Kaman Corp (KAMN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kaman Corporation's First Quarter 2013 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (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, Vice President of Investor Relations. Please proceed.

Good morning. Welcome to the Kaman Corporation first-quarter 2013 conference call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President, Chief Executive Officer; and Bill Denninger, Executive Vice President and Chief Financial Officer.

Before we begin this morning, please note that some of the information discussed during today's call will consist of forward-looking statements setting forth our current expectations with respect to the future of our business, the economy and other future events. These include 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 those indicated in any forward-looking statements due to many factors, the most important of which are described in the Company's latest filings with the Securities and Exchange Commission, including the Company's 2012 Annual Report on Form 10-K, Form 10-Q and current report on Form 8-K filed yesterday evening together with our earnings release.

Additionally, I'll note that our discussion today will include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to our GAAP financial statements have been included in our earnings release, which has been posted to our website, www.kaman.com.

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

Thank you, Eric. Good morning, and thank you for joining us today. Sales for the quarter were $388 million, slightly higher than prior year, and diluted earnings per share were $0.26. Sales were in line with our expectations and earnings were slightly better than expected due to a favorable sales mix of Aerospace programs, which more than offset weaker-than-expected performance in Distribution, where pre-tax earnings were impacted by a $3 million restructuring charge.

Looking at Aerospace, sales were flat with the prior year at $130.9 million. During the quarter, we achieved higher sales of bearing products in JPF fuzes, which were largely offset by lower deliveries of BLACK HAWK cockpits, reduced engineering services revenues, and lower sales for the Egyptian SH-2 and blade erosion coating programs.

Our bearing product lines delivered a solid quarter, benefiting from continued strong demand, including higher sales from large commercial aircraft and several nonrecurring military programs, including retrofit programs for the Tornado and drive shafts for several helicopter models. We have experienced strong top line growth for a number of quarters now, and based on recent order intake rates, we expect that rate of growth to moderate over the second half.

During the quarter, we delivered 4,620 JPF fuzes, approximately 200 more than in last year's first quarter. Our expectation for JPF deliveries remains 18,000 to 22,000 fuzes for the year, down from a record 27,500 delivered in 2012.

Despite the lower deliveries, we expect program revenue to be flat to up slightly due to a higher mix of higher profit direct commercial sales in 2013. This includes deliveries under the $35.5 million order announced in January and a recently awarded commercial order of approximately $20 million for an unnamed customer.

While our backlog increase of $7 million in the quarter was primarily related to JPF. We also have a number of newer programs and sales opportunities in various stages of development. We have increased our business development investment, including the creation of a new sales organization. These efforts have significantly benefited our pipeline with outstanding bids having more than doubled over the last several quarters.

Additionally, we are making initial deliveries, we are ramping up production across a number of programs including the AH-1Z cabin, Lear 85 composite store, 57,000 and 8,000 fixed leading edge, [Trench 700] nacelle panels and the G280 winglet program.

To date, we have experienced little in the way of program reductions or cancellations related to sequestration as the government grapples with its implementation. Until we learn more, we have no reason to change our estimate of an annualized impact of sequestration of $20 million to $25 million.

One concern we do have relates to the furlough of government employees and its resulting disruptions. These furloughs could cause delays in a variety of areas, including contracting, payment processing and approvals. These delays have the potential to be disruptive and add additional volatility to the timing of revenue recognition and earnings.

Our announcement a few days ago that the New Zealand government had approved the purchase of 10 SH-2G(I) aircraft was a milestone for the Company and we expect to be under contract in the next few weeks. As most of you know, five years ago we mutually agreed with the Government of Australia to terminate their program which capped the Company's risks and potential loss from the original contract. However, it did not eliminate our total disclosure.

Now with the imminent resale of the aircraft to a country with a long service record with the SH-2, we are approaching a favorable and final resolution to this program.

At Distribution, sales from continuing operations were up 1.8% with a contribution from acquisitions offsetting a 5.9% decline in organic sales. Further, daily sales have been essentially flat for three consecutive quarters as we continue to experience weakness in many of our end markets, each of which has been impacted differently by market conditions.

