Kaman Corp (KAMN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kaman Corporation conference call.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Eric Remington. Please proceed, sir.

Thank you, and good morning, everyone. I'd like to welcome you to the Kaman Corporation first-quarter 2011 conference call to discuss our earnings results and our updated 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 provided -- have been included in our earnings press release.

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

Thanks, Eric, and good morning. I'm pleased to report a strong start for Kaman in 2011, as we drove significant growth in revenue and operating margins in both of our segments, resulting in improvement in our earnings to $0.45 per share on an adjusted basis.

I will begin my review of the first quarter with our Industrial Distribution business, which continued to strengthen in the first quarter. Total sales increased 33%, driven by approximately 12% organic growth, with the balance from acquisitions completed in 2010.

We continue to be encouraged by the contributions of the Minarik and Allied acquisitions, both in terms of financial results and increased growth opportunities. For example, Minarik is presenting new opportunities with our national accounts, and we continue to further leverage the combination of Minarik and Kaman capabilities across our customer base.

Daily sales in our organic business continue to be very healthy in the first quarter and average daily sales increased slightly on a sequential basis, reaching their highest level since the third quarter of 2008. Our sales growth for the quarter was broad-based across customers, geographies, and end markets. Of the top 10 industries we serve, all were up compared to prior year. In fact, six of our top 10 end markets were up double digits.

Looking at our business from an MRO versus OEM perspective, our MRO business was up approximately 11% for the quarter, while our OEM business continued to show even more robust trends, up approximately 31%.

We were also encouraged that we achieved another quarter of substantial year-over-year improvement in our operating margin to 4.9%, up 220 basis points compared to the first quarter of 2010 and 70 basis points sequentially. This was due to drop-through from organic sales growth and contributions from acquisitions, along with higher rebates. I am particularly pleased with our team's success in improving margins in a very difficult environment.

We continue to experience prior price increases, which we are working to pass through. However, we are experiencing a period of price cost squeeze, which combined with higher fuel prices provided a headwind in the quarter. However, improved efficiency and operating leverage from our increased volume enabled us to overcome these challenges. All in all, a very solid start to the year.

The Aerospace segment also delivered significant growth in both revenue and operating margins in the first quarter, with total segment sales up 43% and operating margin up 520 basis points compared to the first quarter of 2010. One of the main drivers of this performance on a year-over-year basis was the higher deliveries and improved pricing from our JPF program. As you all remember, we struggled during the first half of 2010 due to a supply component failure.

1Q 2011 was the third quarter of consistent production levels. And as first clear evidence of our improved performance, Kaman Precision Products was recently awarded a four-star supplier award for supplier excellence from Raytheon Missile Systems for impeccable delivery and quality performance.

On a sequential basis, our JPF deliveries decreased, as expected and as communicated last quarter, given that our fourth-quarter JPF deliveries benefited not only from catch-up production from prior quarters last year, but also from a large commercial order.

Along with along with growth in the JPF program, our first-quarter Aerospace results included approximately $8 million in sales from the Global Aerospace (sic) acquisition that we completed in the fourth quarter of 2010, which expanded our capabilities in structural design, stress analysis, and certification. Due to Global's expertise and strong reputation in the marketplace, we are seeing opportunities to bid for joint design and build packages for existing and new customers even sooner than we had anticipated. Currently, we are working on joint proposals on programs ranging from engineering work to tooling to production for several OEM and Tier 1 customers.

Further contributing to our results for the March quarter, we recognized revenue under our unmanned K-MAX aircraft program earlier than anticipated. Note that this is simply a shift in the timing of revenue recognition, rather than an increase in the contribution from the program this year. That said, we continue to be optimistic about the potential of this program to be a meaningful contributor to our growth and profitability over the long term.

In addition to the growth from JPF, Global Aerospace, and the unmanned K-MAX program, we had higher deliveries for the Sikorsky BLACK HAWK cockpit program as expected, delivering 45 cockpits during the quarter compared to 39 in the prior year. Overall, the improved profitability associated with Option 6 of our JPF program, as well as the year-over-year improvement at our Wichita facility, drove a 520 basis point increase in our Aerospace segment operating margins compared to the prior year.

Now, I would like to provide an update on how we see the remainder of this year and beyond unfolding, and Bill will provide more detail.

In Industrial Distribution, we were encouraged to see our business remained strong in the first quarter. In combination, with key indicators pointing to continued expansion in the industrial and manufacturing sectors of the economy, the environment for distribution appears to remain very healthy.

