Kaman Corp (KAMN) 2014 Q4 法說會逐字稿

Welcome to Kaman Corporation fourth quarter and full year 2014 earnings conference call. (Operator Instructions). I would now like to turn the conference over to your host today Mr. Eric Remington, Vice President, Investor Relations. Please proceed.

Good morning. Welcome to the Kaman Corporation fourth quarter 2014 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 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 2014 annual report on Form 10-K and the current report on form 8-K filed yesterday evening 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 on today's call. In 2014 we performed well across both of out segments as demonstrated by the 8% growth in our adjusted EPS to $2.43 for the full year. Our Aerospace business delivered record sales and profitability for the full year driven by continued strength in our bearings business, the New Zealand SH-2 program and improved performance in our composite units. In our Distribution business we achieved significant margin improvement in 2014, delivered organic growth in each quarter of the year and laid important ground work for further improvement during 2015.

Now I would like to provide more detail on the performance of each of our segments starting with Aerospace. Full year aerospace sales were $633 million an increase of 3% over 2013 with operating margin on an adjusted basis expanding by 20 basis points to 17.2%. Our full year margin results benefited from improved performance across a number of programs as well as a favorable product mix in the fourth quarter. The sales increase was due to the contributions of the New Zealand SH-2 program and a broad number of other programs across this segment including the AH-1Z and A-10. This sales increase was achieved despite headwinds during the year from several defense related structure programs. With three programs the UH-60, Black Hawk, C-17 and Egyptian FHQ upgrade program accounting for a year -over-year revenue decline of $25 million. To be able o generate top line growth in the face of such significant headwinds speaks to the strength of our business and the commitment of our team.

We delivered just over 24,000 JPF fuzes in 2014 versus approximately 21,000 in the prior year with a higher proportion of lower margin U.S. Government units. The JPF remains an important program, and our year-end backlog of $115 million reflects strong demand. At this time we expect JPF volume this year to be similar to 2014 but with a slightly higher mix of higher margin direct commercial sales during the year.

Segment backlog ended the year at $518 million less than the prior year end. The lower backlog is largely attributable to two programs; our New Zealand SH-2G program and our UH-60 Black Hawk program. Backlog excluding these two programs as grown year-over-year, and we are confident that our business development efforts will support our base and provide additional organic growth opportunities in the future. We recently announced a number of key program wins and extensions that should maintain a stable revenue base for us going forward. These include extensions of agreements to supply Bell with both commercial and military rotor blade components, a new contract to supply fixed trailing edge assemblies to Boeing for both the 767 and 777 programs, a new contract for the fixed trailing edge assemblies on the KC-46 tanker and the Peru SH-2 program. These programs combined have a potential value of $200 million the majority of which is not included in our current backlog figure. Overall Aerospace is firmly position to continue improving operational performance, successfully execute new programs and win additional work to provide steady long-term growth.

Moving on to Distribution. 2014 was an important year for this segment as we continue to build momentum. Overall we grew revenue nearly 12% over 2013 to $1.16 billion. Top line growth was driven by the combination of the B.W. Rogers acquisition and full year organic growth of 3.2% our highest annual rate since 2011. Adjusted operating profit dollars grew 24% and out paced our revenue increase as we were able to expand segment level margin by 50 basis points to 4.9% for the full year excluding Mexico.

2014 and the earlier part of 2015 have marked an important period for Distribution as we achieved a number of important milestones that will improve the competitive position of the business going forward. First we completed two strategic acquisition; B.W. Rogers the largest acquisition in this segment's history, and G.C. Fabrication Inc. B.W. Rogers added to our Parker franchise and provides additional scale to both our fluid power and automation control and energy platforms. In fact, Parker is now our largest supplier and we believe we are their second largest distributor in North America. G.C. Fabrication and Electrical Distributor for Kaman's commands Automation, Control and Energy platforms into the New York metro market, while meaningfully deepening our relationships with Schneider Electric.

