Kaman Corporation
Q1 2015 Earnings Call Transcript

Published: 3 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Kaman Corporation Earnings Conference Call. My name is Jackie, and I will be your operator for today. At this time, all participants are in a listen-only mode, and we will be facilitating a question-and-answer session towards the end of today's presentation. [Operator Instructions] I would now like to turn the conference over to Mr. Eric Remington, Vice President, Investor Relations. Please proceed.

[Eric Remington:]

Good morning. Welcome to the Kaman Corporation first quarter 2015 conference call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer; and Rob Starr, Senior Vice President and Chief Financial Officer. Before we begin this morning, please 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 2014 Annual Report on Form 10-K and the current report on Form 8-K filed yesterday evening together with our earnings release. With that, I'll turn the call over to Neal Keating. Neal?

[Neal Keating:]

Thank you, Eric. Good morning and thank you for joining us on today’s call. We started the year on a strong note, with diluted earnings per share of $0.46, which was ahead of the prior year. Consolidated sales were up 8.5% to $443 million and were driven by a more than 20% increase in sales in our distribution segment, partially offset by lower sales in aerospace. Higher distribution sales were the result of acquisitions completed in the past 12 months and organic growth during the quarter. Our overall profitability was higher compared to the prior year, as operating income and distribution increased on the higher revenue. Aerospace operating margins were significantly higher on improved operational performance and a more favorable sales mix, with profit dollars roughly flat despite the lower volume. Before walking you through the segment, I would like to briefly discuss our improving cash flow generation and the implications for capital allocation going forward. Free cash flow in the quarter was $26 million building on the $81 million of free cash flow generated in 2014. As a result, in addition to the 12.5% dividend increase announced in February, our Board approved a new $100 million share repurchase program. We believe this initiative, combined with our regular dividend program, highlights our commitment to creating shareholder value. Looking forward, we expect to continue to invest in attractive organic growth opportunities and acquisitions that complement our current capabilities and improve the competitive position of our businesses. And this share repurchase program provides an additional tool to optimize our capital structure. Next, I’d like to provide some color on the performance of each of our segments. Beginning with distribution, sales were up a little over 20% against the prior year with approximately half of that growth stemming from acquisitions completed in the past 12 months, and the balance representing organic growth. On a sales per day basis, growth of 2.1% was our sixth consecutive quarter of positive organic sales growth. In addition, we benefited from having four additional sales days in the quarter compared to last year. Distribution sales growth while continuing its positive momentum remains below our expectations and continues to be inconsistent from day to day and week to week. During the quarter, we were impacted by both lower energy prices and the strengthening U.S. dollar. While we have limited oil and gas exposure, we did add business in the Marcellus Shale region through last year's acquisition of B.W. Rogers. In addition, the impacts on specialty steel, where we have a stronger presence, and the general cooling of CapEx spending across the industrial economy related to the fall of energy prices is impacting our business. Finally, our expansion into automation control and energy products has increased our OEM exposure. Since many of our OEM customers sell their products abroad, the stronger U.S. dollar has dampened near-term demand, particularly for our machine tool and process equipment OEMs that sell into Europe. Despite these issues, we continue to generate organic growth and will focus on leveraging our broad product and service capabilities to accelerate growth over the balance of the year. Segment-level operating profit was 4.2% in the quarter, 30 basis points lower than last year and slightly below our expectations. While we had anticipated higher ERP and pension expense this year, we have also experienced higher medical expenses. These three items accounted for a 40 basis point headwind in the first quarter in comparison to the prior year. Moving to aerospace, sales in the quarter were $131 million, which was down from $149 million reported in the prior year. We expected lower sales based on the timing of revenue recognition and deliveries during the year, and Rob will talk you through some of the details in a few minutes. We are confident in the longer-term trajectory of revenue trends in aerospace. In the quarter, bookings of our bearing product lines were strong. In fact, they were at record levels, and I am extremely encouraged that the anticipated ramp from the A-350 program appears to be materializing. In addition, we received our first order under option 12 of our JPF contract with the U.S. Air Force, increasing JPF backlog to over $150 million and our overall backlog up to $545 million, an increase of $26 million from the end of 2014. Looking at the contributions of specific programs, our specialty bearings product lines performed well on a favorable sales mix. Execution on the JPF program was strong and provides confidence in our full-year outlook for the program. The SH-2 program was also a meaningful contributor to the quarter and to date a total of six aircraft have been accepted by the New Zealand government. We expect all aircraft deliveries to be completed by the end of the third quarter, although the program is expected to run into 2016. BLACK HAWK captive deliveries were higher year-over-year, and we had strong spare sales for both the SH-2 and the K-MAX. Overall, our aerospace segment performed exceptionally well during the quarter, and we are confident that sales and profitability will increase sequentially as we move through the year. The segment is firmly positioned to continue to improve operational performance, successfully execute new programs, and win additional work to provide steady, long-term growth. Finally, I would note that corporate expense in the quarter includes approximately $1 million in acquisition expenses. These costs relate to an aerospace segment acquisition that we pursued to expand our specialty bearing and engineered product offerings. While we were not successful in completing this acquisition, we remain focused on internal investment and acquisition opportunities in that area. Now, I would like to turn it over to Rob to provide you with some additional color and details. Rob?

