Kaman Corporation
Q1 2017 Earnings Call Transcript

Published: 6 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Kaman Corp. Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr. Jamie Coogan.

[James Coogan:]

Good morning. I would like to welcome everyone to Kaman’s first quarter 2017 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 the 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 2016 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?

[Neal Keating:]

Thank you, Jamie. Good morning, and thank you for joining us on today’s call. Before I begin my remarks today, I wanted to introduce you to Jamie Coogan. He was recently appointed Vice President of Investor Relations, preceding [ph] to the position held by Eric Remington for the last nine years. Jamie has been with the company for more than eight years in various accounting roles and is a graduate of our first class of our leadership development program, a program designed to recognize and cultivate talented individuals from across the company who not only have made significant contributions to command, but who are also seen as future leaders. Eric, will assume a new role with responsibility for Government Relations and Corporate Communications. Jamie and Eric will work closely during the transition period as we look to uphold the strong tradition of integrity and transparency that we’ve worked so hard to foster. Now, I would like to discuss our results for the quarter. Our first quarter was in line with our expectations and builds upon the key strategic and operational initiatives we have undertaken to drive improvement in our business. Beginning with Distribution. Sales declined to $17 million during the quarter, or 4.4% on an organic sales per day basis when compared to the prior year. Operating margins increased 70 basis points on a GAAP basis to 4.3% as our ongoing productivity initiatives continue to deliver positive results. These improvements were offset by the loss of leverage from lower sales volume, including lower vendor incentives, which impacted margins by 20 basis points. The costs of our productivity initiatives in the quarter were significantly lower than in the first quarter of 2016, when we incurred $3.1 million of expense. The analytical tools we’ve developed provide numerous benefits, including the ability to better analyze and make decisions based on our cost to serve certain customers. As anticipated, this has put some limited pressure on our top line performance in the near-term. However, the favorable impact on our margins is evident as our operating income dollars increased compared to the prior year, despite the lower sales and vendor incentives. We believe these initiatives have been critical to strengthening our distribution operations while positioning us for positive earnings growth as we move into the balance of 2017. We were encouraged to see positive trends in the quarter, with sequential sales growth in five of our top 10 end markets when measured on a daily sales basis. Leading this improvement was performance from machinery manufacturing, mining, food and beverage and fabricated metals. In addition, our average daily sales increased in each month of the quarter, with organic sales per day for March 8.5% above January levels. Looking at preliminary results for April. Sales per day were up 1% year-over-year and 4.4% over our run rate for the first quarter. This improvement in sales, along with increased quote and order activity are encouraging signs for the performance of distribution for the balance of the year. Moving to Aerospace. Performance for the quarter was driven primarily by improved margin performance for our bearing products and structures programs, offset by the sales mix of our JPF Fuze. I want to provide a little additional context on the JPF sales mix and its impact on our performance for the quarter. Option 12 of our U.S. government contract has a lower price per unit than our prior USG options and is lower than our price per unit on direct commercial sales orders. As we noted on our fourth quarter call, we expect to direct our production capacity during the first nine months of the year to fulfilling our U.S. Government Option 12 requirements. As a result, we expect to experience lower margin performance on this program through the third quarter before we begin to deliver the higher-margin DCS sales in the fourth quarter of the year. Turning to our acquisitions. EXTEX and GRW were both strong contributors to the quarter and are performing in line with our expectations. Integration is ongoing and we’ve taken a number of steps to reduce cost and to expand growth opportunities. First, we’ve recently completed the consolidation of GRW’s U.S. operations into our specialty bearings and engineered products facility located here in Bloomfield, Connecticut. This reduces the overall cost of the operation, while expanding the U.S. sales channel for GRW’s product offerings. Second, we are progressing on the transfer of assembly for a portion of our traditional airframe bearings to GRW’s low-cost manufacturing facility in the Czech Republic and have run test parts to determine the feasibility of the move. Finally, EXTEX is utilizing our in-house testing capabilities, reducing the time and cost for the development of new PMA products. I also wanted to spend a minute on other growth areas for our specialty bearing products. Recently, Sikorsky’s CH-53 helicopter achieved authorization to proceed to low-rate initial production, an important milestone for this program. Our current content per aircraft is approximately $100,000 and we look forward to supporting Sikorsky and the Marine Corps in their desire to produce 200 of these next-generation aircraft, with initial deliveries scheduled for 2021. We also have content on a number of additional aircraft that expect to see noticeable increases in build rates over the next few years, including the Airbus A350, the F-35 Joint Strike Fighter, the Bombardier C Series and Global 7000 and the Bell 505 commercial helicopter. These represent just a few of the growth platforms for our products and are great examples of the types of opportunities we will continue to leverage once these aircraft enter the fleet and require ongoing maintenance and overhaul support. Also in 2016, we approved a significant investment in a new test facility in Bloomfield, Connecticut for our specialty bearing product lines. We expect this new facility to be completed by the end of 2017. This investment will create a world-class test facility that will allow us to offer our customers more advanced solutions, while reducing the time and cost of new product development. Our continued investment in our specialty bearing production capacity, business development initiatives and new product offerings continue to provide long-term growth opportunities for our business. In short, results for the first quarter of 2017 were as anticipated. We continue to expect earnings to step up sequentially through the year with a steep ramp up in the fourth quarter. We remain focused on execution, improving margins and delivering on commitments to our stakeholders. And now, I’ll turn the call over to Rob. Rob?