Next we completed the process of hiring approximately 60 new sales resources to help drive organic growth by addressing identified market opportunities. The early indicators are encouraging with this initiative contributing positive sales earnings and margin impacts in our fourth quarter. Third, we have began the implementation of our new ERP system a key element of our strategy to achieve operating margins in access of 7%. Finally, in December 2014 we completed the divestiture of our Mexico Distribution business Delamac. We reached the conclusion that this operation was subscale and based on the lack of suitable acquisition targets the business would be better positioned for success by being apart of RYASA the largest bearing and power transmission distributer in Mexico.

Overall, we performed well in 2014 and enter 2015 on solid footing. I would like to turn the call over to Rob to provide some more details on the numbers and our 2015 outlook. Rob.

Thank you, Neal, and good morning everyone. I would like to begin this morning by reviewing our financial performance for the fourth quarter and full year before discussing our 2015 outlook. At a consolidated level adjusted earnings from continuing operations were a diluted EPS of $0.76 in the fourth quarter and $2.43 for the year. There are a number of nonrecurring items included in our results and I would like to walk you through those in more detail.

First, in connection with the divestiture of our Distribution operations in Mexico we recorded a net loss on the transaction of $5.3 million. Mexico sales for the year were $23.5 million and the business recorded an operating loss of $3.8 million. These amounts are excluded from our continuing operated results. Also keep in mind that in the third quarter we had severance cost in distribution and a charge related to the sale of our Moosup facility. These amounts totaling $2.7 million pretax are also excluded from our adjusted results.

Finally during the fourth quarter we benefited from a number of discreet tax items and tax planning strategies that resulted in our full year tax rate coming in at 31.8% or 300 basis points below the 2013 rate. The lower tax rate favorably impacted earnings per share by approximately $0.07 per share for both the fourth quarter and the full year. Free cash flow performance in the quarter was excellent as we generated $57.9 million as our level of investment and capital expenditures moderated through the end of the year and we maintained our discipline focus on improving working capital metrics.

For the year we generated nearly $81 million which was more three times our prior year level and well ahead of our long-term target of 80% to 100% of net income. The higher cash generation has allowed us to significantly de-lever our balance sheet bringing our debt to capitalization ratio down to 35.2% in line with our year end 2013 level. Our strong balance sheet coupled with our anticipated cash flow generation in 2015 provide us excellent financial flexibility going forward. Yesterday we announced a 12.5% increase in our dividend rate, bringing our quarterly dividend rate to $0.18 per share. This increase reflects our commitment to creating value and returning cash to our shareholders.

Taking a closer look at segment performance beginning at Aerospace, we have seen sales of $175.2 million for the quarter and $633 million. Increases of 2.6% and 2.1% respectively over the prior year period as our broad range of programs enabled us to overcome some of the headwinds Neal mentioned earlier. Operating margin in the fourth quarter was 18.9% a 290 basis point improvement compared to an adjusted 16% in the prior year. This was driven by contributions from New Zealand SH-2 program, strong results in our bearing product lines and improved performance in our composite programs. For the full year the operating margin was 17.2% versus 17% adjusted in 2013.

Taking a look at Distribution, we generated revenue of $302.7 million for the quarter and $1.16 billion for the year, which is an increase of 16.3% and 11.8% respectively over the prior year. Distributions revenue growth benefited from a combination of continued organic growth and contribution from acquisitions completed in the past 12 months. Our full year adjusted operating margin from continuing operations was 4.9% a 50 basis point improvement over the prior year. Fourth quarter operating margin was 4.7% an increase of 30 basis points over the prior year. The increase in operating margin was primarily due to leverage on high organic sales levels and higher rebate income.

Turning now to our 2015 outlook and starting with Aerospace our expectation of aerospace is for low single digit revenue growth in 2015. We expect to achieve growth in a number of key areas including a solid pipeline increasing bearings and new structure programs are expected to ramp up this year including the AH-1Z, the Peru SH-2 program and the 747-A Wing-to-Body Fairing program. Offsetting this growth are a number of defense program headwinds as we expect fewer BLACK HAWK cockpit shipments and both the C-17 and Egyptian FHQ have ended. We also expect to complete the New Zealand SH-2 program during the third quarter of 2015 although this will be partially offset by the start of the Peru program. The estimated year-over-year revenue reductions associated with these programs is $45 million. We are pleased however that despite these program declines we will achieve sufficient growth in our other programs to more than offset these headwinds. 2015 Aerospace operating margins are expected to range from 16.8% to 17.2%, as we continue to focus on operation execution across our programs. In summary, we are projecting another solid year for Aerospace as we grow the top line and maintain strong margin performance.