But we believe there are reasons for optimism. Daily sales appear to have bottomed in January and our sales comparison trends improved on both a year-to-year and sequential basis as we moved through the quarter.

We have also begun to see some improvement in our OEM markets which were the first to turn negative. This is supported by several months of favorable book-to-bill ratios in growing backlog in parts of the segment. When we look at our 10 largest markets on a year-over-year basis, five are up and five are down. The up markets include primary metal manufacturing, paper and non metallic mineral product manufacturing. Down markets include food, beverage and tobacco and mining.

Encouragingly, nine of our top 10 end markets were up sequentially from Q4 to Q1 with mining the only exception, demonstrating a low single-digit decline. We also sent more confidence in the market place, all of which lends support to our outlook.

However, based on our assessment of market conditions during the fourth quarter of 2012 and January of this year, we took a number of management actions later in the first quarter including facility consolidation and headcount reductions to better position the Company going forward. These actions will enable us to improve profitability for the balance of 2013 and to deliver improved operating leverage as organic growth returns in Distribution.

As a final comment, I'd like to address our CFO transition.

Two weeks ago, we announced that Bill has decided to retire and the Board has appointed Rob Starr as our next Chief Financial Officer. Rob is already transitioning into his new role and we expect the handover to be seamless. Over the last several years, we developed a succession planning process and plans for key positions throughout the Company. Bill has built and developed an outstanding team of finance professionals throughout the organization and we were pleased that we had qualified internal candidates for the CFO position. Rob has been our Treasurer for this last four years and has been a great addition to our management team.

For those of you who have not yet met Rod, I am sure you will have the opportunity over the coming months. I know he will be an outstanding CFO and I am very much looking forward to working with him in the years to come.

Before I hand it over to Bill, I would like to say a few words about him. Bill tried retirement once before. Lucky for us he wasn't ready yet and we were able to convince him to join Kaman. Shortly after I became CEO we lost several long-serving senior financial executives through retirement and Bill's past experience as the CFO of a publicly traded company was very reassuring to me at the time. That experience has proven extremely valuable over these last five years.

All of us at Kaman will miss Bill, but I know now he is ready to enjoy his retirement. I thank him for his service and wish him health and happiness in his future adventures.

With that I would like to turn the call over to Bill for his last call as Kaman CFO. Bill?

Thank you, Neal. On our last earnings conference call, we provided an outlook for 2013 and indicated that we expected to earn about 10% of that full-year outlook in the first quarter. At $0.26 per share, we did slightly better than that. Results for the quarter include $3 million or $0.07 EPS in costs, the higher end of our estimate related in other restructuring and distribution. These costs, which are included in the segment operating expenses, consist of severance and facility consolidation expense.

Distribution operating margin in the quarter was 1.8%. Excluding the restructuring cost margin would have been 3%. We expect to begin recognizing about $3 million of expense savings per quarter from the restructuring beginning in the second quarter. This combined with higher anticipated organic sales volume and the corresponding expense leverage is expected to improve operating margins sequentially as the year progresses.

Cash usage in the quarter was in line with our expectations and we are reaffirming our full-year outlook of $35 million-$40 million in expected free cash flow. Our effective tax rate a quarter was 31%, reflecting the reversal of the reserves related to a favorable state tax title settlement, and annualized and normalized tax rate remains at approximately 35%.

With this release we are reaffirming our full-year outlook. We indicated in February that we expected first-quarter net earnings to be about 10% of our full-year total. As I said we came in slightly better than that and this was mainly driven by the timing of revenue recognition on certain aerospace programs. So we are not raising our full-year expectations.

The revenue mix in aerospace is heavily weighted toward the second half of the year and in Distribution as we said we expect sequential improvement in organic sales growth throughout the year. We continue to expect 60% to 65% of our full-year earnings to be recorded in the second half.

The announcement of the New Zealand Government authorizations enter into our contract for the SH-2G(I) helicopters has generated lots of questions about contract accounting and the cadence of revenue earnings and cash flow. These are questions we are eager to answer; however these elements are still being negotiated. I would like to summarize for you what program information we are able to provide today.

