Kaman Corp (KAMN) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Kaman Corporation earnings conference call. At this time, all participants are in listen-only mode. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Eric Remington, Vice President of Investor Relations. You may begin, sir.

Thank you, and good morning, everyone. I would like to welcome you to the Kaman Corporation fourth quarter and fiscal year 2010 conference call to discuss our earnings results and our outlook for 2011. 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 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 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 included in our earnings press release. With that, I will turn the call over to Neal Keating. Neal?

Thanks, Eric. Good morning. During the fourth quarter of 2010, we achieved the best operating performance in the history of our Company, delivering adjusted earnings per share of $0.80. After a difficult first six months of 2010, we were pleased with our strong finish to the year.

I will begin my comments with our results at Industrial Distribution, where we achieved another quarter of significant growth in revenue and operating income. Total sales increased 46%, following a 37% increase in the third quarter. Approximately half, or 23 points of this growth, was driven by the three acquisitions that we completed in 2010. The performance of Minarik and Allied has been consistently strong over the past few quarters, and both acquisitions were accretive for the quarter and for the full year.

Our organic sales in Industrial Distribution have also remained robust, up 23% in the fourth quarter, following a 15% increase in the third quarter. We were especially pleased to see our daily sales trends remain strong sequentially. Our fourth quarter sales typically experience a seasonal drop-off compared to the third quarter, but this year our fourth quarter daily sales were up 3% from the third quarter of 2010. This is also the first quarter where daily sales exceeded 2008 levels, which we find encouraging, even though the first -- excuse me, the fourth quarter of 2008 was when we began to experience a decline in sales.

Our Q4 distribution sales were strong across geographies and end markets, with the exception of construction and housing related business. In fact, the top 10 industries we serve were all up year-over-year, with eight of those industries up 10% or more. In addition, we continue to add new product lines to drive share gains and to build our national account base.

Our strong sales results and lower benefit costs at distribution allowed us to drive another quarter of substantial year-over-year improvement in our operating margin, which increased to 4.2%, or 190 basis points above the fourth quarter of 2009. Bill will provide more detail about this in a few minutes.

Our Aerospace segment also achieved strong sales results and even stronger profit performance. Total segment sales increased approximately 23%, following a 7% increase in the third quarter. As you know, we had a very weak performance in the first half of 2010, and we had communicated earlier in the year that we expected our Aerospace results to be weighted toward the second half. And the Aerospace team delivered on this commitment.

A substantial driver of our Aerospace performance in the fourth quarter was the JPF program, where we delivered more than 9,000 units during the quarter. After clearing the issues related to supplied components, we were able to leverage in-process inventory and production capacity to make up much of the production missed in the first half of the year. We also took advantage of a large direct commercial JPF sale in the quarter, which was higher margin as well.

Along with growth in the JPF program, our fourth quarter Aerospace results reflected higher deliveries for the Sikorsky BLACK HAWK cockpit program, where we delivered 45 cockpits compared to 38 in the prior year. Overall, the significant profitability in the fourth quarter on the JPF program drove a 720 basis point improvement in our Aerospace segment operating margins compared to the prior year, excluding the goodwill impairment.

Finally, I would like to note that Wichita returned to profitability in the fourth quarter. Last quarter, we announced that Wichita received an $11 million follow-on order from Boeing on the CH-47 program, and we have also won several other follow-on programs for various customers. We are proud of the progress we have made at Wichita, and I would like to thank our team there for all of their hard work.

Before discussing 2011, I would like to first briefly review some of our key accomplishments in 2010. Acquisitions are fundamental to our growth strategy, and during 2010 we acquired four businesses, three in Industrial Distribution and one in Aerospace. Our distribution acquisitions of Fawick, Allied and Minarik proved to be very well-timed, as sales of these combined businesses are up more than 30% compared to 2009. And, they were accretive even faster than we anticipated.

In Aerospace, we acquired Global Aerosystems, which expands our capabilities in structural design, stress analysis and certification. Global's expertise, combined with our manufacturing capability and experience, creates a formidable team to compete for higher margin, life of program opportunities across the Aerospace market. In fact, we are benefiting from the combination, and are already bidding on joint design and build packages much earlier than originally anticipated.