[Rob Starr:]

Thank you, Neal, and good morning everyone. I'd like to begin this morning by reviewing our financial performance for the quarter. At a consolidated level, we met our expectations delivering first quarter diluted earnings from continuing operations of $0.46 per share compared to $0.44 in the prior year. There were a number of items impacting our results for the quarter that I will discuss in greater detail as we review each segment. First, in aerospace, we achieved an operating margin of 16.6%, a 180 basis point improvement over the prior year. This improvement was largely driven by strong execution within our specialty bearing products and the Joint Programmable Fuze program. In addition, we recognized lower sales on a number of structural programs, which positively impacted overall margins. As anticipated, first quarter aerospace sales were lower than the prior year due to timing of certain programs and the wind down of other programs. From a timing perspective, our first quarter was impacted by lower revenues from missile fuze program deliveries, which tend to be lumpy; a lower mix of Joint Programmable Fuze direct commercial sales; and fewer deliveries under our Bell blade program. As noted previously, both the C-17 and Egyptian update programs on the SH-2 concluded last year and Bombardier recently announced in January they were suspending their Learjet 85 program indefinitely. These three programs combined accounted for a $6 million year-over-year revenue decline. We also faced currency translation headwinds at aerospace during the quarter, with revenues being negatively impacted by $2.5 million. Moving to distribution, as Neil commented earlier, market conditions have been softer than expected as the weakness in the energy sector has impacted other portions of the industrial economy. Industrial capacity utilization has declined for the past four months; and in March, registered its lowest level since January 2014. During the quarter, our year-over-year growth rates were stronger in January and February and weakened somewhat in March as we faced a more difficult comp. Focusing on end markets for a moment, machinery, paper, fabricated metals and food manufacturing all showed positive results year-over-year, while mining and transportation equipment manufacturing remain relatively weak. While we have experienced some near-term challenges at distribution, we believe we are well positioned for a solid 2015. National accounts have continued to perform well, as we have won a number of new accounts over the past year. And backlog at our AC&E product platform has increased 15% over prior year levels helping to contribute to our confidence in our full year distribution outlook. Neal mentioned the $100 million share repurchase program authorized by our Board, and I would like to provide some additional color. Our primary intent is to use the plan to offset the annual dilution that results in the issuance of shares under our stock compensation and employee stock purchase plans. Over the past several years, this equates to approximately 250,000 shares to 300,000 shares per annum. The share repurchase program enables us to continue our commitment to increasing shareholder value. While this program provides us additional capital deployment flexibility, we remain focused on maintaining a strong balance sheet and financial position so that we can continue to invest in the business and pursue value-creating acquisition opportunities. Turning now to our outlook for the year, we have made a few adjustments. Starting with aerospace, we have lowered our expectations for 2015 revenue by $10 million, reflecting primarily the negative FX headwinds we are encountering at our German and UK operations. In addition to the currency issue, we have removed our Learjet 85 sales from our outlook for the year based on our expectation that Bombardier will not restart the program during the year. While aerospace sales will be lower, we have increased our overall margin expectations due to a more favorable product mix and higher profitability on certain product lines most notably on the Joint Programmable Fuze. We have also slightly increased our expectations for corporate expense to account for the acquisition expenses we incurred in the first quarter. Distribution outlook remains unchanged from our previous guidance. In total, these adjustments will have a negligible impact on our bottom line relative to the outlook we provided at our year-end call. Similar to the outlook we discussed on our year-end call, we expect earnings for the year to be weighted to the second half, with nearly two thirds of our full year net earnings projected to be recorded in the second half. This is largely driven by the expected sequential ramp-up of sales and operating margin performance in aerospace as the year progresses. And in distribution, we also anticipate improved results as we move through the balance of the year. I would highlight that our third quarter in distribution is expected to be our strongest from both a revenue and profit perspective. We mentioned earlier that distribution had four extra sales days in the first quarter compared to prior year. It will get us back in the fourth quarter, which will have four fewer days than the prior year. With that, I will turn it back over to Neal. Neal?

