Kaman Corp (KAMN) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Kaman Corporation first quarter 2009 earning conference call. My name is Mary and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would like to turn the presentation over to your host for today's call, Mr. Eric Remington, Vice President Investor Relations. Please proceed.

Thank you. And good morning, everyone. Welcome to the Company's 2009 first quarter conference call. This call is also being webcast over the internet at www.kaman.com and an on line archive will be available within one hour of the conclusion of the call and will be available until May 19th at this site. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer, and Bill Denninger, Senior Vice President and Chief Financial Officer.

Before we begin, let me take a moment to reference the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This conference call may contain certain forward-looking statements subject to significant risks and uncertainties, including the future operating and financial performance of the Company. Although the Company believes the expectations reflected in its forward-looking statements are reasonable, we can give no assurance that such expectations or any of these forward-looking statements will prove to be correct.

Important risk factors that can cause actual results to differ materially from those reflected in Company's forward-looking statements are included in our earnings release filed yesterday and in the filings with the Securities and Exchange Commission. In addition, the information contained in this conference call is accurate only on the date discussed. Investors should not assume that the statements made in this conference call remain operative at a later time. The Company undertakes no obligation to update any information discussed on call. With that, I will turn the call over to Neal Keating.

Thanks Eric and good morning. I will discuss the specifics on our quarterly results in a moment but before I do, I want to highlight through these challenging times across the markets we serve, we have continued to increase revenues, manage our costs effectively, improve our working capital metrics and cash flow, and execute against our long-term operating plan. These results reflect the diversity of our businesses, the strength of our customer and platform mix, and the initiatives that we have implemented to manage costs in response to the current environment.

The aerospace group overall delivered solid results reflecting its exposure disabled military platforms with secure funding. Helicopters exceeded our expectations for the period. Our Jacksonville operations turned into strong performance and operations at our Wichita facility are beginning to show improvement. Also, specialty bearing continued strong performance in spite of a softening commercial aerospace market.

However, we did have disappointments during the quarter. This included dismal market conditions in the industrial distribution segment and a poor quarter for precision products due to a delay on certain shipments and a tough comparison against a very good first quarter last year. You've all seen the numbers so let's move on to the details for each of the segments.

Turning first to industrial distribution. The tough market conditions that affected the business in the fourth quarter continued in the first quarter and in fact, sales declined throughout the quarter. As we discussed on our last call, we responded to the sudden downward shift and have implemented a number of cost reduction measures to size the business appropriately. Within KIT, the slow down industrial production has led to a modest sales decline to MRO customers and a severe decline in sales to OEMs, which historically comprises approximately 25% of KIT's business.

As a result, the organic sales decline that KIT began to see at the end of last quarter continued through the current period, down sequentially each month and on a same-day sales basis organic sales were down 14.7% for the quarter. Year-over-year sales sales comparisons were mixed across the industry's we serve. For example, mineral manufacturing and primary metal manufacturing were off more than 30%. Machinery manufacturing and mining showed about our average decline, and food, beverage, tobacco and paper manufacturing all showed double-digit growth. The overall organic sales decline was offset somewhat by the incremental contributions of ISC and Intermec.

The decline in profitability for the segment was related to the decline in sales in the associated negative leverage, but I should point out that there was also $0.5 million of expense in the quarter incurred to achieve cost reductions. This includes restructuring our operations in western Canada to improve profitability.

In British Columbia, we eliminating a distribution and consolidating our operations from ten branches to three. We believe these will be adequate to serve those markets effectively and the cost reductions will allow us to do so profitably.

While we are managing through some very difficult times for the industry, we are actively growing our national account base and continue to take share in the overall market. Particularly, from smaller, less-well capitalized competitors. In fact, sales to our top three customers were actually up year-over-year and sequentially.

I think this is a testament to the value we provide to our partners particularly in such a challenging economic times and we remain committed to preserving our value proposition, investing in the business and protecting our position as a respected leader in the market. A key pat of our investment strategy will be continuing to look opportunist include at acquisition targets with attractive valuations that expand our geographic reach, product offering and customer base.

Now, let's move ton on to the aerospace which reported strong top-line growth aided by the acquisition of Brookhouse. Let's walk you through some of the drivers of performance for the aerospace group during the quarter.