Overall for the year, Industrial Distribution achieved annual sales of $832 million, up 29% compared to the prior year. Organic sales drove approximately half of this increase and were up 14% for the year, while acquisitions contributed the balance. Our operating margin for the year was 3.6%, up significantly compared to only 2% in 2009. Along with the increase in sales, this drove our operating profit up 140%, to $30.3 million.

In Aerospace, our sales for the year were down approximately 3%, compared to 2009. This was primarily due to a decline in our bearing product lines, which was partially offset by higher BLACK HAWK cockpit deliveries. Despite lower bearing sales, with the transition to Option 6 and JPF program, and the year-over-year improvement in Wichita, our Aerospace segment operating margin improved by 60 basis points, to 15.6% in 2010, excluding one-time items.

Now, let me provide some perspective on how we see our business playing out in 2011, and Bill will also provide more detail. Overall, we see another year that begins with lower first quarter results, with improving performance throughout the year. This trend is largely related to our outlook for our major end-markets and programs in Aerospace.

Commercial aerospace markets appear to be continuing to improve, with orders in 2010 far surpassing 2009, and production increases planned for 2011. Production on the Boeing 777 should be ramping up in the second half. However, Boeing has also announced a further delay on the 787, and the A-10 is now more likely to ramp up to full rate production by the end of 2011 versus earlier in the year.

These are both great programs for us, but the shift in timing will contribute to a more second half weighted year. As a reminder, our A-10 program has grown to over $110 million in anticipated revenue, and we have about $250,000 content on each 777 aircraft, and $100,000 on each 787 aircraft.

The regional and business jet market appears to have bottomed, although we do not expect a rebound in this market until 2012. Nevertheless, as we stated last quarter, the long-term market prospects remain encouraging, and we are well positioned to take advantage of a recovery when it materializes. We continue to pursue opportunities on the SH-2 helicopters, with several interested countries, and we will certainly update you on any material developments.

We also were awarded several contracts during the quarter which have the potential to contribute to our results this year and beyond. First, as we have already announced, in December we were awarded two commercial sale purchase orders under our JPF program for a combined $44 million. With these two orders, our backlog for the JPF program has grown to $128 million, and extends into 2012.

Remember that the Air Force also increased the value of Option 7 of our JPF program by $36 million in September, bringing the total value of the option to $81.5 million. We expect Option 7 shipments to begin in the second quarter of 2011.

Second, as we announced in December, the US Naval Air Systems Command awarded the Lockheed Martin command team a $45.8 million contract for two unmanned K-MAX aircraft systems for evaluation of unmanned cargo resupply capabilities. If successful, this award would be the next step towards developing a longer term, larger opportunity for this program.

Third, we have been awarded a contract to manufacture new cabins for Bell's AH-1Z attack helicopter. Including potential follow-on options, the program value could exceed $60 million. The AH-1Z is a highly capable, updated version of the AH-1W for the Marine Corps. We value our deepening relationship with Bell, which also includes our recent contract to supply 18 different helicopter blade assemblies for eight Bell aircraft.

Finally, we have been awarded a contract from Bombardier to build composite doors on the Lear 85, a new midsize business jet. This is our first significant contract award for Aerostructures from Bombardier.

In Industrial Distribution, key indicators of our business continue to improve, and support expansion in the industrial and manufacturing sectors of the economy. We are pleased with the sales results that we achieved in 2010, as well as our operating margin expansion. We remain committed to our long-term operating margin goal of 7%, and expect to make further progress in 2011.

Along with improvements in our organic business, revenue and profitability from our 2010 acquisitions was even better than we had expected, and they should be even more accretive this year. Given that our daily sales trends improved sequentially in the fourth quarter, and were above 2008 levels for the first time, we believe this positions us well to deliver another year of improved results in 2011, albeit against more difficult comparisons.