First we expect total program revenue to be about $120 million over a three-year period. The contract is expected to include the sale of 10 aircraft, spare parts, full mission flight simulator, claiming an in-country support over the three-year period. Our 2013 outlook does include $20 million in program revenue, most of which is expected to occur in the second half.

The value of the SH-2G(I) inventory on our balance sheet at the end of the quarter was $53 million, and we do expect most of this to be relieved over the life of the program.

Through the end of April, we have made our contractually required payments of CAD39.5 million to the Government of Australia. Over the life of the New Zealand contract, we expect to make additional revenue-sharing payments of about $5 million to Australia.

Finally we expect after-tax cash proceeds over the life of the program to approximate $60 million to $65 million. In an effort to maintain the program schedule on our 2013 outlook, we have already begun some work under the anticipated contract. While this [does accrete] some exposure until we actually have a contract, it allows us to maintain the delivery dates promised to the New Zealand Defense Force.

Before I close my formal remarks, I would like to make a personal comment. I came to Kaman five years ago because I knew it was an outstanding company and I thought I could leverage my experiences to help make a difference, to help make it even greater and found opportunity to be part of a new management group that was committed to building a stronger, more profitable and better capitalized company, which I believe we have done. I am most proud of the team we have built. That team under Rob's guidance is more than ready to help lead the Company into the future. The culture at Kaman is special and I understood that my first day on the job. I am grateful to have been part of it if only for a short time.

Finally, I would like to thank Neal and the Board for their confidence and support. Thank you, Neal, for the opportunity. We made a great team and we had a great run.

With that I will turn it back over to Neal.

Thanks very much, Bill. Overall, we are satisfied with our start to the year. Our outlook calls for and we are expecting significant operating performance improvement as the year progresses and our team is focused on execution.

We will continue to face near-term challenges, but we have positioned the Company for continued long-term growth and improve profitability. With that I'll turn the call back over to Eric.

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

Arnold Ursaner, please proceed.

Good morning. My questions relate to the margin in Aerospace. Two specific things. One is within specialty bearings you mentioned you had some one-time award or one-time work, perhaps if you can quantify the magnitude of that. And then again related to the margin in Aerospace, depending on if you did sell an AH-1Z in the quarter it would have impacted your tooling which is tied to the first delivery. So could you comment on both of those, please?

I think in terms of the one-offs in specialty bearings, it looks to me to be about $2 million to $3 million in the quarter and the AH-1Z we are not projecting to collect on that tooling in Q3 when we have shipped the third unit. That is a contract terminology.

So, it did not have a negative impact in the quarter as recognizing the tooling, is that correct?

It did not have a negative impact, right.

And the $2 million to $3 million was revenue in specialty bearings although it is obviously very high margin as well.

Yes.

And then just a clarifying question. I think you mentioned in your prepared remarks that as it relates to the contract you would only have approximately $5 million more of payments, US dollars, you would make to Australia. Should we therefore assume that if you do get $120 million of proceeds the balance will go to you?

Well, there are other factors as I said on the opening. We expect $65 million to $70 million roughly after-tax cash proceeds.

Okay. I will jump back in queue. Thanks.

Matt Duncan.

Good morning. Neal, in your prepared comments you mentioned that your sales trends improved a little bit through the quarter at KIT. Is there anyway to quantify sort of the level of improvement that you saw? And what does April look like so far?

We improved from organic sales, Matt, improved about 2% from January run rate to March run great. April, obviously, we don't have final numbers in yet, but we did see continued improvement in the organic sales growth rate. So again that saw some improvement there and also saw improved backlog in our continued improve backlog for the OEM portions of that business as well. So we continue to be encouraged. We would like to see all of it more underlying improvement, though.

Just to clarify, April is a lesser of our negative organic growth than first quarter. But still negative (technical difficulty).

So. Full second quarter probably is still going to be a little bit negative for the organic growth rate and it should flip to a positive in the 3Q, I guess it sounds like, is your expectation.

That is a reasonable expectation, yes.

Neal, is there any way as you look at the timing of the Easter holiday with Good Friday following the last sales day of the quarter? Is there any way to quantify the impact that might have had on you guys?