I will begin with specialty bearings where strong military sales somewhat offset currency head winds, lingering effects of the Boeing strike and a rapid softening of demand in the commercial aerospace market. Overall, the business delivered strong performance despite flat revenues and we were able to maintain a healthy operating margin which Bill will discuss in more detail in a few minutes. Our specialty bearings business remains an industry leader. In fact, during the quarter, Tramatics was named supplier of the year for proprietary products by Augusta Westland, to whom we supply RK flex couplings.

However as you know, approximately 75% of specialty bearings sales are exposed to the softening commercial aerospace market. At this stage, based on order intake, we are anticipating a weak top line in the third quarter with the second and fourth quarters having flat year-over-year comparisons and the outlook for 2010 remains uncertain. As a result, we are actively implementing measures that we believe will protect our historically strong margin performance over the balance of the year and for the longer term.

In Precision Products, we continue to see progress on the JPF program but overall we were disappointed in the results for the quarter. The key issues included a delay in the timing of JPF related and deliveries on two programs last year, a memory program and a legacy fuze program with no comparable follow on this year. As a result, sales declined 14% over the prior year period and operating income was down significantly. The delay JPF shipment amounted to approximately $7 million was the result of a test failure on a JPF accessory part that held up the shipment of the compute leaded fuze product in Q1. We are working through and issue and some of the product has already been shipped in Q2 the and we expect the balance will be delivered by the end of the second quarter.

We also had technical issues on the legacy missile program that deferred $4 million of sales out of the first quarter. On the positive side, we increased JPF fuze sales to foreign militaries during the period and we will begin shipping orders under option five in the second quarter. Renegotiation of the JPF contract for options six, seven and eight is progressing and we expect the award before we announce second quarter results. Again, while disappointed in the first quarter performance, the business has made very good progress and we continue to expect improved profitability during 2009.

Our Helicopter business had an excellent quarter delivering growth in operating profit of over 90%, and sales growth of 12% over the first quarter of last year. The results were ahead of expectations due to higher sales, in the Egypt, maintenance and upgrade program, SH 2G spheres to New Zealand, as well as strong performance on Sikorski sub- contract programs, which is combine to more than offset the lost service revenue from the Australia program. Marketing of the Australian SH2G is proceeding and we continue to anticipate to 2011 to be a reasonable time frame for a sale of aircraft. We have already begun to sell spheres out of inventory at a profit, reducing our liability to the Australians. Helicopters was a strong contributor during the quarter and going forward, we continue to pursue opportunities to expand our sub contract basis.

Moving on to Aerostructures, sales rose 54% and operating profit reached $1.5 million for the quarter compared to an operating loss of $1 million for the same period last year. The strong top line performance was driven by a combination of organic growth and contributions from the Brookhouse acquisition. In addition, we began to see indications of the success of our operational improvements at the Wichita facility. As an example, during our recent Nadcap accreditation audit, our freezer controls and processes, an area where we had encountered significant difficulties in the past, were identified as a best practice by the auditors. I noted earlier that we are making progress on the Brookhouse integration and as evidence, Brookhouse was recently awarded its first internal command tooling order to support the A 10 program.

Our Aerostructures business continues to be well positioned despite the uncertainties of the macro environment. Approximately 75% of Aerostructures business is military contracts, insulating it to a large extent from the near term-- in the near term from the uncertainties of the commercial aerospace, and the longer term nature of most of our contracts provides us with solid revenue visibility into this business through the year. Now, I will turn it over to Bill Denninger to walk you through the financials in more detail. Bill.

Thank you, Neal. And good morning, everyone. For the first quarter net earnings were $5.4 million or $0.21 per diluted share. EPS for the first quarter was and for the first half will be light relative to the second half of 2009 for a number of reasons. There were severance costs of KIT in Q1, lower first-half sales of KIT, higher fourth-quarter 2008 costs flowing through Speciality Bearings during the first quarter, and the sequential quarterly improvements we expect in Wichita.