We are optimistic about our growth prospects for 2011, due to the organic daily sales levels that we have been achieving, combined with growth in the acquired businesses. We have increased our operating margins from 2% in the depths of the recession to nearly 5% this quarter. And we believe we are well-positioned to continue on the path towards our goal to make this a $1.5 billion revenue and 7% operating margin business by 2014.

Keep in mind as we enter the second quarter, comparisons for the remainder of the year will become more difficult. This is due to the fact that the acquisitions of Minarik and Allied started to contribute to our results during the second quarter of last year.

In Aerospace, we were encouraged to be able to show improvement in sales of our bearing product lines in the first quarter, but even more encouraged by the growth in our orders and backlog for future quarters which were up significantly. This activity affirms our outlook for modest improvement in sales from this product line in 2011.

In addition, while we expect production on the Boeing 777 to begin to ramp up in the second half of the year, the 787 and A-10 are now expected to ramp up closer to the end of 2011 than originally anticipated. We continue to grow our backlog in Aerospace, which is 5% higher than year-end and 20% higher than a year ago.

I'm also pleased to report that we have had excellent results with program wins on the new Airbus A350. While production of this aircraft is a couple of years away, it demonstrates our commitment to continuing to lay the groundwork for future growth on new platforms.

Regarding the SH-2 helicopters, we are continuing to actively pursue opportunities with several interested countries, and we'll update you on developments as they occur.

On our JPF program, we recently announced that we were awarded two additional orders for Option 8, totaling approximately $44 million. With these two orders, our backlog for the JPF program has grown to more than $159 million and extends into 2013.

We also continue to make progress in growing our Blade Center of Excellence by adding to the erosion coating program, and during the quarter we were awarded the first UH-60 FMS erosion coating award from Sikorsky. We see additional opportunities on other platforms and with other nations and are pursuing these prospects.

We also continued to invest in our business. In addition to increased R&D investments, our new production facility for our production -- for our bearing products is in operation. And I am pleased to report that our new hardened duplicate IT data center went live last week, on time and on budget.

Overall, the progress our team is making in leveraging our unique products and services to new customers and expanding our business with existing customers is helping us continue to drive towards our goal to make Aerospace a $1 billion revenue and high teens operating margin business by 2014.

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. First-quarter sales grew 36.5% to $377.8 million driven by growth in both our Aerospace and Industrial Distribution segments. Net earnings for the quarter were $11.7 million or $0.45 per diluted share on an adjusted basis, excluding a $2.4 million or $0.07 per share benefit associated with the death of a former executive.

On a segment basis for the quarter, Distribution sales were a record $238.9 million, up 33.3% year-over-year. Organic sales were up 12.3% on a sales per day basis, with acquisitions contributing the balance of the growth.

Segment operating income was $11.7 million, up 144% or $6.9 million year-over-year. As a result, Distribution's operating margin improved by 220 basis points to 4.9%. Included in the first-quarter operating margin were higher rebates related to our year-end true-up of accounts with some vendors which will not repeat. These non-recurring rebates contributed approximately 20 basis points to Distribution's operating margin in the quarter.

Moving on to Aerospace, sales in the quarter were $139 million, up 42.5% compared to prior year. Aerospace operating income increased 117% or $11.3 million to $20.9 million. As a result, operating margin improved by 520 basis points to 15.1% on leverage from higher sales and improved profitability on a number of programs, including the JPF and bearing product lines and continued improvements at our Wichita composites facility.

As Neal indicated, Aerospace backlog ended the quarter at $561 million, up $28 million or 5% from year-end and up 20% from a year ago.

Moving on, corporate expenses were $11.5 million in the first quarter adjusted for the $2.4 million benefit I noted earlier. This amount was driven by higher salary and incentive-based compensation expenses and by higher group healthcare costs.

Capital expenditures were $7.2 million for the quarter for 2011. We continue to expect CapEx to approximate $30 million, as we fund continued technology and facility improvements.

We had a use of approximately $21 million of free cash flow during the quarter, which was largely due to two cash payments. First, we paid the initial guaranteed payment to the Commonwealth of Australia, which amounted to $15 million US, net of our hedging transaction. Second, we made a $9.8 million pension contribution in the quarter.

Excluding these two items, we actually generated cash in the quarter, a quarter in which we historically have used cash. We continue to expect our free cash flow for the full-year 2011 to be in the range of $30 million to $35 million, inclusive of total pension plan contributions of $20 million, as well as the payment to Australia.

Moving on now to the full-year outlook, we continue to expect 2011 to be a year of significant operational improvement over 2010. This includes double-digit sales growth for each of our businesses and significant margin improvement in Distribution. We have demonstrated with our first-quarter results that we were off to a strong start.