With that, I will turn it over to Bill Denninger to walk you through the quarterly financials and our outlook, in more detail. Bill?

Thanks, Neal, and good morning. Fourth quarter sales were a record $365.1 million, up 36% compared to the fourth quarter 2009, driven by growth in both of our -- in both our Aerospace and Industrial Distribution segments. Net earnings for the quarter were $21.1 million, or $0.80 per diluted share on an adjusted basis, excluding a $6.4 million, or $0.24 earnings per share, goodwill impairment charge.

On a segment basis for the quarter, Distribution sales were $218.7 million, up 46% year-over-year. Organic sales were up 23.2% on a sales per day basis, with acquisitions contributing the balance of the growth. Segment operating income was $9.2 million, up 173% year-over-year. As a result, Distribution's operating margin improved by 190 basis points, to 4.2%.

Note that included in the fourth quarter operating income for Distribution were lower healthcare costs, which were down approximately $1.8 million compared to the prior year. These lower expenses were a result of lower than expected claims in the fourth quarter, and a true up of our medical claims for the full year.

Moving on to Aerospace, sales in the quarter were $146.4 million, up 23% compared to the prior year. Aerospace operating income increased 80% to $32.8 million, excluding the goodwill impairment charge from $18.2 million in the prior year. As a result, operating margin improved by 720 basis points, to 22.4%. Aerospace operating profit also benefited from $1.1 million in favorable year-over-year healthcare costs. Aerospace backlog ended the year at $532.6 million, up $101.7 million, or 23.6%.

As I mentioned, in addition to improved underlying operational performance in the fourth quarter, our operating income benefited from lower healthcare expenses. These expenses were challenging to predict in 2010, after we implemented a new self-funded medical insurance program on January 1.

Overall, in addition to the $1.8 million benefit in Distribution and the $1.1 million benefit in Aerospace, our consolidated operating income also benefited from approximately $700,000 in lower healthcare costs at corporate, for a total benefit of approximately $3.5 million.

As a result of our annual goodwill impairment testing, we took a $6.4 million non-tax-deductible charge for the write-down of goodwill at our UK Aerospace operations. This resulted from reduced revenue expectations due to shifting customer priorities, including a contract cancellation, deferrals on the JSF and A400M programs, and a customer choosing to in-source certain work.

Capital expenditures were $7 million for the fourth quarter and $21.5 million for the full year. For 2011, we expect CapEx to be about $30 million, as we fund continued technology and facility improvements. We generated approximately $3.2 million of free cash flow during the quarter and $15.8 million for the full year, or $28.2 million and $40.8 million, respectively, excluding the voluntary pension plan contribution of $25 million we made in December.

2010 cash flow was higher than projected, as we were able to make significant cash collections on shipments made late in the fourth quarter. As we look ahead to 2011, we expect our free cash flow to be in the range of $30 million to $35 million, inclusive of a $20 million pension plan contribution.

Our leverage remains relatively low with quarter-end debt to cap ratio of 29%. This is up from 23.1% at the end of the third quarter, due to the $115 million convertible notes offering we completed in November. Combined with our new credit facility, the convert provides us with additional financial flexibility to pursue accretive acquisitions and to make additional investments for organic growth.

Moving on now to some additional detail on our outlook for this year, starting with Distribution. We are encouraged by our consistently strong sales results, which have been driven by favorable market conditions, our efforts to win new accounts and the contribution from acquisitions.

While we are up against more difficult comparisons in 2011, we expect to achieve another year of growth in revenues and operating profit. We expect total sales for the year to be up 12% to 15%, to a range of $930 million to $960 million. We expect full-year operating margin to be in the range of 4.2% to 4.5%, compared to 3.6% in 2010.

In Aerospace, as Neal previously mentioned, we have several programs that will be ramping up in the second half of 2011, including the 777, the 787 and the A-10. Balanced with a soft but stabilized business jet market, we expect our bearing product lines to be up slightly in 2011.

Our JPF business has a strong backlog for the year, and we should revert to hitting our normalized 6,000 units per quarter production rate for each quarter of 2011. JPF's sales mix will result in higher profits in the second half of the year than the first.