Net sales for the quarter were $294 million up 3% over the first quarter of last year despite the negative organic growth we had at KIT. Also, notable is our year-over-year sales comparison was impacted by the stronger dollar. Overall currency translation added $3 million and 1% negative impact on the top line. Most of this was in KIT as a result of our weaker Canadian dollar and Mexican peso. Operating income for KIT for the first quarter of 2009 was $2.8 million, inclusive of one-time charges totaled $900,000 compared to $9.1 million in the first quarter of 2008. On a same-day sales basis organic sales for the quarter were down sequentially each month. At this point, we have not seen any improvement in sales trends in Q2. In fact,we have seen continuing deterioration.

KIT operating margin for the quarter was lower than the projection for the year we discussed on last conference call, when we said margin could be down for the year as much as 150 basis points. That was based upon organic decline of 10 to 15%. We are now seeing organic sales off closer to 25%, for the merger and is in for the jeopardy. We will however, begin to see the full impact of our Q1 cost reduction efforts and the remaining quarters of 2009. Keep in mind that we will have 300 in additional expenses related to restructuring Kaman in Q2 and $600,000 in Q4. These actions will generate additional annualized savings of 1.5 to $2 million depending on the sales level.

In addition to severance costs other items contributed to higher costs in the quarter,including incremental of $350,000, and two atypical items a branch fire and one time claim for auto accident totaling several hundred thousand dollars. Moving on to command aerospace, Specialty Bearings continues to perform well with operating margins slightly lower than the prior year for which two primary drivers. One is higher product development costs over the prior year as we have hired more engineers to develop additional applications for our technology. The other is a as a result of the low margin. A portion of Specialty Bearings each quarter comes from product manufacturing in the prior quarter. In Q1, the sales that came from product manufacturing in the fourth quarter of 2008 carried a higher unit cost resulting in 130 basis point impact on our Q1 margin. On our last call, we indicated we expected sales growth to slow with Specialty Bearings. We now expect 2009 sales to be down about 5% versus prior year. However, we are taking actions to maintain or increase the operating margin percent.

Neal mentioned our disappointment in Precision Products results for the quarter, as we have stated in the past, this business is lumpy and that the products we manufacture are sold in lots that result in sales spikes. We benefited from these spikes from several programs from last year's first quarter but we did not enjoy this year. However, we believe that as a successful repricing of the JPF will help to smooth out the results of this business going forward.

Helicopters during the period, we took title to the former Australian aircraft. This noncash transfer resulted in a $52 million increase in inventory, a reduction of $32 million on accounts receivable and recording of a liable if the amount of $26 million. Helicopters is on the way to being nicely profitable for the year and we are working diligently to maximize value from the sale of these aircraft probably in 2011.

Aerostructure's operating income for the period was $1.5 million compared to an operating loss of $1 million in the first quarter of 2008. The improvement was primarily due to one off items in the prior year that did not recur. Brookhouse continues to perform well and we continue to expect significant reductions in operating losses at Wichita and plan to breach the break even level on a run rate basis by the end of 2009. Overall our consolidated results were impacted in the quarter by pension expense that was $2.1 million higher than last year.

For the quarter our free cash flow was $39.4 million favorable to the first quarter of last year. This comparison benefits from several one time items totaling $20 million that impacted cash flows last year but is also a result of our focus on working capital and cash management. As I mentioned last quarter, we expect to generate 35 to $40 million, in free cash flow this year.

In the current environment, I do not want to pass the call over before addressing our balance sheet. I want to emphasize that our leverage remains very low, with a total debt to cap ratio of 28% at the end of the quarter and only $6.4 million of our debt comes due in calendar year 2009. We are beginning the year on a solid financial position and we are pleased to report that S&P has recently completed the annual review of business and reaffirmed our investment grade credit rating.

In all, we are satisfied that this -- in this challenging business each market is laser focused on cash flow optimization, as a result from a financial perspective, we are well positioned to continue execute on a strategy and to take advantage of growth opportunities in the marketplace. With that, I will turn the call back over to Neal.

Thank, Bill. Before we take questions, I want to highlight a few points and add concluding thoughts. Although the impact of the global economic slow down continues to be felt across the market, we feel that we are taking the right steps to manage through the current environment.

We are managing costs on a realtime basis to protect our profitability, seeking opportunities to maximize revenue and investing in business with a focus on making sure we are well positioned when the economy starts to strength.

