Kaman Corp (KAMN) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 Kaman Corp. earnings call. My name is Serita and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Eric Remington, Vice President Relations. Please proceed, sir.

Thank you, Serita. Good morning, welcome to the Kaman Corp. fourth-quarter 2013 conference call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer, and Rob Starr, Senior Vice President and Chief Financial Officer.

Before we begin this morning please note that some of the information discussed during today's call consists 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 the 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 2013 annual report on Form 10-K in the current report on Form 8-K filed yesterday together with our earnings release.

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

Thank you, Eric. Good morning and thank you for joining us today. We closed 2013 with a successful quarter led by 15% year-over-year growth in adjusted sales at our Aerospace segment driven by strong performances across several programs while at Distribution we achieved a return to organic growth up 5.2% year-over-year in the fourth quarter.

For the full year we delivered earnings per share of $2.16 adjusted on record consolidated sales of $1.7 billion. Full-year Aerospace sales were a record $614 million, an increase of 6.2% over 2012 adjusted sales. And operating margin on an adjusted basis expanded by 80 basis points to 17%. Distribution sales for the full year were up 5.5% to a record $1.07 billion.

I'd like to provide some color on the performance of each of our two segments. Starting in Aerospace, there were three primary drivers of the strong performance during 2013.

First, sales of our proprietary bearing products increased 10% for the full year driven by an increase in core product sales as well as the delivery of several one-time retrofit and upgrade programs in the first half of the year.

Heading into 2014 we expect growth to moderate as we see fewer one-time retrofits and upgrades and production rates for many commercial programs begin to stabilize at higher levels and before we see some additional acceleration from the A330 aircraft entering production in 2015. The future for these product lines remains bright as we continue to invest in new development programs and applications that will continue to drive long-term growth.

Second, the New Zealand SH-2G(I) program has had an immediate impact on our results. Initial milestones on the program have resulted in the recording of more than $20 million in sales during 2013. We expect sales to increase substantially in 2014 providing incremental defense revenues for the segment.

Finally, our JPF program had an extremely strong performance for the fourth quarter and for the full year. Revenue was at record highs despite lower volume as we increased our mix of direct sales to foreign customers. For the full year we delivered 21,000 units compared to 27,000 units in 2012. Our program backlog stood at $100 million for JPF at the end of the year.

Apart from these primary factors we also made progress across a number of new programs including the AH-1Z for Bell Helicopter. We expect to increase deliveries to more than one a month over the next couple of years and this program could exceed $200 million in total revenue.

In addition, during the fourth quarter we received a milestone payment for nonrecurring costs such as tooling, an important first step in attaining more normalized levels of working capital investment in this program.

I also want to highlight that we continue to make progress on a number of other new programs including the Learjet 85 passenger and over-wing exit doors, the G280 winglet and a fixed leading edge for the Bombardier G7000 and G8000. And in a nod to their confidence in our capabilities, Boeing recently awarded us the 747-8 Wing-to-Body Fairing. This program is significant for several reasons.

The program expands our long-standing relationship with Boeing to now include their Winnipeg facility. The successful execution of this program will position us for future opportunities as well. And this win exemplifies our One Kaman philosophy as we combine the capabilities of our Aerospace segment to provide integrated solutions to our customers.

This program is a great example where four different command facilities will manufacture subcomponents with final assembly taking place at our Jacksonville facility. Overall Aerospace is firmly positioned to continue to improve operational performance, successfully execute new programs and win additional work to provide steady long-term growth.

Moving on to Distribution, we were pleased to see organic sales turn positive in September and remain positive throughout the quarter. In the quarter sales were up 7.7% over the prior year level and organic growth came in at 5.2%, marking our first quarter of organic growth since the second quarter of 2012.

Monthly sales levels were steady as the quarter progressed with a slight uptick in December. Eight of our top 10 end markets were up over the prior year including computer and electronic products manufacturing, nonmetallic mineral products, chemicals and machinery manufacturing.

As we enter 2014 January and February sales are down slightly as compared to last year and we recognize that, while difficult to quantify, adverse weather conditions in the South and Northeast have disrupted our business.