[Neal Keating:]

Thanks, Rob. We are pleased with our start to the year. It began largely as we expected, with solid earnings and strong cash flow, which has put us in a position to achieve our full year expectations. With that, I’ll turn the call back over to Eric. Eric?

[Eric Remington:]

Thanks, Neal. Operator, may we have the first question, please?

[Operator:]

Thank you. [Operator Instructions] Okay. Your first question comes from the line of Jeff Hammond, KeyBanc Capital Markets. Please proceed.

[Jeff Hammond:]

Hey, good morning guys.

[Rob Starr:]

Good morning, Jeff.

[Neal Keating:]

Good morning, Jeff.

[Jeff Hammond:]

Just, can you talk about the sales rates through the quarter? What did you see in March other than a tough comp? And what's been the trend into April on the distribution side?

[Neal Keating:]

Sure, Jeff. For the first two months of the year – so January and February, we were up close to that 3% organic growth range that we had outlined as the lower end of our organic growth range for the year. So we were pretty good through January and February at that 3%. We went down to just around 1% in March. So we clearly did have a tougher comp in March. Sales were up still which was positive, but not in the 3% range that we would have liked to have seen. As you know, typically the first month of a quarter is our weakest month in the quarter for distribution. We are not done with the quarter yet, but month to date, we running in the 2% organic growth range. So still positive organic growth – a little bit below where we would like to be, certainly, but we feel okay about how April is trending so far.

[Jeff Hammond:]

Okay. You are leaving your guidance unchanged, but it sounds like the tone is maybe a little bit weaker. What gives you confidence in that second half build on distribution?

[Neal Keating:]

Jeff, there clearly is a little bit more caution in our tone. I think that's fair, given 2% -- or 0.2% GDP in the first quarter. However, we’ve just gone through our forecast for the balance of the year with the team and we feel comfortable that we can get to the range that Rob outlined. There are a number of things clearly that we see in the balance of the year that will continue to help us. Certainly, the first quarter in the last couple of years has been historically weak given weather, GDP growth. Certainly we had some impact from both higher U.S. dollar and the impact on some of our exporting OEMs. And also, just clearly the second order impact as well as the lower energy prices. But we see that we’ve continued to gain some traction in our AC&E business. We've built backlog there, which we think bodes well for the balance of the year. We also continue to see good performance out of the sales initiative that we put in place last year. So those are the things along with certainly, some rebound in GDP for the balance of the year that we feel will enable us to get back to the range that Rob outlined earlier.

[Jeff Hammond:]

Okay, great. And then just one quick one. On this aero acquisition, is that a deal that got done and you passed on price? Or is that still out there?

[Neal Keating:]

It’s a deal that got done, and we did pass on price.

[Jeff Hammond:]

Okay. Thanks guys.

[Rob Starr:]

Thank you, Jeff.

[Operator:]

Thank you. And your next question comes from the line of Matt Duncan, Stephens. Please proceed.

[Matt Duncan:]

Hi, guys.

[Rob Starr:]

Good morning, Matt.

[Neal Keating:]

Good morning, Matt.

[Matt Duncan:]

So just back on Jeff's question on distribution, I am really more focused on what's going on with margins. So it was a little below your expectation this quarter. It's got to be above 5% the rest of the year just to get into the guidance range. So how do you guys get confident that that's doable?

[Rob Starr:]

Yeah. Matt, this is Rob. That’s an excellent question. If you take a look historically – if you go back to last year, in the second quarter we delivered 5.4%. In the third quarter, we did have the challenge with our ERP implementation last year. But if you adjust for the Minarik OI impact of about $2 million in the third quarter last year, we were right around that 5.4% level as well. So think given the fundamentals of the business, we feel pretty confident that we will be able to expand the margin. We certainly, as Neal alluded to, see an increased backlog at our AC&E platform, which typically will carry higher than segment average margins. What also is giving us confidence is we just came out of a 0.2% growth GDP quarter and we are certainly going to need a little more help on the organic side to get there, and we are confident we can deliver that.