Our Aerospace Group is exposed to military programs with good revenue visibility. Despite some one off issues, we continue to make good progress on the JPF and results at Wichita are on pace to show improvement during the year. Our Jacksonville facility turned in another solid quarter, and we believe we are well positioned relative to the DOD budget as recently proposed by Secretary Gates. The exception of course is the C17. We have been anticipating and planning for the end of the C17 program for a number of years. As an example, our recently awarded A10 contract will begin ramping up in 2010 and we expect this program to be larger overall than the C17. Don't get me wrong, I want the C17 to go on as long as possible but we are well positioned for its ultimate end. At KIT when deterioration began to hit our business during the fourth quarter, we quickly responded and our position to navigate through the slowdown, to gain market share and to benefit from the ultimate recovery.

Overall, our results reflected diversity in our business lines and end markets and the work we have done to capture the business to the current climate. As a result, we are in the financial and competitive position to grow our business and to position for success over the long term. That concludes our formal comments and with that, I will turn the call back to Eric.

Thank you, Neal. Operator, may we have the first question please.

(Operator Instructions). Our first question comes from Arnie Ursaner from CJS securities.

Good morning.

Morning, Arnie.

Could you quantify the loss at Wichita in the quarter and you did mention your expectation for the balance of the year to each break even, any particular steps you may have to achieve to make that occur?

Hi. It is Bill Denninger. We do not disclose the loss numbers but we are operating a number of key -- or tracking a number of key operating metrics at Wichita, things ike scrap rate, overhead rate, a number of open work order. They are all moving in a favorable direction and in addition to the operating improvements, we need some additional sales in Wichita and the sales and marketing folks are working hard to make that happen.

Okay. One more question on the aerospace side, you obviously specifically highlighted the C-17, but you also indicated in the general sense that you feel you're well positioned for various programs. Are there any you view as under more than average risk or no worthy risk under the Obama proposed budget.

I don't think so. The one that stuck out was C-17. When you look at F-22, we had very limited exposure to the F-22 simply through -- not to diminish that but our specialty bearings business had a little bit of content on that aircraft but that was it.

More important for us is the Joint Strike Fighter and in fact, the fact they're going to accelerate the deliveries of the Joint Strike Fighter I think will help us you know, recognize revenues earlier than we would have otherwise. And also, I believe as we commented in our last call, we are working aggressively through the, our Brookhouse business to gain additional share on the JPF through the BA systems, work share over in the UK. Although we have not been awarded any contracts on that yet. I want to be clear, we are working on a number of work packages right now.

Okay. Going to the industry distribution for just one second. You mentioned the deteriorated each month, you now expect a 25% revenue decline versus the 10 to 15, and obviously it is going to have a severe impact on margin.

The question I have, is this customers destocking inventory? Can you comment on why you are seeing the kind of deterioration you are? And given your mix toward customers and food and beverage which showed very strong growth, where is the major weakness or change you are seeing occurring?

Okay. Really good question. I will try to break it down into three parts and make sure that we cover what you're after here. Number one, as we said, we saw a declining organic sales rate through the first quarter. That -- our actual incoming order rate was relatively flat on a month to month basis. However, if you remember last year, we had very strong organic growth in the first quarter. So, that is what drove our, our relative performance to the first quarter of 2008 down throughout the quarter. And in fact, in the second quarter of last year I think that we had something like a 14.5% total growth, about 7% of that from the acquisition of ISC, and 8% organic growth.

So we are looking at a comparative basis where we were having quite frankly very strong organic growth through last year and so the comparison is getting tougher. And that is what is really driving a large part of the decline. The second is yes, we are beginning to see some destocking. We have not been able to effectively quantify that yet, Arnie, although, we are working to do it. We are seeing it come through in two aspect, one is that both OEMs as you would expect and our MRO customers are reducing their inventory levels and changing their reorder points downward. So we are seeing just that inventory correction.

And in addition, we have had a number of OEMs and in fact a number of end user that is have come to us to return some of the higher volume -- excuse me -- higher value inventory that they have today to generate cash for themselves. We are working with our suppliers to do that. But that is where we are seeing destocking today, primarily both with OEMs as well as with large end users with high value inventory.

Okay. Thank you very much.

Your next question comes from the line of Matt Duncan from Stephens Incorporated.

Hi, guys.

Morning, Matt.

