Kaman Corp (KAMN) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 1, 2010 Kaman Corporation earnings conference call. My name is Veronica and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). I would like to turn the conference over to your host for today, Mr. Eric Remington, Vice President, Investor Relations. Please proceed.

Good morning, everyone. I would like to welcome you to the Kaman Corporation 2010 first quarter conference call to discuss our earnings results and the outlook for the year. 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 this morning, please be advised that this call may contain certain forward-looking statements such as projections of revenue, earnings and other financial items, statements on the plans and objectives of the Company and its management, statements of economic performance, and assumptions underlying these statements regarding the Company or its business. The Company's actual results could differ materially from any forward-looking statements made due to several important factors described in the Company's latest filings with the Securities and Exchange Commission.

Our discussion today will include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to our GAAP financial statements have been posted on our web site.

With that, I will turn the call over to Neal Keating. Neal?

Thanks, Eric and, good morning, everyone.

During the first quarter, we experienced issues in our aerospace segment that impacted our financial performance. However, at the same time, we were pleased by progress in several fronts. We are very encouraged to see that our industrial distribution business is starting to regain its footing. With results for the quarter above our expectations, we were able to generate real growth in this segment, after more than a year of significant declines. And earlier this week, we announced KIT's acquisition of Minarik Corporation, the largest acquisition in KIT's history. This is the third acquisition in the industrial distribution business this year, which will allow us to further expand our geographic footprint, significantly increase our served market through the addition of new product lines, and improve our overall competitive position in the market.

As I mentioned, the quarter was not without issues. As we expected, sales of our commercial aerospace bearing product lines were soft, however, there are indications that conditions for these product lines are improving, as Boeing and Airbus have announced production rate increases and business jet production rates appear to have bottomed. We will get into more detail regarding our outlook for each of our businesses later in the call, but first I will comment on our operating performance for the quarter, starting with aerospace.

Sales for the aerospace segment declined by approximately $20 million, compared to the prior year. This resulted from several factors, including the JPF shipping delays, as well as the lower sales from our specialty bearing product lines. On the JPF, we experienced a supplied component performance issue during acceptance testing which prevented the shipment of approximately $25 million of JPF units. However, I am pleased to report that we went back into production in late April, and we will resume shipments in May.

We continue to anticipate meeting our full-year delivery schedule of approximately 24,000 fuses for the program. The JPF continues to be the Air Force's fuse of choice and we were recently awarded Option 7, which was valued at $45.5 million and provides us with a backlog on the program into 2012. Combined with lower JPF shipments, the mix shift away from the specialty bearing product line depressed our operating profit in the quarter.

Moving on to more positive news, during the quarter, our Kamatics subsidiary was named one of the top 100 Sikorsky suppliers. This is in addition to their previous recognition was a UTC gold supplier. And two weeks ago, we marked a milestone in our Jacksonville facility, also a top 100 Sikorsky supplier, when we delivered to them our 500th Black Hawk cockpit. Our Jacksonville team has done a tremendous job over the last several years to support the needs of Sikorsky and our men and women in uniform. In just a few years, we have capitalized on our helicopter heritage and capabilities to grow our Sikorsky relationship to the point where they are now one of our largest customers.

With that, I will move on to industrial distribution, where we saw the signs of recovery in the first quarter. Revenues increased by 2.9% on a same-day sales basis, compared to the first quarter of 2009. This was our first positive quarterly year-over-year sales growth since the fourth quarter of 2008. More impressively, on a sequential basis, same-day sales growth was 10.5% above the fourth quarter of 2009.

I would also note that our results strengthened significantly on a sequential basis during the quarter, with our daily sales up 7% in January, 10% in February and 14% in March compared to our fourth quarter 2009 levels. This was largely driven by OEM markets, and sales trends have continued to be encouraging in April. As you compare our results to our peers, you might remember that the downturn impacted our business later than our competitors, and, in fact, over a two-year period, we believe our sales have out-performed.

Our profitability at KIT also increased significantly with the improvement in volumes. Our gross margins continued to improve compared to the prior year and our operating income was up 73% compared to the first quarter of 2009, and 42% compared to the fourth quarter.