Moving on to Distribution. We expect sales growth between 8% and 10%. This breaks down to between 3% and 5% organic growth with the balance coming from the B.W. Rogers and G.C. Fabrication acquisitions. Our organic growth outlook reflects our expectations for continued moderate economic growth during 2015. On operating margins we are projecting a full year range between 4.9% and 5.2% building on the progress we have made in 2014 despite a number of headwinds that we will experience in 2015. Most notable of these expense increases are pension and ERP related. These two items combined are expected to have a 50 basis point negative impact to Distribution margin in 2015 compared with 2014. Adjusting for those items, we are projecting Distributions underlying margins to expand by over 50 basis points in 2015.

Overall, we expect to see pretax income growth in 2015 in excess of 16% at the mid point of our varies outlook ranges. The return to higher effective tax rate in 2015 will result in lower earnings per share growth relative to the growth we expect in pretax income. Similar to 2014 we anticipate quarterly earnings to increase sequentially throughout the year with approximately 60% to 65% of our full year earnings in the second half. This reflects our expectations for incremental improvement largely driven by the expected timing of Aerospace program revenues and improved performance at Distribution. We anticipate our 2015 full year tax rate to be approximately 34% as many of the discreet items impacting our rate in 2014 are unlikely to recur. Finally, our full year free cash flow expectation for 2015 is a range of $75 million to $90 million reflecting a another year of strong cash flow generation with a conversion ratio to net income exceeding 100%.

With that, I will turn it back over to Neal. Neal.

Thanks, Rob. Overall 2014 was a successful year for Kaman. Our results reflect the successful execution of our long-term strategies across our segments. And I remain confident that we will continue to deliver improved operational and financial performance in 2015. With that, I will turn the call back over to Eric. Eric.

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

(Operator Instructions). And the first question comes from Edward Marshall. Please go ahead.

Good morning, guys.

Morning, Ed.

Morning, Ed.

I wanted to, if I could, talk about the industrial business because you have had some pretty good growth there in the quarter. And I just wanted to get a sense from you, if I could, what the cadence may be in the year so far has been 2015. I mean, your guidance looks like it is pretty strong. And then accordingly the ERP implementation I think there were some comments made about maybe some of the margin impact for that business you know as we move into 2015 as well.

Okay. Ed, how about if I start and I talk a little bit about the revenue cadence and then maybe turn it over to Rob on some of the headwinds year-to-year ERP and other issues. We were really pleased with the uptick in organic sales to 4.8% in the fourth quarter. Partially that was impacted by some of the slow down that we had with our ERP transition in the third quarter, so we got a little bit of benefit from that arguably a point or so. It was our 5th consecutive quarter of organic sales growth, so we were pleased with that. And actually through the second and third quarters and fourth quarters adjusting for the ERP impacts in the third quarter we had slight but certainly noticeable uptick through the last three quarters of the year. As you know, starting 2015 we always have some of the difficulties with weather, et cetera. We have really looked at it on a year-to-date basis, and we are up about 4% organically so far this year. So despite some of the bad weather we are pleased with that. Clearly some of the investments that we have made in expanding our salesforce are paying off and also some of the markets that we participate in haven't been impacted as some of our competitors have been. So we have been pleased with the organic growth cadence, but we recognize we still have some work to do the balance of this year to get to the 5% expectation, 3% to 5% expectation we have for the year.

And, Ed, if I could just give a couple data points on some of the expense headwinds. We do expect between pension and ERP about a 50 basis point headwind at Distribution. If you recall we did go live at our Minarik operation the beginning of the third quarter and as result of that we take the full depreciation on the investment that we make. That is certainly about two-thirds of the drag of the 50 basis points. The remainder of that is primarily pension. As I'm sure most of you have read, discount rates have came down. Our discount rate is down 80 basis points year-over-year from 4.6% to 3.8%, and we also had an impact relating to a change in our mortality table as we highlighted in some of our public financial that we just issued. So the combination of those two are creating about a 50 basis headwinds. So when we look at really the core underlying performance of the business, we are seeing a pretty strong year-over-year margin improvement at Distribution.

