Kaman Corporation
Q3 2015 Earnings Call Transcript

Published: 31 Oct 2015

[Operator:]

Welcome to the Kaman Corporation Third Quarter 2015 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Mr. Eric Remington, Vice President of Investor Relations. Please go ahead, sir.

[Eric Remington:]

Welcome to our third quarter 2015 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 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. 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 yesterday's 8-K. With that, I'll turn the call over to Neal Keating.

[Neal Keating:]

Thank you, Eric. Good morning and thank you for joining us on today's call. I'm pleased to report that we executed well in the third quarter driven most notably by higher margins in aerospace which led to earnings per share of $0.62. Aerospace again delivered outstanding results with operating margin expanding 280 basis points over the prior year on strong performance from specialty bearing product lines and a favorable sales mix. At distribution, their operating margin result of 4.9% was relatively consistent year-over-year which reflected ongoing efforts to improve operational efficiency. We were pleased with this performance as the team executed well given the challenge of lower sales in the quarter. Taking a closer look at segment performance, distribution sales were $296 million or 5.2% lower year-over-year on an organic sales per day basis. The lower sales were a result of continued weakening across many of our end markets. In fact, during the quarter, six of our top ten markets were down year-over-year, led by mining, fabricated metal manufacturing, machinery manufacturing and transportation equipment. The markets that showed positive growth for the quarter were paper manufacturing, chemical manufacturing, food processing and computer and electronic manufacturing. Looking at our business sales by product platform, automation control and energy was slightly positive in the quarter. This platform is less dependent on our traditional customer base and more so on markets such as commercial construction, health care, pharma and waste water which have held up better relative to the broader industrial economy. Our bearing and power transmission business was down about in line with the segment average while fluid power saw the sharpest decline given its heavier focus on OEM markets. Fluid power also has our greatest exposure to oil and gas which has seen the most impact from the decline in oil prices. Our aerospace segment recorded sales of $137 million which was approximately 10% lower than the prior year. The sales decline was largely driven by lower U.S. government JPF deliveries, missile fused shipments, New Zealand SH-2 revenues, currency headwinds and lower demand on our bell helicopter blade programs. These declines were partially offset by higher sales of bearing product lines and increased revenue from our 747-8 and E2D programs while JPF DCS deliveries provided a partial offset to the lower U.S. government shipments. We also had higher revenue from our tooling programs as we begin to see benefits of our investment in a new facility in the UK to support the growth of this business. Overall, while segment level sales have trended lower throughout the year, we are beginning to see a more positive trend taking shape as we head into the fourth quarter and into 2016. Operating profit results were excellent with a margin of 20.2%, 280 basis points above the prior year. The strong profit performance was primarily attributable to outstanding execution across our various specialty bearing product lines in the U.S. and a very favorable mix of DCS JPF shipments. Turning to JPF, there have been several developments during the quarter which I'll characterize into medium and long term. In the medium term, we have good visibility on JPF volume through at least 2019 and we're expecting program volumes to grow over the next couple of years. In fact, during 2015, we have seen our highest level of DCS order's for the JPF in the history of the program and our backlog currently exceeds $200 million. In addition, the Air Force recently announced their intent to award a contract for upto additional 50,000 units and we're experiencing unprecedented interest from number of foreign customers. As a result of all of these positive developments, we are taking steps to increase our production capacity as we move into 2016. In the longer term, we were disappointed with the Navy's recent announcement that it has awarded the development contract for the next generation programmable fuse to a competitor. As we've noted in the past, the Air Force has stated publicly that it will transition from JPF to the navy 139-DB, assuming price, performance, qualification and producibilitytargets are met. However, we believe there are number of factors that make an Air Force transition to the139-DB in the next four to five years uncertain including product development challenges and funding risks. It is notoriously challenging for military development programs to achieve their targeted performance and availability as we experienced firsthand with the JPF. With the complexity inherent in designing, developing, qualifying and entering into successful high rate production of the new safe and armed device, schedule slippage would not be uncommon. While this development does introduce long-term risks to the program, we do not expect it to have an impact on our business until at least 2020 and we remain committed to supplying the joint programmable fuse, the world's most reliable bomb fuse, to the U.S. military and 26 other nations for this foreseeable future. Now moving on, the last month has been very busy for K-MAX with a receipt of deposits for two manned aircraft for China and two demonstrations of the unmanned K-MAX. The first demonstration for the Marine Corps highlighted the aircraft's unmanned vertical resupply capabilities to over 70 personnel during the modern day marine exhibition in Quantico, Virginia. The marines are interested in expanding the mission capability of their existing aircraft and we are working to incorporate these enhancements while continuing to focus on achieving a program of record. The second demonstration took place in Boise, Idaho at the aviation headquarters of the department of the interior. Highlighting the unmanned firefighting capabilities of K-MAX. The demonstration was attended by the Department of the Interior, Department of Forestry, and other key decision makers from the government and garnered widespread media coverage. We believe there is substantial interest in the platform and capabilities of the K-MAX and we're working with our partner, Lockheed Martin, to position the unmanned K-MAX team to capitalize on this opportunity. Finally, we were very excited to complete the acquisition of Alcor Aerospace Technologies, our first aerospace acquisition since 2011. The business, which we will rebrand, ex-tech engineered products, designs and supplies after-market parts to support aerospace MRO businesses. We believe it is a nice complement to our specialty bearings and engineered products after-market business. The business which operates primarily in North America strengthens our position in the profitable MRO market and provides opportunity to leverage our global sales organization to further accelerate growth. Now, I would like to turn it over to Rob to provide with you some additional details. Rob?