[Robert Starr:]

Thank you, Neal, and good morning, everyone. I would like to begin by providing financial details and adding some additional context to our results before discussing our outlook for the rest of 2017. Our GAAP diluted earnings per share were $0.22 compared with the prior-year level of $0.35 on a GAAP basis and $0.41 on an adjusted basis. As Neal noted, this was not unexpected. When we issued our 2017 financial guidance back in February, we noted that less than 10% of our full-year earnings would likely be generated in the first quarter. So thus far, the year is unfolding as expected. Gross profit in the quarter was $124.8 million, or 28.6% of sales, compared to $134.4 million, or 29.8% of sales. The lower gross profit result was attributable to an unfavorable sales mix at Aerospace, partially offset by improvement in distribution gross margins due to the continued positive contribution we are achieving from our productivity initiatives. As Neal mentioned earlier, these initiatives strengthened distribution and positioned the business for increased profitability in a sales environment. Operating income in the first quarter was $14.2 million compared to $18.4 million in the prior-year period. The lower operating margin was driven largely by the unfavorable product mix at Aerospace, notably our Joint Programmable Fuze program. We continue to focus on improving our operational effectiveness on our structures programs, and we are beginning to see the benefit of these actions, as the year-over-year performance on these programs has improved, with further progress expected as we move through the balance of the year. We continue to execute on cost reductions throughout the company with SG&A expenses down 4.7% from the first quarter of 2016. Finally, we had a use of cash of $26 million during the quarter, which is in line with our expectations. This result is not unusual as we typically use cash during the first quarter based on the timing of cash requirements for our business. This also reflects a $10 million contribution to our pension plan, while the higher accounts receivables were the result of two K-MAX orders received at the end of the quarter and higher sales at distribution in the month of March. Before handing the call back over to Neal, I would like to take a moment to talk through our outlook for the rest of the year. Based upon first quarter results and the positive trends we are seeing at Aerospace, we are raising the low-end of our sales outlook for this segment to $730 million due to the overall strong business conditions for our specialty bearing products, which saw an increase in order intake over both the first quarter of 2016 and sequentially from the fourth quarter of 2016. We are also encouraged by the trend of distribution and remain confident in the performance of the remainder of the business and, as such, we are reaffirming the remainder of our 2017 outlook. As we noted last quarter, the expected cadence of earnings for the remainder of the year, calls for our earnings to increase sequentially. We expect 25% of our earnings to occur in the first-half of 2017 with more than 50% of our full-year earnings in the fourth quarter. The back-end weighting in 2017 is primarily due to the expected shipment of a large Joint Programmable Fuze direct commercial sales order during the fourth quarter, which requires the receipt of government approvals. We remain confident that the approvals will be received and that we have sufficient production capacity to meet the requirements for this shipment. However, a delay in the approval process could shift some of these direct commercial sales into early 2018. That said, we still have a strong backlog to work through, which currently stands at approximately $150 million. We are continuing negotiations for Options 13 and 14 to do with Air Force and other customers for additional orders that would provide sales coverage beyond 2020. At Distribution, we are beginning to see some improvement in our sales trends. Sequentially, Organic Sales Per Sales Day increased approximately 1% from fourth quarter levels, an encouraging sign of improving macroeconomic conditions. This result along with the increase in quote activity across the segment and increased order activity for our automation products provides encouragement for improved performance as the year progresses. We continue to expect free cash flow to be between $70 million and $100 million, approaching or exceeding 100% of net income once again this year. Our 2017 year-end leverage is expected to be at approximately 2 times debt-to-EBITDA, the low-end of our targeted range. We will be disciplined in our use of cash and seek to deliver shareholder returns via organic growth, our disciplined acquisition strategy, dividends and share repurchases. With that, I’ll turn it back over to Neal for his closing comments.