I want to dig in to what's going on at KIT a little more in f we can. When you talk about sales being down 25%, are we looking at daily sales and are there fewer or more days in 2009 than they were there 2008.

We are looking at daily rates, Matt. And in the first quarter we had three more business days in 2009 than we did in 2008.

Okay. But for whole year of 2009, is there some way about how the Holidays are fall, are you guys going to have more days the whole year or is it the same number of days for year.

I don't know but we have pom that can tell us that in two seconds.

Okay. Maybe while you are looking for that answer, if I look at down 25% organic at KIT for the whole year looks like your revenue run rate is below the first quarter each quarter the rest of year. Is that accurate.

First off, Matt. The number of day, 253 this year 254 last year.

Okay. So you actually have one less day.

Yes.

I am having a hard time reconciling down 25% at KIT for the full year because as I said, you did 177 million at KIT in the first quarter. You would have to do about 150 each quarter for the rest of the year, is that about right.

Our projections are really based on sales per day which show some recovery in the third quarter and significant recovery against an easier comparison in the fourth quarter.

Are you expecting revenues to be at that 25 million below what they were in the first quarter, each quarter for the rest of the year? Is that the only math that works to get down to a down 5% total year at KIT?

That is certainly the case in the second quarter.

You know, Matt, I'm not sure. We were saying that we were going to be down 25% for the --

Second half.

For the second half. So, we were not going be down 25% for the year.

Okay. Okay. So it is second half. Okay. Thanks. That helps. About what the plate revenues were for those branches and how much of those revenues do you think you can consolidate into your other western Canada locations?

The -- I don't have the revenue number, but our expectation is that we would be able to sustain about 50% of the revenue from those branches.

But the key there Matt is we do expect annualized savings rate of 1.5 to 2 million having done the consolidation.

Okay.

And to maintain profitability in Canada.

The other aspect of that, Matt is that as we have talked about, you know, we have a number of locations where we have made investments and we are committed to gutting out some markets that we think might be down for, you know, nine months, twelve month, even eighteen months. What we found from our view of western Canada, that was predominantly lumber and building materials related. And we saw more like a two to three-year time frame for our recovery. And frankly, at the run rates we were at it did not make sense for us to sustain the level of presence we had there for that time frame.

That's helpful. Let's move on to the delays at precision products this quarter. I guess you said it was 7 million of JPF and 4 million of another product. Do you expect to record all of that 1 million as revenue in the second quarter and would that be additive to whatever revenue you would already expected for the second quarter for precision product.

Yes, it would be. It would be added. We expect by six months, we are back on track.

Okay. So maybe over the next two quarters then not just all in the second quarter?

No, it would be all in the second quarter so that through six months we are back on track.

I got you. All right. That's helpful. Then can you maybe quantify the impact of those shipment delays on EPS?

We haven't really done that. The JPF sales were primarily USG with low profit margin.

Okay. And the other 4 million? What's the profitability like on those sales typically?

Good profitability. I don't have the specific number.

Okay. So I mean sounds like probably somewhere between $0.02 and $0.04 would be a good guesstimate then. Just trying to get some sense of what the impact was there. You guys -- one final thing here. If you look at specialty bearings and I know you gave us a little bit of color here, on military being up, commercial being down, I don't know if there's any way you can quantify how much military was up and how much commercial was down. I think that would be helpful if you can.

On a -- actually we can come close to that. The --give us just a second. You know, we said that our --in round numbers, Matt, we said that normally military runs about 20% for that business, and it is about 80 commercial, 20% military. In the first quarter, we ran closer to 25% military.

Okay. All right. Thanks, guys. I appreciate it.

Your next question cops from the line of Edward Marshall Sidoti and Company.

Good morning, guys. The my first question was about you talked about the monthly trend for industrial distribution. Do you actually have the monthly numbers from organic perspective you can giver us same-store?

Yes, we do. Hold on one second.

Sure. And then April as well if you can.

For the first quarter organically same-day basis, January was down 11.6. February down 14 and March down 17. April was down about 23%.

23. Okay. Now you mentioned the reduction in head count at KIT as well as the branch consolidation, did you discuss the cost savings and the timing of that cost savings.

We did not disclose that. The number is in ball park around 12 million annualized.

And what would be the timing is this.