[Matt Duncan:]

Okay. So it's based on an acceleration of organic growth, and then some of the one-time stuff last year won't repeat. And basically, you just need to execute about like you did last year and get a little bit better growth rate, is that a good summary?

[Rob Starr:]

I think that’s a fair summary.

[Matt Duncan:]

Okay. At aerospace, you've got a pretty nice ramp expected in your guide for revenues. I think it would be helpful if you can talk a little bit about how that ramp is going to go for the remaining three quarters of the year, so we can get some idea of what the exit rate looks like as you ramp some of the new programs you've won that you've been adding to backlog. Can you give us some help there?

[Rob Starr:]

Certainly, Matt. If you were at – the math would highlight that we need to average about $165 million or so per quarter for the remainder of the year to get to the revenue outlook. So the way that I would think about it is, we do expect to see increasing revenue sequentially each quarter in aerospace based upon expected timing of program deliveries. So it will be lighter in the second quarter relative to the fourth quarter – similar to last year, Matt, where I think you asked a question well, gee, we have to do $180 million in the fourth quarter to get there? And that was correct. We are expecting sequentially improving revenues and margins in aerospace as we go through the year.

[Matt Duncan:]

Okay. And the last thing, just on M&A, Neal, it sounds like you looked at a decent sized acquisition there in the first quarter in aerospace, passed on price. What are the multiple expectations like out there right now on both aerospace and distribution? And then how does the acquisition funnel look at this point?

[Neal Keating:]

It’s a good question, Matt. We were looking at an acquisition – willing to pay a multiple higher than we historically have. Acquisition size would have been in the $450 million to $500 million range. However, the multiple got even higher and we took a step back from it. So we think that multiples remain high in the commercial aerospace market. We recognize that and are willing to go to a higher level than we historically have, but there are also levels that we will not go to. The pipeline remains very strong, quite frankly, and we are very anxious to be able to close some transactions that will help build out our specialty bearing and engineered products lines. Today, we've got great capability there. It's demonstrated clearly in the programs that we've won and the performance that those businesses consistently deliver to our bottom line. We want to leverage that management team and that operational capability into some good acquisitions. And Phil Goodrich and Greg Steiner and that team are very focused, and we think we will be successful.

[Matt Duncan:]

Okay. Great. Thanks.

[Operator:]

Thank you. And your next question comes from the line of Pete Skibitski of Drexel Hamilton. Please proceed.

[Pete Skibitski:]

Good morning guys. Nice quarter.

[Neal Keating:]

Thank you, Pete.

[Rob Starr:]

Thank you, Pete.

[Pete Skibitski:]

And congrats on the share repurchase authority. I thought it was a pretty decisive move, and it looks like maybe [indiscernible] authority you guys have done in sort of modern Kaman history. I did have a question on what you guys are thinking about in terms of the length of that authority. It's pretty sizable. You could take down a lot of shares, given that size. But are you guys thinking it's over two years, three years, four years? The last one lasted for about 15 years, I think. So I'm just wondering how you are thinking about that.

[Rob Starr:]

Pete, this is Rob. I think the way to think about – a couple of things. It is a sizable program relative to our market cap. It is about 8%. But the primary intent is really to enable us to offset the annual share count increase that's been occurring relating to our employee stock compensation and employee stock purchase plans. If you take a look historically, we’ve been averaging about a 250,000 to 300,000 share increase per year in our basic share count or about 1% annually. And over time, that adds up. So we really wanted to refresh the existing program because, to your point, that was a pretty dated program. I mean there was nothing wrong with it, but we wanted to refresh it. So there really is no expiration in the current authorization. It is a $100 million. It will provide us some level of flexibility as we evaluate capital structure, but we haven't changed our capital allocation priorities. We certainly are focused on investing in the business, and pursuing value creating acquisitions and maintaining a very strong balance sheet.

[Pete Skibitski:]

Okay. Just on – theoretically, if the shares for some reason took a big hit for some reason, would this authority – would you consider supporting the shares in that case – you are going beyond options creep? Or is that just not something you would ponder?

[Rob Starr:]

No, I mean that is certainly something we would consider. We would certainly evaluate the situation and take a look at that use of capital relative to our next best alternative. And based on where we are, balance sheet and cash flow wise, we would absolutely consider that.

