Kaman Corp (KAMN) 2012 Q4 法說會逐字稿

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

Good morning. Welcome to the Kaman Corporation fourth quarter and full year 2012 conference call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President, and Chief Executive Officer, and Bill Denninger, Executive Vice President and Chief Financial Officer.

Before we begin this morning, please be advised that this call my contain certain forward-looking statements such as projections of revenues, 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.

Additionally I will note that our discussion today will include references to certain non-GAAP financial measures. Reconciliations to these non-GAAP measures to our GAAP financial statements have been included in our earnings press release, as well as a presentation which has been posted our website, www.Kaman.com. With that, I will turn the call over to Neal Keating. Neal?

Thank you, Eric. Good morning, and thank you for joining us today. Overall, we delivered a good performance in both the fourth quarter and for the full year of 2012. Adjusted earnings per diluted share were $2.18 for the year, and $0.61 for the fourth quarter. Full year sales reached a record $1.6 billion, and for the first time our Distribution segment exceeded $1 billion in sales. Each segment increased its full year profit contributions, with Aerospace delivering a $6.9 million, or 7.9% increase in operating profit dollars, while Distribution and operating profit dollars increased $4 million, or 8.3%.

In Distribution, sales from continuing operations were up 8.8% for the year, and 8.6% in the fourth quarter. Full year growth was provided by acquisitions with organic growth essentially flat, as we experienced a slowdown in the second half of the year and a very weak December. The slowdown is macro related, but has impacted each of our end markets differently.

Important end markets that have exhibited weakness include coal mining, semiconductor, solar, food processing, pharmaceuticals, and government sales. Performance of these markets have been somewhat offset by strength in primary metals, and we have begun to see some improvement in cement and housing-related industries, as well as power generation, water infrastructure, and waste water treatment. Sales weakened as we progressed through the fourth quarter, and December sales seem to have been impacted somewhat by the timing of the holidays, which we believe resulted in more extended plant shutdowns than is typical. While we have seen a slight sequential uptick in January, our organic sales were 6% below January 2012 levels.

Given these lower sales levels, we are taking a number of management actions, including facility consolidations and headcount reductions, which will better match our cost space to current revenues. These actions will enable us to improve profitability for the balance of 2013, and to deliver improved operating leverage as organic growth returns. Looking back, despite the industry-wide slowdown we experienced late in the year, 2012 was still a year of significant progress for Kaman distribution. Strategically, we have transformed this segment into three robust product platforms which differentiates us in the marketplace, and significantly increases the size of our served market to $35 billion.

Our national reseller relationship with Parker Hannafin is progressing, and during 2012 we successfully converted much of our existing fluid power business over to Parker. As expected, this resulted in flat year-over-year fluid power sales, but positioned us for growth in 2013. And in December of 2012, we announced another significant step in repositioning Distribution, through our national agreements with Schneider Electric. This agreement provides command with a broad line of electrical components and automation products that we will now be able to offer to both our MRO and OEM customer-base. SchneidAir is a global leader in automation, control and energy management, and we are very pleased to become their partner in the US market. We recognize that based on our current conditions, 2013 will be challenging for our Distribution business, but our confidence that we have built a strong foundation of differentiated products and services that will enable to us accelerate our growth as markets recover.

In our Aerospace segment, adjusted sales were up for the year by $30.9 million,or 5.6%, despite a $53 million headwind from lower BLACK HAWK tax hits, unmanned K-MAX, and missile fusing revenue. The improved performance was driven by the JTF program, which achieved 27,000 unit deliveries for the year. Record sales for our Baron product line and double-digit growth in Composite structures. During the year, we also secured several program wins, including new composites work in the UK, continued success on new aircraft platforms for our bearing product line, and continued foreign demand for the Joint Programmable Fuze.

The performance of the two unmanned Kaman aircrafts in Afghanistan continues to be extraordinary, the aircraft are approaching their 1,000 mission mark, and continue to deliver an innovative, reliable and low-cost alternative for cargo resupply. We are pleased to report that this performance has led to several recent recognitions. These include being nominated for the prestigious Collier Trophy, the greatest award in aviation, named to Popular Mechanics Best of What's New Compilation, and a recent profile on FOX News. Together with Lockheed Martin, we continue to work with the services regarding the future of the program, and our confidence in the value we can deliver.

Sequestration is clearly at the forefront of discussions today in Washington and across the country. While the 2-month delay enacted by Congress did provide a short-term reprieve, it now appears more likely to happen. However, there is still little clarity on how cuts will be implemented, so it is difficult for us to predict specific program impacts, or the timing of those reductions. What is clear is that we still expect to be able to grow our defense-related revenues in a declining defense spending environment.