Well, it will start flowing through in Q2 and the rest of the year.

Okay.

Remember also as Bill outlined, we have got some additional cost costs occurring in second and -- fourth quarter related to the Canadian shut down.

Okay.

Or consolidation.

Okay. And finally you know, do we have a break down of the markets and distribution? I know we have tried to yet this a few times but can you give us a better understanding of what is really driving the sales decline and that segment. The percent of your pharmaceutical, your food and beverage et cetera.

You know, we tried to underscore that a little bit earlier but our biggest market is food and that was up nicely. Our second largest market is machinery and manufacturing. and as I believe we commented, our OEM business was down significantly more than our MRO business. So machinery, manufacturing is down. Yet it is still our second largest market.

Mining is our third largest market and that is down but then go to others like paper and the beverage and tobacco and those are coming right close after, after mineral mining and those are up. That's why I think that there's a couple of things that we felt okay about. One was the relative overall sales decline versus what we were seeing in the market.

The second was that our diversification into you know, food, beverage really did help. The OEM business is really down. While we weren't happy with that, we were glad that that has traditionally for our US business been about 25% of our business as opposed to a larger percentage.

And the last was as we begin to see hopefully a tick up in some of the commodity prices, we will see the mining portion come back, which is a railroad big part of our business especially in the mountain state area, where we are very strong on a local basis.

I see. And moving over to specialty bearings, is there any share loss you are experiencing there. I know there is a few other suppliers out there have the capabilities, although not as sophisticated as you on the KAron type systems. Are you maintaining your share, gaining share? Losing share?

You know, I think that we are maintaining share. I am not aware from any of your discussions with the team there that we have lost business that we had. And in fact, one of the things that I hope we underscored adequately is that we added quite a number of engineers for us into that business over the course of the last year to take advantage of new application opportunities. So, I really don't think that we are in a position where we would say we are losing share.

Okay.

In fact I hope we are positioning to gain some additional applications.

That's good to hear. JSF, do you have a content for us, ship set?

As Neil mentioned, Brookhouse has been on a number, the content is just a bit over $100,000 per aircraft.

That's on the structure or through the bearing.

That's on the structure side.

Okay.

Combination.

Structure and bearing both.

Okay. Perfect. Thanks, guys.

Your next question comes from the line of Steve Levenson from Stifel Nicolaus.

Thanks. Good morning, Neal, Bill, and Eric.

Morning.

Could we go back to the charges again. Am I correct you said 500,000 in the first quarter.

There was 500 of severance. And then we mentioned a couple of other smaller charges, which in total were around 300. One for a fire at a branch and another for an auto accident. That's 900,000. In addition, pension expense was up in KIT.

Okay. And then there are additional ones 300,000 in the second quarter and about 600 in the fourth.

Yes.

Okay. Thank you. With the changes in the market place, are you refocusing the M&A more on aerospace now rather on industrial distribution, or do you still see the opportunities on both sides.

We still see the opportunities on both sides, Steve. You know, aerospace obviously important to us. I think that people are coming to, you know, we are involved in a number of activities early on where now people are actually going back and redoing their out year forecast, which I think will help bring some of the valuations down there. I think in the industrial distribution side, as well, a downturn like this quite frankly to me underscores the importance of scale for us.

And when you combine that with the fact that these are typically privately held medium to small-size companies, who are looking out understanding that they're not going to have the by side advantages of any of the three big national players today, that inventories are going to get squeezed, customers are going to expect as much or more service in these difficult times. That it does provide us the opportunity to be able to expand our footprint geographically, which is absolutely crucial to us, to add good management and expand our product line, and frankly, increase scale.

So, you know we are going to have a very balanced view, I mean the valuations will be different clearly. But we think we have good opportunities in both of our businesses and we will pursue both equally.

So looking in a crystal ball, do you see 2010 and again just rough right now, potential for in any growth in 2010 or do you think thing also be flat or even lower.

I think that 2010 should have some advantages for us in that while we expect commercial aerospace will be down in 2010 over 2009. You know still comes back to military being a much bigger part of our portfolio. That business will be strong through 2010. We should have JPF delivering on option 6, 7, and 8. So from a pricing perspective, we will be improved there and certainly, we would expect as well that on a year on year basis there should be growth in our KIT business. So, 2010 we would expect some growth.