[Rob Starr:]

Thank you, Neal. Good morning, everyone. I would like to begin this morning by reviewing our financial performance for the third quarter. We delivered earnings per share from continuing operations of $0.62 on continued strong margin performance at aerospace and solid profit performance at distribution as we continue to tightly manage discretionary expenses across the entire company. Our year-to-date performance provides us with confidence in our full-year profit outlook. I would like to now walk through the details by segment, beginning with distribution. As we noted in the prior quarter, market conditions continue to be softer than expected with our same store sales declining approximately 4% from Q2, 5% on a same day basis. Despite this typical sales environment, we were still able to deliver an operating margin of 4.9%. This resulted from stable gross margins and significantly lower year-over-year SG&A levels as we manage our cost structure to account for market conditions. While we are managing through a difficult industrial economy at distribution, we are investing in the business as we execute on our differentiation strategy. During the past week, we completed our new marquee multiproduct facility in Bolingbrook, Illinois. This new 40,000 square foot facility dramatically increases our ability to serve a variety of customers across product platforms while also enabling us to consolidate existing facilities to a single location. This new facility doubles our former hydraulic power station fabrication capacity, triple the size of our prior Parker store and improves our testing capabilities to broaden our target customer base. Moving to aerospace, segment level operating margin was a clear highlight as it was up 280 basis points to 20.2%. The aerospace team accomplished this strong margin despite a10.6% decrease in revenue to $137 million. This was driven by several factors including a higher mix and strong profit contribution from our specialty bearing product lines and a positive mix shift to JPF direct commercial shipments. Taking a step back, I would like to provide a broader view of aerospace in 2015 and high-level bridge into next year. In the current year, we've been pleased by the operating performance in this segment which has been mostly driven by a higher mix of direct commercial sales of JPF, strong profit contribution from our AV [indiscernible] programs and outstanding execution in our specialty bearing product lines. Offsetting this performance has been certain program level headwinds creating top line pressure in certain structures programs. A deceleration in our SH2 revenue recognition as well as foreign currency headwinds. While we are not at a point to provide a formal outlook for next year, we are seeing several drivers that give us confidence we'll see improving revenue trends as we head into the fourth quarter and into 2016. This optimism is driven by strong order intake for specialty bearing product lines which are up approximately 24% sequentially over the prior quarter. Higher anticipated volumes at JPF through at least 2018, revenues associated with the start of the K-MAX line and contribution from our most recent acquisition. Neal touched on the Timken Alcor acquisition and I would like to give you a little more detail. As we indicated in our release, the business had sales of approximately $20 million in 2014 and we expect to be able to grow that over time. At a purchase price of approximately $45 million, we feel we paid a reasonable price of about nine times expected 2015 EBITDA. In 2015, we expect to incur approximately $1 million in one-time costs related to the acquisition and those costs are reflected in our revised financial outlook. Excluding these one-time costs, we expect the transaction to be neutral to 2015 earnings diluted per share and nicely accretive to the full year in 2016. Turning now to our outlook for the year, we've made a few adjustments. Overall, given our top line challenges, we are reducing our revenue expectations in both segments. We have lowered our expected sales distribution given the weaker environment we've experienced during October and which we expect will continue for the balance of the year. We're also concerned that a portion of our customers may extend their normal shutdowns during the holiday period. The margin outlook at distribution has been lowered by 25 basis points at the mid-range to account for the impact continued organic sales declines will have on vendor incentives and our ability to absorb certain fixed costs. We continue to take steps to control our operating costs and are encouraged by our results. At aerospace, we have slightly lowered our revenue range for the year based on schedules for the final quarter. In line with our previously outlook, we continue to expect aerospace to deliver approximately 30% of its projected full year revenue in the fourth quarter. We are raising aerospace operating margins by 115 basis points at the midpoint based upon our continued strong execution and anticipated mix for the balance of the year. In summary, our revised outlook calls for a modest increase in 2015 segment level operating, in when compared with our prior outlook. Excluding approximately $1 million of incremental acquisition related costs, corporate expenses remain in-line with our previous expectations. All other elements of our outlook remain unchanged. With that, I'll turn it back over to Neal for his closing comments.