We continue proactively take actions to accelerate our growth trajectory and improve margins including -- one, improving the scale of our business through additional acquisitions; two, expanding margins through differentiated products and services; three, capitalizing on our relationships with key suppliers to optimize the supply chain and enhance vendor support programs; four, deepening our existing relationship with Parker Hannifin; five, investing in additional sales resources across the business; and six, beginning the rollout of our new ERP system.

A key element to achieving our objectives is to grow our higher-margin fluid power product platform. As you know, we have closely aligned with Parker Hannifin, the global leader in fluid power. Parker Hannifin through our acquisitions and also our national reseller agreement. This relationship differentiates us from other distributors and provides us with a nationwide footprint to drive increased scale in this business.

Today we are taking an important step towards the expansion of our Parker strategy with the announcement of our proposed acquisition of the assets of B.W. Rogers. On a pro forma basis we project Kaman will be the sixth largest fluid power distributor in the United States and one of Parker's largest fluid power distributors.

To put this in perspective, if you look back just three years before we acquired Catching FluidPower and signed our Parker distribution agreement we had five locations authorized to distribute Parker products. After closing the B.W. Rogers acquisition we will have more than 40 locations authorized to distribute Parker products directly as well as an additional 200 locations to our national reseller agreement.

The transaction will also provide us with exposure to end markets where we have previously been underrepresented including steel, Life Sciences, shale gas and automotive. In addition to fluid power B.W. Rogers machine control and integration business aligns well with our automation control and energy product platform. We are looking forward to closing the transaction and welcoming the B.W. Rogers employees to the Kaman team.

In 2014 were begun an important initiative to expand our sales resources across the business in key markets with a focus on our fluid power and automation control and energy product platforms. During the year we expect to add approximately 50 to 60 new account managers calling on customers to drive increased sales and market share.

Overall we are pleased with our strong growth in Aerospace and encouraged to see improving trends in Distribution. Given our current momentum, coupled with the acquisition of the assets of B.W. Rogers, we believe we have set the stage for improved performance the course of 2014 and will be well-positioned to execute on our long-term strategy.

Now I'd like to turn it over to Rob to provide you with some additional details and color. Rob.

Thank you, Neal, and good morning, everyone. Overall results for 2013 were solid as we closed out the year with continued strong performance from Aerospace and improved sales performance at Distribution. Aerospace delivered adjusted operating profit of $104.6 million, an increase of 12% over the prior year.

The Distribution operating margin of 4.1% was impacted by a number of items including the restructuring charge we took in the first quarter, issues with fixed pricing mining contracts at of our Mexico operations and negative organic sales growth during the first three quarters of the year.

Before focusing my comments on our outlook for 2014 I'd like to address our balance sheet and cash flow performance. We ended the year with a strong balance sheet providing us flexibility to fund the acquisition of B.W. Rogers as well as fund our other growth initiatives.

Our debt to capitalization ratio stood at 35%, down from 38% in 2012. This ratio was favorably impacted by strong earnings and a significant improvement in the funded status of our pension plan which is now at 87%, up from 79% at the end of 2012.

Our free cash flow in the fourth quarter was slightly higher than expected at $27 million due primarily to strong collections at Aerospace. For the full year free cash flow was $22 million, in line with the revised guidance we provided on our second-quarter call.

During 2013 in capital expenditures increased by 26% to nearly $41 million as we continue our investment program. We are highly focused on improving cash flow performance and of taken a number of actions to ensure we meet our objectives.

With our earnings release yesterday we have provided our first look at expectations for 2014. In Aerospace we expect 2014 sales to be up for the year by between 4% and 8%, sales growth is expected to come from various aerostructures programs and higher New Zealand SH-2G(I) sales. We expect JPF fuze volumes to be higher than 2013 levels with a higher mix of lower margin US government sales.

2014 Aerospace margins are projected to be between 16.5% and 17%. Our outlook is supported by a year-end backlog of over $600 million up 13% for the year, and a backlog continued to grow in January as we added nearly $60 million in new orders.

In Distribution we are projecting total sales growth of between 4% and 7% and organic growth between 3% and 6%. Operating margin is expected to improve to between 4.7% and 5.2%. This improvement is primarily driven by the leverage of higher organic growth rates and the non-recurrence of one-time charges we took during 2013.