Okay. Thanks. Last based on the relationship with Sikorski, are you hearing anything on the CH-53K? Are there any opportunities for command there?

Oh, you know, absolutely. You know, we continue to work on opportunities with Sikorski across a range of products.

But I can't tell you that we have got a win on CH-53K but we would certainly like to demonstrate to them that we can continue to support them in the way that we have on the BLACK HAWK .

And when will the first BLACK HAWK fly out of Bloomfield?

You'd have to talk to the people down the street.

Okay. Thanks very much.

Okay. Thank you, Steve.

Your next question comes from the line of Jeff Hammond, Keybanc Capital Management.

Hi, guys.

Good morning, Jeff.

So just on the KIT. I just want to understand better just given the magnitude of the drop and certainly some moving pieces in terms of pension and restructuring but would you expect KIT to be profitable in 2Q in the is second half of the year.

Absolutely.

Okay. Would you think 1Q is the bottom in term of operating margins or do with you see some downdraft from here?

Based on the drop in sales in April and thus far in May I think the down quarter is going to be the second quarter. I mean it is marginally profitable based on the numbers we have got.

Okay. As you look into the second half, you get some of the restructuring benefit and that lifts the margins from there.

Yes. That's correct.

Moving to specialty bearings, what kind of detrimental should we think about on this 5% down revenue?

We have said that we are taking actions to maintain or even slightly increase the operating margin percent.

That's on a year on year basis or versus the first quarter run rate?

I think it is more year on year.

Okay. Just because your comp begins 37, 38% margins in 2Q, 3Q and it seems with some of the pressure on the top line, you would seem margin degradation.

When you look at it for full year as when we were in the last call we told you you can expect margins between 2007 and 2008 levels.

I think that we would feel that that would still be the case even given the slight detriment in revenues because of the actions that John, Greg and the team are taking there.

Okay. Good. And then you mentioned OE business, and KIT being under considerable pressure. What percentage of KIT would you consider to be OE.

Roughly 25% is OE.

Okay. And then final question, how are you thinking about pension contribution for the year?

We have made our contribution of about 11 million. We made it in April and that shall do it for the year.

That's built into the free cash flow guidance?

Yes, it is.

Okay. Thanks, guys.

Your next question comes from the line of Robert Kirpatrick, Cardinal Capital.

Good morning.

Morning.

Could you try to quantify the amount of sales that have been accounted for by OEMs returning higher value items in order to raise cash? And could you address how unusual that has been?

I will start at you know, Rob, we can't, we don't have a number on that, on how much has been requested to be returned or how much has been returned. However, I will give you for what it is worth, one bit of, one specific example. Jack and I travel together late last month to 11 different branches from Minnesota to California and all points in between.

And in the mountain state, specifically in the mining area, we had an example of a large copper company that was, that had ordered a gearbox that was $400,000, and they accepted an 80% cancellation charge. And so it has been pretty dramatic in particular in the mining industry.

So the way that particular thing would work is that instead of booking $400,000 in sales, you book 320 and you keep the gearbox? Or you then return it to the supplier? How does that all run through your -- your financial statement?

That was an example where we had not, we had not taken delivery yet the gearbox was not complete at the OEM. So, essentially we never recognized a sale for it. The -- because we would recognize the sale when it was -- when it was delivered. And we passed that cancellation charge back through to the customers. So it did not recognize --we did not recognize a sale there.

And in general, are the products that are being returned booked at a contra account on the sales line? Is that how that works?

It is basically a reserve for returns, like against gross sales.

Okay. And then do you have any rights of returns for those things back to the OEMs that manufacture them?

Yes, we do. We typically have a couple of windows a year where we can return product.

Now you talk about doing M&A in the industrial distribution business. With numbers falling as rapidly as they are on a same-store basis, and I will assume that the industry's probably going through rates of decline similar to the rate of decline that you mentioned here, how do you value a business when you have a degree of drop off like this?

I think, Rob, what we do is we look at obviously what the steady state historical sales volume has been for the Company. And what customers -- what the customer mix is. Then we have to establish the viability of the customer mix in the local market to make sure that we can gain a level of confidence that they're going have a return back to an acceptable revenue rain rate.