Okay. And the full year expense and I guess I'm referring to both businesses with pension versus what it was last year.

We expect pension expense to go up by approximately $3 million year-over-year, Ed. So last year it was about $3.7 million. It will be somewhere around $7 million for the year.

Great, guys. Thank you.

Thank you, Ed.

Thank you. And the next question comes from Matt Duncan, Stephens Inc. Please go ahead.

Good morning, guys.

Good morning, Matt.

So, Neal, on the salesforce additions at KIT do you think there is anyway to quantify how much those are adding to your growth rate? Obviously I would think those guys are probably going to get more profitable and add more to the top line as time goes forward. And just curious how much that was factored into the margin guide for KIT this year.

We expect that in the fourth quarter it was about 1%, Matt. So we have been tracking it pretty closely. We are not able to allocate full cost, et cetera. But it turned positive for us in the fourth quarter. We had planned for that, and they were able to achieve that. We would expect that overall it would be perhaps 2% through 2015. As you know, in any Distribution business you have a certain turnover in your sales organization, so we think we are well prepared to handle that if it does occur. So we're pretty pleased with it and it has met our expectation so far in turning positive during the fourth quarter. And we see a good contribution in 2015 as well.

Okay. And then on Aerospace segment sales, Rob, you mentioned that the earnings cadence is going to be such that back half is 60% to 65% of the full year. I'm assuming part of that is because of the Aerospace revenue flow and perhaps even maybe the Aerospace margins are below the guide early and above the guide later. Can you give us a little help on how to think about the trajectory of both Aerospace revenue and margins through the year?

Sure. No, I think that is terrific question, Matt. You are correct, we would expect to see the Aerospace revenue more back half loaded not dramatically. But certainly I would say north of 50% of the revenue will be expected in the third and fourth quarter. And in terms of the general margin cadence based upon the expected timing of shipments and programs we do expect Aerospace margins to increase during the course of the year with the first quarter being our lightest quarter from a margin perspective at Aerospace.

Okay, that helps. Last thing just the M&A pipeline, Neal, what is that looking like? And with you guys paying down some good debt in the quarter you have good free cash flow projection for the year how are you thinking about acquisitions?

Matt, we continue to be very active in the M&A side of our business. Obviously with starting the year with the G.C. Fabrication acquisition that was a nice one for us to continue to build out our automation control and energy platform. Clearly we continue to be interested on the Distribution side of our business. And as we have been saying for a while we really would like to be able to be more active in the Aerospace side of our business. As you know, those multiples have been quite high for a number of years. But we would really like to be able to add to our bearings business and increasingly you are going to see us focus there. Whether we'll be able to be successful or not is the question mark but we are very active.

Okay. Thanks, guys.

Thanks, Matt.

Thank you. And the next question comes from the line of Pete Skibitski, Drexel Hamilton. Please go ahead.

Good morning, guys. Nice quarter.

Thank you, Pete. Good morning.

I guess to start out I just wanted to ask about the BLACK HAWK. I think over the summer you guys were anticipating on the order of 95 cockpits for 2014 and I guess it has ramped down quite a bit here in the 2015. What is your sense of is that just lower DoD requirements or Sikorsky kind of moving work? And what is your mid term line of sight of that program? Does it continue to ramp down pretty meaningfully, or how should we think about that?

Pete, that is a really good question. I think that it is mainly a reflection of DoD requirements through Sikorsky. We do anticipate that we will be down again in 2015 versus 2014. As you've probably seen I'm sure you have seen, the budget in 2016 begins to tick up a little bit more. So we would certainly be looking for this year to be the low point. But let's keep in mind there is a lot of steps before the budget is approved and that is a 2016 budget, so any impact on us would be in our fourth quarter of our calendar 2015.