Our operating margin guidance incorporates the impact of long-term investments we're making in the business including increasing our sales force by 50 to 60 new salespeople to take full advantage of growth opportunities. The expenses associated with investment will begin this quarter and it will take time to translate into higher sales.

In addition, we will begin incurring depreciation expense in 2014 in connection with our ERP system, ahead of the benefits we expect to accrue from this system in the future.

While these investments will negatively impact operating margin in the near term, they are crucial for us to obtain a sustainable higher level of profitability going into the future. We expect these and other initiatives to gain traction as we progress through the year positioning is to exit 2014 at a strong run rate.

The Distribution outlook for sales and operating margin does not include the impact of the B.W. Rogers acquisition we announced earlier. We anticipate that transaction will close early in the second quarter. We expect the acquisition to be modestly accretive to 2014 earnings even when taking into account the negative impact from acquisition costs, inventory write up, transaction integration expenses as well as the amortization of intangibles.

Based upon a targeted close date of early second quarter we expect these items will add approximately $4 million in expenses to 2014. Excluding these items we expect this transaction to be highly accretive.

Corporate expense is forecasted to increase from $45 million in 2013 to $52 million in 2014. The primary drivers behind the year-over-year change are -- one, increased depreciation and maintenance expenses relating to infrastructure improvements at our Bloomfield campus; second, higher pension and medical costs; third, increased legal, M&A and compliance expenses; and last, higher levels of long-term incentive compensation accruals.

Our outlook for the full-year free cash flow is between $40 million and $45 million. The improvement in 2014 free cash flow is being driven by higher earnings and working capital improvements. Capital expenditures are predicted to remain at elevated levels as we continue our infrastructure and ERP investments during 2014.

Overall, 2013 was a successful year for Kaman and we are focused on delivering improved financial performance in 2014. With that I will turn it back over to Neal. Neal.

Thanks, Rob. During 2013 we made strong progress across our businesses and strengthened our foundation for improved 2014 performance. Together with the strong performance in our Aerospace segment the acquisition of B.W. Rogers will provide Distribution with a powerful catalyst for accelerated growth and improved profitability.

Based upon the successful execution of our strategy, I'm confident that we have never been in a better position to deliver value to our shareholders. With that I will turn the call back over to Eric. Eric.

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

Arnie Ursaner, CJS Securities.

My first question is in regards to your guidance. You did indicate that Rogers was not in the guidance. But if we were to build that in again, we are trying to get a feel for the potential accretion. You mentioned the expense level, would it also impacted your interest expense, wouldn't that go up reflecting this acquisition?

Arnie, hi, this is Rob. You are correct, we will be funding the transaction with our existing credit facility. So you are absolutely right that we will see some moderate increase in interest expense during 2014, which we did not spike out in the costs that I just identified.

Okay. One other question regarding the release you had. You did mention you finally has the one-time payment on the AH-1Z which covered some of your costs. What was the impact on margin and where would we find it?

Okay, Arnie, that has a dilutive impact to our overall Aerospace margins and we are effectively recovering nonrecurring expenses at really essentially flat margins. So I think it certainly showed up in our overall Aerospace margin results for the year.

Okay. A question for Neal. You are adding 50 to 60 reps and you have about 240 locations. Maybe you could give us a little better feel for the training costs involved, what you hope to gain in the way of market share, and when successful the incremental margin contribution you hope to get from the 50 to 60 reps.

Sure thing, Arnie. Our main emphasis in doing this is that we think clearly with the build out in our fluid power and automation control and energy platforms in particular that we have a lot of capabilities now that we don't have adequately represented in our existing sales force.

So the addition of the 50 to 60 people will be primarily focused on fluid power and the automation control and energy platforms, although certainly we will put some into our base power transmission mechanical business as well. We expect that we won't do this on a metered or a disciplined basis over 2014 we have already begun the program early in January so we have begun that.

You are right, we do have and on boarding process that will include both training on Kaman and also there will be training sponsored by a number of our suppliers. Parker Hannifin, [Schneider], Rexnord, Timken and others that we'll take advantage of.

We would expect that we will have a headwind through most of this year, hopefully get it to breakeven in the fourth quarter or early in 2015 and begin to see the benefits of it in 2015. And we certainly want to be well-positioned to take full advantage of any uptick that we would see in the industrial economy during that time.