Now, let's talk a bit more about the Minarik acquisition. Minarik is the only national distributor focused on motion control and automation products. This includes motion control, precision gearing, automation, PLCs and motor controls that significantly enhance our traditional product offering. The acquisition will provide us with a platform to expand our product breadth into the motion control and automation industry, which is an important element of our strategic plan for this business. It also expands our footprint to significant markets such as Cleveland and San Jose, and strengthens our market share in other locations, including Charlotte, Dallas, Minneapolis, and Seattle. Minarik largely serves OEM customers, whereas KIT primarily serves MRO markets and where we do share geography, there's very little customer overlap.

We have discussed before how one of the keys to our success is the capability to leverage our business due to broader sales coverage and scale. And while there will be some back office synergies, the larger leverage opportunity will come from sales synergies. For example, Minarik brings a significant market presence in the OEM side of the packaging and processing aspects of the food, beverage and pharmaceutical and high-tech industries to complement KIT's strong MRO position in these industries. Additionally, Minarik has a very technically qualified group of application engineers that will serve as an internal resource to our existing sales force and benefit our traditional customers. Earlier this week, I had the chance to spend time with employees from several Minarik branches in the Midwest, and was very impressed with their professionalism and technical capability, but most of all, by their enthusiasm as we discussed the combined capabilities of our businesses and the impact we can have in the market.

We also closed our acquisition of Allied Bearings Supply on April 5 and Fawick De Mexico at the end of February. Combined, these three acquisitions will add over $100 million in annualized revenues to KIT, and we continue to seek other high quality strategic acquisitions to further expand our business.

With that, I would like to provide some perspective on our updated view of the remainder of 2010, and Bill will provide a few more specifics on our outlook. I already discussed the commercial aerospace markets and our military business continues to be a benefit, as it remains a relatively stable and consistent source of business. We have felt some effects from the delays in the A400M and slight declines in the UH60, but otherwise, there are no major program changes that have been announced that are expected to impact us in 2010.

Most of our key orders are in firm backlog or in production. Additionally, in a sign of Boeing's confidence in our capability our, A10 program has grown to about $114 million, up from the prior expectation of approximately $100 million.

At KIT, we are encouraged to see a recovery taking hold. The key indicators for our industry, including industrial production and capacity utilization, have been improving steadily for a number of months, and that is starting to translate into our results. We do still have some areas of weakness, such as heavy mining and forest products, but these are being offset by other categories such as food, packaging, and consumer products. Acquisitions will also be a key factor in our expected growth for the year.

In summary, while we had challenges in the first quarter, we believe we are positioned for improved results in our industrial distribution and aerospace businesses over the balance of 2010.

Now, I will turn it over to Bill Denninger to walk you through the financials in more detail. Bill?

Thanks, Neal and good morning, everyone.

Let me start with first quarter sales which were $276.8 million, down 5.9% compared to the first quarter of 2009. As a decline at aerospace was partially offset by a modest but noteworthy decrease at KIT. Foreign currency translation positively impacted first quarter sales by $2.1 million or about 0.7%, compared to the prior year. Net earnings for the quarter were $1.7 million or $0.07 per diluted share, down from last year's $5.4 million and $0.21.

On the segment basis for the quarter, industrial distribution sales were $179.3 million, up 1.3% year-over-year and up 2.9% on the sales per day basis. Sequentially sales were up 19.7% compared to the fourth quarter. Segment operating income was $4.8 million, up 73% compared to the prior year and 42% compared to the fourth quarter of 2009. As a result, operating margin improved by 110 basis points year over year and 40 basis points sequentially to 2.7%.

Neal mentioned that we improved our gross margin. Please keep in mind that we account for our inventories on average cost basis. So we increased margins without the benefit of LIFO income. One item to note is that we have some seasonality in our vacation expense within the distribution segment and every year that results in a significant sequential increase in the expense from Q4 to Q1. If you adjust for this, our drop through from Q4 to Q1 was around 12.5%, slightly lower than we would have expected due to higher payroll taxes and our reinstatement on January 1st of last year's salary cuts.

Moving on to aerospace, sales in the quarter declined 16.7%, to $97.5 million, and our operating income of $9.6 million was down 37%. These declines were largely due to the absence of $25 million of JPF sales, as well as lower sales of our higher margin specially bearing product lines.