[Pete Skibitski:]

Okay. Got it. Thank you. Maybe, Robert, one more for you. On FX you mentioned, I think the impact to aerospace for the quarter. Was there any impact to distribution in the quarter on FX? And what's your estimate for the full year?

[Rob Starr:]

I mean there wasn’t a direct impact per se to distribution relating to foreign exchange. We don’t sell directly but certainly relating to some of our customers that do export into Europe and another places, there was certainly a second order impact there. So we haven’t quantified that, Pete, but it's certainly a contributor to the weaker overall growth that we experienced in the first quarter.

[Pete Skibitski:]

Okay. And do you have the full year expected impact to aerospace or kind of get that offline or something.

[Rob Starr:]

I mean we talked about the reduction in revenues being about $10 million. A good portion of that – I would say more than half of that relates to foreign exchange impact, Pete.

[Pete Skibitski:]

Got it. Okay, thank you. Thank you. And then, Neal, one for you. AH-1Z, to me it seems like maybe that's your – maybe your largest single risk item right now. There is a lot of things going on, according to the Q, in terms of your increased work scope. I think you have a claim with them; they have a claim with you. How are you guys sort of managing that risk going forward? I imagine it's a lot of your time. It's potentially a sizable program. Potentially, here, things could go wrong, because the claim against you is kind of sizable as a percentage of your annual aerospace EBIT. So just interested in your thoughts there in terms of how you manage all that.

[Neal Keating:]

Sure, Pete. I think that it’s fair to say that as we've noted on calls in the past, it's been a very difficult program to date for both Bell and Kaman. This aircraft had not been built for many years, and they did some significant design changes to it, which means that while we anticipated a build-to-print program, there has been a number of engineering changes and supply chain issues that have impacted both cost and schedule for us. And quite frankly, cost and schedule for Bell as well. So that’s why we have, not atypically, claims with Bell and Bell now has some claims with us, although the size of these are larger than we normally have. I think, to take a step back though, the number one priority for both Bell and Kaman is to support the program and deliver aircraft to the Marine Corps. And if that means that we need to rescope some of the Kaman effort so that the final assembly goes to Amarillo, or other ways so that we can enable Bell to incorporate engineering changes more quickly. We will do that. We know that we will be teamed with Bell over the long term of this contract over the program of record we believe and also that there is opportunities, the first of which is additional FMS sales of aircraft to Pakistan, which was announced in the last couple of weeks. So I think that both Bell and Kaman are very focused on delivering aircraft to the Marine Corps. That is our number-one priority and we will work through the various claims between the two companies and work on this together over the long term. But it is a risk item, you're absolutely right. But I think we have the right team managing it within Kaman. And I think that, again, not to be redundant, but both companies have the same objective in mind, and that is to get aircraft to the Marine Corps.

[Pete Skibitski:]

Appreciate it. Thank you.

[Operator:]

Thank you. And your next question comes from the line of Scott Graham, Jefferies. Please proceed.

[Scott Graham:]

Hey guys. Good morning guys. A good start to the year.

[Neal Keating:]

Thanks, Scott. Good morning.

[Rob Starr:]

Thank you, Scott. Good morning.

[Scott Graham:]

So the questions I have are also about the distribution margin, and sort of why things get a lot better. And in answering that, maybe you can help us first understand what was the impact of ERP on distribution in the first quarter?

[Rob Starr:]

Yeah, Scott. This is Rob. ERP had an approximate 20 or so basis point impact in the first quarter. We also had a pension impact, bringing those two combined impacts to about 30 basis points and we touched on medical as well. Our medical expense experience in the first quarter has been considerably higher than last year. So that also impacted distribution results in the first quarter based on the medical experience that they were encountering in Q1.

[Scott Graham:]

Got you. I guess just sort of the math suggests that with the second, third, and fourth quarters seasonally higher sales in that business, when you consider those as essentially fixed costs, you'll get operating leverage at sales – a higher sales levels, right? That's going to help the…

[Rob Starr:]

That’s correct. Yeah, that’s absolutely right.

[Scott Graham:]

Right. And then the other question I have is about distribution pricing. Could you tell us what pricing looks like right now? Are you flat? Are you up? Are there pressures out there?

[Rob Starr:]

Yeah. I would characterize it as relatively flat, Scott. We are not seeing any inflation in the channel. It's pretty competitive out there, in particular on the bearings and power transmission side. So we certainly are always evaluating price and making sure that the price is appropriate for our customers, but also that we remain competitive in the market.