Thank you very much.

Jeffrey Hammond, KeyBanc Capital Markets.

Hi, guys, this is James Pickrell filling in for Jeff. A question about the $4 million in corporate expense tied to the acquisition. Is that one time in nature for 2014 or can we just expect to spillover into the out year?

Yes, the $4 million is -- and rough order of magnitude is about half of it you would expect to be really -- in 2014 with obviously the amortization of intangibles kind of going out into the out periods.

Got it. And then can you just maybe talk about the margin profile of B.W. Rogers, maybe by just sort of aligning it with the margin profile of your current product portfolio, specifically fluid power and the automation lines?

Jay, actually we are not going to break that out at this point in time. We are busy haven't even closed the transaction yet. But on our first-quarter call we would expect to be in a position to provide you what the full-year impact of adding B.W. Rogers to our Distribution would be.

Okay, that is fair. And then just switching gears for a second here. You did have that recent announcement regarding the helicopter, the tradeshow, the recent tradeshow and the commercial use K-MAX orders. Can you just elaborate on what you see the opportunity to be there?

Sure. As we commented in the release -- actually as Jim Larwood commented in the release, we get inquiries from current commercial operators about the availability of additional K-MAX aircraft on a fairly regular basis.

And what we thought was appropriate given where we are in the program right now was for us to go out and try to solicit existing customers or certainly new customers as well to define whether or not there was sufficient demand for us to restart the production line.

We got to good results at HAI and we will continue to work that. We are certainly not in a position yet to determine whether or not we would be able to restart the line. But we see a couple of advantages there clearly.

One is that we would put additional aircraft into the commercial operating fleet and that is good certainly from the perspective of initial sales as well as our ongoing service and support revenue.

Secondly we do have significant inventory today in our K-MAX product line to support the existing fleet. We would not only be able to utilize that if we were to go back into production, but we would likely be able to have a lower overall investment on a percentage basis if we were able to increase that fleet.

And finally, we would certainly see an advantage to having a hot production line as we continue to market the aircraft to both US and foreign military.

Great. Thanks, guys.

(Operator Instructions). Matt Duncan, Stephens Inc.

The first question I have got is just on Distribution. Neal, you talked a little bit about the sales trends you saw there. I am assuming that you were talking about organic revenues when you said that January and February were tracking negative, is that correct?

Yes, Matt, you are exactly right. Slightly negative for January and February.

Okay, so we are talking low-single-digits. I am assuming that your view would be that that is largely weather driven and I certainly appreciate it's difficult to strip out how much. Was the organic growth rate in terms of sales per selling day fairly consistent in the fourth quarter?

I guess it was around 3.5% for the full quarter; it sounds like maybe it was a tiny bit better in December. But I am just trying to get a sense for how much it has decelerated in January and February to try to maybe look at what the weather impact is.

Sure. Matt, for our US sales we're down about 1% organically so that is -- is a single digit. And we have tried to assess it and from -- there is two parts to that the impact of weather. One is that we lost about 1% of our branch selling days during January and February because of the weather.

We clearly have gotten the benefit of the investments that we've made in our voice over IP phone technology so we didn't lose customer calls but clearly if they are plants are shut down it is going to impact purchases from us. How much of that comes back to us, Matt, I think that it is always difficult to assess.

But again, to summarize, down 1%, so very slightly organically for January and February and again about 1% of our selling days being lost due to weather -- branch selling days.

Okay, that is helpful. Shifting over to the Aerospace side. I know it is probably a little bit early to really have a good feel for this, but in terms of the defense budget that was announced this week, I know there was a line in that budget that might cut out and retire the A-10 and you are currently working on a re-wing program there. Is there any way to gauge how that budget might impact you guys?

Met, it is a little bit difficult. However, I would say a couple things on that. Actually in the first quarter we received an additional release on an order. So we now have orders through ship set 172 of the 242 maximum that we expected. We delivered about roughly 55 through the end of last year so we've got about 117 left to go to fulfill the orders that we have.

We think it will take us about two and a half years to do that and the ship set value for us is between [$]450,000 and [$]500,000. We feel pretty good given the additional orders that we have recently received. However, we will continue to, A, perform on the program for Boeing and the Air Force and continue to work with Boeing to underscore the importance of the A-10 to the US fleet.