[Neal Keating:]

Thanks, Rob. Our first quarter came in as expected and we expect significantly improved performance as we progress through 2017. Aerospace volumes remain exceptionally strong with profitability increasing as sales of our bearing and fuze products increase throughout the year. While at Distribution, margin enhancement programs are delivering the expected results and revenue trends are showing early signs of improvement. I’d like to thank our investors for their continued interest and support and our more than 5,300 employees for their dedication and commitment to delivering world-class products and service to our customers every day. Now, I’ll turn it back over to Jamie. Jamie?

[James Coogan:]

Operator, may we have the first question please?

[Operator:]

[Operator Instructions] Our first question comes from the line of Edward Marshall with Sidoti & Company. Your line is now open.

[Edward Marshall:]

Hey, guys, good morning.

[Neal Keating:]

Good morning, Ed.

[Robert Starr:]

Good morning, Ed.

[Edward Marshall:]

I just wanted to talk about the Distribution business, if I could, for a second. Looking at the different segments, you had mentioned the market – the end markets that were performing well. Can you kind of talk about maybe some of the end markets that weren’t performing up to the quarter’s standard? How you see them shaping up throughout the remainder of the year?

[Robert Starr:]

Sure. Ed, this is Rob. We did talk a little about the ones that were up. In terms of year-over-year, I’ll just give you a couple of industries that were down. For us, that would be the paper, chemical manufacturing and transportation. We experienced some declines. We do expect to see those improve over the course of the year relative to the year-over-year performance. I will say that on a sequential basis, once again those were really our – probably our three weakest end-markets. But once again, keep in mind, we have very diverse exposures. But we did see an improvement certainly on a sequential basis relative to the year-over-year.

[Edward Marshall:]

Got it. And when looking at the guidance, we talk about the bearings being the – one of the causes called out in the press release as to the guidance change on Aerospace and lifting the low-end of the revenue. But being that it’s a much higher margin product for the rest of the – I’m surprised that you are not raising the operating income expectations as well? Can you talk me through kind of what your thought process was there?

[Robert Starr:]

Yes, no, it’s a good question, Ed, and you are correct. Certainly, we wanted to highlight that we are seeing improved order intake that gives us confidence to raise the low-end. And if you look at our overall Aerospace OI range, I mean, that may give us a good increased confidence that we could perhaps achieve towards the higher-end of that range. But given some of the uncertainties of some other programs, as you would expect, at this time, we didn’t feel that it was prudent to go ahead and raise the range.

[Edward Marshall:]

Got it. And just a point of clarification on the CH-53, you talked about the $100,000 of content. Is that LRIP pricing and – or is that full production pricing, kind of help me think through that as well?

[Robert Starr:]

That’s really what we anticipate as our average selling price over the life of the program.