Pension expense was $4 million for the quarter, about flat with the first quarter of last year. We did not realize the full benefit of our pension changes were adopted in late February in the first quarter. I do anticipate our pension expense to drop to roughly $2.5 million per quarter and the remaining quarters of 2010 for a full year total of about $11.5 million, down from $15.8 million in 2009.

Moving on, our effective tax rate for the quarter was 35%, the same rate we expect for the full year. Capital expenditures were $3.6 million for the first quarter. We continue to expect our CapEx to be in the $20 million to $25 million range in 2010, due primarily to a number of IT investments we are making at KIT and at corporate. We used $16.9 million in free cash flow during the quarter, largely driven by a buildup in working capital associated with the delayed JPF shipments. Seasonally, our first quarter was usually characterized by use of cash.

Our balance sheet leverage remains low with a quarter-end debt-to-cap ratio of about 21%, which is up slightly from year-end due to the use of cash in the first quarter. Even with the acquisitions we have announced, we expect our debt-to-cap ratio at the end of the year to be in the mid-20s. We have no significant near term debt maturities. We expect to take advantage of this financial strength to continue to pursue accretive acquisition opportunities in 2010.

I would now like to provide some additional detail on our outlook for the remainder of the year. In industrial distribution, as Neal mentioned, we have been encouraged to see our sales trends strengthening and move into positive territory in the first quarter. While it's difficult to forecast the exact shape of a rebound, we internally expect to achieve organic growth for the year in the range of 6% to 8%, up from the previous outlook of 3 to 6%. With roughly three quarters of contributions from the three acquisitions, we expect total sales in industrial distribution to be up18% to 22% for the year.

With the progress we have already made in the first quarter on additional leverage that we would expect to gain on improving volumes, we expect our full-year operating margin at KIT to be between 2.85 and 3.2%. We expect Minarik to be neutral to slightly accretive this year, and Fawick and Allied to be accretive in 2011.

In aerospace we continue to face difficult markets for commercial and regional business jet aircraft, and expect the volumes of Black Hawk cockpits and JPF fuse shipments to be down somewhat in 2010. However, the outlook appears to be stabilizing and we will be ramping up deliveries on several programs such as the Boeing 787 and the re-wing of the A10. We expect our second quarter bearing product line sales to continue to be down compared to the prior year, but up from the first quarter. We would expect some improvement in the second half with our overall bearing product line sales down slightly to flat for the full year. While we still expect to meet our full-year JPF sales expectation, we will ship about half of the missed Q1 deliveries in Q2. Also, we now expect to begin shipping Option 6 of the JPF contract in the third quarter, which will make the program more profitable in the second half, compared to the first.

Taking all of this together, we are holding our aerospace outlook and expect our full year aerospace sales to be approximately flat for the first half of the year, weaker than the second. We continue to expect full-year aerospace operating margin to be up 50 to 150 basis points due to higher JPF pricing and expense reductions we have made in the business, partially offset by a mix shift away from our higher margin bearing product line sales. This aerospace outlook does not include any sales related to the Sterling helicopters or the unmanned K-MAX deployment, although both are possible.

It's important to note that we expect to incur higher corporate interest income tax expenses in 2010. We now expect our corporate expenses to be on average in the range of $9 million to $10 million per quarter, including expected due diligence costs related to evaluating potential acquisitions. Interest expense for the full year will be approximately $5 million above 2009, due primarily to the impact of higher borrowing costs and higher borrowings to fund acquisitions.

In summary, while aerospace conditions remain challenging, we are encouraged to see some signs of stabilization and we were happy to see an inflection point in the first quarter in industrial distribution. We will continue to invest in business development, evaluate acquisition opportunities, and tightly manage our expenses and working capital in order to maximize cash flow generation and overall profitability.

With that, I will turn the call back over to Neal. Neal?

Thanks, Bill.

Before we take questions, I wanted to thank our employees across Kaman for their continued commitment to our success. We faced several challenges in the first quarter, but I believe we have responded in our position for continued growth and improved profitability over the balance of the year. I also wanted to welcome new employees of Fawick De Mexico, Allied Bearings Supplies and Minarik as they join the Kaman team. And finally, on behalf of all the employees of Kaman Corporation, I wanted to thank our customers and investors for their continued support.