In Distribution, we continue to be encouraged by the consistently strong trends we have seen. We are up against more difficult comparisons in the remaining quarters of 2011. However, in light of our stronger than expected start to the year, we now expect annual sales to be near the high end of our previously communicated range of 12% to 15% growth and $930 million to $960 million.

Additionally, given our profit performance for the first quarter, we now expect our full-year operating margin for this segment to be in the range of 4.6% to 4.8%, up from 3.6% in 2010. This new range is up from the prior range we had given of 4.2% to 4.5%.

In Aerospace, we are maintaining our full-year outlook, which calls for significant year-over-year performance improvement. We were pleased to see our incoming order rates for bearing products strengthen in the quarter, and we continue to expect sales of our bearing product lines to be up in 2011, offsetting some of the programs that are shifting to the right.

We now expect lower Aerospace profitability in the second quarter due to the mix of JPF business and the completion of a short term helicopter subcontract program early in the second quarter. Aerospace profitability should improve sequentially in both the third and fourth quarters.

In terms of BLACK HAWK cockpit deliveries, we continue to expect to deliver 150 to 160 cockpits this year, down from 177 in 2010. Taking all of this together, we are reiterating our outlook for Aerospace for the full-year, which includes sales up 13% to 16% to a range of $550 million to $565 million and operating margins in the range of 15.2% to 15.5%.

On a consolidated basis, we also expect to see higher corporate expenses in the second quarter, similar to what we experienced in the first quarter excluding the one-time benefit. This higher level for the second quarter relates primarily to the timing of certain expenses. For the third and fourth quarters, we expect corporate expense to return to the $10 million to $10.5 million range we provided in our outlook.

We also expect the Company's full-year pension expense to increase $2.5 million in 2011, which was largely reflected in our operating margin outlook for each segment. We continue to expect interest expense 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, we continue to project a 35% effective tax rate for 2011.

So in summary, we are encouraged by our solid start to the year and believe we are well-positioned to achieve significant growth in revenue and earnings in 2011. With that, I'll turn the call back to Neal for some closing comments.

Thanks, Bill. To reiterate what Bill just said, we are very pleased with our first-quarter performance, which reflects not only positive market dynamics in each of our businesses but also successful execution by our team. I'm even more confident today in our growth strategy for both Industrial Distribution and Aerospace, and look forward to continuing to expand our business and market share as we move forward in 2011 and the coming years.

I will now turn the call back over to Eric. Eric?

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

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

Hi, good morning and congratulations on the quarter. Want to try to focus a little bit on your comments regarding Q2. I think you mentioned lower profitability in JPF and a subcontract coming to an end. So, focusing on JPF first, can you give us a sense of how many fuzes were shipped in Q1, how many you expect in Q2, and remind us what you expect for the year?

Sure, Arnie. It's Neal. We do expect to return to a normalized rate of about 6,000 a quarter for the year, so 24,000 for the year. But it is going to be variable in the first half of the year.

We shipped -- I think it was just over about 3,500 fuzes in the first quarter, Arnie. And that was primarily due to -- as you know, we had significant shipments in both the third and fourth quarter as we moved inventory through so we were -- I don't mean to say starting from scratch, but we had to build up from raw material through work in process, et cetera, to move through the fuzes.

So, we should be more in a normalized frame of about 6,000 units in the second -- maybe a little bit higher than that in the second quarter, and move towards probably 6,000 a quarter in Q3 and Q4. The decrease in profitability in the second quarter, Arnie, is driven by a customer mix for the sales of the program. So non-US government sales.

Okay. But if you have more JPF shipping it's a higher margin product in the segment margin in total, isn't it?

In this particular case, Arnie, it is driven by customer mix and pricing with that customer.

Okay. I assume for competitive reasons and others it probably doesn't make sense to drill down too much more.

That would be true.

And highlight the subcontract item, as well please?

Sure. We were doing some additional subcontract work here in Bloomfield for Sikorsky, and we -- that tailed off right at the beginning of the second quarter.

Do you expect your segment margin in Q2 to be lower than Q1 in Aerospace?

Slightly lower, Arnie.

And just one more question if I can. You mentioned bearing products were up; you expect bearing to be up for the year 2011 and that has always been second half driven. How much was it down in Q1, year-over-year?

No, bearing sales and orders were up in Q1.

Yes, they were up year-over-year, Arnie. There were down a little bit -- our shipments were down sequentially, but they were stronger from year-to-year. And we've had -- from an orders perspective, we've -- it's has been, frankly, very good news.