Okay. And then two quick questions for Rob on guidance. Just on the Aerospace side it sounds like you're obviously expecting the profits to ramp more in the back half. I am assuming that the same would be the case for revenues. So any help you can give on what the revenue ramp might -- ought to look like in Aerospace?

And then in Distribution on the -- I would classify it as investments in future growth and profits between the ERP system and the salespeople. If there is any help you can give us on how much that is actually putting a headwind on your operating margins this year that would be helpful.

Sure. Why don't we address the Aerospace question first, Matt. You are correct that we will expect to see a slightly higher revenue ramp and operating profit ramp in Aerospace toward the back half of the year really driven by a couple of things.

One is on the aero systems side we have a number of aerostructures programs that are projected to increase in their ship set, in particular we'll look at AH-1Z and a couple of other programs. Also on SH-2G(I) we expect the second half of the year to be slightly heavier in terms of the revenue so we expect that as well.

And then on bearings, I think we certainly are also expecting some improvement as we progress through the year. So that is what is driving the Aerospace side, so are you are correct, we will see a slight second-half improvement over first talk and Aerospace.

Going back to Distribution, addressing your question on ERP headwinds. We're expecting, as we have talked about, we are planning on rolling out the ERP system initially in the first half of 2014. And as a result of that we begin recognizing depreciation expense relating to our ERP investments. We expect that to be about a 20 basis point or so headwind relative to 2013 performance.

And then moving on to your question or around the sales force- - it's difficult to quantify because it does depend on how quickly the sales ramps up and what the actual hiring pace is. But certainly you're going to see more of an impact in terms of drag in the first half of the year as we onboard salespeople and we expect (inaudible) to become productive toward the second half of the year.

Okay, very helpful, Rob. Thank you. Thanks, guys.

Scott Graham, Jefferies.

Rob, when you indicated that ex the expenses on this acquisition that you would expect it to be substantially accretive. Now I don't want to take that number and run away with it, but -- that phrase and run away with it, but could we assume that that means maybe 5% accretion to what you did in 2013 or $0.10 a share ex those expenses? Obviously including the interest expense, but ex the one-time stuff, is $0.10 in the ZIP Code?

Yes, that is in the ZIP Code.

In the past, Neal, you have went asked kind of run through some of the hotter programs that you guys are working on -- bidding activity, things that might monetize into orders this year. I was hoping you could do that again for us on the Aerospace side.

Well, Scott, we are very involved in a number of bids and we want to be a little bit careful clearly for competitive reasons. But the areas that we're focused on right now are working with Boeing to continue to provide a highly capable cost effective outsourced partner for them. And I think the 747-8 program is an example of that and I commented on that in my prepared comments.

But everybody can say well, 747-8, that is a relatively low volume program and we would agree with that. I think what is more important is expanding our active relationship with Boeing Winnipeg. I think in addition the recent announcement that we put out about the additional office that we are adding for our Kaman engineering services group to support the Boeing facilities for the 787 is important.

On the military side we continue to work with both BAE and Raytheon on the P-8 as well as Boeing for the P-8. We continue to work with Boeing on the 767 tanker for the US Air Force. And also we continue to work with both Airbus as well as Aircelle and a number of Airbus suppliers on both their A330 and A320 product lines.

So those are the areas that we are focused on right now. And we are very pleased with the acceleration we have begun to see in our bidding activity as a result of the investments that we have made in the regional sales director infrastructure in the Aerospace group.

That is fine. That is exactly what I was looking for. With one exception, if you wouldn't mind, there was obviously some news this week that you guys published on K-MAX. Can you kind of tell us what that means on the timeline for potential commercialization?

Scott, that is a good question. I think that it is clearly going to be a number of months before we are able to establish how many firm customer commitments we would be able to generate. And then use that for making our decision on restarting the line. It is hard to say, that is probably a three-month to six-month window for us to decide.

Fair enough. My last question is on the corporate expense outlook. I was a little surprised at how high that number is and I was maybe wondering, Rob, if you could tell us maybe you have given us the three or four reasons as to why but A, maybe tell us which of the bigger buckets of those three or four? And B is that perhaps some conservatism in that $52 million?