With that, I will turn it back to Eric. Eric?

Operator, may we have the first question, please?

(Operator instructions). And your first question comes from the line of Arnie Ursaner from CJS Securities. Please proceed.

Hi, good morning, Eric, Neal and Bill.

Good morning.

A couple of questions related to the industrial distribution piece. Minarik is adding quite a bit of revenue. It's your largest one yet, and yet if I'm reading this right, you are maintaining your view of operating margin. I guess I have two questions related to that. If your organic growth is expected to be materially higher, almost double what you had previously thought -- significantly faster than you had previously thought, and when you make an acquisition there should be some leverage within that, I guess I'm surprised your margin in the segment isn't higher than your previous guidance, particularly since we are also seeing, I think much stronger organic growth than you would have assumed fairly recently.

Hi, Arnie, it's Bill. Regarding Minarik and its impact in 2010, you've got to take into account amortization of intangibles. You've got to take into account higher interest expense, which doesn't hit the segment but certainly hits EPS. I think we are reasonably conservative in our estimates. We said neutral to slightly accretive. We are hoping we see some good sales growth there and that it turns out that, in fact, it is accretive.

Can you quantify the amortization charge that we are expecting for let's say this year, from --

Yes, all three, it's about $1 million for all three acquisitions.

Okay. And focusing again for a minute on the military side, you thought -- you know, since you have changed your segment reporting, you focus much more on program activity. And there's a lot of concern among investors about programs that are at risk. Just highlight, if you would, your view of your key programs, and if you believe any of yours are at risk or even possibly poised for an acceleration.

Arnie , it's a good question. As we look at our key programs, clearly in conjunction with Sikorsky, the Black Hawk is our number one program. And obviously that continues to be very strong with demand from a variety of services. So we feel very good about the continuation of the Black Hawk program. C-17 now is solid through 2012, with the potential for additional international orders. So we feel good about that one as well.

When you -- when you combine that with the A10 ramping up, we don't really see any of the -- the program reductions or cuts that other people have experienced or other platforms have experienced really impacting us. You know, the big ones that have been cut back are the F-22 and we had very minimal content, solely through our specialty bearings business there. The future combat system being reduced, obviously, we did not have any content on that.

So as we kind of tick through the programs that we're on, we feel good about those, and even some of the increases that they are talking about today, that are positive for us. For example, with the B-22, through our specialty bearings business, and additional Apache work as well. So we feel pretty comfortable with the mix of military programs that we're

Thank you very much. I will jump back in queue.

Okay. Thank you, Arnie.

Your next question comes from the line of Edward Marshall with Sidoti & Company. Please proceed.

Good morning, everyone. Thanks for taking my call. The first question was about the KIT. You made several acquisitions there and in particular, in Minarik recently. What can we kind of look at with the new volume that we have added, kind of when we get back to those peak type margins? What can we expect from that business segment assuming MInarik is a little bit higher margin because of its product offering?

I think we can say that Minarik is going to help us get to the 7% objective a little quicker than we otherwise would have. There are some synergies we need to get. We will be spending a little money on integration this year but synergies should be coming through this next year and it certainly should help.

How much of that is related to maybe manufacturer rebates and how much of that is just the raw margin power of that business?

It's really very little of it, as manufacturer rebates. We don't have a lot of volume with the same suppliers as Minarik and there's some opportunity there, but limited. The opportunity comes from sales synergies and our ability to leverage our fixed costs across a larger base, once we have gotten the integration done.

It's much higher margin than the core business was?

I wouldn't say much higher, but certainly a bit higher.

Okay. Switching over to the aerospace side, you had mentioned indications in the bearings business showing that second half could improve. I'm assuming those comments are related to backlog. Could you discuss maybe the backlog trends you see there. I don't think you break it out any longer.

You know, Ed, what we really see -- a couple of things that are leading up to the second half is going to be a little bit stronger, than the first half, it really comes down to the fact that as we are doing a year-on-year comparison, Ed, especially in the first half of the year. For the first four to five months, we have very strong bearings sales to the business and the regional, primarily business jet manufacturers last year. And as you know, they began to cut production rates and really have cut them down to about 50% of their peak rates now. So that really -- we have very tough comparisons for that business for the first half of the year.