We actually thought quite a bit about that and there were a few things that added some noise to the first quarter. First of all we had one less sales day. And while that typically wouldn't be a big deal and particularly in our Aerospace business, you and the others that follow us know that sales days are really important in the Distribution business.

So that we think had about 1 -- (technical difficulty) from 64 to 63 days is about 1.5%. So that impacted us.

And I think you are right. The timing of the Easter holiday probably also had an impact. Good Friday was our last business day and although we were open, a number of our customers probably work. So that is not overly helpful when you consider that the last day of the last week of the last month of the quarter is usually our biggest sales day. So we think that that did have a little bit of an impact.

We probably had a little bit of a headwind from the timing of the sale of our Canadian operations. We haven't spun up the [source point alliance] fully yet and finally, I think that we would have our heads in the sand if we think that the restructuring that we went through during the first quarter also didn't impact our performance somewhat. So I think there were a number of factors that impacted first quarter.

And last thing for me and I will hop back in the queue. If I look at your segment margin guidance at KIT, you were at 1.8% this quarter, you are going to need to be, I think, at the low end of your revenue guide, your operating margin would have to be 6.2% the next three quarters on average to get to the low end of that range.

And another way to look at this is if I adjust the first-quarter Op margin to both take out the restructuring charges and give you the benefit of the $2 million in savings on a quarterly basis that you are going to get from those actions, that would put the first quarter at 3.7%. So help me bridge the gap a little bit from both that adjusted 3.7% and the 5.1% that you had last year. To get to that 6.2% you'll need to get into that range. Can you help me think through how you get there?

Absolutely. Matt, you are absolutely right. The first thing that we need is an improvement in underlying organic sales growth rates, because if you go back to the second quarter of last year, we did 5.1%, 5.0%, I think, adjusted to take Canada out and we had a 3.3% organic growth rate. So clearly getting back to that organic growth rate would be very critical to our ongoing improved operating leverage.

Obviously our restructuring costs coming out will give us about $2 million of savings per quarter as you have said. And also, we are expecting to have some improvement in our gross margins during that period of time. So we have looked at our guidance very hard. We have looked at where we are today and your math is correct about what we have to deliver for the balance of the three quarters to get to the 5.2% to 5.4%. But that's clearly still what our stated intention is.

Okay, thanks, Neal.

Jeff Hammond.

Good morning. Back on the restructuring, can you walk through how the $3 million spend turns into $8 million annual cost savings? That just seems like a really compelling payback.

It's strictly savings and salaries and benefits, relative to the initial cost of the $3 million. We took out about 120 people.

And then the facility closers were just some branches?

Yes, branches where we had done acquisitions and found that we could consolidate. I think there were a total of five different situations like that that we accrued for.

Okay and then, you've mentioned some of the distraction and timing, but it seems like over a fairly persistent period of time you are underperforming your competitors. And I just want to understand are we choosing to walk away from business? Are we seeing some share loss? How do you reconcile your growth rates relative to other big competitors?

I will tell you, I don't know that on a growth rate basis as we look at the numbers that we have really underperformed. I think that we have had two quarters of declining organic sales growth while a couple of our competitors were at five when they last reported.

So we are happy to sit down and go through those numbers. But I think what's most important to us is we recognize that we have a couple of things that impact our business probably differently than either of our two larger competitors.

First of all, the end markets that we are traditionally strongest in such as food, beverage, mining, paper have traditionally been strong, especially food, beverage, and tobacco are down markedly over the past four quarters. So that impacts us.

Energy being up, automotive being up, our net -- great for us, simply because we don't have a lot of exposure to that.

The other thing that is relatively new for us as we have expanded into the electrical and automation markets is that we have a higher percentage of our sales coming from OEMs and that business we recognize would be more cyclical. It was very strong in the first half of last year, but it was actually down 15% in the second half of 2012. It has been weak in the first quarter although improving through the quarter in 2013.

So I think the end markets Nick's impacts as pretty significantly and I think as well our increased exposure to the OEM market has impacted us as well.

You said food and beverage down markedly. I thought that was a market that's generally much more stable in this kind of environment. What is going on there?