In terms of BLACK HAWK cockpit deliveries, following a higher production year in 2010 with 177 deliveries, we will be returning to the 150 cockpit level that we delivered in 2009. Taking all of this together, we expect Aerospace sales to be up approximately 13% to 16%, to a range of $550 million to $565 million in 2011. Given mix and higher pension and healthcare costs, we expect our operating margin to be in a range of 15.2% to 15.5%, compared to an adjusted 15.6% in 2010.

On a consolidated basis, we expect another year where our results will be back-half weighted, with sequential quarterly improvement during the year. In the first quarter, we will not be able to match the fourth quarter of 2010's adjusted EPS results, as the first quarter will have approximately $14 million in lower operating income from two items, the JPF program and healthcare expenses. This is a result of lower JPF shipments, as again, we plan to ship a more normalized run rate of 6,000 fuses in the first quarter, compared to 9,000 in the fourth quarter, and of an anticipated increase in healthcare costs compared to the level we saw in the fourth quarter of 2010.

Additionally, as we look in the year in total, while we are expecting solid top line growth and stable to improving operating margins, our bottom line results will be impacted by a few factors. First, we expect our corporate expenses to be in the range of $10 million to $10.5 million per quarter. This not only includes costs related to potential acquisitions, but a substantial increase in our group healthcare cost, consistent with what many other companies will be experiencing.

We also expect a $2.5 million increase in pension expense, which is largely reflected in our operating margin outlook for each segment. Interest expense is expected to be approximately $12.5 million, compared to an adjusted $10 million in 2010, due primarily to the impact of higher debt and borrowing costs. Finally, the effective tax rate is projected at 35%, up from an adjusted rate of 33% in 2010.

In summary, we had an excellent fourth quarter and, while we have a few items that will impact our net results, we are expecting to report another year of strong performance in 2011. With that, I will turn the call back to Neal for some closing comments.

Thanks, Bill. Again, we are extremely pleased with our fourth quarter performance. These results are evidence that our team is executing across the Company, and has us well positioned as we proceed into 2011. We no doubt will face challenges as we move forward, but I am confident that our team will deliver improved results for our shareholders. I will now turn the call back over to Eric.

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

(Operator Instructions). Your first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed.

Hello. Good morning. Can you make it easy for us, and quantify the pension and healthcare costs in total in 2010? And what you expect them to be in 2011?

Good morning, Ernie. Medical was about $20 million in 2010. We are projecting a double-digit increase there for 2011. Pension was $11.5 million in 2010, going to $14 million in 2011.

Okay. Thank you. And I wanted to focus on the margin guidance. And again, you have given us a lot of information that we've got to sort through. But in looking at your Aerospace margin guidance, it is below the actual levels of 2006, 2007, 2009 and 2010. In most of those years, you had some unique items, losses in Wichita, negative impact from Fuzing. It's even below the 15.6% you had this year, and that was in a year where specialty bearing revenues were down year-over-year.

I appreciate you're probably trying to be conservative, but other than these healthcare and pension issues, and the delays in a couple of programs, are there other factors that perhaps you want to highlight that are causing you to have a very cautious view on Aerospace margin?

Arnie, I think we are being a bit conservative, given that it's early in the year.

There's four items, though, that will impact margins year-over-year. We've talked about pension and group health, there's some increased legal fees related to the FMU-143, and we have some startup expenses for the Mexican operation. In total, those represent about $5.5 million of additional cost in 2011. That's about 1% return on sales. In addition, we have ramp-up cost related to A-10, AH-Z1 and LJ85. But when it's all said and done, I think we are being reasonably conservative.

Okay. Final question, real quick. The margin on JPF Option 7, how does that compare to Option 6?

Margin's about the same.

Okay. Thank you.

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

Good morning, guys, and congrats on a great quarter and year.

Thanks, Matt.

Thanks, Matt.

The first question I've got, Bill, just a point of clarification on the guidance for 1Q operating profit versus 4Q. Is the $14 million down tick, is that inclusive of the goodwill charge or excluding the goodwill charge?