We are maintaining our $20 million to $25 million estimate for a full year impact of sequestration. So an impact of less than 2% of expected consolidated revenues for 2013. We also recognize that we are going to be in a environment of lower defense spending the coming years, and we are pleased that over the past three years, we have grown the commercial portion of our Aerospace business to 40% from 28%.

As we look at 2013, we expect further improvement in each of our businesses. In Aerospace, we expect our sales to come in within a range of $620 million to $635 million, or up 7% to 9%. This growth will be driven by the contributions of the AH1-Z program, Composite structure programs, bearings, and anticipated revenue from the sale of our SH-2G aircraft. Larger than anticipated impacts from sequestration or delayed recognition of SH-2 revenue would cause us to come in closer to the lower end of the sales range. We expect operating profit margin at Aerospace to be between 16% and 16.5%.

For Command Distribution, sales from continuing operations should grow by 7% to 10% to a range of $1.08 billion to $1.12 billion. Sales growth is expected to come from acquisitions completed in 2012, and accelerated organic growth in the second half of the year. We expect the operating profit margin to grow year-over-year to a range of 5.2% to 5.6%. Even at the low end of our sales and profit margin percentage ranges, we expect higher contribution of operating profit dollars from each business during 2013.

And now, I would like to turn the call over to Bill for some additional color on the numbers. Bill?

Thank you, Neal. As Neal said, I would like to walk through the numbers in a little more detail. Fourth quarter and full year results havebeen impacted by the sale our Canadian distribution branches which are reported as discontinued operations, and by several adjustments in the Aerospace segment. We have prepared a number of non-GAAP reconciliation tables as Eric referenced, and you should refer to those as I plan to discuss the adjusted numbers.

Please turn to Table 1 on page five in our presentation, so that I may walk you through some of the adjustments in Aerospace. During the fourth quarter, we resolved a claim with a customer relating to a contract termination that was several years old, and as part of the settlement we received cash of $2.5 million which was recorded as sales. We have backed that to arrive at adjusted Aerospace sales of $578.3 million for the year. The settlement also caused us to write-off program related inventory of $5.8 million,vetted against a settlement received from the customer we took a charge of $3.3 million which has been added back to operating profits as an out of period item in our reconciliation.

You also note in the Table that we recorded severance in the Aerospace segment in the fourth quarter of $455,000. This was a severance that we discussed in the third quarter which at the time was reported in corporate, but was allocated to Aerospace in the fourth quarter. In December, we sold our seven Canadian distribution branches to Wajax, and entered into a strategic alliance called Sourcepoint Industrial, under which each organization will support the other in its own marketWith a breadth of Wajax's footprint in Canada, we can now offer our US-base customers service across all of Canada. Likewise, we will be able to offer Wajax customers in Canada who have operations in the US our services from more than 220 locations here.

I would like to run through some of the numbers related to the Canada transaction. Please turn to Table two or Table three on page seven in our slide presentation, which is in US dollars. You will note that Canadian branches generated $20 million in sales in 2012, which have now been classified as sales from discontinued operations in our financial statements. The operations divested recorded an operating loss of $1.1 million in the fourth quarter, that was primarily the result of the sale triggering a pension funding requirement. We have identified these costs in the line titled Costs Associated with Disposal of Discontinued Operations. When you net these two lines together, you will see that Canadian operations generated operating profit of about $400,000 in the fourth quarter, and $1.6 million for the full year. The sale generated cash proceeds of $8.7 million before tax.

Moving on, our cash flow performance was stronger than expected in the fourth quarter and for the full year. Free cash flow from continuing operations was $34 million in the fourth quarter and $52 million for the year, for a conversion rate of 96%. This reflects cash from collections from the strong performance of the JTF program in the second half, lower receivables of Distribution due to lower Q4 sales, collections on several other larger programs, and a focus across the organization on working capital.

Neal reviewed our 2013 outlook for each of our segments, and now I would like to provide additional details. We expect a significant imbalance in our quarterly performance during 2013, starting with a very weak of Q1, which we expect will generate only about 10% of full year earnings, and then we should see a sequential improving sales and earnings as we progress through the year. This Q1 shortfall is due primarily to negative organic sales growth, and the restructuring cost of $2.5 million to $3 million at Distribution. We expect to fully recover those costs and then some during the latter quarters of 2013. Lower sales volume at the beginning of the year on fuzing and composite programs also are expected to impact a weak Q1. While the sales and balance will not be quite as dramatic as net earnings, we expect sales to be down slightly on a sequential basis from Q4 2012 to Q1 2013.

