Kaman Corp (KAMN) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Kaman Corporation second quarter 2015 earnings conference all. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder this conference call is being recorded. I would now logistic to turn the conference over to Mr. Eric Remington, Vice President, Investor Relations. Please go ahead, sir.

Good morning. Welcome to the Kaman Corporation second quarter 2015 conference call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President, Chief Executive Officer, and Rob Starr, 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 certain 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 of 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.

In addition, we expect to discuss certain financial measures an information that are non-GAAP measures as designed in applicable SEC rulings and regulation. Reconciliations to the Company's GAAP measures are exclude in the earnings release filed with yesterday's 8-K.

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. During the second quarter we executed well in both segments and delivered adjusted EPS of $0.63, which was ahead of the prior year. Stronger profitability was primarily driven by two factors -- record high operating margins of 20.5% at aerospace, and a sequential 110 basis point margin improvement in distribution. We achieved this level of profitability despite lower year-over-year sales in aerospace and being impacted by a challenging industrial marketplace in distribution. Consolidated sales were $446.3 million for the quarter, down modestly against the prior year.

Before reviewing the segment level details I would like to take just a moment to recognize our almost 5,000 dedicated employees around the world. 2015 marks the 70th anniversary of our great company and we were pleased to commemorate this milestone with our employees at a celebration last month. At that event we were able to announce that we were resuming production of the K-MAX helicopter. The K-MAX was Charlie Kaman's last design an there couldn't have been a more fitting day to make the announcement as we celebrated all that he accomplished during the 55 years he led our company.

Restarting K-MAX production is an important step for Kaman. To-date we have orders from North American and European customers and are in late stages of negotiation to place aircraft in Asia as well. We are pleased with the initial reaction in the commercial market and expect to begin deliveries early in 2017.

This program has several unique factors that we believe mitigate the program risk while providing a range of benefits. First, because the aircraft is already fully developed and FAA certified, restarting production is expected to require a limited investment. We will produce the aircraft utilizing our existing infrastructure requiring only about $1 million in capital expenditures and modest working capital investments. Further, we believe a hot production line will strengthen our position with the US armed services for the unmanned version of the aircraft, and, again, this summer we will all seen the danger to much of the western US from forest fires. There is ongoing interest in an optionally piloted firefighting mission for the K-MAX and we along with our partner Lockheed Martin will be conducting a firefighting demo in the early fall in Boise, Idaho at the headquarters of the US Department of the Interior Bureau of Land Management Office of Aviation Services. So I believe we are off to a good start on a program with significant long-term potential for Kaman.

Now, I would like to walk you through the highlights of each of our segments beginning with aerospace. Segment sales in the quarter were $142.3 million, which was down $12.6 million from the prior year with the decline primarily attributable to lower volume in our legacy missile and bomb fusing programs which were down nearly $10 million over the prior year. Sales of bearing product lines adjusted for foreign exchange impacts were up slightly while JPF and structures revenues were essentially flat. Looking further at the program level, higher AH-1Z revenues were essentially offset by lower year-over-year revenue from C-17, Bell Helicopter rotor blade demand, BLACK HAWK and B-22inaudible) along with lower Egyptian SH-2 revenue.

In aerospace despite lower revenue, operating profit dollars increased approximately 9% over the prior year as margins registered a 330 basis points improvement. This improvement was primarily driven by JPF customer mix with direct commercial sales accounting for nearly two-thirds of unit volume in the quarter, and continued solid performance from our specialty bearing product lines. Bearing demand remains strong and we continue to improve our operational execution which also contributed to aerospace's quarterly results. We expect both of these product lines to continue their strong performance as we move through the back half of the year.