[Edward Marshall:]

Okay. So full production pricing then? So after the step down from L-RIP. Okay, perfect. Thanks, guys. I appreciate it.

[Robert Starr:]

Okay. Thanks, Ed.

[Neal Keating:]

Thank you, Ed.

[Operator:]

Thank you. And our next question comes from the line of Pete Skibitski with Drexel and Hamilton. Your line is now open

[Pete Skibitski:]

Hey, good morning, guys.

[Neal Keating:]

Good morning, Pete.

[Robert Starr:]

Good morning, Pete.

[Pete Skibitski:]

Hey, I just wanted to understand things better. I guess, maybe, Robert, so if only 25% of earnings for the full-year will be in the first-half, it seems to imply another fairly low margin rate at Aerospace in the second quarter, maybe another 10 percentage or so. So I’m just trying to understand if Aero is only going to be 10% in the first-half, you’ve got a really good bearings business that I thought was fairly high margin. So where is the real – it almost implies that the rest of the Aero business is kind of a low single-digit business, or a single-digit business. Am I understanding that accurately, or what else would you guide me towards to help me understand why – just because of one international or the rest of business is so low?

[Robert Starr:]

Yes, no, Pete, I would say this, we certainly expect improved operating margin performance relative to the first quarter in Aerospace in Q2 based on what we are seeing and we do see that step up through the balance of the year. But you really have two factors as we progress through the year that are predominantly driving the margin expansion in Aerospace, that really being increased DCS sales, in particular, as we get into the fourth quarter. But also a pretty meaningful increase in both sales and expected operating income as we gain leverage in our bearings operations. So I think to answer your other part of the question, we have discussed in the past that our structures business is below segment average. But we are making progress there and that certainly is also part of the reason why we feel comfortable in maintaining our outlook.

[Pete Skibitski:]

Okay. So the bearings volume is pretty important to leverage and that’s kind of second-half weighted as well, is that right?

[Robert Starr:]

Yes. That’s exactly right, and we saw a very similar pattern. This is not an unusual pattern for us, Pete.

[Pete Skibitski:]

Okay. Okay, great. That’s very helpful. Thank you for that. And then maybe just one for Neal. Hey, Neal, just on the decision to increase your ownership in the Kineco JV, can you just talk about kind of what drove that and how you are thinking about that market in terms of the opportunities – the midterm?

[Neal Keating:]

Sure. I’d be happy to, Pete. I was over there recently when we jointly made the announcement of our increased equity stake, and really there’s two drivers for that. We are really pleased with the performance of the joint venture. They’ve recently received an award from BAE Systems as a gold supplier for multiple quarters of 100% on-time delivery and 100% quality, they really do excellent work. So we’ve been very pleased with the way they’ve been able to ramp up their production and sustain quality and also now how they’re able to diversify their customer base. And our ability to move to the 49% ownership was really allowed for by the relaxation of foreign direct investment regulation by the Modi administration. So we were very pleased to be able to do that and we’ve got a lot of confidence in that joint venture going forward and how it can help drive our business growth.

[Pete Skibitski:]

Okay. So you guys are already receiving some earnings from the JV, maybe it’s small so far, but you expect that to grow in the future?

[Neal Keating:]

That’s correct.

[Pete Skibitski:]

Got it. Thanks very much, guys.

[Neal Keating:]

Okay. Thanks, Pete.

[Robert Starr:]

Thank you, Pete.

[Operator:]

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

[Chris Dankert:]

Good morning, guys. Thanks for taking my question.

[Neal Keating:]

Sure, Chris.

[Robert Starr:]

Good morning, Chris.

[Chris Dankert:]

I guess, the big thing on my mind looking at KIT, the industrial EBIT margin pretty darn impressive, given kind of what’s been going on there. I guess, with all the cost you’ve pulled out thinking about the back-half of 2017 into 2018 as we get some positive organic growth. What kind of – did the incrementals change there versus the past, or is that still kind of a low-teens positive incremental on, on the upswing?