You are exactly right. It is one that historically has been very stable. But if you look at -- look at what Procter & Gamble has been doing. Look at the case count coming out of the breweries or the soft drink area or even Pepsi and Anheuser-Busch. None of those companies are talking about increased case count output and we have seen that reflected back through into our sales.

But you are exactly right. That is an area that we had really focused on for a number of years even preceding my being here and done very well, and it served us very well probably up until the last arguably four quarters.

It sounds like given the start of the year you feel maybe more comfortable with the lower half or lower end of Distribution. Can you maybe just talk about moving pieces and arrow and just relative to how you thought the year would start to play out? Any kind of puts and takes and any biases within that range?

We had -- the SH-2G(I) was a bit of a question mark, now that that looks like it is going to happen. No reason to think we won't be at the higher end of the Aerospace range.

We did a little -- as we outlined in our prepared remarks, we did a little bit better on the mix of Aerospace programs than we had expected. We have had very strong business levels from the military, as Bill said, up $2 million to $3 million. So we think the timing of that was a little bit earlier than we had anticipated.

We are anticipating some ramp up in the AH-1Z in the back half of the year. So we are comfortable with where we are -- what we are putting forth as our outlook for Aerospace, but we did actually do a little bit better in the first quarter than anticipated.

So maybe higher part of the range in Aero, lower part of the range in Distribution?

I think that is fair at this point.

Okay. Thanks, guys.

Edward Marshall.

Good morning. Bill, before we start I wanted to say thank you. I've worked with you at now both public companies I've seen you with and you surely are really going to be missed. I appreciate all your help.

Thank you, Ed.

With -- I wanted to focus on industrial distribution if I could. The restructuring efforts that you did in the quarter, is there anything else to follow going forward or are your efforts done for now?

We're done.

Okay. I also wanted to look at it has been a quarter or two since we've had the Parker deal as well as the Schneider deal. And I wanted to get maybe a high level understanding of what opportunities you think these businesses are providing for you or have you noticed any kind of additional wins with customers or additional business coming in? Anything you could add there.

Sure. I will start with the Schneider one to begin with. As you know, the Zeller Electric and Florida Bearing acquisitions came in very close timing to one another. And actually, we have been able to work in a quite large wastewater treatment order down in Florida and we now have done all the electrical and automation panels for that wastewater treatment facility as well. So I think that the incremental add for us on that single program was approximately $1 million or $1.2 million.

So the opportunity for synergy sales is really clear for us now that we have the Schneider and Zeller Electric capabilities within the industrial Distribution group. So we feel good about that. It is an early win, but it is a great example of how we can now leverage that capability on a much broader geographic area and improve our competitiveness in those local markets.

So we have a lot of work to do there to get our people trained on a more broad basis the electrical and automation products that we can now sell from Schneider, but we are well down the path on those training programs. And on the fluid power area with Parker, we feel very good about the progress that we have made. Our catching business improved throughout the quarter and looks good from year to year. We have had a number of meetings with the senior management at Parker and have gotten feedback that we fulfilled all the goals that we have set together. We are going to continue to improve in that area, but we think that we have some opportunities to add to our Parker locations in the near future.

That's good news. A question on the pension. I believe there's a step change in the pension as we look through, it was either this year or next as some amortization carry forward rolls off. Can you give me a point of clarification as to when that pension amortization is rolling off?

We are seeing about a $2 million reduction in pension expense this year versus last year and we expect that pension expense to continue to drop as the plan has been frozen.

And then, finally a point of clarification, the $60 million to $65 million in profit, I guess that you are receiving from the New Zealand helicopter program, is that entirely your share? My understanding is there was some -- and I know you have made some payments and you are going to make another $5 million payment, but my understanding is there are some profit sharing in there as well?

Yes, that is net of the $5 million additional profit-sharing payment we need to make to Australia. So that is ours.

Perfect, thank you.

To be clear that is cash flow, not net income.

Okay.

Steve Levenson.

Thanks. Good morning, everybody. Thanks, Bill and have fun.

Thank you.

In relation to the SH-2s, is there an MRO opportunity beyond what is spoken for in the contract or is all the MRO over the next three years covered in the contract?