Okay. Very helpful. And then just a follow-up, there is a lot of color in the 10-K about startup of K-MAX production line. Can you give us some sense of how you are thinking there in terms of timing and risk and maybe opportunity size? Just any color would be helpful on that point.

Sure, Pete. It is a really good question. Since November the K-MAX team has been out actively working with current and potential new customers to get a significant indication of interest and, in fact, deposits on new aircraft if we were to go back into production. We think it is probably a late second quarter, early third quarter kind of time frame for us to make that decision. And it would really be based on a couple of factors. The first would be sufficient commercial demand for us to effectively and economically restart the production line. And then clearly we also see that having a hot production line is important to us in being able to be better positioned to take advantage of any unmanned aircraft requirements from either the military services such as the Marine Corps or Army or certainly from the Department of Interior and Forestry now in the United States where we have gotten a lot of interest recently on unmanned firefighting capabilities. So it is really a two-pronged approach. One is establishing sufficient commercial demand for us to economically restart the line, and the second part is clearly how that better positions us for potential unmanned orders in the future.

Okay. That's helpful. Thanks I'll get back in queue.

Thank you, Pete.

Thank you. Okay. And the next question comes from Jeff Hammond, KeyBanc Capital Partners -- Markets, sorry. Please go ahead.

Good morning, guys.

Good morning, Jeff.

Just on you mentioned the ERP headwind on Distribution margins and some of the top line headwinds abating. When do you think we get to an inflection point where ERP is a tailwind above top line and margins?

That's an excellent question, Jeff. Based on the current view of the program, we would anticipate ERP reaching that inflection point sometime towards the middle part of 2016 or somewhere in the third quarter of 2016 just based on the current project plan.

Okay, perfect. And then you mentioned a number of Defense headwinds I think adding up to $45 million of headwind, but I think you mentioned some offsets. Can you talk about what the tailwinds net out to against the $45 million and then maybe just touch on how you're thinking about Kamatics growth or commercial growth in general in 2015.

Sure. If you take a look at the $45 million headwind we have roughly about $60 million of programs across the Aerospace platform that would offset that decline across the programs we referenced creating that $45 million headwind. Amongst those we certainly expect AH-1Z revenues to increase this year. We have a number of programs online and the program at the U.K. a lot of tooling projects. Commercial bearings is expecting a strong year this year, high single digit growth. That will certainly help both the top line and bottom line. We talked about Peru ramping up. Wing-to-Body Fairings also ramping up. So we have a number of programs. We also recently announced our recent win with Rolls Royce, so there is lot of what we would term as single and doubles out there that are going to help fill the void. On the commercial side we do anticipate pretty good growth this year. The Aerospace cycle continues to be strong. Probably the most important platform there for us in the near-term will be the A350 ramp up most notably at bearings.

Jeff, it is interesting because if you think about the Aerospace business today, the revenue increase from year-to-year in 2013 to 2014 at about 3% really did offset $25 million of headwind. While it is a little bit frustrating that the top line growth is not higher, I think when we look at the team's ability to offset that $45 million revenue headwind and really accommodate that and still generate growth is a real testament to the diversity of different platforms that they're on. And you do the math and it is between 9% and 10% growth from year-to-year when you look at the $45 million coming out and then you kind of triangulate to the midpoint of our revenue guidance. A little bit of frustrating when you see the top line growing slowly but a tremendous number of moving parts underneath the surface.

Okay, that is real helpful. If I could sneak one more in, from a margin trajectory in Aero I think you're kind of saying flat, you know flat to slightly down. And it seems like with good commercial growth, maybe better mix in JPF, maybe some of these classic defense programs rolling off you would maybe see more of a positive mix shift?

Jeff, you're right. Those are all the positive ones that you hit on. Where we will see significant revenue growth as well as Rob outlined is in the AH-1Z, which is a lower margin structures programs in particular as we're still in the relatively early units of that. We have the Wing-to-Body Fairings again still relatively early in that A-10, so again while we are on in that it is a lower margins structures program. So we really do look at the growth in some of our higher margin product lines enabling us to sustain relatively constant margins despite higher revenue contributions from our lower margin structures business.