[Robert Starr:]

Yes, Chris, this is Rob. That’s a good question and I appreciate the encouragement on our first quarter results. I think there is an argument to be made that our algorithm of about a mid-teens drop-through could be improved based upon the actions we’ve taken in the business to strengthen that operation. So we are certainly looking forward to continue to improve macro economic conditions to prove out that theory. But we do feel very encouraged by what we are seeing at Distribution.

[Chris Dankert:]

Gotcha. And then just a matter of understanding, I guess, looking at the JPF program, if there would be any kind of U.S. government shutdown, does that pose any risk to Option 13 or 14 negotiations, or is procurement kind of exempt from all those issues in Washington?

[Neal Keating:]

I don’t know that we can say there is much that would be exempt from that. But we wouldn’t see that as a big impact as we’ve commented. We’ve got – if we did experience a short shutdown, which now I think appears somewhat unlikely, it would be for a short period of time. So I don’t think it would upset in a meaningful way the acquisition cycle. We have said that we intend to fulfill our Option 12 requirements during the first three quarters of the year. So that’s an order that’s in place. We would be ready to go and then we are going to shift to DCS production in the fourth quarter. So it would be likely the early in 2018 before we’d start fulfilling the next USG options anyway. So I think we should be in pretty good shape there.

[Chris Dankert:]

Got it. And then, you guys mentioned that quoting is up nicely. I think, Rob, last time we talked, it was actually high-dollar quoting, specifically it was doing much better, is that still the case?

[Robert Starr:]

Yes, we do continue to see very strong trends in our high-dollar quotes, Chris. So we are very encouraged by that.

[Chris Dankert:]

Got it. And then, I guess, one more if I could here, any comment on the SH-2 program as far as everything still on track there with Peru? Anything kind of coming down the pike on Egypt at all, just any comment on SH-2?

[Neal Keating:]

It was interesting. We kind of wondered if we’d get that question about Egypt, because we haven’t talked about it in a little bit. We are continuing with Peru, that remains on schedule and will contribute both this year and next. We continue to work with Egypt not only on their current fleet, but also certainly with an eye towards increasing that fleet and remanufacturing a number of the excess defense articles that they acquired last year. So that’s a little bit longer-term for us post both the Peru program and also obviously, our K-MAX program.

[Chris Dankert:]

Got it. Thanks so much, guys.

[Robert Starr:]

Okay, thank you, Chris.

[Neal Keating:]

All right. Thanks.

[Operator:]

Thank you. And our next question comes from the line of Robert Majek with CJS. Your line is now open.

[Christopher Moore:]

Hey, good morning. This is Chris Moore for Robert, actually.

[Neal Keating:]

Good morning, Chris.

[Robert Starr:]

Good morning, Chris.

[Christopher Moore:]

Good morning. Can we just maybe talk a little bit more about the trend of higher bearing content on new platforms. Is that kind of the big driver behind the belief that bearings are going to accelerate the rest of the year or I’m just not the – this trend is – how new is that and what’s the momentum there?

[Neal Keating:]

We’ve got a couple of factors driving it. Number one, cyclical in that we tend to have stronger bearing shipments in particular for commercial aerospace companies – customers rather in the second-half of the year. And we see that every year and it’s a little bit of a head scratcher when you look at the production schedules that they have. But we do have certainly a cyclicality to our specialty bearings business, which is heavily weighted to the second-half of the year. And the second to the point you made, Chris, is more secular. We do have higher bearing content on the newer growth platforms. The big ones for us, as we commented a little bit earlier, will be the Airbus A350 as that uptick in production rate continues. Obviously, there has been a lot of discussion about the narrowbody increases at Boeing and Airbus both, even though our dollar content on each of those aircraft is lower when you are talking about a 10 aircraft per month increase over time, that still contributes pretty significantly. A number of the large business aircraft, both from Bombardier and Gulfstream as they ramp up, we have very nice content on those and also on the new Bell 505 helicopter, which Bell has done really well with their market introduction of that and we were certainly glad to see it. So, I think, Chris, it actually talks to the diversity of the products that we have in the platforms and the customer base. And you combine that with both that historical cyclical trend, but now really strong positions on new growth platforms.