We have really broad-based strength across all of the end markets. The one exception is really military aircraft right now. Military helicopters obviously up significantly, but military aircraft down.

And also we've seen a very strong order intake in the business jet market, particularly versus 2010, which I think is indicative of a couple things. One is the strength of our business on the high-end aircraft, the Gulfstreams and the Challengers. And also most likely, that even the mid- and low-end products from Hawker, Cessna, et cetera. They've probably worked through some of inventory adjustments, and we're experiencing new order intake from them.

Obviously, it's not all for delivery in 2011. It goes through the balance of 2011 into 2012, but we were very pleased to see that broad-based strength in orders. And also, our aftermarket business ticking up in that business as well, gave us a lot of confidence in the balance of the year and into 2012.

I have other questions, but I will jump back in queue and come back later. Thank you very much.

And your next question comes from the line of Edward Marshall representing Sidoti & Company. Please proceed.

Good morning. Thanks for taking the call. The -- I think last quarter you talked about the Aerospace being somewhat of a conservative perform -- outlook. You had talked about particular pushes to the right in your prepared remarks today.

Are the pushes to the right something that you have considered in the first quarter when you gave that guidance and, therefore, the reason why you are sustaining it now?

Ed, I think it's a little bit different. I think we have encountered a couple of shifts to the right on A-10 and also on 787. However, the increased strength of our specialty bearings business, as I just commented, Ed, really is what is giving us the confidence that despite some of those shipments, likely because of customer requirements on the Aerostructure side shifting into 2012, that our improved outlook for our specialty bearings business would be able to offset that.

In the absence of those shifts to the right, do you think you'd be raising the Aerospace guidance today?

I think we would, yes.

Okay, okay. Thank you guys, very much.

Thank you, Ed.

And our next question comes from the line of Matt Duncan representing Stephens Inc. Please proceed.

Good morning, guys, and congrats on a nice quarter.

Thanks, Matt.

The first question I've got is on KIT, on the operating margin guidance there. I guess, Bill, you were saying that it was helped in this particular quarter by about 20 basis points from some things that may be non-recurring in nature, but clearly, guys are still tracking very, very well operationally in that business. Do you still feel like there is some conservatism in your new margin guidance there for the year?

There may be a bit. I mean it is still early in the year. You know that that business is somewhat seasonal and trails down in the fourth quarter. If you go back and look at history, the margin can drop as much as 100 basis points in the fourth quarter compared to the first three. So, we're probably being a little conservative, we don't want to get ahead of ourselves. I mean we're quite pleased with the performance obviously.

Okay. Looking at that business in the quarter on the top line. Obviously, there was a lot of winter weather; you guys have a big footprint in the Northeast. How much do you think that weather adversely impacted your revenues this quarter? Is there any way to gauge that?

Matt, it is very difficult to gauge. In February and in early March we were doing some analysis on the number of branch closure days that we had. So, if you think about the number of branches that we had, in particular as you said in the Northeast, how many days they were shut down, et cetera. And we were coming up with numbers of 1% to 2%.

However, when we really looked at it, we felt that that would really be a shift and maybe we would be able to make some of that up during the quarter now. Obviously, with as many days closed that we experienced and our customers had, it impacted our business a little bit in the quarter. But it was not something that we were able to say that we really lost business in the quarter that we either didn't get back in the quarter, or didn't -- wouldn't get back in the second quarter.

What was pricing like at KIT this quarter versus last year?

As we anticipated, we had quite a few price increases that came in through the quarter that we commented in in our prepared remarks. I think we're still running consistent with what we had said at the -- at our last call where we expect to see about 3% price for the year.

It will be interesting when we have this call at the end of the second quarter to see if we are still at that level, or if actually we are saying that that might tick up a little bit, based on what seems to be another -- wave might be a strong term, Matt, but another round of price increases from a number of our suppliers.

Okay. Then two more things and I'll get back in the queue. Can you tell us how much specialty bearing sales were up year-over-year this quarter?

I think we can say it was double-digit, and that is about all we are going to disclose.

Okay. Fair enough. And then last thing is Global Aerosystems. When you announced that acquisition in November, I think you had said it was on track for annual sales of roughly $20 million in 2010. And if I just take what you did this quarter and multiply by four, you're on a $31 million run rate in 2011.

Is it fair to say that that business is tracking ahead of your expectations? And can we expect to see the revenues there build through the year?

Matt, unquestionably, it's tracking better than we had anticipated. Clearly strength there with both 787 as well as 747-8. I don't know that we'll stay on the $31 million or $32 million run rate, but we do anticipate that that will be a stronger business earlier for us.