[Scott Graham:]

With you. Now, I don't know if you can answer this question, but we are done with the first quarter; we have visibility on shipments, at least what the customer is saying now on shipments out of the backlog in aerospace. Have you been able to size – presumably you have within the guidance, but hopefully you can tell us – what sort of the impact of new wins that shipped this year versus programs which run off from last year – what that incremental dollars are for the rest of the year? Is that something you can tell us?

[Rob Starr:]

Scott, I don’t know that – I think we need to do a little bit more work there and we certainly do look at it, but we haven't defined it to the level of detail that we would like. But I can characterize it, okay? And then we will put pencil to paper and get a little bit better answer. We’ve been very pleased with a couple of new programs that have begun to ramp up – in particular if you were to look at A-350 for our specialty bearing product lines. That’s coming through very nicely. And as we’ve said, we’ve got not quite but almost $300,000 per aircraft on that, you can kind of work the math and if they’re going to ramp up over the next year to 8 to 10 a month, we can see the beginnings of that building in some of our backlog today, which is a plus. And in addition, we’ve got some new work from Rolls-Royce coming in. The P-8 for Boeing, we've got nice content on the P-8 for Boeing and as the G280 ramps up at Gulfstream, we are doing some of the control surfaces in the winglet on that. And also, we've talked a little bit about the Wing-to-Body Fairing that we began to deliver on the 747-8 for Boeing which we began to deliver I think midway through the third quarter of last year. So that should be all be positives for us and the downsides are that C-17 is done; a Lear 85 is on stop right now. So I think because of the size of the C-17, because of the size of the UH-60, we might have maybe a little bit of downward pressure of we might be flat. But we will refine that answer for the next call.

[Scott Graham:]

Okay. So, yes, that would be really helpful if you could do that, because your guidance – correct me if I'm wrong – still suggests that flat is the low end of aerospace, right?

[Neal Keating:]

I think that that’s right absolutely. We still do expect to be able to generate some growth at it. And part of it is certainly new program wins offsetting some of the declines, but also we will have some of the new programs and also a little bit higher production rates. For example, 767 now will have the tanker this coming year et cetera.

[Scott Graham:]

Got you. And let me maybe ask this question a different way, a different slice. Could you tell us if your – and let's ex-out the JPF. Could you tell us overall what in the first quarter – or even if you want to answer it in the terms of the guidance – commercial versus defense sales? Maybe it's easier to answer just for the first quarter. I assume that they were – certainly the defense was down, but was commercial down as well?

[Rob Starr:]

Yeah, Scott. This is Rob. Taking a look at commercial programs overall, they were down year-over-year, not tremendously. We definitely saw a larger downturn on the defense side when you think about some of the programs that came off year-over-year on the defense. Let me just focus on that. I mean, you had C17, LJ85. We are also seeing the New Zealand program start to wind down a little bit because we expect to finish the deliveries of the aircraft in the third quarter. So we certainly and also part of the decline that we had year-over-year related to some of the legacy missile programs. Those tend to be lumpy, and those are targeted more towards the back half of the year. So certainly the majority of the relative decline year-over-year relates to the military side. On the commercial side, it’s pretty relatively flat, Scott. As we would anticipate and certainly we expect not to build in particular as we ramp up, as Neal alluded to, G280 some of the bearing programs really picked up in the back half of the year as well based on their orders.

[Scott Graham:]

Got you. And my last question is, you are expecting the aerospace margin to, I think, be about flat this year as well. And I'm just kind of wondering what the puts and takes are there – I guess, specifically, have you embedded the mix that you now see a little bit better? Is that from just JPF? Or is that for maybe a second look that you took at – took with programs that are ramping versus programs that are declining, and the mix associated with that? Could you tell us where – is it just JPF on your thinking for the better margin outlook there?

[Rob Starr:]

Now, that’s a good question, Scott. Certainly, out outlook for JPF has improved relative to what we had provided at the end of the year based on their overall performance on the program relative to their cost. Other programs, we are also expecting our bearings to improve slightly relative to what we had anticipated. A portion of that is the performance in Germany. I mean, if you recall that facility, we had some challenges with the new facility as we exited late last year and we continue to make progress there. So, we are expecting a slightly better rate of improvement there. Now, we certainly will continue to have some level of foreign exchange risk there. But we think, holding that constant, we would expect to see better performance in bearings. What we are also seeing is certainly improvement in some of our structures programs as we achieve a better run rate and we do a better job at managing our expense base in aerospace.