I would say that the MRO for the next three years is going to be covered in the contract. They will procure as part of the contract a number of spare parts that will be able to meet their service requirements for a while. But certainly, one of the key advantages for us here in putting those aircraft into the flying fleet down in New Zealand is the ongoing service and support revenues.

As you probably remember, we are coming close to completing the Egyptian SH-2 [Depot] level maintenance and upgrade program. Now those aircraft were flying for about eight to 10 years before they came in, but that was an $85 million program for us for 10 aircraft. So while [max] over the next three years certainly after that term we would seek increasing opportunities for service and support revenues to support the New Zealand Defense Force.

Got it. Thanks. And is the cash expected to come in ratably over the three years or is it skewed one way or the other?

[Rick] and I were still working out the details of the contract and I can't give you a solid answer on that yet.

Okay, enough. Seems like you are working on quite a few more composite programs than you have been in the past with some new planes coming out and some new revisions, for example, Boeing, I guess hasn't formally introduced the 777X, but they've done everything but formally introduce it. You see any opportunities to provide parts there? And how might the acquisition of your logistics business out there in the Seattle area, that seems to have a real good relationship with Boeing, help you?

The engineer -- we are waiting for Boeing (technical difficulty) to officially authorize the 777X to offer it for sale. Hopefully, they will do that at their next Board meeting. We certainly can't be sure of that, but we believe that that will provide us an opportunity to increase our current staffing levels for our engineering business, you are exactly right. That is going to be very key to us and the next version, the -9 for the 787 will be important for us. They have a very good relationship with Boeing. In fact they were awarded Supplier of the Year that we announced I think it was early last week. So very well-positioned to benefit there from an engineering perspective.

And we have invested within the Aerospace group in over the past year in a rejuvenated and expanded business development sales and marketing force. And we are beginning to see the benefits of that. We certainly hope to see more of it in the next version to the Boeing aircraft.

Got it. Thank you. Last one, what is in the M&A pipeline these days?

We have a very active pipeline on the Distribution side of our business today primarily focused around both fluid power and electrical automation companies, although we are very anxious to expand our footprint in the traditional mechanical power transmission motion control businesses as well. But very active and very busy there and, also, on the Aerospace side, active primarily in the specialty bearing products line area.

Obviously, we believe that we have got a great capability there from a technology and engineering and manufacturing and we would dearly love to be able to acquire another bearing company where we could bring those capabilities to bear and improve the business that we would acquire and expand our overall specialty bearing product line sales.

I got it. Thanks very much.

Scott Graham.

Good morning and Bill, congratulations, good luck. Be happy. My Aerospace questions have been answered, so I just wanted to ask a couple on the Distribution side.

Could you guys tell us how much of your Distribution business is to OEMs? And even if you are not, could you tell us what the tone of their business is -- I know it is a little start and stop for you, but obviously they are a big engine, a big cog in the industrial economy particularly on the MRO centers. Just kind of wondering what the tone of your conversations was with them.

Scott, in the last quarter, our OEM sales made up about 25% to 27% of that business. And we believe that tone has improved markedly over the last quarter. It hasn't come through in sales yet, but we have had positive book-to-bill, I think, in each of the last three months so, every month of the quarter, and was also looking good in April when we met about a week ago. So we believe that tone has shifted somewhat to a more positive side after being down for the second half of 2012.

Okay. And further on that, your delivery rates with respect to the rest of the business with the consolidation of the -- I'm sorry, the three platforms and how you are operating that business a little bit differently. Have your delivery rates been affected by that? Are they improving? Is that an opportunity to gain some new business?

Could you --?

I don't think our delivery rates are really an issue. I mean in the higher value add business, we do quote and there may be a lead time to get parts and do the assembly fabrication. But I am not aware that we are either competitively advantaged or disadvantaged from our leadtimes.

Yes, no, I wasn't implying disadvantaged. I was just thinking that as you are doing a restructuring, you are taking out some heads that maybe there was a little bit of an opportunity to push them up a little bit further, cash or something new. But if not, not. That was really all I had. I was just curious about the next layer on the ID side. So, thanks.