Not only in its business directly with Boeing, but I think even more importantly, the really rapid traction that we've gotten in working in conjunction with Global Aerosystems to provide more comprehensive design and build solutions to our customers is really what we are waiting for. But we certainly do see that it's going to be stronger than we'd anticipated for the year.

Okay. Thanks.

And your next question comes from the line of Pete Skibitski representing SunTrust. Please proceed.

Good morning, guys. Excellent quarter.

Thank you, Pete.

Thank you, Pete.

Just was wondering if I could get some more color on Distribution. Is there a way to get more color from you around, kind of what contributed most to volume and margin in terms of -- if you separated into customers and geographies and products?

Sure, Pete. I will give that a try. It's interesting, because we really did have extremely broad-based strength across geographies, customers, and end markets. And I will give you a little bit of a flavor for that. For -- if we look at our legacy business, so if we really just take Minarik out of it, we had 10 of the -- all 10 of our industries, the top 10 industries, were up from year-to-year. And six of those 10 were up double digits.

Our biggest ones were up, our machinery -- really our -- it's a pretty broad category, as you know, Pete, but we were up over 30% in that. Fabricated metals up again over 30%. Mining was very strong for us and paper was strong for us. Then when we go across our product categories, all of our top product categories were strong as well and our national accounts were up in the high single digits.

So, it's one where this quarter we are able to say that it was very broad-based.

Okay, okay. Understood. And then just on SG&A, it was pretty low this quarter at 21.4% compared to prior, I think, first half levels. I was just wondering for the full-year if you expect SG&A to be down versus last year, 21.9% level? And whether or not that will impact one of the segments more than the other?

I don't have that analysis in front of me, Pete, but I would estimate that we are going to be relatively flat for the year versus last year.

Okay, okay. So, we will get a rise the rest of the year?

I think it will, slightly. There is a number of factors driving that, but I think we are going to see a bit of an increase.

Okay.

And Pete, if I could go back just for a second to your KIT question. The other elements of that were -- our gross margins were up slightly for the quarter as well so we are very pleased with that, but the main contribution was obviously the operating leverage from the increased volume there.

Okay, okay. Got you. And then, I was just wondering, can you help us understand more? If Aerospace bearings is coming in stronger than expected this year, and that's probably your highest margin product in there I believe, how come you are weren't able to raise Aerospace margin guidance?

Well, the reason is that we did see some shifts in both military and commercial programs, Pete, out to the right. We've talked about the A-10, that was -- is a key program for us. And that is the biggest one right now. We are working with Boeing as they've shifted that to the right and that is having a fairly significant impact, quite frankly.

787, while they're going to deliver some aircraft certainly this year, they continue to be behind where we had anticipated. And those are really two fairly significant impacts for us. So, quite honestly, we were really pleased to see the strength in our specialty bearings business and be able to offset that decline. And certainly, as we close off the second quarter, we'll have a better perspective on what the outlook for the balance of the year might be.

Okay, great. Thanks very much guys.

Thank you, Pete.

And your next question comes from the line of Jeff Hammond representing KeyBanc. Please proceed.

Hi, good morning, guys.

Good morning, Jeff.

Hi, Neal. Just to follow on that point on the margins. So, it sounds like -- because you're bringing in higher margins specialty bearings and you are probably pulling out lower margin OE business, so is it fair to say maybe revenues trend a little bit lower and margins trend higher?

Well, I think that, as you know, our guidance for the year -- our outlook for the year had -- for Aerospace is actually above the 15.1% that we delivered in first quarter. So, we'll -- we are certainly expecting an improvement in margin for the year based on -- up from the first quarter.

And I think your question is a good one, that obviously our specialty bearings business is higher margin, so we may have a little bit of mix shift there as well, with slightly higher margin. But we have got some work to do. We've got very strong -- I believe very strong improvement in our Aerospace business from year-to-year in our outlook. So, we've got -- we are confident, but we got some work to do, to continue to deliver on that for the balance of the year.

Okay, great. And then, just on the JPF, I mean you've -- it seems like there's a number of awards that have been coming in. Are you surprised by the magnitude and number of awards? I mean, is that an upside surprise, or is that kind of how you have been thinking about the program rolling out?

I think that is consistent with how we have expected the program to rollout, Jeff. As you know, it comes in big chunks. So, we are always focused on that next chunk and waiting for it to come in. But as we look over a multi-quarter rolling basis, I think it's about right about where we expected it to be.

Okay, great. And then back to kind of price increases and pricing actions and price costs. You mentioned price cost as a squeeze and a headwind in the quarter. Based on your pricing actions, what's coming in, I mean do you expect that price cost squeeze to get worse, to get better? Just how should we think about that?