[Scott Graham:]

Nice. Okay. Great. Thanks, Rob, thanks, Neal. Thanks, Eric.

[Rob Starr:]

Certainly, thank you Scott.

[Neal Keating:]

Thank you, Scott.

[Operator:]

Thank you. And your next question comes from the line of Jack O'Brien of CJS Securities. Please proceed.

[Jack O'Brien:]

Good morning.

[Neal Keating:]

Hi, Jack.

[Rob Starr:]

Hi, good morning, Jack.

[Jack O'Brien:]

Could you give some more color on the strong free cash flow that was seen in Q1, which is normally a weaker cash flow quarter for you? And what that means for your full year thoughts on free cash flow?

[Rob Starr:]

Yeah, Jack. This is Rob. Excellent question. We did have a very strong cash flow quarter in the first quarter $25 million or about $47 million or $48 million better than we did last year and you are absolutely right our first quarter tends to our weakest cash flow quarter. This year, it’s going to probably be a different pattern really driven by a couple of key factors. We were able to receive payment on some of the New Zealand deliveries or the milestones about a quarter early to than we expected. So that was a key contributor to the higher cash flow performance in the first quarter. We also had good collections at both industrial distribution as well as in our precision products in the quarter. So you will see in our cash flow, we performed extremely well on the receivables and manage inventories pretty well considering some of the buildup in order rate at bearings. So looking at the full year forecast where we are keeping our outlook at $75 million to $90 million at this point because we really view that the performance in the first quarter was strong, but there is certainly a timing element to it at this point.

[Jack O'Brien:]

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

[Rob Starr:]

Thank you, Jack.

[Operator:]

Thank you. And your next question comes from the line of Steve Levenson of Stifel. Please proceed.

[Steve Levenson:]

Thanks. Good morning everybody.

[Rob Starr:]

Good morning, Steve.

[Neal Keating:]

Good morning, Steve.

[Steve Levenson:]

With your additional sales or your additional content going to Airbus and some with Rolls-Royce, I know some of your peers are seeing destocking from some of those customers. Are you seeing any destocking? Or are people picking up the products about on schedule?

[Neal Keating:]

Steve, we would say it’s probably more on schedule for us, a couple of factors in that. One, a lot of our Rolls-Royce business is new business for us so it’s ramping up and we haven’t gotten to the phase in a cycle where we might experience destocking yet. So good news is, there are new programs for us. They were build overtime and also that we don’t have that inconsistency in order and stocking impacts. The second is with Airbus. I actually think that last year where we had a little bit of a lag on a A350 and then late last year and now at the beginning of this year we are beginning to see it come through in support of what we believe is the A350 production rate increases. So I think we actually saw a little bit more of that from Airbus in the second, third and maybe early fourth quarter of last year rather than in the first quarter of this year. As Rob commented in his prepared remarks, we actually had record incoming orders for our specialty bearing product line, so we were really pleased with that.

[Steve Levenson:]

Got it. Thank you. Second, you hadn't mentioned K-MAX at all. And I've seen some news stories where it's being tested, I guess, for unmanned search and rescue. Could you give us an update on K-MAX, please?

[Neal Keating:]

Sure. You are exactly right. We did a very extensive I think first time ever demonstration here on our campus back in March where we demonstrated a casualty evacuation using both an unmanned ground vehicle as well as K-MAX operating unmanned. So that was the first time that it had ever been done and we will continue to work with both U.S. and some foreign governments as well as a special operations community to continue to refine that capability and added as one more potential mission for that aircraft. In addition, in June, I believe or maybe late May, we are doing another follow-on demonstration with U.S. Department of Forestry in Boise, Idaho, on unmanned firefighting. So we continue to work on that as well as with Lockheed Martin and the Marine Corps. As you know, we are rebuilding the aircraft that was damaged in Afghanistan so we can deploy both aircraft out to their unmanned area, where they are going to be establishing a new concept of operation. So we are excited to get that done. As you know as well, it was actually late last year I think in early November, we authorized that team to go out and begin soliciting orders for new commercial aircraft. They’ve made good progress on that so far and we anticipate in some time later this year that we will make an announcement as to whether or not we will restart that line, but they’ve had good results in the five months that they’ve been out actively soliciting new orders for the aircraft.

[Steve Levenson:]

Very good. Thanks very much.