[Christopher Moore:]

Gotcha, terrific. Can – shift gears a little bit. Can you talk a little bit about the process of U.S. government approval regarding that foreign JPF sales. I mean, are there specific milestones that you need to meet between now and Q4, and at what point would you know whether or not definitely that you are going to be able to meet that timeframe?

[Neal Keating:]

We would – it’s difficult, there’s a Congressional notification period that’s in process right now. So we certainly are hopeful that in the next several months that we would be able to move forward with that and get the export license. But it’s one of those where the schedules are a little bit difficult to anticipate, but we know that we still have the ability to transition to the DCS production for the fourth quarter even if we have another delay in that – for another couple of months.

[Christopher Moore:]

Gotcha. All right. Thank much, guys.

[Robert Starr:]

Thank you, Chris.

[Operator:]

Thank you. And our next question comes from the line of Steve Barger with KeyBanc. Your line is now open.

[Unidentified Analyst:]

Good morning, guys. This is Ryan on for Steve.

[Neal Keating:]

Hi, Ryan.

[Unidentified Analyst:]

Yes, my first question is, I was just kind of curious if you could give a little color on what you are seeing in the pricing environment for Distribution?

[Neal Keating:]

Ryan, I think that we haven’t seen a lot in the pricing side. I don’t think we’ve seen a lot on the pricing side for probably a few years actually. It’s a very benign price environment. Obviously, it varies by product category and by customer type. But on a general basis, the contribution to our improvement from general price increases has been very muted.

[Unidentified Analyst:]

Okay. And then just thinking about gross margins as the year progresses, is it safe to assume that 2Q and 3Q could be relatively the same to 1Q levels and then you see a significant ramp-up in 4Q, as those commercial JPF sales come in?

[Neal Keating:]

That’s correct. Yes, that – you’re exactly correct, Ryan, that’s really the – what we anticipate in the Aerospace segment. And what’s kind of interesting, if you go back and look at our results – our quarterly results, over the last couple of years, certainly 2015 and 2016, you will see a significant improvement in operating margins in the Aerospace group when we do have quarters of very high DCS shipments. So it’s not anything that would be atypical for us. If you go back to 2015, not quite – between 45% – about 45% of the units that we ship were DCS and we shipped more than 70% of those in the second-half of the year in 2015 and we had a different profile last year. 37% of the total units were DCS and we shipped 80% of those in the first-half of the year. So again, there is some variation, there is no question about it. But it’s not atypical for us to have that variation between quarters in any calendar year.

[Unidentified Analyst:]

Okay. And then…

[Robert Starr:]

Yes, Ryan, I’d just – this is Rob. I’d just make one other additional comment there. Just the ramp up that we see in bearings will also – will certainly have an impact on the overall gross margin performance as we go through the balance of the year.

[Unidentified Analyst:]

Okay. That’s good to know. And then just thinking about going back to Distribution, as e-commerce becomes more prevalent in the space and you are seeing some investments to new platforms from your competitors, how do you feel about your e-commerce platform within Distribution as it is right now?

[Neal Keating:]

Ryan, it’s one of the areas that we’ve actually began to – begun to accelerate our investments in our e-commerce platform and the foundation for that platform during this year. You would have seen that we re-hosted our e-commerce site very recently, made it much easier to use on mobile devices. So it is an area. We talked a lot last year about our productivity initiatives and the investments that we’ve made there. And we’ve been able to comment as well on the underlying strengthening of the business as a result of those investments. We are making not of the same scale, but we’re making our initial investments in building a strong platform to drive our e-commerce business going forward. And I think, you will see that through the course of this year and into next year.

[Unidentified Analyst:]

Awesome. Thanks, guys. I appreciate the time.

[Neal Keating:]

Okay. Thank you, Ryan.

[Robert Starr:]

Thank you, Ryan.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of James Hegyi with Iron Compass. Your line is now open.