But we have -- we've kind of gone through the cycle where we believe we have seen the OEMs and the distributors reduce their inventories and now we are running more steady state there. We actually saw firming of our orders in the first quarter, driven by commercial and military aircraft segments. So we are seeing that begin to pick back up. I mentioned earlier also some of the military helicopter segments that we -- or programs that we've seen strength in, B-22 and Apache. We are also beginning to see an uptick in orders of 787, probably for the -- to support the ramp up that they are looking at later in the year.

Okay. That's good color. And then finally, my last question, the Australian helicopter liability rolled forward. Can we kind of talk about the -- the potential sale of the Australian helicopter or any of those?

Yes, we've -- you know, if we look at it, you know, we -- I think we have been consistently very cautious in all of our disclosures and discussions around both the sale of the Australian helicopters as well as the unmanned K-MAX program. Right now as we sit here today, we've got promising opportunities for both SH-2 sales, as well as a deployment of the unmanned K-MAX. So, you know, we want to manage expectations there, but, again, I would classify it right now as saying we have promising opportunities for both.

Okay. Thank you guys, very much.

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

Good morning, guys.

Good morning, Matt.

The first question I've got, and you guys talked about this a little bit, on the sales progression at KIT throughout the quarter it sounds like you saw accelerating growth rates there, but I would assume that the comps got easier throughout the quarter as well. So were the daily sales rates higher with each progressive month?

Yes, they were. They were actually up in absolute terms month to month to month.

Okay. Could you by any chance give us what the daily sales rate was for the month of March so get an idea of how you exited the quarter?

It was around $2.7 million.

(inaudible) there continue through April, were those sales up from March on daily sales rate?

You know, we typically see a reduction in the first week of each quarter. We saw a reduction from April relative to May, but still pretty solid. We felt good about it.

Okay. In terms of customer groups, it sounds like heavy mining and forestry products is where there's still a little bit of weakness. Is anything else weak, or for the most part, does everybody else seem to be in recovery mode at this point?

You know, Matt, everybody else seems to be in recovery mode right now. As you would expect, we look at the capacity utilization for the top industries that we serve each month. And for the month of March, capacity utilization over in March over February was actually up in nine of our top ten markets, you know, machinery, food, mineral, mining, those were all up. The only one of the ten that was down was paper, and actually that was still above the group average of 72.5%. So it was really one where each of the industries was hitting pretty well for us.

Okay. That's helpful. Moving on to aerospace for just a moment here. On the JPF program, Bill, you mentioned that you guys expect to get about -- back in the second quarter, a assume that's additive to the normal shipments that were scheduled for the 2Q?

That would be correct. Yes.

Okay. And then you still expect to get all the lost profits back there as well?

Yes.

Okay.

I would point out that we are winding up in Q2 with Option 5 and Q6 has moved into Option 3 -- sorry, Q3 and you know that the pricing is much better on Option 6.

Yes, absolutely. And the last question I've got, Neal, you have alluded just a little bit, could you give us a little more thorough update of where the unmanned K-MAX program stands today and how soon could we reasonably see that get deployed?

I make a stop at (inaudible)'s office almost every morning. They have made very good progress on it. It there are meetings with the Marine Corps in the very near term, with the objective of those meetings to finalize reprogramming of funds from existing programs to an unmanned deployment.

Okay. And in terms of meaningful revenue, is it probably going to be a 2011 event before we would see meaningful sales there?

I think that's correct.

Okay. That's helpful, guys. Thanks for the answers.

Sure.

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

Thanks, good morning, everybody.

Good morning, Steve.

I just wanted to get something clear that I may have misunderstood. This was a disclosure in the 10-Q about some expenses on the MH-92, and I guess I would like to know how the accounting works, what's recoverable and what's maybe not recoverable. I guess you had about a $0.03 impact to earnings per share this quarter. Is that something you think will continue, or is that --

Steve, let me address that. It was a $0.03 share impact. This was the result of a deep dive we did on the program assessing all costs. We built about seven units. We updated the build material, took another look at the labor and the overhead content, and ended up adjusting the cost, if you will, on all 30 units for the whole program. The net impact of that was $1.3 million and we recorded it against a loss accrual in the first quarter. That is all costs that we will not recover from the customer. There's another effort, another claim that we have for this same program that's currently being negotiated.