Jeff, if I may, the other comment I would make there is you are seeing on an EBITDA basis improved performance at Aerospace as we continue to invest in our system EPICOR so we are incurring additional depreciation and amortization also relating to some of the investments we made earlier this year at our facilities in the U.K. and Germany. So when you look out on an EBITDA basis we are expecting Aerospace to improve year-over-year.

Okay. Thanks, guys.

Thanks, Jeff.

Thank you for your question. The next question comes from Steve Levenson, Stifel . Please go ahead.

Sorry, I had mute on. Good morning, everybody.

Good morning, Steve.

I'm just paying close attention to the questions and answers. On the K-MAX and the unmanned firefighting and other applications there have been some preliminary FAA regulations about operating unmanned systems. Would firefighting be exempt from those, or would that come under it? And do you think that would be an impediment of help to potentially selling more for commercial purposes?

Steve, the firefighting applications are always done in controlled airspace. When the firefighters go in, there is a zone declared that is controlled airspace, so it is not applicable in that respect. I think that right now and for the next several years any unmanned K-MAX applications that we would have would be Government related and would be regulated outside of the recent FAA unmanned regulations that came out.

Got it. Thanks. Now I know you don't break out the different portions of the Aerospace segment the way that you used to, but can you tell us if the Kamatics to bearings business margins are similar to the way they have been historically, if they're above or if they have come in at all and if so if it is related to pricing pressure?

Steve, what I would say there is that team continues to do an extremely good job of implementing new technologies to enable them to respond to customer pricing pressures and never disappoint us on the margins they deliver.

Got it. Thank you. And the last one is with some of these programs in decline are there any possibility to consolidate the footprint in aero structure or need all the space you have still got?

Steve, we keep telling our business development people we have plenty of space for them to fill, so we are looking at that as opposed to reducing footprint right now.

Got it. Thank you very much.

Thank you, Steve.

Thanks for your question. The next question comes from Jack O'Brien, CJS Securities. Please go ahead.

Good morning.

Good morning, Jack.

Given the initial success Kaman has had with the salesforce build out in 2014, can you elaborate on any plans to continue to hire new reps in 2015, and the potential end market opportunities for additional reps?

Sure. Certainly the salesforce initiative that we put in place in the second half of last year was successful to this point. We continue to evaluate whatever market opportunities may present themselves, Jack. But we really want to take a little bit of time with this to make sure that it gains the traction that we expect from the full program to make sure that we fully exploit the market opportunities that we identified when we rolled out these 60 folks before investing in another batch of salesforce and resources. Certainly if an opportunity presents itself, we'll act on it, but we are trying to be somewhat measured on that.

Okay. And then just as a quick follow-up, as the reps begin to offset their cost in Q4, do you have time line for when you expect them to no longer be dilutive to margin?

Yes, sure. In the fourth quarter, Jack, the salesforce initiative was roughly neutral to our overall Distribution margins in the fourth quarter, so we actually achieved that as we exited out of the 2014 period. So we would anticipate in 2015 to certainly continue the contribution from the salesforce initiative hopefully at least a segment or maybe even better than segment average.

Okay, great. Thank you very much.

Thank you, Jack.

Thank you for your question. (Operator Instructions). And your next question comes from Eli Lustgarten, Longbow. Please go ahead.

Good morning, everyone.

Good morning, Eli.

Can we talk a little bit about the fluid power business since you made a huge acquisition as to what you're seeing as we go through 2015 expectation for that business. And talk about the profitability. It should be materially more profitable than the regular Distribution business, and is it being weighed down by acquisition cost or is that a potential to enhance the profitability of that segment as we go out over the next couple of years?

Eli, a couple of things, I think as we look at the business overall, we are extremely pleased with the growth of our fluid power business and our ability to effectively acquire a number of really premier Parker distributors over the last couple of years and move to the position where on a run rate basis it's about 25% of our overall revenues. And as we commented, Parker has now moved into the positioned as our number one supplier for our Distribution group. We think that we are their second largest distributer in North America and certainly would like to move in to the number one spot here over the next couple of years. It is a higher margin business for us. You're exactly right. It is one of the reasons that we have targeted that. It is much more engineering intensive and certainly as we are able to focus all of our resources around Parker is the premier brand we are able to get slightly higher margins as well. But as you said, we do encounter all of the amortization of intangibles associated with those acquisitions, so it is one of the reasons that we think the EBITDA tables that we now provide in our releases can give you a good understanding of the underlying contribution of those acquired business.