Excluding it. Just relates specifically to JPF -- lower JPF shipments in margin, and higher healthcare costs. Those two items alone are worth $14 million.

Okay. So, just for those two things, then net-net you would be down about $7 million to $8 million, given that the charge was $6.4 million, correct? So, $27.5 million in operating profit in the fourth Q, including the charge, you would be down about $7 million to $8 million from that number?

I'm not really following, sorry Matt, the logic here. Those two items alone, quarter-over-quarter, will cause a reduction in operating profit of about $14 million.

I guess the other thing, sort of piggybacking on Arnie's question, on the conservatism in the Aerospace segment guidance, help us think through how it should progress through the year. You have been helpful in saying the second half would be better than the first half. Is the right way to think about it that the first quarter will probably be below the full year range, and the fourth quarter would be above it?

Yes. We see a very low first quarter, for the reasons I mentioned, compared to the fourth quarter, and then sequential improvement, quarter by quarter, during the year.

So theoretically, you would exit 2011 above the high end of the full year range?

Yes.

Okay. At KIT, another very good quarter, 23% organic growth there. And Neal, you did say that you had ten big end-markets that all grew. Eight grew double-digits. Were there any in there that were outsized, in terms of their growth?

You know, there were a couple, Matt. Our OEM area continues to grow, and with the NAICS codes, a lot of those goes into one. But we had very strong growth again in the fourth quarter and full year. We also, in the fourth quarter, had very strong growth, probably not unexpectedly, in the mining area, driven by some of the commodity price increases we have seen. Those were the two big ones. Fabricated metals were also up smartly in the fourth quarter.

But interestingly, for the full year all 10 of our top 10 industries were up double digits. So, very strong market performance and I think our guys did a good job of taking advantage of that.

Okay. And then at Minarik and Allied, you are obviously doing better than your expectations. (Technical difficulty) you can provide for us how outsized those two have been, relative to what you thought they would do when you bought them?

In terms of the accretion, when we purchased the companies, we gave the Board, as we always do, a set of projections to which management commits. And actually, the accretion in the year 2010 was about double the numbers we had given the Board earlier in the year.

Okay. That's very helpful. Thanks. And then the last thing I've got, looking at the acquisition environment, obviously you've had some good success with your recent acquisitions. Are there other deals out there now that you are actively pursuing, and is that maybe part of the year-over-year uptick in corporate expense?

That's exactly right, Matt. We are very pleased with an active pipeline, both in Aerospace and Industrial Distribution. Obviously, the number, just in physical number, is higher in Industrial Distribution. I don't think that comes as a surprise.

But I think again, as we've said historically, as you look at our corporate expense, that's where we put in any outside due diligence or legal costs associated with those. So, we see a very active pipeline and we hope that we will be successful, as we were in 2010.

Okay. Thanks, guys.

Thanks, Matt.

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

Good morning, guys.

Good morning, Ed.

So, on the Aerospace guidance for the operating margin, maybe you can talk about, just in your range, what gets you to the high end of your range? What gets you to the low end of the range? What kind of has to happen?

I'll start with that, Ed. What gets us to the lower end of the range, quite frankly, are the startup costs associated with some of the new wins. We are really pleased with the unmanned K-MAX win, the ability to leverage our initial blade order with Bell of about a year and a half ago, to get the Zulu cabins. Big plus for us in our strategy to make Bell as large a customers, hopefully, as we have at Sikorsky today. Lear 85, first Aerostructures award with Bombardier.

Those are all new programs, and I think what gets us to the low end of the range is the startup costs. If those are higher than we'd anticipated or, frankly, if they are the same amount but they occur earlier, that would take us to the lower end of the range.

I think the upper end of the range would be if we are able to manage those a little bit better than we are planning right now, and also if we have an uptick in some of our business aircraft, either after market or forward-fit business, that would benefit our specialty bearings product lines.