Michael Callahan.

Good morning. A couple of quick Defense questions here, I guess. First on the JPF program. Can you speak a little bit about the order flow you saw throughout the quarter and then, if there is any change, once they finally pass the appropriations bill and how comfortable you are with your outlook, especially when you hit more difficult comparisons towards the end of the year?

We feel pretty confident in the range that we gave, I think topping out at about 18,000 units for the year and we haven't seen -- 16,000 to 18,000 for the year. We haven't seen -- I'm sorry, 18,000 to 22,000 for the year. We haven't seen any impact to date from any of the sequestration in Washington. What we did say is that we had a $30 million, roughly $30 million, $35 million order and then we also had one that had not been previously announced for another $20 million.

So we feel good about the backlog that we are building. We probably would have the opportunity to get to the upper end of our range for unit deliveries if we have additional particular foreign demand during the course of the year. But we certainly do feel pretty confident in the backlog there. It is now about $106 million. And actually, as we commented in our prepared remarks, a lot of the backlog increase of about $7 million from the end of 2012 was in the JPF area. So that is really pretty solid for us.

Great. And only other question I had, program we haven't talked about in a while, the A-10, looks like it got some additional funding for 2013 and likely in 2014 as well. Is there -- have you guys heard anything on your end or is that likely to step up through the end of the year? Just your thoughts there.

We are planning to deliver around 33 units for the year. So --

Full rate production is 38 so we aren't seeing any impact at all if we use funding at this point.

Okay. Could you see -- you saw some of that in the last year though, right? On that program?

Actually it wasn't so much that we had reduced funding as it was a push-out with the First Flight [of the] aircraft. So this was a fairly complex program for Boeing, taking a relatively -- in fact, quite an old aircraft, reengineering it, going to a 3-D model and it did cause some challenges through the engineering phase for Boeing and First Flight. But that is really what drove the delay as opposed to funding.

Fair enough. Thank you.

Jim Foung.

Good morning, everyone. First, Bill, let me just echo my congratulations on your retirement as well.

Thank you very much, James.

All the best. And just going back to the sale of the SH-2G, could you talk about what you plan to do with the cash as you accumulate that over the three-year period?

The net cash proceeds after-tax we expect to be in the $65 million range over the three-year period.

Right but what are your plans for the proceeds?

Initially we [do stead] unless there's a strategic acquisition that we are ready to pull the trigger on.

So, you are going to look for as you indicated earlier in the [food pairing] Distribution possibly a [more ground] business in Aerospace dynamics?

Absolutely, that's right. Those are the key areas for us where we see that we can improve the relative competitiveness of the two businesses and that is where we would focus those efforts.

And how about the last aircraft. Any kind of in your plans that you might be able to sell that last SH-2G?

Absolutely. Clearly we are focused right now fulfilling the requirement for New Zealand on the 10 aircraft, but we will continue to market that 11th aircraft. And now it would be most likely that it would go to one of our current operators.

And, James, it is on the books for around $2 million. So it is not going to be a big drag from a working capital point of view.

Right. How soon do you think you might be able to sell that aircraft or is it just too early right now to comment?

It is really too early to tell. We are going to focus on the delivery of these first 10 aircraft and make sure that we fulfill all of our requirements to the New Zealand Defense Force and those aircraft and through that period of time we will worry about where we might be able to effectively place the 11th aircraft. But right now, we know that we have got a commitment to New Zealand. They fly five of our aircraft today. They have since the late 1990s and we are focused on fulfilling that contract with them.

Great. And then, could you talk a little bit about unmanned K-MAX? Haven't heard about that in a while. Can you talk about maybe the progress you are making trying to sell some more of those helicopters?

Well, we continue to make progress, albeit slowly. In fact we were very pleased that, last week, the Secretary of the Navy actually mentioned the unmanned K-MAX in his prepared remarks in front of the House Arms Services Committee. So I think that you realize that that is an important step. There is actually a Marine Corps Media Day today or media briefing today that is featuring the unmanned K-MAX. It came out last night that they are going to say that we are now over 3.2 million pounds.