Can you talk a little bit about the outlook you have for that business in 2015 embedded in your guidance?

Sure. Eli, this is Rob. We certainly anticipate in that business similar types of growth that we have projected for the overall segment. I don't think we are projecting anything that would be terribly dissimilar there. And to answer your other question we certainly would expect fluid power as time goes on to certainly be an above segment average which is why we are investing in those lines of business to improve the overall profit margin of Distribution.

As a follow-on your salesforce initiative which is looking to be working out very well and I understand your caution, but it is not unique to Kaman. It is basically being done by ever major Distribution company that we look at. We have five that I know of that are doing it, and they are all doing it for the same reason because it is tough to get growth, you can't open more stores that quickly so companies are putting more feet on the street to enhance their growth. Do you see that as a competitive issue that you have to be adding more sales people, or do you think you can do it more selectively? Because as I said, everybody is doing it that we look at.

Eli, I think that with every Distribution business as I said earlier there is always some inherent turnover in your sales organization. I think what we did differently was simply to scale of it for a business of our size. So I think that it was important to us especially if you look at the context we came out of 2012 with a very tough revenue environment, beginning of 2013 like some other companies had a restructuring and reduced some of our headcount. Through 2013 we clearly identified some areas that we were under resourced and also as we built out our automation control and energy and fluid power platforms those were really different experiences and skill sets then we had in our base KIT business. So for us it was also required for us to be able to get the right resources with the right experience in training into the markets that we had some opportunity. So I think you are right, every company does that to some degree I think for us as a percentage of our overall outside sales force it was significantly higher.

Got it, and thanks. Can you talk a little bit about e-commerce in your businesses whether your investments percentage and what you have to whether it becoming a more important part of our business and we don't have much commentary on that here?

Sure, e-commerce is a pretty important part for Distribution. I think it's an area where we continue to make investments, we probably have some catching up to do perhaps relative to some of our competitors who are further down the road on that, but certainly we recognize the importance of e-commerce as way of reducing transaction costs and gaining additional market share going forward.

How much of your business is your e-commerce at this point?

We haven't really disclosed that but, I would say it is fairly small.

All right Thank you.

Thank you, Eli.

Thank you for your question. (Operator Instructions). And the next question comes from Scott Graham, Jefferies. Please go ahead.

Good morning. Very nice quarter.

Thank you.

Couple of questions from me the backlog in Aerospace. Do you guys have an idea of how much you expect to ship in 2015 of the backlog?

Scott, we typically the general rule of thumb we typically expect to ship roughly I think about 80% plus of the backlog during the course of the year, somewhere in that range is what we would expect in 2015.

Okay. I'm going to sort of triangulate here to a question about how the earnings flow in 2015. It looks to me from at least from my math and please correct me if I'm wrong that based on your comments in Distribution that our first quarter earnings per share will probably be down given that sort of 60%, 65% second half. So I guess my simple question is based on the shipments schedule that you see in your backlog right now obviously it is going to take some wins and some sort of run rate business to get to the revenue number in Aerospace. How confident are you in that Aerospace sales guidance?

I think Scott there is always some variability because you're right there are orders that you anticipate winning during the course of the year and being able to convert into shipments during the year. The ratio for us this year is not atypical from what we've had over the last three or four years. So that gives us confidence in our ability to hit the sales outlook and also as we commented in our prepared remarks, we had a number of programs that we closed recently that we see providing some upside for us to able to hit that outlook during the course of the year. So you're absolutely right, you do the math and it require us to win and convert orders during the course of the year. We track that pretty closely and it's not an atypical percentage for us.

Okay great. Last question is are wins that you talked about the Bell, 767, 777 the Tanker, you said about $200 million, most of it is not in the backlog, could you tell us how much is and how much expect or when do you expect the rest upon to hit the backlog?