Our effective tax rate in 2013 should approximate our normalized rate of 35%. The tax rate was lower in the fourth quarter of 2012 due to the reversal of reserves for unrecognized tax benefits related to the expiration of certain statutes of limitations. The cash flow in 2013 is expected to be between $35 million and $40 million after a continued high level of CapEx of $40 million to $45 million, and a $10 million expected contribution. The 2013 CapEx plan includes about $12 million for IP projects in both segments, and about $8 million for a new facilities for our bearings in Germany to support growth there.

In summary, 2012 was another good year for Kaman, and we are anticipating continued growth in both sales and profits in 2013. Thank you, and I would now like to turn the call back over to Neal. Neal?

Thanks, Bill. Overall, we closed the year on a strong note, with a solid quarter and good performance from both of our businesses. No doubt, we are facing near-term challenges. We have built a strong team to manage through them, and have positioned the Company for continued growth and improved profitability.

Finally, I would like to welcome Scott Kuechle, the former Chief Financial Officer of Goodrich Corporation to the Kaman Board of Directors. We are very pleased to have had Scott join us last week, and we know that his financial expertise and experience building Goodrich into one of the premier global suppliers to the aerospace industry will be invaluable in the future.

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

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

(Operator Instructions). Our first question will come from the line of Arnold Ursaner.

First question regarding the significant imbalance in Q1, two very specific questions related to that. The AH-1Z, depending on when you had tooling costs, did that hit in Q4, or will that hit in Q1? It is obviously dependent on your first delivery.

Arnie, we are expecting to ship that probably in March, maybe April. Right now the deadline, or the targeted shipment date is March.

So the cost for tooling is embedded in the Q1 view?

Yes it is.

Okay. Also related to SchneidAir, you will be stocking products at various locations in the US in Q1. Is the cost of that embedded in your guidance?

You mean inventory costs?

Yes. Yes, inventory costs, or other expenses to roll it out?

Yes, that would be built in our plan, yes, sir.

Two more quick questions or JPF. You shipped 27,000, but I thought your production capability was less. I assume you had inventory, or have you been able to increase your production capability in JPF?

Arnie, we say that our production capability is about 24,000 units at the high side, but working extra shifts, we are able to up that some, and that is what the team was able to do really across the second half of 2012 to meet customer demands.

Okay. Final question is a quick one on Parker. You indicated it had 19.4% growth in the year, but it was more than offset by declines in your other FluidPower brands. When do we anniversary that?

Now.

Are you hopeful that you can continue to have solid double-digit growth from Parker?

Absolutely, Arnie. We recognized going in that we were going to have the high hill to climb in converting accounts from competitive lines that we had been promoting for many years to the Parker line, and that was the main focus of our activities in conjunction with the Parker field sales organization during 2012. Now we are pleased with the progress, and as importantly, Parker is pleased with that progress, and we think we now have a firm foundation on which we can grow in 2013. We considered that we would be flattish during 2012,and begin to grow in 2013, and that continues to be our expectation.

Thank you very much.

(Operator Instructions). Your next question will come from the line of Edward Marshall.

Yes, I just had a couple of questions surrounding the guidance. How are you doing, guys?

Good, Ed.

The industrial sales growth that you project for 2013, looks like organic is about 1% to 4%. Obviously, Zeller is in that number, in the full-year number as well. Are there other future projected acquisitions related in that number, or is that 1% to 4% all organic?

The organic in terms of our internal plan is at about 2.5% are there are no additional acquisitions assumed in our outlook.

Then on the Aerospace side, you mentioned a $20 million to $25 million impact from sequestration. Is that included in that number, or if sequestration was to go through, we would actually pull that out?

That would bring us in at the lower end of our sales range if sequestration were to take full effect.

Okay. You mentioned $0.06 to $0.07 of restructuring, or at least that is the after tax impact of $2.5 million to $3 million in the first quarter. Assuming that 10% run rate, that is included in your guidance, correct?

Yes, it is.

Okay. Thanks, guys.

Your next question will come from the line of Matt Duncan.

Good morning, guys.

Good morning, Matt.

Neal, I want to dig in on KIT a little bit here. I appreciate the color you gave us on how that looked through the quarter. Sounded like January started a little bit soft, too. You called out the holiday timing is an impact inDecember. Is there any way to quantify the impact the fiscal cliff may have had there?

I think, Matt, that is a little bit difficult. But the way we characterized it, we saw the fiscal cliff really impacting us in a couple of different ways. I think that everybody, our suppliers, our competitors, all talked about deferred capital spending at our customers, and that impacts both our MRO segment, Matt, as well as our OEM segment, because if customers aren't buying equipment and installing it, it hits us in both areas, and that is what we saw in the fourth quarter.