[James Hegyi:]

Hey, guys. Quick question on the Distribution business. Just looking at the sales performance for the quarter compared to Motion and AIT, they don’t do the organic calculation quite the same way, but Motion was up 3% and AIT up a little north of 6%. So whether you want to compare that to the negative 4.5%, or negative 6%. Just wanted to understand the gap, why it was so large this quarter?

[Neal Keating:]

James it’s – we’ve obviously spent sometime on that on that as well. I think that we have to break it down into a few areas. We serve – we have strengths in different end markets. Obviously, a number of years ago, as oil and gas was on its uptick, we were pretty clear that because of the geographic distribution of our Distribution business, we didn’t have a lot of oil and gas exposure. We didn’t benefit from that on the uptick And if you go back a couple of years ago, we didn’t get hurt nearly as bad when that cycle turned down. We also obviously from the recent uptick probably haven’t benefited as some of our competitors have. Another area is in fluid power. We are very, very strong with Parker in the industrial MRO segment. We are not as strong, in fact, not strong at all, in the mobile equipment market, it’s not a market that we’ve chosen to pursue. And that business has been very strong for the last couple of quarters, and also we haven’t expanded our product line to include things like consumables and safety supplies. It’s really not the technical differentiation that we look for. So I think that when you look at the – really the differences in markets that we serve, we are inevitably going to have periods of time whether it’s a quarter or two quarters, where one of the larger national chains outperforms the other. We also kind of think about market share in terms of it being a $35 billion market, that’s extraordinarily fragmented. So we think that that puts the larger national distributors at an advantage to the smaller local and regional players and we believe that that is a systemic trend that will continue. But we think that it’s predominantly based on the mix of markets that we serve. What we are really focused on right now is, we also know that as we’ve been utilizing a number of the tools and we even commented in our prepared remarks, we’ve been using a number of the tools that we’ve developed in the last year-and-a-half to really identify the cost to serve some of our customers and some of our customer segments. We’ve been working with those customers to see if we can realign, how we do work, where we do work to contribute – make sure that that contributes to our operating income growth in the manner that we want to see. And obviously, in certain instances, we’ve had to move away from that business. I think that, as you look at the outlook for the year, with the operating income in excess of – up in excess of 30% on a relatively flat growth, that’s a trade-off we’re willing to take.

[James Hegyi:]

And just on the oil and gas piece of that, because AIT, they talk about oil and gas as being like 7% of their business. To your point, obviously, that’s come back strong. And I guess, of their – Motion doesn’t disclose, but AIT, the 7% I think probably accounted for about half of the 6% total growth, they saw about 3% of that’s probably from oil and gas. I guess, just in – and further kind of try to compare. I mean, is that –what portion of Kaman’s business is oil and gas related?

[Robert Starr:]

Yes. James, this is Rob. I mean, I would say, our direct oil and gas exposures is less than 1% of our overall market. I mean, clearly, we have other industries that are impacted by what’s happening in the oil and gas sector. But in terms of, as we measure it direct oil and gas, as we measure it, it’s less than 1%.

[James Hegyi:]

Okay. so that – okay, fine. So it’s really a mix of all the things you guys are talking about that contributed. It isn’t just oil and gas?

[Neal Keating:]

No, we have a very diverse. I mean, AIT, if you were to look at their investments and their acquisitions, they made a very conscious effort to invest heavily in upstream exposure, which is their decision. And this particular quarter with a very strong rebound to your point, they benefited very nicely from that. And that’s just not an area where we have a lot of direct exposure. But we are very encouraged by the volume trends we are seeing. And we think just like we are a little late to the game on the downside, we maybe a quarter or so behind on the upside just given some of the end market exposures that we have.

[James Hegyi:]

Okay. Thank you.

[Neal Keating:]

You’re welcome.

[Operator:]

Thank you. And I’m showing no further questions at this time. So I’d like to return the call to Mr. Jamie Coogan for any further remarks.

[James Coogan:]

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

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.