Jeff, we -- it's a tough one for us. If you had asked me that question a month ago, I would have told you that we would have expected it to get better. Irrespective of what may have happened in commodity markets in the last couple of days, our customers have -- or rather our suppliers have continued to come in with some additional -- an additional round of price increases.

So, I guess I would not be overly surprised, if we still have that cost price squeeze in the second quarter. But again, I think what I was most pleased with from the KIT team in the quarter was that despite that and some other headwinds, that they were actually able to still deliver a slight improvement in gross margin. And that I viewed as a real plus.

Okay, great. And then just final question. Can you talk about what is driving corporate expense up?

Sure. I mean, we've got an increase for the year of about $1.5 million. And that's primarily related to our long-term incentive plan, which is based on a comparison of our performance to the Russell 2000 over a three-year period. The latest Russell data we've gotten, on a relative basis, indicates that our performance is a bit better than we had earlier estimated, and we've had to track up the accrual for our long-term incentive plan accordingly.

So, it's more driven by the stock price than your business unit performance and --?

There is a number of factors. Stock price, return to stockholders is one of them, but yes.

Okay. Thanks guys.

And your next question comes from the line of Steve Levenson representing Stifel Nicolaus. Please proceed.

Thanks. Good morning, everybody.

Good morning, Steve.

In the past, you have given some daily sales trends since the end of the quarter. Are things holding up okay in KIT?

They are. Steve, Bill, will give you that number. We actually just got it late last night since we finalized the --

Yes. We've got our April numbers and the average daily sales rate was slightly above that at the first quarter, so we are quite pleased to see continued growth at KIT.

Sounds great, thank you. On A-350, I know you mentioned some order activity there or contract wins. Are those parts that are going to be built in the US, or are those going to be in the UK plant?

I believe that those are actually going to be likely some in the UK, but I also expect that it will be in France for the final assembly of where the --

Our production.

Oh, our production. I'm sorry, I thought you were talking about the A-350 production. No, that would primarily be both here and also at our facility in Germany.

Okay. Does that mean bearings?

Yes, exactly right. Steve, I'm sorry. The new contract wins there were primarily in our specialty bearings area. We were really pleased with a couple awards that we got during the quarter.

And in fact, we have increased our content per aircraft on the A-350 to $277,000 per aircraft and actually about $230,000 of that now is bearings. And if you had asked us the question at the end of the fourth quarter, we would've to you it was $150,000 an aircraft, so it went up $80,000 an aircraft.

And is that mostly airframe parts, or is some of it engine parts?

Mainly airframe parts.

Got it. Thank you. With the situation potentially winding down in Afghanistan, do you see that as the obstacle to the Marines buying unmanned K-MAXs, or do you think they've learned a lesson and want to have them for the future regardless?

I think that it will go on, regardless of that. I think that certainly people believe that we will have a distinct need for an aircraft with that kind of capability for unmanned resupply. And while Afghanistan and other current conflicts may wind down, I think that our government's responsibility is to plan for the future and our responsibility is to support them in those plans.

Great, thanks. Last one, did get you any orders for replacement parts for stealth helicopters?

Not in the last few days.

Okay. Thanks very much.

You have a follow-up question from the line of Arnie Ursaner representing CJS Securities.

Okay, a couple of follow-ups. Was Wichita profitable in the quarter, and what was the swing year-over-year, please?

It was slightly profitable. The swing year-over-year was around $3 million.

Okay. The Mexican Aerostructures facility, how much -- what sort of startup costs are you incurring there? And is that where you are getting some of the incremental orders now in private aircraft?

Startup costs about $300,000 in the quarter. Neal, do you want to --?

Yes, and, Arnie, we are really doing test parts and certification parts there right now, very low level parts of production. We certainly hope in the very near future to talk to you about initial production orders from customers that will go through there.

We have a number of bids outstanding and we are waiting on response.

But essentially right now it's still a drag, not a positive --

Oh, absolutely right.

That's true, yes.

It's an investment, Arnie.

Okay. A couple of questions regarding acquisitions. You mentioned previously that when you had made the three acquisitions in Distributions in 2010 the actual results had doubled what you had told the Board at that time, and you had said that it would be incrementally accretive in 2011. Can you update us on your thinking now for 2011, now that we are even further along into the process?

I think the position we gave you earlier stands. I mean they will be significantly more accretive in 2011 than they were in 2010, partly because we have them for the full-year. But we've continued to see very nice growth and profitability out of those acquisitions.