Interestingly we had our MRO segment had organic growth in the first and second quarters, as well as into the third quarter. It was the third quarter that we really saw a dramatic decline in other OEM business, not only for US customers but for export businesses as well. We saw a dramatic decline in the third quarter in our OEM segment, and that continued into the fourth segment. In fact, overall for the year, our MRO segment was up just a little over 5%, so it is hard for us to break down what the timing of the holiday and the fiscal cliff impacts were. But we were down in December of this year. Last year we were up, so that was a little bit more difficult to comp for us as well.

Neal, you said January was down about 6%. What were the months of the fourth quarter, what did those look like as you ran through the quarter?

Bill has got it.

October with were down about 3.8% again, this is organic, same day sales, on November down 5.5%, then December down 9.4%, so we were down about 6.5% for the quarter.

So it has bounced back a little bit in January. Is there any way to look at what that trend looks like so far in February?

We think it is very close to the trend that we saw in January. We haven't closed the books yet, but that is the way it is looking.

Okay. Last thing for me, Neal, you called out cost cutting that you are doing at KIT. Can you talk a little bit about more how many branches you may be looking at closing, and at what level of headcount reduction?

Then looking at the 2014 goals that you guys had laid out, obviously, the slowness in the macro will make those a little bit tough. Do you still have those same goals? Have you attached a new timeframe to them? Just give us a little bit of an update there as well.

Matt, I will back up to the first part of the question, how I would like for you to characterize the branch actions is really going to be consolidation. Currently, we are not planning to exit any of the geographic markets that we participate in. There might be a small branch where that would be the case, but that is not really what we are looking at here. As you know, we have done a number of acquisitions in recent years in areas where we have other locations, so we are looking to consolidate offices. My preference would be not to name those locations right now, but it is really going to be in a geographic area where we have a number of branches, and we are able to consolidate those, that is really where we are going focus. I am going to stay away from quantifying the people side of the equation after we have completed all of our actions, we will come back out and be able to provide a much more detailed assessment of those actions.

Okay.

Then on your 2014 goals, we thought about that a lot. We are sitting here right now, we may modify those a little bit in the future. You are absolutely right, that the recovery has been much lower than we would have anticipated when we set those goals back in the 2009 timeframe. We can all look at 2% or lower GDP rates in that period of time, and certainly that is impacted the market and therefore our organic growth part, but we have done well on the acquisition side. We have to focus and improve our organic growth rates, and we are not stepping away from those yet.

Okay. Thanks, Neal.

Your next question comes from the line of Jeff Hammond.

Good morning, guys.

Good morning, Jeff.

So I just wanted to dig in a little bit here on the Aerospace bridge. It looks like you are calling for 7% to 9% growth. If you could just walk through some of the big buckets of growth, because it seems like the JPF numbers that you give in the 10-K suggest a tough comp there. It seems like just overall defense spending is a headwind. BLACK HAWK seems like a headwind. Maybe just walk through some of the big pieces of growth, and maybe how much you have in there for the Australian helicopters, and anything for unmanned K-MAX would be helpful?

Alright, we can do that. Page 1Z we are looking at a total number of shipments of 6 cabins this year, that should be around $8.5 million. 777 fixed trailing edge, we did 94 in 2012, we are looking at 99 in 2013. The value per ship set is around $300,000. A-10, 25 in 2012, 34 in 2014, ship set value at around $450,000. JPF, while the number of units is going to be down, we have about 20,000 in our plan, a significant portion of them are DCS related which means typically higher price. So we are not necessarily looking at a volume drop there, SH-2GI we have around $20 million in the plan for the end of the year. Specialty bearings, sales up mid-single digits, composite sales up about 10%.

So you mentioned the SH-2G, that comes the latter part of the year?

Yes.

So you are anticipating that you are selling some but not all?

We think it will be a two to three year sale process. We do have to modify the aircraft. We are hoping to have a signed contract probably in Q2, and the we hope to book some shipments towards the end of the year as I said.

Then just to be clear on Distribution. The guidance, the full-year guidance includes the $2.5 million to $3 million charge that is in 1Q?

Yes, sir.

But when you report, you will kind of spike that out as a one-time item?

Right.

Can you just, it seems like you are off to a slow start, you have got fairly muted growth, core growth for the year. If you include that charge, you have got pretty healthy margin expansion, underlying margin expansion in KIT. Can you just walk through how you get the higher margins in a pretty muted demand environment?

Jeff, it will be driven by a couple of things. As you know, our outlook for the year includes the contribution of acquisitions that we did in the second half of 2012. Those acquisitions are higher than our average margin, which certainly helps us. We have been able to increase our gross margin as well during the year, which helps us, but the consolidation in headcount reductions that we are undertaking in that business are really what is going to better match our cost structure as we said with our current revenue levels. We do anticipate that we will have some organic growth coming in the second half of the year, and we are really going to benefit from that operating leverage in the second half of the year to improve the operating performance and margin in the business.