Looking at distribution, segment level sales increased 2% to $304.1 million. Organic growth per sales day was a negative 0.8% ending six consecutive quarters of organic growth. The quarter started on a strong note registering 4.6% organic growth in April, our best monthly performance of the year. However, organic growth turned slightly negative in May with a further step down in June as our comps became more challenging. Taking a closer look at the organic growth rates by product platform, bearings and power transmission was down slightly against prior year, while fluid power experienced the deepest slowdown given their industry exposures. And we were pleased that automation control and energy was up modestly against the prior year. Also, it is important to note that our organic sales increased sequentially from the first to second quarter reflecting strong relative performance given the challenging industrial environment.

While we are disappointed that the macro-environment is not more robust, we continue to invest in growth opportunities so that we can benefit more fully when market conditions turn more favorable. Segment level adjusted operating margin was 5.3% in the quarter, slightly lower than prior year and up 110 basis points sequentially. Distribution was impacted by slightly negative organic growth, higher ERP depreciation, and pension expense, along with lower vendor incentives.

In summary, we were pleased with our ability to deliver improved profitability despite a more difficult revenue environment. Looking forward we see some near-term challenges that are causing us to temper volume expectations for 2015. However, we are confident in our abilities to control costs and drive results over the second half of the year.

Now, I would like to turn it over to Rob to provide you with some additional details. Rob?

Thank you, Neal, and good morning, everyone.

I would like to begin this morning by reviewing our financial performance for the second quarter. At a consolidated level we continued to meet our profit expectations for the year, delivering second quarter adjusted earnings from continuing operations of $0.63, a couple of cents ahead of the prior year. As Neal mentioned expectations despite lower than expected revenue in the quarter, driven by our consolidated operating margin of 50 basis points over the prior year of 6.8%. During the quarter consolidated sales were $446.3 million or about 1.5% lower than the same period in 2014.

I would like to now walk through the details by segment beginning with aerospace. Segment operating margin was the clear highlight, which was up 330 basis points over the prior year to 20.5%. The aerospace team accomplished record high margins despite an 8.2% decrease in revenue to $142.3 million. This achievement stems from several factors including a reduced mix of lower margin structures program, strong profit contribution from our specialty bearing product lines, and a positive mix shift, and (inaudible) commercial sales shipments and segment mobile cost controls. We are also seeing some of our recent now facility investments begin to pay off, with strong tooling orders in the UK and improving performance in our German specialty bearing operation.

Moving to distribution. As we noted in the prior quarter conditions continue to be softer than expected and sales trends have remained weak into July with year-over-year organic sales down mid-single-digits in the month to this point. Our end market performance has been mixed, and while we have limited direct exposure to the oil and gas sector it has become increasingly clear that this sector's weakness has spilled over to the broader industrial economy which is impacting us. In spite of these near-term challenges, we continue to invest in the business and are margin enhancement initiatives across the business.

I would like to add a comment about our reported tax rate in the quarter which was unusually low at 20.3% effective for the quarter. We recorded certain discrete items relating to a state income tax regulatory change that provided a current period benefit of about $0.16 per share will higher state taxes in the future. Our future effective tax rate is expected to remain at approximately 35%. However, given these discrete items in the second quarter, our 2015 full-year rate is expected to be approximately 31%.

Last quarter we initiated a renewed share repurchase program, and have bought back approximately 930,000 shares during the quarter. This did not have a meaningful impact on our second quarter earnings-per-share.

Turning now to our outlook for the year. We have made a number of adjustments. Overall, we are reducing our revenue expectations for both segments and are raising the operating margin range in aerospace offset by a modest reduction in our distribution margin outlook. Starting with aerospace, we have lowered the range for revenue expectations by $20 million at the mid-point. This primarily reflects the pushout several programs such as the Peru SH-2 program and missile program along with revised expectations for certain programs in the near-term. While aerospace sales will be lower we have significantly increased our overall margin expectations to a more favorable product mix and higher profitability on certain product lines, most notably, the transprogrammable fuse.

On distribution, we have lowered the midpoint of our forecasted sales range by approximately 4% or $50 million, based upon our expectation for continued softness in the industrial market for the remainder of the year. This implies a full year consolidated growth rate of 3% to 5% with an organic growth rate of negative 1% to positive 1% at distribution. We have lowered the mid-point of distribution's operating margin by 15 basis points to 4.9% as we look to offset the impact of lower sales through management of expenses along with operational prudence we are undertaking in the business. These include process improvements and margin enhancement initiatives to drive higher reflection of gross profit.