Okay. And I think, if I could summarize your key message on Aerospace, it sounds like you're getting an incremental positive from bearings and an incremental negative by the shift of the 787 and A-10 that has occurred since the previous guidance. Is there a way you can perhaps quantify the positive, quantify the negative? Because you're getting to the same place and but in a quite different way.

Arnie, I think that -- obviously, the volume on the A-10 was significant, and particularly in the last half of the year. We still anticipate that we'll get to kind of those volume levels with maybe a little bit more BLACK HAWK, et cetera, but it's really going to be a shift between the two. And maybe at the end of the next quarter where we have a little bit more visibility of what the end demand for A-10s is going to be this year from our customer, we would be able to talk in a little bit more detail about that.

Okay.

It's a little bit tough only essentially three months into the year with the kind of movement that we are getting in A-10.

Well, for example, you just said you expected it to shift out. So, what revenue had you embedded previously from the A-10 in your previous guidance?

I just don't have that number sitting there.

Okay. Another maybe simple mechanical question you can answer for me. You shipped 45 BLACK HAWK cockpits in the quarter. That's 180 on an annual basis, yet you're only talking 150 or 160. So, when does the program come to an end or your work for it come to an end?

Well, it's not a come-to-an-end, Arnie, it's really the timing of the demand from Sikorsky. And we had a very strong last year -- year last year of 177. And as we went through the numbers, it was a question that clearly we anticipated.

You can multiply by four, as you did, and come up with a much bigger number but right now our end customer, Sikorsky, is telling us that we are going to be in the 150 range. So, that is really what is driving our outlook.

Arnie, back to your question on the A-10. Our prior outlook would've included sales of around $5 million and profit of around 200 -- or $2 million, sorry. And that has shifted to the right as Neal said.

Okay. And I assume you don't want to give, or can't give, a similar number on the 787?

I don't think we can right now, Arnie. Because we have got a lot more -- we work through sub suppliers to Boeing primarily for our Boeing product, or excuse me, for our bearing product lines on the 787. So, we know that we had very strong orders in the second half of last year. It is a little bit slower than we had anticipated this year, as we have said, but I don't know that we can finalize what kind of shift we'd experienced there.

Okay. If I can ask one final question. In the last call you talked about healthcare and pension benefit costs, legal fees on the FMU-143, startup costs on new programs, and your total of these was about a $5.5 million annual hit or a full percentage hit to margin. Two questions, how much of that hit in Q1? And what is your current thinking on the total of these costs and the margin impact?

I think roughly a quarter would have hit in Q1, Arnie, and I don't have any reason to change that estimate at this point.

Thanks, again.

And your next question comes from the line of Robert Kirkpatrick representing Cardinal Capital. Please proceed.

Thank you, and good morning.

Morning, Rob.

Your SH-2 inventory has been declining as you have been selling off pieces of that, spare parts to New Zealand, et cetera. But this quarter it increased for the first time; not a lot, but it did. Did you take something back or is there something else going on there?

Rob, I don't have an answer to that. We will certainly follow-up. With the support that we do for New Zealand and Egypt we may have had a material that came into inventory for the Egyptian upgrade program. And if we -- that is a fairly large program for us and it was in a little bit of a delay as the conflict in Egypt was on our radar screens, for all of us at actually, at the last call.

So, it may well have been that we received inventory in support of the Egyptian upgrade program, because we said that that wasn't going to change in -- through the course of the year. That we expected to have that program continue.

And also, the Egyptians were in here flying -- at the end of the -- end of last -- mid last month. So, I believe we delivered a helicopter back to them early in the second quarter. So, the inventory may -- would shift from that I would expect.

Arnie, just to clarify. I mean, at the end of the year we had $53.7 million, and at the end of April or April 1, the end of the first quarter, $53.1 million. So, there was --

That was the decline?

Yes, $600,000 decline during the quarter.

And secondly, Neal, you mentioned that you are even more confidence in your growth strategy in your prepared remarks. What is giving you that increased confidence? And is there any difference between your confidence in the growth strategy as it is internally operated and as it is externally operated in terms of M&A opportunities?

I think what is giving us the continued confidence, Rob, on our internal businesses, first of all, at KIT, quite frankly, I was really pleased with the continued strength of sales and the operating margin leverage that they got from it. So, I think it proves that a number of the steps that they have put in place, including their organizational realignment, to get more focused on the customer and improved back office operating efficiencies is delivering the kinds of results the we were looking for.

I think on the Aerospace side what is giving us confidence is, first of all, the continuing growth in backlog, which we were very pleased to see. And also the strength of our specialty bearings business, which you know very well drives a lot of the profitability in that segment. So, from an internal what we have today, those are the things that continue to give us confidence that we are executing on that longer-term plan.