I'm going to take the second half of the question first because it is a little bit easier for us as we look at what the current backlog is by couple of those programs, but we did close those orders late in the fourth quarter or early here in the first quarter so we would anticipate that a fair amount of it would come in during the first quarter Scott. The thing to keep in mind is that in some of these instances we will enter into a contract, but it will be based on a series of purchase orders and for us we have a tight policy that it has to be on PO for us to be able to put it into our backlog. So for us, we currently have only about --

It's about $40 million Scott, roughly give or take that's in our backlog today that related to those programs.

Okay. And then with these signings and as these things hit the backlog and I definitely applaud you for the conservative approach you take. Would we expect to see the backlog rise sequentially in the first and second quarters?

No, we would expect to see the backlog improve over the year. Scott, some of it does relate in terms of how they place their POs and the timing of when they do that. So it really comes down to on some extent just the customer demand in terms of how they place the POs relative to the rate of sales and that does fluctuate at times.

I'm with you. Thank you.

Thank you, Scott.

Thank you for your question. And the next question comes from Robert Kirkpatrick, Cardinal. Please go ahead.

Good morning. Is the ERP operation at Minarik now working as expected after the disruption earlier in the year when it was put in place?

I would say it Rob. There are still some things that we're doing to optimize the performance of the system and also some things that we're doing to modify some of our processes to make sure that we can be more efficient. But we took a big step up in the fourth quarter and cleared a lot of the backlog that we built and we're not able to -- because we weren't able to ship it in the third quarter. We actually just had our Board meeting last week, and the ERP team gave an overview for the Board and I would say that Minarik is back in operating well but there is still some improvements that we can make. Since it's was our first go live. we certainly had a number of items on our lessons learned list.

Thank you. When is the next cut over expected to happen and which operation will be cut over?

We anticipate that it will be in probably early in the third quarter, Rob. And it will be one of our more recent acquisitions. We think it will be Florida Bearing. And the reason that we have elected to go live then is that it gives us a full quarter to go through all of our Sarbanes Oxley testing and compliance. So typically we will do go lives at the beginning of a quarter.

Okay. And then you talked about the salesforce expansion effect for the quarter. But I was wondering if you could give us any color on the amount of investment that netted out for the year?

When you say that the investment, Rob, are you speaking to the net P&L impact?

Yes, the net P&L impact.

For the year it did have a negative impact for the year. It probably had in the neighborhood of about a 10 basis point impact for the full-year.

Super. Thank you so much.

Thanks, Rob.

Thank you for your question. And the question comes from Peter Skibitski, Drexel Hamilton. Please go ahead.

Yes. A few follow-ups, guys, for Neal or Rob. I guess I'm trying to understand better the Aerospace margin guidance. I'm trying to understand why margins would be kind of flat to down in 2015 on at least flat volumes for your guidance and although better mix, right? You talked about better mix at JPF as well as higher bearing sales. So is it pension is it something else, could you just help us there?

No, Pete, good question. There are couple of things that are really working to keep the margin relatively flat year-over-year. You are absolutely correct, we are expecting a slightly better mix on our JPF orders, although it's not that dramatic. In bearings we expect an improvement. Really offsetting that there was a number of things in particular the significant ramp up in AH-1Z as we mentioned, as Neal mentioned that's an early rate production, so that will be at much lower margins. We also expect there will be pension headwind there as well similar to Distribution just given some of the change in our pension assumptions. So it's really a mix of some ramp up on lower margin products offsetting growth and some of the higher margins, so when you kind of net it all out we're pretty much at an expected flat margin environment year-over-year.

Okay. Okay, got it. And then the $45 million revenue headwind to Aerospace you talked about from the four programs, is that roughly kind of 25% impact from all of those or is one significantly greater headwind than another?

Pete, terrific question. No, it is not 25% across all of them. We do expect a larger impact from the reduction in the New Zealand SH-2 program as that winds down in the third quarter of this year. The remaining programs are fairly equivalent in their impact, but we would expect New Zealand to be the larger contributor there.

Thank you for your question. 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 with you again in a couple of months when we report our first quarter.

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