovery.
We’re on pace for a record sales year for the company, including acquisitions.
MDM: Organic sales were up, as well. Are you expecting that trend to continue?
Smidler: We hope so. If hope was a strategy, yes.
MDM: One of the issues that arose a lot in the past couple years was inventory destocking and restocking. Do you think we’ve gotten out of the destocking mode, where we’re starting to see increases that are real sales increases or are we still moving through a restocking of the diminished inventories?
Smidler: For ourselves, Kaman didn’t really destock a lot. We’ve been given credit by a lot of our suppliers that we were the least of anybody’s problem from the rollercoaster ride of inventory levels.
Some manufacturers have commented that in the electrical industry, the replenishment cycle has not occurred. But, what is restocking? I think this is the new normal. Companies have just resized their inventories appropriately, based upon the market.
In power transmission, there have been some major players, specifically the second-tier guys, who have taken down their inventories as a comparable. That’s just the new reality.