[Neal Keating:]

Thanks, Rob. Overall, we are pleased with our results in the third quarter and year-to-date. While distributions end markets are challenging, our team is focused on managing through these headwinds. The execution in aerospace has been outstanding and we're taking preemptive actions to meet the increasing demand we see for a number of our programs as we move into 2016, in particular, for our JPF program and our specialty bearing product lines. I mentioned earlier the capacity increase we are implementing for JPF. In addition, given our long-term visibility for specialty bearing product lines, we are undertaking an expansion of our manufacturing capacity in Bloomfield, Connecticut. Based upon a strong demand outlook combined with our strong operational execution by our specialty bearing product lines, we are strongly positioned for future growth. With that, I'll turn it back over to Eric for questions. Eric?

[Eric Remington:]

Abigail, may we have the first question please?

[Operator:]

[Operator Instructions]. Our first line is from Edward Marshall from Sidoti & Company. Your line is open.

[Edward Marshall:]

So my first question is on the JPF, the production capacity you discussed. I'm curious first what type of investment would that be and are the hurdle rates based on returns that you assume on the timeline post-2020?

[Neal Keating:]

Actually, Ed, I think that it's more so driven by near-term customer demand in the next three to potentially four years. So for us to be able to meet that customer demand, we recognize the requirement to increase our production capacity. As we look at the type of investment though, Ed, it's not in bricks and mortar. We will be adding obviously additional shifts to the workforce. Likely some relatively minor investment in additional equipment. But primarily, it would be an investment in working capital as we ramp up that production rate.

[Rob Starr:]

Ed, I would add one other item there. There may need to be some minimal investment also in our supply chain in order to meet the increased production.

[Edward Marshall:]

I think if I remember correctly, it is not a lot of heavy machinery there.

[Neal Keating:]

You're exactly right. It's not, Ed.

[Edward Marshall:]

Okay. When I historically think of your distribution business, I don't recall historically seeing a lot of energy in there. What is the energy exposure you mentioned it kind of in reference to the fluid power comments?

[Neal Keating:]

Yes. Ed, there's really a couple of levels of impact for the declining energy markets on our business. And in fluid power, specifically, if we look at our B.W. Rogers acquisition, that had a relatively higher percentage of energy than our other business, primarily in the Marcellus shale region. So that was important to us. But another big impact for us has been in the specialty steel areas where we provided quite a bit of that in -- through both our B.W. Rogers acquisition and through our earlier catching fluid power acquisition in the Gary, Chicago area. So we've had that second order impact from steel hitting us as well primarily in the fluid power areas.