The other area that could move us to the higher side would be group health insurance. We're still watching the claims every month. As you know, we had a new program last year and the claim level came in quite a bit below expectation in 2010. That could happen again in 2011, but it's too early to tell.

So if I'm hearing you correctly, it's basically if you encounter further difficulties on the start-up programs, that gets you to the low-end. Aircraft production ramp up, as well as managing start-up costs, and then the lower group health insurance gets you to the high end or helps you surpass, if that's possible?

I think that's right, Ed. Just so that I've characterized our start-up costs accurately. Any time you win a new program, you incur start-up costs with those. We've planned for those start-up costs, and that is what is leading to some of the lower margins from year-to-year, in addition to the items that Bill has outlined.

It is not anything that's unexpected when we win a new program. But if we can do a little bit better than planned, we should move to the high end of that guidance.

Okay. And then the capacity on that JFF -- JPF, right now. I know you did 9,000. I know you are not going to repeat that. Is 6,000 where the capacity is now? Have you added additional capital to work through higher run rates?

No, 6,000 is about the run rate at current capacity levels. It's where we were last year, on a normalized basis, and where we expect to be this year.

Okay. And then, the two commercial sales that you had, or commercial orders that you had placed this year, I know some of the -- the JPF went out in this particular quarter. Now that Option 6 and Option 7 are repriced to the higher levels, are they pretty much parallel with commercial, or is commercial still a little bit higher?

It varies by customer mix. The product that we shipped in the fourth quarter was a very profitable sale for us. As we go into next year, we will have a mix of customer pricing.

Okay. And then, on the industrial business, looks like organic growth may be around 8% to 12%, is that about right?

That is a fair assumption.

And then on -- we had a couple conversations, I think a few questions asked on the last conference call about some national accounts that were coming up for renewal. Can you update us on how those negotiations are going, or when?

We continue to work through those, Ed, as we do, on an ongoing basis in that business. We haven't seen anything on the horizon that would lead us to voice any concern on them. We get paid to worry about those things. So, we are certainly worried and focused about them. But there is nothing right now that we are overly concerned about.

Nothing positive, nothing negative?

I guess that would probably be a fair characterization. We feel very good about our Industrial Distribution business right now.

Right. Thanks, guys.

Okay. Thank you, Ed.

(Operator Instructions) Your next question comes from the line of Steve Levenson with Stifel Nicolaus. Please proceed.

Good morning, everybody.

Good morning, Steve.

Thanks for all the additional detail. In relation to the K-MAX, I know you mentioned before, the order there. There was a report out the other day, a news item, that you had reached a number of milestones. What's left?

Well, we have critical design review that we are working through right now. We have to actually go through the deployment exercises here in the US. But, we have met the early milestones, together with Lockheed Martin. Obviously, they are a great partner and a very strong team, and we continue to be encouraged.

These other milestones, does that get you -- I don't know if milestone C is something that applies to the K-MAX, but is that what you're trying to get to?

As we look at it, Steve, there are milestones, both internal and formal external milestones, that we have to meet with NAVAIR. In the end, we have all been through this long enough that you know that for us to be able to be chosen as the aircraft that's deployed to Afghanistan and most of all, to be successful in that mission, is what our key milestone is.

Got it. Thanks. Does the order for the Learjet 85 parts potentially give you a leg up on C-Series? Have any discussions begun? Is there anything you can tell us there?

Well, we are very active with C-Series already, with our specialty bearings product line, Steve.

And certainly, I think for us, and probably a number of businesses, the ability to win a new program demonstrate both your technical capability as well as the quality of the parts you deliver on time to the customer, really enable you to expand that relationship. I think that was certainly true with Sikorsky.

We feel that the quality of work that Sal and his team have done on the helicopter blade work for Bell played an absolutely pivotal role in our ability to demonstrate the capabilities of Kaman Aerospace and to win the AH-1Z cabins. We'd certainly like to have that same model at Bombardier from the Lear 85 up to the C-Series.

And on the AH-1Z, which location will build the cabins?