Our expectations for corporate expense and free cash flow remain unchanged. Similar to last year we expect our earnings for the year to be weighted to the fourth quarter with more than one-third of our full-year net earnings projected to be recorded during Q4. This is driven by the expected cadence of sales mix and accompanying operating margin contribution in aerospace.

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

Thanks, Rob. I think it's clear that the first half of the year has not played out exactly as we had predicted. The industrial economy continues to be significantly weaker than anyone forecasted coming into the year and program delays in our aerospace business, primarily in our legacy missile product lines, have led to lower revenues in aerospace. However, despite these topline challenges, we have been able to deliver operating productivity in line with our expectations and the investments we have made in the businesses such as our new facilities in the UK and Germany are paying dividends.

In this quarter, the diversity of our three-platform strategy and distribution also proved to be a strength as our automation control and energy product area helped to offset some of the weakness in fluid power. So halfway through the year I am pleased that we have met our profit expectations despite the additional program and product-specific challenges we have highlighted. And while we recognize there is a lot of work ahead of us in the second half the year, we are confident in our team and our capabilities across Kaman to achieve these objectives.

With that I'll turn the call back over to Eric. Eric?

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

Thank you. (Operator Instructions). And our first question comes from the line of Ed Marshall from Sidoti and Company. Your line is open. Please go ahead.

Good morning, everyone.

Good morning, Ed.

I am curious when -- when we look at the guidance and especially the tax retime wondering if you anticipate -- you expect it to -- or does that include that $4.3 million tax benefit in the quarter? And to me it looks like it includes it, but I just wanted to be near.

Thank you for the question. This is Rob. It does include the impact of the tax change. So we just wanted people to understand what the GAAP estimated tax rate will be for the year.

Got it. So on a pro forma basis it will be closer to the effective rate of 35%?

Yes. Exactly.

Okay. When we look at the next in airplanes I know you had a pretty good quarter as related to commercial and I guess that's a foreign military sale in some respect and I know they are unusual in timing at times. Can you look at your backlog and tell -- and have an idea as to when those orders are coming through? I assume you do and is there anything coming in the next two quarters related to the commercial sales?

Ed, this is Neal. You're exactly right. When we're able to book a direct commercial sale order for JPF, we do have a fairly good understanding of what the shipment timing will be. As sometimes that varies a little bit, but it is one of the drivers behind the strong profit performance that we're forecasting for the fourth quarter of this year. Again, similar to this quarter we will have a strong mix of direct commercial sales for the JPF product line in that fourth quarter.

I understand they kind of shift depending upon the US Air Force's request for shipments as well. Are we at that point where you have pretty good visibility that it won't shift from 4Q to 3Q or the first quarter of next year?

There is -- there's always some variability in that because there's special transportation that's required for that as well, as well as export licenses. So there is -- there's always some variability in -- in those respects, Ed, but we think that we have that pretty well scoped out, but there is always some variability.

Okay. Did you quantify the decline in bearings industrial business? I think you might have said modestly. Do you have that number and also do you know where the inventory level of bearings industrials and in the industrial distribution stand?

So on the industrial distribution side of the business we did have a slight decline in the bearings and power transmission area, but it was relatively slight. We did experience a much more pronounced decline in fluid power, which I don't think surprises you or anybody, and overall our inventory levels have not changed very much. So we're relatively stable there.

Okay. Great. Thanks, guys.

Okay. Thank you, Ed.

Thank you, Ed.

Our next question comes from the line of Matt Duncan from Stephens Inc. Your line is now open. Please go ahead.

Hi, guys.

Morning, Matt.

Good morning, Matt.