[Edward Marshall:]

And do you have the best guess as maybe to the total exposure in the distribution business of energy?

[Neal Keating:]

Yes, Ed, I would say, you know, it is probably in that 10% or so range. I mean we certainly kind of group it broadly speaking into our natural resources and commodity exposures.

[Edward Marshall:]

And lastly, on the acquisition, you mentioned nine times EBITDA. I'm curious, does that include any synergies or any kind of -- any other kind of accounting I should be aware of?

[Neal Keating:]

No. That does not really include any synergies, Ed. And in terms of purchase accounting, the least of impact in amortization as we go into '16, but that's a clean multiple.

[Operator:]

Thank you. Our next question comes from the line of Pete Skibitski with Drexel. Your line is open.

[Pete Skibitski:]

I just wanted to ask on aerospace. A couple of programs we didn't hear about and that is AAH1Z [ph] and [indiscernible], I suspect that maybe the guidance reductions we've had this year in aerospace has something to do with those two programs because we've known things like the C-17 decline and stuff like that. So I just want to the verify. Is that true? Are those two programs kind of a primary cause for the guidance decreases and kind of why have they slid right and when do you expect them to ramp or not?

[Rob Starr:]

Sure. Pete, this is Rob. In terms of the outlook, certainly Peru has impacted our outlook relative to our prior estimates as that program has moved out to the right. There were a number of additional program design reviews and other items that we have to go back and forth with Peru in order to get to a final configuration that we could then move forward on to that, certainly has impacted our 2015. On H1Z, that really has not impacted our outlook on the topline. And certainly as we've disclosed, we're working with Bell through some issues on the program that we continue to work on. But really no impact to the outlook relating to that program.

[Pete Skibitski:]

Okay. Is the Peru design review, is the configuration set yet or do you have an expectation for when it will be set?

[Neal Keating:]

It is currently set. There are some other obviously some other steps that both we and Peru need to didn't through together. But the configuration is set and through those changes, we've actually added additional work scope and content to the program. So while it has moved to the right, it will have a more significant revenue impact for us which we thought was a good thing.

[Pete Skibitski:]

Okay. And then I guess just lastly, can you talk about the impact of the pension freeze, what that might have next year to either an income statement impact or cash flow impact or anything?

[Rob Starr:]

In terms of the pension freeze that there will be a P&L impact. Essentially what you would see is the majority if not all of the service cost will drop to zero for next year as a result of the freeze. If you look at the expected service costs, it is probably in that $8 to $10 million range that we would expect to see an improvement next year. In terms of cash flow, the freeze itself in the short term really doesn't impact cash flow. That’s going to be driven more by -- because that was set in stone once we froze the plan. That will be determined by interest rates and future contributions that we decide to make that impact has a roll on effect of future cash flow. So really no impact relating to the freeze on cash flow per se.

[Pete Skibitski:]

Okay. So we'll see an $8 to $10 million impact on the aerospace operating margins or maybe both the segments?

[Neal Keating:]

That was for total company, Pete. We don't break out the specific allocations because that can change based on the formula in which we allocate costs.

[Pete Skibitski:]

We'll see this that net corporate margin, we'll see a benefit there is my point.

[Neal Keating:]

And just one thing to keep in mind not to get into technical accounting Pete here, just so everyone is aware, certainly more on the aerospace side, some of the savings get caught up in inventory. So it is a little bit difficult to tell exactly how that will roll through in terms of a quarter by quarter.

[Operator:]

Thank you. Our next question comes from the line of Steve Levenson with Stifel. Your line is open.

[Steve Levenson:]

Two questions. One is on the bearings expansion. Is that something you had planned to meet additional needs from the growing build rates and I know Airbus announced they're adding ten planes per month on the A-320 line, that's 2019. So as it weighs out or is that going to require more?

[Neal Keating:]

We'll break it down into a couple of pieces. First is that we've been considering this expansion probably for 18 months, given the strong position that we have on the A-350 and the success of that aircraft and the continued ramp up across the board at both Boeing and Airbus for new aircraft deliveries. So we've been contemplating it for a while and just recently completed the plan, if you would. So that we felt comfortable going public with our plan. You've been to our campus. As you know, we have some additional floor space that's available to us. So we're really repurposing that and the building that they will extend across into has significant additional capacity that we would love to be able to dedicate the specialty bearings over time.