So in a way it is similar to aerospace in that we look at content and platforms and stability of platforms. In this case, we substitute customer for platform.

Okay. Speaking of customers and platforms and aerospace, last night it looks like the Army indicated that they were going to award a firm fixed price contract for some additional work on your KAmax. Can you talk to that and where that situation stands.

We have been working with them for funding for one of the unmanned demonstrations. We have been funding at least partially funding some of the burrow program ourselves. We felt it was appropriate that if we were going to continue to go forward, we would get more participation by the government. That's what you saw last night. There continues to be interest in it. We continue to classify it as opportunistic but a big point was to be able to get the Army or Marines to fund more of the demonstration programs we were doing.

Great. Thank you so much, gentlemen.

Your next question comes from Margo Mertah with Schneider Capital.

Thanks very much.

Good early morning.

Actually I'm in New York, so it is not so bad. I was curious about bidding activity in aero structures, you referred to the fact that there are significant opportunities for Brookhouse and what's the status on what's the environment like?

We continue to -- the biggest one for Brookhouse is that the Joint Strike Fighter. There are either four or five packages being released by BAE systems. They have released the first of those, we have responded to it and were in discussions with them right now. The so that is the biggest one for Brookhouse.

The second actually has been internally the all of the tooling both in Jacksonville and Bloomfield for the A10 program and Brookhouse was awarded that program as well. So, those were two JFS obviously the biggest one. But we were glad to see that we had some internal tooling work as well for them. The other is there has been a lot of discussion in the press recently, however on the C 27J, with the L3. We are bidding packages for them right now. If the work ends up being done at Cecil field in Jacksonville, we believe that we are well positioned to be able to win some work there.

Now that is back in the press as you know, Margo, where there's a question as to whether or not there's going be work done with it. Then we come to smaller program, continues upgrade work with Egypt, and the other big one for us would be if when we win the option 6, 7 and 8 on JPF.

Okay. And also I was wondering about your capacity for acquisitions in this environment. Are you revised what you think you can spend and how are you looking at cash in this this environment?

You know, our debt to capital ratio was 28% at March. We would be willing for the right deal to run that up and take other action in the capital markets post-acquisition and would consider for the right deal some use of company stock as part of a consideration. So, we are not doing but a number of smaller deal that is make good sense we are more than capable of handling.

Okay. Thanks very much.

Okay. Thank you,.

Your final question comes from Matt Duncan Stephens Incorporated.

A couple of quick follow ups. When you look at these month by month sales trends you have seen at KIT you talked about down 23% in April. Are you seeing kind of a similar type of May or are we seeing further acceleration of those declines so far in May?

You know we are only, Matt we are only in the we just completed our first week of May. It is really not an --

Yes.

Okay. Fair enough. And then kind of thinking bigger picture if r a second. When you look at the inventory destocking process your customers are going through right now, of the product that is you guys sale in KIT, where do you think we are in that process and do you have any indication, you know, any thoughts on when that might be done? And might see an up tick when that happens give than when something breaks your customer versus to come to you to get it.

You know, Matt I -- let's look at it from two perspectives if you look in the fest first quarter OEM was down 23%, and a little bit, in the US, 23 and change percent down. It was actually down further in the first month. So in April. I can't believe that after the end of the second quarter, that there would be much more destocking that could be done there frankly. And we should, you know, hit some steady state. Our MRO business actually in the first, in the first quarter was only down less than 2%.

So, I don't know that we have seen destocking in our KIT business at the MRO level very much. We have seen probably lower incoming order rates but not a lot of destocking. So I can't say that we have got a good answer on the MRO side. But I would say that I would be surprised if the destocking phenomena goes past the second quarter in KIT for the OEM. I don't know how it can.

When you talk about down 25% at KIT are you assuming that things are are as bad as they are in the 2Q pr the rest of the year or are you baking in the assumption that the destocking process would be over at the end of the second quarter is this.

We are baking -- forecasting some slight recovery of incoming order rates in the second half of the year.

But off of a much lower second quarter base if I'm hearing you correctly?

Yes.

All right. That's help. Thanks.

Okay. Thank you, Matt.

At this time I would like to hand the call to Eric Remington for closing remarks.

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

Thank you for your participation. This concludes the presentation. You may now disconnect. Have a great day.