So just on KIT, the deceleration in revenue that you're seeing there -- is there any particular customer end market that you can point to that that's responsible for that, Neal or is it really more of a broad-based slowdown that you're seeing?

Yes, Matt. This is Rob. It's really -- I mean as we look at our top ten end-markets four were down, four were up, but the ones that were down were down fairly considerably. Those mostly being mining, non-metallic metals and aggregates. Machinery manufacturing and into the wholesalers. We have seen certainly in the mining and commodity area a bit more of a deceleration an we're being impacted by that.

Matt, the other thing I would add and we tried to make sure that we hit it on our prepared remarks is that the -- the second quarter comp for us got -- got pretty tough. So our organic sales were actually up from the first quarter to the second quarter, but -- but last year we -- as you may remember we had a -- a really strong both organic and acquired growth rate for KIT in the second quarter of 2014. Now, the comps don't get very much easier for us through the balance of the year, but we were pleased to see that -- that the team at distribution was able to deliver positive organic growth from the first to second quarter despite as you know some really tough markets out there.

Sure. So, Neal, on that point and maybe this is for Rob -- if the organic sales declines stay in the mid-single-digits on a per selling day basis an you have got four fewer selling days in the fourth quarter than you did last year would you still be in the guidance range that you have given for that segment if we say in this sort of down mid-single-digit daily organic decline? Would that put you in the guidance range or do you need things to gets a little better later in the year to do that?

No. Matt, excellent question. I mean the implied second half daily organic sales rate is -- is between negative about say 3% and up 2%, but on a -- we have three fewer selling days in the back half of the year so to answer your question yes, on an absolute basis we can be down in that mid-single-digit range and certainly meet our outlook.

Okay. That's helpful. So let me flip over to aerospace then. I am trying to make sure we understand of the flow of the back half in that segment because it sounds like the 4Q from both a revenue and profit perspective are going to be much higher than the 3Q to sort of get to that one third of full year earnings is going to come in the fourth quarter the guide that you have given us. Can you help us sort of look at 3Q versus 4 4Q in aerospace to make sure we kind of dowse this thing correctly?

Yes. No Matt. This is Rob. I think the way to think about it is about 30% or so of aerospace's full year sales will be in the fourth quarter, but one thing to keep in mind as Neal mentioned before is based upon expected timing of DCS shipments as well as bearing deliveries and a few other areas we do inspect the margin in the fourth quarter to be higher just based on product mix.

So it's really more of a product mix margin driven earnings number than it is sort of a really lumpy sales number?

No. It's -- the sales will be weighted more towards the fourth quarter.

Okay. And then last thing just on the programs that seem to be slipping a little bit there, Neal. Can you give us any more detail on sort of why they are slipping and when you think these things are going to starts to hit the ground running again?

Yes. For us one of the big impacts was some slippage in the Peru program. That's really timing as we met with them. They have wanted to add some additional capabilities to the aircraft so that has required us to go through a second time -- go through a preliminary design review for a second time. So actually that will be a little bit of good news for us as we go through the program, but it is impacting us here in the near-term.

Okay. That helps. Thanks, guys.

Our next question comes from the line of jack O'Brien from CJS Securities. Your line is now open. Please go ahead.

Good morning. Thanks for taking my questions.

Hi, Jack.

Good morning, Jack.

So despite revenue being a bit light, aerospace margins are impressive with obviously strength coming from bearings and JPF. As we put the next couple quarters aside how can we look about EBIT performance going into 2017? Or 2016, excuse me.

Yes, Jack. This is Rob. I think certainly if you go back to investor day we talked about our goal of having aerospace at a high teens margin and certainly the outlook would indicate that we have accomplished that. As we look out beyond, clearly we're not providing any outlook for 2016 at this time, but I would say that certainly our two most profitable segments have very strong fundamentals behind them. Those being bearings and certainly our fusing and JPF program with very solid backlogs and very solid performance so we feel pretty good about that. And our aerostructures business, we will continue to work on the performance that has certainly been stable and showing good pockets of improvement. So we feel very comfortable that the business over all is in good shape.