[Steve Levenson:]

The other one is in relation to K-MAX. Obviously there have been a lot more fires. Do you think this is an attempt or is the government looking to expand the fleet of aerial fire-fighting capability or is this both to expand and replace a lot of the old aircraft that are out there being used? And would the government be the customer or would the firefighting services be the customer?

[Neal Keating:]

Steve, it is likely a new additional as opposed to a replacement capability. I would expect that it would likely be a combination with some assets being acquired by the Department of the Interior, the Department of Forestry and also, as you've noted certainly the companies that they contract with for fire-fighting services today. But I think what came out again in the demonstrations out in Boise were the clear advantages of being able to fight fires on a 24-hour basis rather than the six to eight hours that they're able to fight them today. And as you said it, this year was an absolutely horrific year for fires. And as we sit down with, you know, our partner Lockheed Martin and us, the Department of Interior, the Department of Forestry, there is a clear need. Now we face that same challenge of getting that need translated into a requirement and that requirement translated into a contract.

[Steve Levenson:]

I think this will be a little bit easier, a little more pressing than the military ones as far as the process goes?

[Neal Keating:]

You know, it's interesting. I think it could be because these are real time events that more people here in the U.S. see as they tune into the news or read the papers. And again, in particularly this year, between the loss of life and the loss of property, it was a tragedy. So I believe that it may move more quickly. In addition, as we commented, we were at the modern day marine exposition in Quantico. And we had a very extensive capabilities review and demonstration of the unmanned K-MAX and the Marine Corps is really look today at expanding the mission profile of the aircraft, mission capabilities of the aircraft. So while that may inject a little bit more delay as we move toward a program of record there, it will, clearly enhance the capability of the aircraft and make it applicable in a broader range of missions. So we see that as a positive step as well.

[Operator:]

Thank you. Our next question comes from the line of Matt Duncan with Stephens, Inc. Your line is open.

[Unidentified Analyst:]

This is Will on the call for Matt. I wanted to start with the distribution segment and maybe get some help. If you guys could walk through the quarter, month by month and talk about the trends you saw at KIT and what if anything has changed in October. Have things started to weaken significantly more on those markets that you pointed out with six of ten being down and just any color there at distribution and what the end markets are seeing?

[Rob Starr:]

Sure. Well this is Rob. In terms of what we saw during the quarter, you know, in terms of relative growth rates, July also saw decline year-over-year but less so than what we experienced on the quarter by average. We did have a step down in August to kind of -- roughly high single digits decline and then a mid-single digits decline in September. So for the quarter, we were down 5.2% and in October, we saw a very high single digit or so decline. So not too far away from what we saw in August. We do have some difficult comps. Our third quarter as way of reference is our most difficult comp in terms of sales per day. If you take a look at our outlook at the low end of the range, it implies about a 9 % organic decline so the mid-range is about 5%. So feel pretty comfortable there. In terms of the end markets, certainly as we touched upon, you know, six of our top ten were down in the quarter year-over-year. Pretty significant decline in mining. That was an area of largest decline. Transportation equipment was down. Machinery manufacturing, all down double digits. We did have some sectors that were up those being chemicals, paper and food. And feel pretty good about that position the portfolio, sequentially just in terms of what we’re seeing as the year progresses, once again, mining leading the pack down about 10% over the second quarter. Transportation, equipment and fabricated metals down in high single digits. So we are certainly seeing some that are down. A couple that were up sequentially were food and nonmetallic minerals so if you think about aggregates.

[Unidentified Analyst:]

My second question, flip over to the aerospace segment and the strong operating margins in the Q3. Was there anything one time nature that helped the segment more than just make shift? I know it is early but I don't want us to get carried away when we look out into 2016. Do you think this 18%, 19%, 20% operating margin is sustainable going forward? How should we be thinking about it? Any color into next year would be great.