[Neal Keating:]

Thank you, Steve.

[Operator:]

Thank you. And your next question comes from the line of Chris Dankert of Longbow Research. Please proceed.

[Chris Dankert:]

Hi, good morning, everyone. Thanks for taking my question.

[Neal Keating:]

Good morning, Chris.

[Chris Dankert:]

So, most of my questions have been answered. I was just wondering if you could give a little bit of color around the new headcount distribution. What kind of leverage have you been getting? Or when can we expect to really see the impact of that?

[Rob Starr:]

Yeah. Now, Chris, this is Rob. We have had these folks in place for really roughly about let’s call it two quarters and as we exited last year, we talked about earlier last year about hopefully achieving a breakeven run rate. We were able to do that maybe a little bit better as we exited the fourth quarter and the first quarter as we tracked the performance of that group continues to meet our expectations and we certainly have that as part of the driver and being able to achieve our outlook. So I think overall they are making positive contribution as anticipated to distribution.

[Chris Dankert:]

Okay. And then I guess in the first quarter, personally, I was pretty impressed with how distribution shook out, just given the prevailing headwind. I was wondering, was it – were you getting better-than-expected leverage from B.W. Rogers? Or was that just operating about in line with what you expected?

[Neal Keating:]

It actually operated about in line with what we had anticipated, Chris. I mean it’s performing very well so I guess we had pretty high expectations for that group. It was a great company that we are able to add to the Kaman distribution business. But they performed well, but about in line with our expectations.

[Chris Dankert:]

Okay, great. Thanks, guys.

[Neal Keating:]

Thank you, Chris.

[Rob Starr:]

Thank you, Chris.

[Operator:]

Thank you. [Operator Instructions] And your next question comes from the line of Robert Crystal, Goldman Sachs. Please proceed.

[Robert Crystal:]

Good morning, guys. I just had a question for you on the acquisition that you passed on. If I understood right, it was on price? Is that correct, Neal?

[Neal Keating:]

There were a number of considerations as we looked at the final pricing contract terms. Price was one of the key elements that prevented us from completing the acquisition.

[Robert Crystal:]

Have you given any thought recently to all the outfits you have? Obviously, the bearings business is doing pretty well; and multiples in that space, as you alluded to, are pretty healthy. So any thoughts there on unlocking the value or illustrating the value in that business a little bit more, as it continues to gain prominence within your portfolio?

[Neal Keating:]

Rob, as you well know, there is a lot of considerations that we and the Board go through at an ongoing basis, but the portfolio of businesses that we have how we can take best advantage of them and what the various implications are for us, whether there are tax implications or other things. Right now, we feel that our specialty bearings and engineered products category is a great part of our business today. And we believe that we can acquire companies, add capabilities and continue to improve the growth rate, so accelerate the growth rate and deliver great operating profit and shareholder value out of the business. So we are really focused on trying to grow it as part of our portfolio of businesses today.

[Robert Crystal:]

Okay. And then, Rob, thanks for the cash flow and the focus there. I guess as we've gone through this call, I mean, you guys sort of say things and do things, and execution has been pretty good over the years. So given that the real intention of the buyback is to offset dilution, can you help me understand why $100 million? I mean, it's an eye-popping number relative to the size of the company and relative to your intention of general use. By my calculation, you are talking about somewhere in the neighborhood of $12 million to $15 million a year that you sort of intend to use. That would mean seven years worth of authorization in normal circumstances. So maybe help us understand why $100 million is the authorization, if that's not the?

[Neal Keating:]

No, Rob. Your math is as always right there. The $100 million is really there to provide us the flexibility. I mean we are looking at our capital structure all the time, Rob, and while our priorities will certainly be investing in the business and pursuing acquisitions, at a minimum we want to make sure that we offset the dilution that we have been encountering each year and have the flexibility should our capital structure warranted or should a share price level warranted to be able to act quickly in the market to either support the stock or really provide us with an appropriate capital structure. So it’s really just meant to have flexibility.

[Robert Crystal:]

Okay, great. Thank you both, and best of luck.

[Neal Keating:]

Alright. Thanks very much, Rob.

[Rob Starr:]

Thank you, Rob.

[Operator:]

Thank you. I would now like to turn the call over to Eric Remington for closing remarks.

[Eric Remington:]

Thank you for joining us today and we look forward to speaking to you again when we report second quarter results in July.

[Operator:]

Thank you. So, ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may disconnect and have a great day.