Sure, no problem, Scott. I would say in looking at the four categories that I highlighted, really the larger buckets are really relating to some of the expenses around some of the infrastructure improvements that we made at our Bloomfield campus, as well as some of the increased legal and M&A and compliance expenses that certainly is meaningful this year.

I mean I would say those are kind of two of some the larger buckets within there. Then in terms of the conservatism, I mean certainly if you look at prior years where we have ended up with corporate expense relative to our initial outlook, we typically have come in lower than that. I really can't speak to where the year will fall out, but I would say that there is certainly some level of conservativism just given some of the activities we have going on.

Understood. Very good. Thank you.

Steve Levenson, Stifel.

One of the things I didn't hear any talk about was H-60, and I was curious what is going on with the program there. And based on the news that Sikorsky is likely the only bidder for the combat search and rescue helicopter what you think the outlook is going to be for Kaman?

Well, Steve, clearly the UH-60 has tailed off in terms of deliveries. Just a couple of years ago we delivered about 177 aircraft and this past year closer to 113 to 114 aircraft. So we are down significantly. So we are really pleased that Greg and the Aerospace team have been able to demonstrate growth despite that kind of headwind.

We think we should be fairly stable in the 100-ish range in 2014 so we are pleased with that. We certainly believe that we are a very good supplier to Sikorsky at a time that it is important to them. And also to build on that relationship for the eventual award of the combat search and rescue helicopter.

Clearly the team of Sikorsky and Lockheed Martin on that competition is pretty formidable. And I think if you were a betting person you would think that they will be the eventual winner. Parts of it have already been funded. So we would certainly be anxious to support that team on a combat search and rescue program.

Got it. Thanks very much. I think everything else has been answered -- for me, anyway.

Edward Marshall, Sidoti.

So my question is around the Parker deal I guess or I guess B.W., but I am curious about kind of how the market is shaping up because, as you mentioned, it is accretive. I assume it is at the higher end of your revenue dollar per purchase in the Distribution business.

But I am wondering if there is reduced competition for these businesses and kind of maybe makes that deal multiple actually somewhat more reasonable, only because I know the differences between Parker and maybe the other fluid management distributors and therefore I imagine you have a lot less competition for these acquisitions.

I am just kind of also curious how many you have -- how many targets are actually left.

Ed, you know, first of all we were really pleased to be able to acquire the assets of B.W. Rogers, it is -- Rick Rogers and Alita Rogers, it is the third-generation of ownership, it is a really well-managed company with a great team. Frankly we have been working this for almost three years.

So between the relationship that we were able to build with Rick and Alita, their management team and I think the ongoing support for Parker Hannifin in continuing to expand our Parker Hannifin footprint based on the performance that we have delivered since the acquisition of Catching in 2011 provides both continued accelerated growth for us in fluid power.

And, I think you are right, it does also demonstrate that there is less competition for Parker fluid power distributors, there is still clearly competition. But as people look at who has been able to successfully acquire and integrate and then deliver value both to the customer and to Parker Hannifin I think that that is where Kaman has really distinguished ourselves so far.

And being a regional player and it looks like they have a good regional footprint, but being a regional -- consolidating these regional operations I am curious how many targets of this size remain? And by the way, are these private transactions?

They are private transactions and there are not many targets of this size, In fact, I think when this transaction closes we will be able to have more accurate numbers. But we think this would certainly make us one of the top two or three Parker distributors in the United States.

To me this is one of the bigger highlights that you guys have done in the most recent years, not to take away from anything else. But just continuing to build out this Parker stream just, hats off. Thanks, guys.

Yes thanks for much, we couldn't agree with you more. We are very pleased to be able to make this happen.

Thanks.

[Rob Crystal], Goldman Sachs Asset Management.

Thanks, my question was actually answered.

Arnie Ursaner, CJS Securities.

A couple of quick follow-ons. In your release you talked about vendor volume incentives being an impact on margin. In that K you talked about a receivable of [13.9] versus [15.9] in 2012. Is the way to think of this that is roughly $2 million that was basically come right out of your margin?

Yes, Arnie, this is Rob. I am not certain it really equates that way. I don't think you would see 2 million come out of the margins just based upon the receivable balance.