I'm really glad you asked that question, because the cabins will be built in Jacksonville, Steve. But this is another program that is similar to our A-10 program, where actually our UK organization will actually be doing the tooling for the program. So, that's going to be a fairly significant piece of this program as well.

We were really pleased with the combined capability of the Aerospace group including, as I said earlier, the track record that Sal and the helicopters group provided, the capability of our tooling organization over in the UK, and certainly the expertise of Bob Kanaskie's team in Jacksonville. Really, those three things together positioned us to win that program.

Sounds good. Last item. Assuming the 767 tanker award sticks, what is the potential for command there?

You know in reality, today we have about $230,000 of content on each 767, primarily between our specialty bearings business. And of course, as you know, we do the fixed trailing edge for that aircraft down at our facility in Jacksonville, as well.

In addition, with Global Aerosystems now part of the Kaman Aerospace family, we see a significant opportunity for them to support Boeing, both on the commercial aircraft side, for the airframe, and certainly Boeing, what used to be called IDS, where they will do the missionization for the aircraft.

But, if you look at just simply the content that we have today for 179 aircraft, that's in excess of $40 million. So, as they expand either the number of aircraft, or certainly if we are able to position ourselves to win a significant part of the engineering, it would add to that total.

Thanks a lot for all the detail.

Okay. Thank you, Steve.

Your next question comes from the line of Robert Kirkpatrick with Cardinal Capital. Please proceed.

Good morning. Congratulations as well. Neal, could you talk about the SH-2 program in Egypt and the upgrades that are going on? With all the changes that have gone on in that country, is there some risk of that program being completed and/or getting paid for that?

Rob, good question, and obviously that was one of the things that we've been keenly focused on in the last four to six weeks.

As you may know, that contract for us is actually an FMS contract, so it comes to us through the US government. We have a portion of that, which was planned for our 2011, that is for long lead-time items for kits, et cetera. We have that on order. We would get paid for that from the US government, so we don't have any concerns on that during 2011, because they are contractually committed to it, as we are.

Currently, to give a little bit of flavor for that, as you would expect, we have about five people in Egypt supporting that program today. After the issues that arose, we brought those people out, and we've actually gotten a request for them to return. So, we are working with the State Department right now for the appropriate timing to put those people back in country, to support the fleet that they have and actually to continue with the upgrade program.

So, at this point in time, we do not see any near-term risk to that. We will, of course, stay very close to it and manage it accordingly. But right now, we see that program continuing pretty much on the schedule that we have for it.

Great. Thank you. And secondly, with respect to the Joint Programmable Fuze follow-on orders, there's been a lot of changes that seem to be going on, as the government goes through its development of a RFP for that. Where do things stand at the current time?

I think we are still on schedule for mid- to third quarter of this year for the competition. They did have what they call an Industry Day, and went through and overviewed the program and what the requirements would be for potential bidders on that. And of course, we were there. We paid close attention, and we feel pretty good about our position in that competition.

But again, as a shareholder, you pay us to worry about it, and we are worrying about it.

Thank you. And then finally, with respect to KIT, how do you feel about, while the sales growth has been very good, are you as pleased with the incremental margins that the business is delivering as it goes through this period of recovery from the 2008/2009 period?

From 2008 to 2009, I think we were pleased, Rob. And the reason was that we had a lot of things going on at one time there. We not only had a lot of very rapid growth, but we were investing in new voice and data communications. So, we changed out -- it sounds mundane for a lot of us, but we changed out most of the phone systems across that business. And the phone is the lifeblood of that business.

We implemented an entire new organization within KIT so that we could realign and focus more resources on the customer, and made some significant changes to their IT platform as well. All of those things had the potential to derail some of the sales growth or profit conversion, and I think they stayed on a very good track through the course of the year.

In addition, I think that 2011 represents what we would expect as a meaningful next step in that margin growth. I was pleased, certainly with the performance they turned in, in 2010, but we have some significant increases in expectations for 2011, as well.

Great. Thank you so much, and congratulations, again.

Yes. Thanks, Rob.

Your next question is a follow-up question from the line of Matt Duncan with Stephens, Incorporated. Please proceed.