So it continues to operate extraordinarily well in theater. We are adding additional capability to the aircraft back here today for an advanced Army program. So we continue to work it, but we certainly are anxious as a number of others are to see if we can't move this towards a program of record.

So you are making progress, fair enough. Great, that's all I have. Thank you.

(Operator Instructions). Derek Jose.

I was wondering if you could clarify your comments on gross margin from earlier that you said it was going to improve in the back half of the year. Is that for the whole Company driven by bearings in Aerospace or is that just for one specific segment?

That is primarily for our industrial Distribution group.

And why is the gross margin going to improve in the back half of the year?

Well, we are hoping to have it improve through the back half of the year driven by a couple of things. Primarily it will be product mix and the second is that we are getting good growth from the new acquisitions that we have added, which happen to be at a higher gross margin than our underlying business. So the mix there between the fluid power and electrical and automation and service support businesses versus traditional distribution.

And on that same tone, do you see -- how do you see pricing in terms of those markets right now? Are you able to pass through pricing or have you been or have you had to hold some back given that the market is still a little slow through the early part of the year?

It is a really good question. Last year, early last year, we were able to pass through pricing. We have not been able to, I would say, for the past two quarters.

For the past two quarters, okay. Helpful. And lastly in terms of your relationship with Parker and you talked about the acquisition pipeline, how much of that is being driven by Parker right now? How big of a say or how much are they bringing to you so to speak in terms of opportunities considering that it has been over a year since Catching?

They are bringing a number of opportunities for us. I think we are working very constructively together in that. One of the things that we have to keep in mind is that these are privately held companies and they decide the timing which they are going to sell. So as I commented earlier, we are talking with a number we feel very good about our opportunities to close some in the near term. But again, we will go through periods of time where we are ready and anxious and if the owner of the company is not quite ready to sell yet, it is still not going to happen.

And these are similar companies in the size and scope as Catching?

There's actually a range. There's some that are smaller and some that are larger as well. I don't mean to be vague, but that is actually the universe of companies we are looking at today.

Thank you. I appreciate it.

Robert Kirkpatrick.

Good morning. There were also two aircraft that were possibly to be sold to a country in South America. Can you update us on the status of that?

Yes, that was two SH-2s for Ecuador. And that has not progressed. Rob, we think the probability of that is relatively low.

Think you so much, appreciate it.

[Brian Campbell].

Good morning. My question was previously answered just a moment ago about the Catching deal and I guess just a little more follow-up there. You have anniversaried of the year requirement to do further deals. Are you able to do more than one now going forward? Or is it still kind of a steady pace of moving slowly with Parker Anderson?

I think it would be more than one deal and I think it will also vary somewhat with size. Clearly if we are doing smaller transactions, we would expect to be able to do a number of them in quick succession with one another. I think what would be important for us to keep in mind, though, is that if we were to do a larger acquisition of a Parker distributor, we would also if you will take a bit of a time out from additional acquisitions until we assured ourselves that we had properly integrated that new company into our Fluid Power platform of businesses.

So we are working on more than one at a time today, but again if we are successful doing a larger transaction with a Parker distributor, then I wouldn't be surprised if it would be another year or so after that until we get back active in that area.

Have there been any disruptions with that deal itself in maybe having to shed past products that were competing?

Absolutely. There was significant disruption last year and still some continuing disruption through the first quarter of this year as we transition from competitive products to Parker product line. Because obviously a number of our legacy suppliers really have not provided support, and we told them that we were moving away from them.

So that has continued, less in the first quarter of this year than the second quarter of last year, but still a little bit of a drag that we expect will turn to a positive in the second or third quarter of this year, hopefully.

Last question, just on free cash flow guidance for the year. And maybe I missed it, but is the guidance given not inclusive of the sales of the SH-2?

It is inclusive.

Okay, so remind me the numbers again, Bill?

$35 million to $40 million full-year free cash flow. And the number for the SH-2s as I recollect is around $10 million for this year.

For this year, okay. All right, that helps. Thanks a lot and, Bill, enjoy your retirement.

Thank you.

I would now like to turn the call over to Eric for closing remarks.

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

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