[Rob Starr:]

Will, I think as we looked at the quarter, there were not anyone-time issues that came up in aerospace that provided a leg up in that margin. I think it really did come down to the customer mix in particular for JPF. And the product mix as well with very high relative shipments from specialty bearings. So in relatively lower shipments in our lower margin structures business. So it truly did come down to a combination of both product and customer mix. We've said that we expect that that business can deliver high teens operating margins on a consistent basis. And we certainly believe that to be true and in fact, our experience I think so far this year demonstrates that that's certainly achievable.

[Operator:]

Our next question comes from the line of Jack O'Brien with CJS Securities. Your line is open.

[Jack O'Brien:]

Just back to JPF for a second. You've had two strong quarters of the foreign sales and then you're updating guidance and commentary from the last call would point us to more direct foreign sales in Q4. I know visibility by end customer can be difficult to forecast with this program. But with the demand you're seeing, is it safe to say we can expect foreign sales on the program to represent a higher mix of volumes, kind of over the longer term?

[Neal Keating:]

You know, I think that for this year and next year, that's likely to be the case, Jack. I think past that, simply because of the lumpiness of those orders from foreign customers, it is hard to say. But I think definitely we saw that this year and we would anticipate that we see that next year as well.

[Jack O'Brien:]

Okay. And then quick follow-up for me. Can you give a little more color on the scope of the expansion for the bearings project and maybe the level of investment that's going to be required to get that done?

[Neal Keating:]

Sure. For those of you that have been to our campus, you know that we have a building across from our existing specialty bearings facility that had historically been used for the joining work, when we joined the cockpit and the mid cabin for this Sikorsky Blackhawk program. We're no longer doing that. So we're able to take a portion of that facility and simply extend the specialty bearings production facility across into that building as well. So it will help them relay out their facility, give them a little bit more room for both expansion and also to relay out some of the product flow now that they're as busy as they are in their existing facility. So that's it from a bricks and mortar perspective. The investment will be relatively minor outside of that. We will obviously be investing in new advanced machine tools to help drive improved operating efficiency and meet that demand, but we'll update our capital expenditure plans for 2016 in our fourth quarter call. But I would not expect it to be a significant capital investment.

[Operator:]

Thank you. Our next question comes from the line of Ryan Cieslak with KeyBanc. Your line is open.

[Ryan Cieslak:]

I guess just my first questions to follow up on the distribution sales trends here into the early part of the fourth quarter. If I heard you right, Rob, I think you mentioned October was down in the high single digit-type range. How were the comps in October versus November and December meaning did the comps get more difficult the next couple of months or are they relatively the same with October?

[Rob Starr:]

Actually, they're relatively flat with October on a per sales basis.

[Ryan Cieslak:]

And then when I look at the distribution margins in the quarter, you know, I thought they were very resilient, considering the sales decline so kudos to you guys. I want to get a sense if I look at the updated guidance, I think it does imply some step down in the margin and distribution in the fourth quarter. I'm just curious to know what maybe are some of the puts and takes there going to the fourth quarter and anything in particular you guys are doing that is potentially new or could help the margins going out into 2016. That would be helpful.

[Rob Starr:]

You are correct. The implied margin for the fourth quarter is a bit lower. And certainly that's going to be just driven by an expectation for continued organic declines. And if you think about it, we have 60 sales days in the fourth quarter. And you know, our operating expenses really are more calendar-based than perhaps sales day based. So you would expect to see some reduced leverage in the fourth quarter, just given the reduction in sales day. So that's also driving -- we also have some concerns as I talked about in my prepared comments that just given the weakness in the general manufacturing environment, that some of the manufacturing customers may extend their holiday shutdown perhaps a bit longer than they normally would so we've accounted for some of that in our forecast. In terms of the cost controls, I mean we really are just -- as any managing team would, we 'relooking at the expense base at distribution in light of the environment that we're in. We certainly have been exercising very tight to controls over discretionary spend across the entire company, in particular distribution. People are really pulling together and doing a great job there. And you know, we're just going to continue to look at the business and make decisions based upon the size of the business and where we think it's going.