Okay. So in other words, that's across the balance of the units. So that should be it?

Right. Yes. As far as we know, we've got it right now.

Great. Thanks. On -- I won't ask an unmanned K-MAX question. (Laughter) Other than to say that, I guess Sikorsky and Northrop are talking about an unmanned Black Hawk. I would guess you can compete a little bit better on price, but is that something, you know, do they need a cockpit on an unmanned Black Hawk?

Well, they would still need a cockpit because it's part of the structure and my expectation -- we don't know what their design would lead to. But I think you are right, we would -- we would have a -- a significant cost advantage versus the Black Hawk. But then again, Steve, I think what we are seeing is a pretty fundamental transition to unmanned aircraft across a very broad range of mission, and I would expect that the intent for a mission for an unmanned Black Hawk, while certainly it could be cargo resupply, there could be other missions in mind for that aircraft as well.

Thanks. Just in relation to the H-60 with the heavy use that they are getting -- is there much in the way of MRO away from blades or are you pretty much just working on the blades?

You know, pretty much from a pure MRO perspective, or for what's easiest for us to identify, it's the blades.

Okay. Thanks. And last item is on business jets. You said you think it's hit bottom. Does that mean it's still on the bottom, or is it coming off the bottom?

Oh, it's still on the bottom, Steve. And I think that, you know, to be quite honest, the people we listen to and talk to are people like Honeywell and Rockwell Collins, certainly Pratt and Whitney who we think have the closest insight into those markets as well as the OEMs themselves, whether it's Cessna, Hawker, Beechcraft, et cetera. But I don't think anyone thinks we are seeing a tip up in production yet. I think there's some indications that, you know, with increased usage, et cetera, that it might bode well for the future, but we're looking at that still as probably a late 2011 kind of an event for us to begin to see any increase in production in business jets.

Got it. Thanks very much. Thanks for all the detail.

Yes, sure thing, Steve.

Your next question comes from the line of Jeffrey Hammond from KeyBanc Capital Markets. Please proceed.

Good morning, guys.

Good morning, Jeff.

Just to better understand the moving pieces within aerospace, should we think about the Kamatics business being down on a full-year basis?

I think we said flat to slightly down.

Flat to slightly down.

Right.

Okay. That's helpful. And then just overall, just given that you are getting some of the JPF shipments back in 2Q, I mean would you expect overall aerospace, with some of the persisting weakness in bearings to be down year over year in total in 2Q or do we bet back to growth?

Hang on one sec. It should be down a bit. Not a lot a bit.

So the big drivers of the margin improvement are just internal productivity initiatives and then the Option 6 JPF. Is that the right way to think about it? I'm just trying to understand how, you know, if bearings is down maybe a little bit year on year, you know, how that doesn't, you know, drag on the margins.

I think that --

Well, it does. I mean, that's why I said that overall aerospace in the second quarter will be slightly down from the prior year.

That's right, for the second quarter. From a full year perspective, Jeff, there's obviously several things. Clearly our internal cost reduction in lean activities have continued, and despite some weakness in certain programs, we expect to have still very, very strong margins in those businesses. Option 6 is a significant increase for us from a profit perspective, and in addition, we have a good mix of programs in the helicopter area as well, with -- I mean we do have a little bit of a drag from Bell picking up, but the additional Bell volume will help us from an overhead absorption perspective. We are doing very well on the blade coating and continue to improve our efficiencies on the work that we are doing for Sikorsky as well.

Okay. And then Bill, very good color on the flow-through profitability, and I guess sequentially for distribution. You mentioned some payroll and some salary costs coming back. If we were to -- how should we think about that, that drop through on a sequential basis as we go forward, if we get, you know, some seasonal lift and further improvement?

Right, we look for 15% to 17% in any given quarter.

Okay. And that -- you think you get back to that range, you know, for the remainder of the year?

That's reasonable. Maybe a little closer to 15% with integration costs, but it certainly should be 15% or better.

Okay. Great. And then can you just give us expectations for free cash flow for the year? I know some moving pieces this quarter with working capital just -- just how do we think about free cash flow for the year?