Okay. Just on the M&A pipeline, I think the hope was after a year with the first Parker deal you would be able to reassess, and maybe there would be more opportunities there. Can you just talk about pipeline in general within distribution?

Sure. Jeff, we will talk about the Parker side first. In fact, we have met with Parker management recently, and they have been very supportive of our increased acquisition efforts, in fact, have helped us in those efforts, and we expect that in the first half of this year we would certainly hope to be able to talk about additional Parker locations that we have been able to acquire and bring into the command portfolio of businesses. Also if you will, in the legacy MRO and power transmission business, we have a number of smaller deals that we are very active with right now. Of course, based on valuation between us and the buyer, you can never be sure. We also believe that with the acquisition of Zeller, and the entry into more of the electrical and automation market, that now some of those distributors will come on our radar screen as well.

Okay. Thanks, guys. Great.

Your next question comes from the line of Peter Skibitski.

Good morning, guys.

Good morning, Peter.

I want to make sure I understand Distribution organic growth in the fourth quarter. Did it decline for all three of your platforms in Distribution in the fourth quarter?

I think the way we would look at it from a product perspective, I would expect that our FluidPower was probably flattish. Our bearings and power transmission was probably where we went down. If you looked at some of the SKF announcements or Timken announcements for the fourth quarter, they were down pretty markedly. For us, we have a big positive impact year-to-year on the electrical and automation side, simply because of acquisitions. I would say that we were probably flat on organic probably in electrical, but I don't know if we have that level of detail, Peter.

Okay. And then your 2013 assumptions, are you assuming all three platforms grow organically? Does one grow faster than another? Can you give us some color there?

Sure. We are assuming that they would grow organically, simply because of the relative size of them. I would expect that our FluidPower product lines would probably grow more on a percentage basis, probably followed by our electrical and automation lines. Just given the underlying dynamics of a lower growth power transmission motion control market, I think that would probably be the lowest of the three growth areas, hence, why we have really focused our acquisition efforts in the higher margin and higher growth FluidPower and electrical and automation markets.

Understood. Then can you update us on how the integration of Zeller is coming along, and maybe what its revenue contribution is expected to be in 2013?

From an integration prospective, we are very pleased with Gary and the entire Zeller team, and the capabilities they have brought to us. We have had a number of joint programs that they have done to enable us to, historically we have done a fair amount with water and waste water treatment plants, in terms of providing equipment. Now with the Zeller team and their capabilities, we are able to provide entire engineered systems, so we are very pleased with the pipeline of synergy sales opportunities, and in fact, some early orders leveraging both Zeller and the Florida Bearings acquisition that was also done in the second half of 2012. We feel very good about that. I know that when we acquired Zeller we said that they were about $80 million in sales, and we would, we typically, after we acquire, Peter, we don't break that out after we acquire them, but we certainly expect positive growth for that business in 2013.

Okay, thanks very much.

Your next question comes from the line of Steve Levenson.

Thanks, good morning everybody.

Good morning, Steve.

Could you talk a little bit more about the alliance with Wajax, and how significant you think that might be, maybe not so much in 2013, but looking forward? If you can give us detail about when you think you will really begin to see benefits, that would be great?

Sure, Steve, we can. We have actually worked with the Wajax management team for a number of years where they supported plant locations for our national accounts in Canada, where we really didn't have any coverage. We took a step back and decided that there wasn't a company that we could acquire in Canada that would really get us to the scale that we felt we needed to be at to be competitive in that geographic market. It became clear to us that a relationship with Wajax really made sense, and that was the genesis for the concept of the alliance, Sourcepoint Industrial.

Now we feel that we have really leveled the playing field, if you will, for us to be able to effectively compete for customers with locations in both the US and Canada through this alliance with Wajax. If you put it into perspective, before we had seven branches in Canada. Now we are teamed with Wajax, they have 65. Our combined businesses now have over 250 engineers, $250 million in inventory, so we feel that it really provides us a much better offering for those accounts, again with locations both in the US and Canada for Wajax, and also for Kaman. We would expect that we would be able to make up the, you are right, it will start slowly like anything does in this area, but we would expect within two to three years that we would be able to offset the $20 million of lost revenues from the Canadian operations. Obviously with a higher return on invested capital, and it could be significantly higher than that if we are successful with the number of large, particularly mining accounts.

That is good detail, thanks a lot on that. Can you also talk a little bit about bearings? I guess I thought you might have a little bit more than mid-single digit growth in 2013. Is there something holding it down? Is it slowness or inventory in the supply chain, or are you just being maybe a little conservative?