Again, we are trying to quantify obviously an item that impacted margin that you highlighted and that seemed to be the only way to try to come up with the number.

Yes, Arnie, we can certainly -- I can take this off-line with you if you would like to (multiple speakers).

That would be great, that would be great.

Why don't we do that?

Okay. JPF, you had a great year, you talk about it again in the K that you hope to do a substantially higher number, perhaps 20,000 to 26,000 in 2014. And yet you also mentioned you have a higher percentage from US government, but you also have the new option kicking in midyear. And the new option does it change your margin on US government sales?

It does, Arnie, on the follow-on option with US government it will compress our margins slightly. So we are -- that is one of the reasons why we have got relatively flat performance in those product lines from 2013 to 2014.

Okay. And one thing you didn't mention in your guidance is depreciation and amortization in the upcoming year and yet you start capitalizing -- you have been the capitalizing the cost on the ERP, but starting in the back half of the year that will change. How should we think about D&A for the year?

Arnie, D&A will certainly increase year over year. I mean I think in rough order of magnitude we would expect our combined D&A to go up by about 15% to 20% year over year.

Okay. And my final question is you used the word substantial to describe the SH -- the sale of the helicopters, the SH program. Just remind us again, when you bought them back from the government your plan was to split the proceeds under a formula with the government, so two questions related to that. One would be what do you think the revenue will be in 2014 and just remind us how we should think of the accounting treatment on the split?

Sure, no, that is fine Arnie. In terms of the revenue we would expect this year, as we mentioned on the call, we did slightly over $20 million this year and we talked about delivering around $10 million or so per quarter once we were up and running on the program given about a three-year run rate on $120 million. So I think using a rough rate of about $10 million per quarter is fair.

And then in terms of the agreement we have with Australia, as you recall, as part of the settlement agreement with Australia we had a AUD39.5 million minimum payment to be made to them. That payment has already been made. We finished that off actually in really early 2013.

In terms of going forward, we do expect that based on the contract we will have some future obligation, but that is pretty nominal. Certainly in that $5 million or so range based upon the contract we see. And that payment really will have to be negotiated in terms of the timing with Australia. But certainly it is pretty nominal relative to the overall cash flow we expect from the program.

So when you actually make these sales now you are getting essentially call it 90 -- I don't want to say 100%, but you are getting a substantial percentage going directly to Kaman as opposed to splinting it on the prior formula, is that correct?

That is correct.

Okay, and remind us again of how you have this treated on the balance sheet?

Yes, there is no liability. I mean we do have inventory associated with the program on the balance sheet, Arnie. But in terms of -- we are not accruing really any significant liabilities relating to the contract. I mean basically as we execute and incur costs on the program, we then recognize revenue according to the contract.

So what would the cash flow impact be in 2014?

In terms of the cash flow impact, as I mentioned, over the life of the program it is $60 million to $65 million. We did receive advance payments last year as we hit certain milestones and we expect to see positive cash flow relating from the program for the full year.

Okay, thank you very much.

(Operator Instructions). Scott Graham, Jefferies.

One last one, guys, from me. So you talked about, Rob, the incremental expense that will hit the distribution margin in 2014. One of the things we talked about last time I think was that there will also be some spending required to pursue some of the programs you are pursuing on the Aerospace side. Is there any way to quantify what type of a drag that would be on aerospace margin in 2014 as well?

Scott, I don't think so and the reason is that we have invested in both -- since really 2011 in building out our business development infrastructure within the Aerospace group. So that is set and if you will a fixed or constant cost as we look at 2014.

While we incur costs to bid a complex program, they are not of the scale that you might see at a UTC or a Collins where they are talking about multiple millions of dollars to bid on a new program. We are just really not that impacted in that manner with incremental engineering costs when we bid those.

The exception probably is in our specialty bearings business where we do have -- we certainly do incur some costs as we bid new programs for engineering work or prototype. The typically that is fairly minimal at an incremental basis for us looking into -- at the change from 2013 to 2014.

Okay, great. Thank you.

We have no questions at this time. I would now like to turn the call over to Mr. Eric Remington for closing remarks.

Thanks, Serita. Thank you all for joining us for today's conference call. We look forward to speaking with you again when we report our first quarter in April.

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