[Ryan Cieslak:]

And then my last question is just if you can maybe just given update on where you guys are right now with the ERP implementation at distribution and any sort of color, if any, of the type of maybe headwind that has had on margins year-to-date. That would be helpful.

[Rob Starr:]

Yes, Ryan, a couple of things. In terms of the updates, we did another small implementation during the quarter rolling out the system at distribution. We are also just as a sideline here, we've also been busy implementing our [indiscernible] system at our air system businesses and that continues to go well. So as we look out, really no significant changes in the overall time line but we are certainly seeing some software upgrades that we're going to take into account. And we've also -- as you know --have been busy on the acquisition side. So we've actually consolidated 13 systems into six during the course of the year. So we made very considerable progress in terms of just reducing the disparate number of ERP systems that we have and also network consolidations have been a key focus for the IT department in the year and we expect that to continue into '16.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Pete Skibitski with Drexel. Your line is open.

[Pete Skibitski:]

I think that you mentioned E2 in your opening comments. I don't know that I was aware that you guys had content on the E2D. Is that something new? If it is or if it isn't, what kind of content do you have on that program?

[Neal Keating:]

Actually, Pete, it's the E2D, you're right. It's not a new program for us. We've had it for a while. I think that if you give us one second, we can -- I believe we can give you the relative content. We can get back to you and fill that in. It is just that from year to year, it was up in one of our structures programs that was up so we did want to note that. But it is not new for us and it's not a big swinger like some of the other ones would be.

[Pete Skibitski:]

Okay. And then just the last one JPF. You know, it's clearly going really good there right now and probably will be for a few years. So great job there. As you think about over the longer term, however, do you -- I guess I want to ask is do you guys think about the IR&D profile? And given things are going so well, do you think about adjusting up the IR&D profile as a means of hedging against long-term risks in that program?

[Rob Starr:]

Yes, we are and we have been. If we were to look at our IR&D profile if that business, 2016 will probably mark the third year of increased IR&D spending.

[Operator:]

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

[Robert Kirkpatrick:]

Could you talk to the M&A environment? You've obviously gotten something done for the first time in a number of years in aerospace. Are we starting to see a shift in things that are available and in pricing? And then given the economic environment on the industrial distribution side, the ERP implementation, are you seeing less opportunity to be inquisitive on that side in 2016?

[Neal Keating:]

I'll start with the second part of your question relative to the distribution business. I can't say that today we've seen a slowdown in activity for acquisition pipeline in distribution. However, as you know, with the difficult environment and a lower level of EBITDA, a number of potential sellers may decide that they want to wait this cycle out rather than get evaluation based on what they would consider at least are relatively low base level of EBITDA. So we'll have to see how that plays out but I can't say that we've seen notable change so far. On the aerospace side Rob, we’re very active. We were very glad to be able to complete the acquisition that we did in the quarter. We felt that it was a fair evaluation for both Kaman and Timpkin and provides us some significant upside as we're able to leverage our global sales organization to help expand that business. But I can't tell you that we've seen a compression of multiples in the aerospace side.

[Robert Kirkpatrick:]

And given aerospace is now going to be incorporating the Timpkin business into its side, is the capacity to take on additional work on integration and on acquisition on that side? And then again, the same type of question for the transportation side.

[Rob Starr:]

In terms of aerospace, I'll start there. We think given certainly the strength of the management team at aerospace that we would have the capacity to integrate further acquisitions beyond Extech's. Extech is a single facility and they come with a strong management team. While there will be IT and other back office integration efforts, we feel very comfortable the team can manage it and as Neal mentioned, we're certainly very active in looking at additional aerospace options and opportunities. On distribution, while we have pretty much integrated B. W. Rogers, we're still in the process of consolidating a lot of the networks and ERP systems there. But we do remain active in looking for distribution acquisitions that make sense. We have once again a terrific team at distribution and if the opportunity presents itself and it makes sense to grow the franchise and bring value, we're going to pursue it.

[Operator:]

Thank you. I'm showing no further questions at this time. I would like to turn the callback to Eric Remington for closing remarks.

[Eric Remington:]

Well thank you for joining us for today's conference call. We look forward to speaking to you again when we report the fourth quarter and full-year results in February.

[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.