We saw a fall-off in bearing order rates in the second half of last year, it didn't go negative, I think they were negative in the third quarter, slightly positive in the fourth quarter, so based on that downward trend in incoming orders, we think single-digit or mid-single digit is reasonable. We hope there is some upside there, to be honest.

Okay. Thank you very much.

Thanks, Steve.

Your next question comes from the line of Scott Graham.

Good morning.

Good morning, Scott.

Piggybacking on that last question, maybe more as to the why. I understand your reference to Timken, certainly we have seen that as well. Why do you think that segment of your distribution business has weakened into the fourth quarter? Certainly, fiscal cliff was a factor here, but it looks like the industrial environment is a little bit better post the fiscal cliff and that category doesn't seem to be seeing it yet. Why would you say that is the case?

Scott, a lot of this business is replacement business, hence, maintenance repair and operations. I think in the fourth quarter, plant utilization was down. We did see extended shutdowns. If they are not running the plants, we are going to have lower maintenance and repair. We were in the same camp as you were where we expected that there might be a significant bounce back after the first of the year, and we saw a slight uptick and another slight uptick in February, but not the kind of bounce back that a lot of people were talking about in the fall timeframe, and now people are talking about it occurring in the second half of the year. I think it has more to do with a combination of lower plant utilization combined with to some degree, technological substitution as well, where people are going to more FluidPower or electrical-based motion control, as opposed to historical mechanic motion control.

That makes as much sense as anything I have heard. On the restructuring for the first quarter, is that going to really kind of hit the more of the legacy business, or is that kind of spread out so that your three platform distribution businesses in fact reach separate platforms? A little bit more on the specifics of that?

Scott, we are not going do peanut butter across the board. It is going to be a combination of how we are doing in geographic markets, and how we see the potential for future growth in those markets. I would expect it will certainly impact all three product platforms, but it is not going to be a peanut butter approach.

Fair enough. Last question is the free cash flow has done a continuing improvement versus where it was a year and a half ago. It has been actually a terrific comeback on a trailing 12-month basis. I am just wondering, this is probably more for you, Bill. What are some of the tenants of that, particularly in the second half, it was a really good beginning of the quarter?

I think that the key drivers there were good collections, and higher shipments on JPF where we get progress billings. There was an across the company focus on Receivables collections late in the year. The lower sales of Distribution did result in lower Receivables, slightly higher inventories. It came from a number of different locations. It wasn't one big driver. Those were really it.

Alright. Thank you.

Your next question will come from the line of Derek Jose.

I was wondering if you guys could touch on the tax rate for the fourth quarter a little more, in terms of that one-time benefit? Is there anything more specific than what you mentioned?

There were two or three situations where we had reserves set up and statutes of limitations ran out, and we no longer needed those reserves. We took them through to profit.

Okay. In terms of going back to the Accounts Receivables, how much of that was, maybe I missed this, but pulled forward from the first quarter of 2013?

It is roughly $10 million to $12 million of Distribution is the kind of number that we were looking at.

There was none from the Aerospace that was pulled forward?

Not pulled forward, no. Distribution to the extent that sales moved out into the first quarter, so to collections.

So then if you say reverse that, and you pulled it forward. Was fourth quarter actually, if you kind of exclude the collections, and you just look at the actual demand, notably weaker and then that first quarter may be more of a significant improvement if you had collected those in the first quarter over the fourth quarter?

Sorry, I am not really following the question.

Sure, I am sorry. In terms of actual demand. If you had switched the collection from first quarter to fourth quarter, is fourth quarter actually weaker than what you were saying ,and first quarter actually might be doing a little better if the sales were collected in the first quarter rather than the fourth quarter?

Sorry, I am still not following. Maybe we can take that offline.

Sure, no problem. Have you been approached by Parker again for any situation similar to the Catching? I know that anniversaried, and I know that part of the agreement had to do with them, you guys being a preferred purchaser?

Derek, you are correct, and during the fourth quarter of last year, we met with members of the Parker management team, certainly to review our performance. We were performing well as judged by both Parker and Kaman, and they have supported us in continuing to acquire a number of Parker distributors, and depending on if we are able to come to an agreement on valuation, we would expect to be able to add some Parker locations during 2013.

If I remember correctly, you could only add one every year. Has that changed? It seems like you are indicating that there may be an opportunity to add more than one Parker distributor?

That is true. Derek, I think how we would characterize it was that it would take a year before we would be able to do another one, I think for a couple of reasons. Certainly, we needed to prove to Parker that we could provide the benefits that we thought we could, and also for to us bring our people up to speed quite frankly on all of the Parker product lines, and that was not an insignificant task during the year. Our expectation is that still would be multiple Parker distributor locations that we would be able to acquire of varying sizes. There are a number of smaller ones that would fit quite well. We would certainly also be anxious to have a larger transaction as well in the size range of another Catching, or even larger.