Externally, while we have not been able to announce any acquisitions, it is a time where we are very involved with a number of potential transactions on both sides of our business today. And we feel confident that we will be able to provide the growth through acquisitions that we have put into our longer-term plans in both of those businesses as well.

Great. Thanks so much and congratulations on the quarter.

Thanks, Rob.

You have a follow-up question from the line of Matt Duncan presenting Stephens Inc. Please proceed.

Hi, guys. Just a follow-up on the SG&A costs. Bill, to make sure I understood you correctly, are you expecting those expenses to build through the remainder of the year on a dollar basis, on a percent of sales basis? I was a little confused as to what your thoughts were there.

I would expect a slight uptick on a percent of sales basis.

For each quarter of the year or here just in the second quarter? I know you expect the corporate costs to run higher in the 2Q but then come back down.

Primarily in the second quarter. And as we said, we expect to drop down to the $10 million to $10.5 million per quarter in the third and fourth.

Okay, that's helpful. I just wanted to kind of better understand how the flow of those costs was going to go.

On the acquisitions, the two at KIT and at Global, can you talk may be about how the three combined added to earnings in the quarter? Were they accretive?

All were accretive. Global was accretive, just slightly, in the first quarter, but we were certainly pleased to see that being the first quarter under our ownership. So, we were quite happy with all the acquisitions.

Can you breakout maybe how much those three added to your earnings together in the quarter?

I don't think we'd disclose that.

Okay, fair enough. And then last question for me. Neal, you referred a little bit to the operational changes that have been made at KIT to help drive better profitability there.

Can you maybe expand on that a little bit and talk a bit more about what you guys have done to sort of change the way you are approaching the business at KIT? And how you expect those changes to impact your operating margin moving forward?

Well, I think that the major change that we've made, Matt, is really a realignment of our organization. To move from a branch-centric organization to -- where we had integrated operations, customer service, and sales in each branch, to really a focus where we have 13 customer support centers so that we can provide a higher levels of support to our customers and still do it on a focused, geographic basis.

To be able to have a greater percentage of our people now focused in sales and inside sales/customer support roles so we get essentially more face time or phone time with the customer and higher levels of -- higher percentage of our people working directly in business development and sales opportunities.

And then continued investments in our IT and people infrastructure, both in our Fort Wayne processing center and certainly across the board with investments such as voice-over-IP technology to help support our customer support centers. And also improvements to our information technology to make it easier and faster for our people to work with.

Those were things that we really identified to enable us to get increased operating leverage from increased sales and also so that we did not have to increase our headcount at the rate that we normally would in a recovery. So, those are all of the things that we have done to make sure that we can demonstrate concrete steps towards that 7% goal. And I feel that, certainly, the first quarter of this year was a good example of that progress.

Okay. So, the right way to think about this, Neal, is you guys did not obviously reduce headcount in this process. What you have really done is enhanced the operating leverage inherent in the model going forward?

That's right. Because if you go back to 2009, we did reduce our headcount in the Kaman Industrial Technologies. I don't remember exactly, Matt, but I was probably between 9% and 11%, and we have not added people -- we have been able to restructure and not add nearly the number of people back into the organization that we would have if we had been in our old structure.

Okay, thanks. Very helpful.

You have a follow-up question from the line of Pete Skibitski representing SunTrust. Please proceed.

Hi, guys. Just wanted to talk about cash flow for a minute. On the payment to Australia in the quarter, the $15.5 million, can you tell us how much you received from your counter-parties and then maybe just verify for us how much is left to go this year? I assume maybe it is $12 million.

The next payment is March of 2012 and there is another payment March of 2013. The total of them is around $12 million US.

Okay.

The hedge, the payment we made this March in Aussie dollars was AUD26 million, that translated to $15 million after our hedge.

Okay, so $15 million net.

Yes, US.

And the $12 million, is that a net figure that you are giving, an expected net figure?

It is actually about $9 million net.

$9 million net. Okay.

Right.

Okay. So, that is between the two years. So, I guess incrementally you should have a little bit a cash flow tailwind going into the next year, all else equal?

That's true.

Okay, okay. And then just wanted to ask, because we saw a lot of this this quarter on the defense side, did you guys have any impact from you this quarter from the continuing resolution?

Pete, I don't think that -- we would see it reflected through demand from our customers, for example, Lockheed Martin, et cetera, but I don't think that we could have a good window as to a direct impact of that.

Okay. Okay, understood. Thanks guys.

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

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.