Just a couple more things. First, on the timing of the AH-1Z ramp, it sounds like that's probably more a 2012 ramp. Can you give us a little bit of detail on when the more significant revenues could start there?

I think 2012 for the initial is correct, but it's really 2013 on.

Okay. So that's when you'd see the bulk of the $60 million then, is 2013 on?

Yes.

And the orders, I think from the K, were through 2015, right now?

That's correct.

Okay. Shifting over to specialty bearings, it sounds like that was probably down year-over-year again this quarter? I guess you have said in your guidance that you expected those sales to be up a little bit in 2011. At what point during the year would they begin to show year-over-year growth?

We've actually -- we were pleased with the order intake in the late third and fourth quarter, Matt, so that our backlog built. I don't have it right in front of me, but if you give us a second --

We're going to see an increase starting in the first quarter.

Year-on-year, I think we'll see a slight increase in the first quarter.

If you remember, Matt -- it's going back a bit, now, 2009. The first half of 2009, our shipments were very strong, primarily because that was the tail end of the business aircraft build up and it really went down dramatically in the third and fourth quarter of 2009. We said, in the first quarter of 2010, that we were then there at steady state in the business aircraft. And that's pretty much what turned out to be the case. So now we have built some backlog in some other product line areas or platform areas, and that's what will begin to tick up in the first quarter.

Okay. Can you give us any idea of what that revenue stream, the size of that revenue stream was in 2010?

We really, since we went to one segment, Matt, we have not been disclosing the absolute numbers on bearings.

Okay.

It's pretty close to where it was when it was a separate segment.

Fair enough. So it's somewhere, a percent or two either side of about 10% of total company sales then?

That's fair, yes.

Okay. And then last thing, moving over to KIT, just two questions there. First, what was the month-to-month sales trend you saw throughout the quarter, and what have January and February looked like?

We're surprised we didn't get that question before now, Matt.

We actually saw a sequential increase month-to-month in the fourth quarter, in terms of average daily sales. Normally we see a tick down in December, but December was actually up. And we looked at January and February, and we are running 1% to 2% over the October, November average daily sales rate. So, sales have held up very nicely, as we've gone into this first quarter.

Okay. And then last thing I have on that business is on the operating leverage. You guys put up 160 basis points of leverage there in 2010, and that's off of a year in 2009 where you had some temporary cost cuts. So, you're obviously seeing great leverage there.

Other than the obvious driver of economies of scale and a bigger revenue number, what else is behind the leverage that you are seeing in that business? And if you are growing 8% to 12% organic, is there any reason to think that maybe you are not being a little bit conservative with your segment operating margin there, and that there are opportunities for that to be better than the 4.5% level this year?

Matt, there's a couple other things that helped our conversion. We had -- we improved our gross margins from year-to-year. So, improved gross margins certainly helped us. Part of that gross margin improvement was driven by improved rebates, based on that volume from year-to-year. Since we are not growing at as fast a rate in 2011, we would expect our rebates to be strong, but on a year-on-year basis not contribute as much differential as it did from 2009 to 2010.

We also benefited from increased sales of fluid power products in a couple other higher profit product lines. So, that was a plus for us. We are anticipating that we will have some higher costs that Bill outlined, both in pension and healthcare costs in that business from year-to-year that would impact our margin performance. And also, we are encountering a number of price -- sorry, are you still there, Matt?

Yes, sorry about that.

We are encountering a number of price increases from suppliers, we're moving those through. But there is the potential for some margin squeeze there as well, until those flow through.

Neal, what is the size of price implied in your guidance for 2011?

Matt, we would say it's probably around 3%.

Okay. Very helpful. Thank you.

Matt, I just wanted to highlight again, as in the case of Aerospace, with Distribution, there should be some upside if medical comes in at levels below what we've projected.

Okay.

At this time, I would now like to turn the call back over to Mr. Eric Remington for closing remarks.

Thank you for joining us for today's conference call. We look forward to speaking to you again when we report our first quarter results in May. Goodbye.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you, and have a great day.