And this is currently not in the numbers I am assuming?

That's correct. We don't have any acquisitions in our numbers, Derek.

Okay. But this is definitely a change from 2012, given it seems like that the size of the Parker opportunity, not even if you exclude the organic growth potential, which seems like it is double digits, it seems like the Parker opportunity this year is even greater than it could have been a year ago?

With acquisitions, that is true, yes.

With acquisitions, absolutely.

Okay. Thanks, guys.

Great. Thank you, Derek.

Your next question will come from the line of Matt Duncan.

Just Bill, I want to follow-up a little bit on the guidance to make sure we are understanding this correctly. The first quarter you will be down a little bit from the fourth quarter on the top line, is that correct?

Correct.

It sounds like in Aerospace the year starts pretty slow just like it does in Distribution, and there is a build from there. Maybe if you can give us a little color on how much of revenues and earnings you expect on the total Company to record the first half of the year versus the back half of the year, just to kind of help us get the shape after the first quarter?

I can tell you on the profit side, and that is about 40% in the first half.

Okay. So 30% of full-year profit then would have to come in the 2Q, right, because you said about 10% of profit would be in the 1Q?

Roughly true, yes.

I guess would it have that same sort of, it sounds like then maybe each of the last three quarters of the year from an earnings perspective will be fairly similar at about 30% each?

Yes.

Okay. In terms of revenue, any thoughts on how quickly the build may occur?

I don't have that number in front of me.

Okay. Fair enough. And then on the impact of Sandy in the quarter. Obviously, you guys would have had some impact, especially in KIT, where I know you have got a pretty heavy focus in the Northeast US. is there any way to think about how that impacted you guys? Have you seen any material impact in the first quarter from the winter storm that hit a couple of weeks back? I know it hit Connecticut pretty hard.

No, Matt, interestingly it hasn't. If you go back to Sandy, we did an analysis after that, and we knew that we lost some business because plants were shut down, then we felt we gain it back so we were flattish, but we didn't see a uptick. Unlike are the some of the suppliers that you are familiar with in the utility industry, where a storm impacts their revenues pretty significantly, because the utility rebuild requirement, and the timing with which those happen. We haven't seen a lot and I can't say we have seen much in the first quarter either.

While we had a pretty significant storm here back a few weeks ago, there wasn't a lot of damage to facilities. We didn't have the roof collapses and other things, while traffic was shut down for a couple of days or three days, it was primarily over a weekend, so we shut down a little bit early on Friday, and we were open Monday morning, and I don't think we were atypical.

That is helpful. Last thing for me, Bill, on the guidance. You had given us the segment guides and a lot of line item guide to get to an earnings number, but I want to make sure I am interpreting it correctly it looks like the EPS numbers roughly 220 to 250, is that in the ballpark?

I would not argue with you.

Thanks guys.

Your next question comes from the line of Jeff Hammond.

Hey, guys, maybe just to close the loop on Aero. Can you talk about some of the bigger headwinds from a line item, maybe touch on BLACK HAWK and anything else that is a drag?

BLACK HAWK we are looking at currently about 116 cockpits this year. We did 124 last year. Other than just general sequestration, I don't see any other significant headwinds.

Okay, great. Can you just talk about the big moving pieces in CapEx? Looks like that is bumping up quite a bit?

Yes. Really, the single biggest driver is about $8 million for a new facility in Germany to cover the growth we are seeing there on the bearings side. Our maintenance CapEx would be probably in the $20 million area, so we have got the IT spend I mentioned of $12 million, another $8 million for the bearings facility, those are really the bigger chunks.

We have got a little bit, maybe another couple million incremental for some expansion here on specialty bearings, on the Bloomfield campus, for specialty bearings as well. That is capital that we look forward to spending quite honestly.

Sure. Thanks, guys.

Thanks, Jeff.

Next question is a follow-up from the line of Edward Marshall.

There is consolidation in the industrial space. You have been consolidating yourself. You mentioned the phrase several times today about agreements on valuation. I wanted to be clear on something. A competitor or a peer, had what I would call an eye-popping valuation for one of their businesses, I understand that it is a different type of distribution business than you are, but I just want to be clear that you are not seeing the type of valuations in the space and not preventing you from further acquisitions going forward?

You are correct, Ed, we're not seeing those eye-popping kind of valuations. We looked hard at that on Monday morning, but that is not anything close to what we are seeing.

Okay. Thanks, guys. Good.

And your next question comes from the line of Peter Skibitski.