Right now we are estimating somewhere in the $20 million to $25 million range. Doing a little work on working capital we could approach $30 million, but that's where we are at.

On the CapEx side, a fairly big bump this year, does that normalize into 2011?

There's three projects, actually four projects -- three within KIT and one on Harden Data Center that we are building here at corporate. All of these projects are two-year projects. Total spend is in the range of $15 million. So you could roughly pencil out half of that this year, and half of it next year.

Okay. Great. Thanks, guys.

(Operator instructions.) And your next question comes from the line of Jim Foung from Gabelli & Company. Please proceed.

Hi, good morning, guys.

Good morning.

Could you just tell me when you exit the year in both segments, what the margins might be in both aerospace and industrial distribution?

We haven't disclosed that kind of detail. It depends on the aerospace side, what happens with the helicopters, the Australian helicopters. But, again, our guidance there for aerospace is an increased year over year of 50 to 150 basis points and as we said for distribution, including Minarik, 2.8% to 3.2% operating margin.

Is it fair to assume that you will be at the higher end of range as you come out the year, and that would be a good baseline to go into 2011?

Well, we have given the range because it's May. You know? We don't know yet, but we think that's a reasonable range.

Okay. And then -- and then just moving on to the 787, what is your lead time in regards to shipments to the 787 as Boeing ramps up on that aircraft?

Jim, typically we back up about four to six months.

Okay. And I think the last time you talked about it, you mentioned that you may have -- like, you have about $200,000 of content in that aircraft from bearings and aerostructure has that --

It's about 220 for -- as you say, bearings and aerostructures, right.

And that's roughly half and half there, right?

Yeah.

Okay. Okay. Great. Thanks a lot.

Thanks, Jim.

Your next question comes from the liner of Robert Kirkpatrick from Cardinal Capital.

Good morning, thank you very much. Neal, could you talk a little bit more about the appetite for further acquisitions in the industrial distributions space given that you have made 3 here in the last 60 days or so?

Yes, Rob, I think -- you know, right now certainly if there was one that was, you know, exceptional, we would -- we would not -- we would not shy away from it. But I think it also is reasonable that right now after having done these three acquisitions, that we focus our resources on making sure that we are able to integrate them effectively and get the value from them, that both we and our owners expect. So that's -- you know, we are --we are not going to be shy if there's one that can move the needle for us in a significant way, but at the same time, even as of the meeting yesterday afternoon, we are keenly focused on making sure that we deliver the value out of these three.

And does the fact that you've done three in KIT make you less able from either an integration or an evaluation point of view to look at opportunities on the aerospace side?

I don't think so, Rob. You know, the -- the team for the integration is primarily within the business. So it's primarily within Jack Cahill and Steve Smidler's areas of responsibility, certainly with support from our IT group here. But we would -- we have ability to do acquisitions. We have interest and appetite for acquisitions on the aerospace side. I think as we have talked about before, the valuations still are not quite where we would like them to be and when they get there, we will be more active.

And how should we think about transaction costs? I did see in the press release that there was $800,000 of transaction costs were in the quarter. Were all of those related to the one small acquisition that you acquired and therefore we should think about them kind of as almost $1 million per acquisition or help us a little bit on that, if you could?

Yes, it certainly wouldn't be $1 million per acquisition. I mean, in the first quarter, we would have been working with outside parties on due diligence related to Allied and perhaps we would have begun Minarik at that point. So it certainly wasn't just Fawick. It's tough to say on average what these costs would be. It really depends on the nature of the target that we are looking at. If I had to pick a number, it's probably $500,000 on average.

Okay. And then in your -- in your 10-Q, you disclose at one point that you had informally been notified by a customer of an intent to terminate a contract. I was wondering if you could give us any further color on that.

I think only to say that we are continuing negotiations with a customer. We have what we believe is an excellent technical solution to a customer weight problem and we are trying to work out the way forward with them, so that we are both happy.

And by weigh problem, weight problem, I assume you are talking about pounds not time?

Right.

Thank you very much, gentlemen.

Thanks, Rob.

Ladies and gentlemen, this concludes question-and-answer session. I will now hand the cull back to Mr. Eric Remington for closing remarks. Please proceed.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.