Hi guys. Just a follow-up. On the fourth quarter for Aerospace revenue, revenue came in a little bit lighter than your expectations, maybe $5 million to $7 million. Were there a couple of programs that slid out there or could you talk about what happened?

It really was one program and that related to the first shipment on the AH-1Z, which takes with it, I think $8.5 million and that moved into the first quarter out of the fourth quarter.

Got you. Then on JPF, I think at year-end, you had about $65 million in backlog. Are you expecting additional orders maybe in the first half of the year to get to your expectations for the full-year revenue?

Yes. We did announce an order of $35.5 million I think in January, there is another order out there for around $20 million that we are hoping to book soon, and then we have the USG contract, which should generate orders some time in the second or third quarter, so we are in very good shape from a backlog point of view on JPF.

So that $35 million is incremental to the backlog that is in your K?

Yes.

I see, okay. The last question, small question. Can you give us specifically your bearings growth for the year in 2012? Maybe give us a ballpark? I think you were expecting mid-teens, I am not sure if you hit that or not?

It was mid-teens.

It was mid-teens. Okay. Thank you.

Yes, sales growth, and that varies a lot. Those are really a collection of product lines, so between military and commercial, it obviously varies some.

Got it.

We have another follow-up question from the line of Arnold Ursaner.

Just wanted to spend a moment on your margin assumption in Aerospace. You indicated that the BLACK HAWK cockpits should be down, but you also indicated the bearings should be up which is your higher margin business. I am just sorting through the other pieces. JPF, the margin, maybe you will have less revenue in total because you have fewer units, you may or may not, but I would assume the margin of what you are selling there is much higher. I guess I am trying to understand why your margin wouldn't be higher because on an adjusted basis in Q4 you were almost 18%?

Arnie, I think it will be driven primarily by increased volume from start-up programs. Obviously, AH-1Z, the initial deliveries for that are lower margins. We also talked about a significant amount of our growth coming from our composites programs, those are also early production, so also lower margins. We are pleased that we are able to continue to grow that business and expand our commercial mix, but we also have the downward pressure of those new programs coming in at lower than the margins that you talked about, certainly with bearings and JPF.

So what do you think the quantification on the margin hit from start-up costs would be, and are they expected to be completed by mid-year?

I don't know that they will be complete bid midyear, Arnie, because we will have several different programs that will go through qualification and early shipments in the first half of the year, and begin to ramp up in the second half of the year. I think it is going to be a phenomena that we will experience throughout 2013 and that is why we have really put the guidance at the level that we have.

In your mind, is it 100 basis point or more hit to margins in 2013 for the start-up expenses?

That is probably a reasonable estimate, Arnie.

Just take perhaps an extra 30 or 40 seconds and remind us of the balance sheet impact when you make an eventual sale on the SH-2, how that reverses certain accruals that you have made over the past few years?

The 11 aircraft and related equipment are on the books for $53 million, so that would be relieved. We would generate from the sale on an aftertax basis probably around $60 million, $65 million based on our understanding of the current negotiations and that would take place over a two to three year period, starting we hope this year.

And none of that is embedded in your guidance for the upcoming year?

No, we do have about $20 million of SH-2 GI sales in the guidance or outlook.

If you can do $20 million in sales, does that in fact reverse the accruals that you made?

Starts to.

Remind us again of any cash obligations that you have to the Australian government this year?

Right now, it is $6 million Aussie. Okay. You in the past have tried or talked about getting a tax reversal on the losses you had for that program? We actually got it about three years ago and we recorded it.

We had a $6.6 million cash refund from the IRS, as Bill said, about three years ago, Arnie.

Sorry, I forgot about that.

That is alright. We liked that day.

Last question will come from the line of Robert Kirkpatrick.

Good morning. Could you talk about whether the pension is a headwind for you guys in the coming year as well, and whether was there are other corporate costs that we need to keep an eye on?

Pension is actually a pretty good story, despite the trend on interest rates. Our pension expense in 2013 will drop about $1.5 million from 2012, and continue downward. The plan is fully frozen at the end of 2015 because of recent legislation. We are not required to make any cash contributions in 2013. We have elected to do so. We are going to put $10 million in because we think it is the right thing do, but the pension expense will go away starting in 2016, and cash contribution should trail downward as well, hopefully, as interest improves or increase I should say.

Are you expecting higher interest rates for the year in your estimate for interest expense?

No sir, not in 2013.

Great. Thank you so much.

Thanks Robert.

That concludes the question and answer session portion for today. I would now like to turn the call back to Eric Remington for closing remarks.

Thank you for joining us for today's conference call, and we look forward to speaking to you again when we report first quarter results in April.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you again for your participation. You may now disconnect, and have a great day.