All right. Great and then just one quick follow-up. Given the somewhat slow start to the first half the year. I was wondering if any of this impacts you in regards to acquisitions. Are you looking to solidify a bit more, or if it doesnt impact you at all, what you guys are seeing out there?

I don't think it -- it does, Jack. We've -- we've consistently stated that we're very interested in being able to acquire companies that will build up the strength that we have in our bearing and engineered products categories within the -- the aerospace business and while the end-market conditions or volatility certainly may impact some of the valuations on distribution companies I don't think it -- it changes at all our long-term strategy of continuing to build out our geographic footprint and also supplementing with additional acquisitions in both the automation control and energy as well as fluid power markets.

So I don't think it changes our strategy at all. It may change the relative valuations that we might be willing to pay in the near-term for some of the distribution companies, but I don't think we have seen any change in multiples in the aerospace market.

All right. Great thanks, Neal.

Our next question comes from Ryan Cieslak from KeyBanc Capital. Your line is now open.

Hey. Good morning, guys.

Good morning, Ryan.

Welcome, Ryan.

Glad to be here. First off, Neal, I wanted to maybe get some color on how the underlying pricing and distribution trended through the quarter and maybe more importantly what's implied in the updated distribution outlook for -- for the back half of the year?

Actually, Ryan, despite some of the lower vendor incentives that -- that we experienced in the quarter as we commented on we -- we had a -- an okay pricing environment. I think a lot of that has to do with some of the process improvements that -- that Rob referenced. We're really trying to be very disciplined around our pricing strategies. And also the team in distribution has done a -- a good job of -- of effectively managing their cost base given some of the declines that they have seen in end-markets. So I think it's a combination of not having as much pressure on the pricing line as we might have otherwise thought and, again, I think I would give our team some credit on that and also some product mix within the -- in particular the power transmission and motion control group with some movement towards slightly higher mix of higher profit product line sales in that -- within that platform.

Okay. That's great. Good color. And then I think in the prepared remarks you had mentioned some margin enhancement initiatives within distribution. I just wanted to see maybe if you could provide some more color exactly what you guys are looking at there, as obviously you guys are facing a little bit more difficult demand environment.

It really comes down to -- to pricing discipline and -- and how we look at not only the individual line item pricing, Ryan, but also the cost to serve for the customer. So I think a little bit better analysis for us based on frankly some -- some tools we put in place over the last couple of years that we're beginning to get some return on right now enables us to better establish what our cost to serve at a specific customer is. And that helps us to obviously price more effectively, and I think that that's come flu and helped us. And also we've had some consolidation of ER -- back office ERP systems now as we have gone through the first half the year and that's provided us some benefit as well. I mean obviously that comes through in the SG&A costs, not the gross margin, but we have seen some benefit there as well.

Okay. Great. The last question I had I just want to take maybe another shot at thinking about the airplanes margins going forward and maybe the way I would ask it is thinking about the trajectory of those margins into 2016 and how mix might play into that just based on what you guys see within the backlog right now. Is -- I am assuming maybe there's some normalization that potentially could occur as we go into the first half of the year, but maybe just some color around that would be helpful.

Yes. Ryan, it's a good question, and the reason I say that is that we look at it from several difference perspectives on the aerospace side. Number one is we have a -- a really strong specialty bearing product line and that backlog continues to -- to build really great positions on new aircraft, the business for us with the highest percentage of aftermarket sales as well. So we feel really confident in the ability of that business to continue to grow although low to mid-single-digits probably, but grow and then continually make improvements in their operational performance that contribute to the bottom line. So we feel very good about that business.

The other is that as you look at our -- our fusing product lines we see clear underlying strength and continued exceptional operational performance in the JPF product line so we see that continuing certainly into and hopefully through 2016. And where I think we were most apt to see some of the -- the change in the margin percentage would be based on our ability to continue to grow our tooling and aerostructures businesses. We see growth there although it has been slower than we would like. We see growth there and we know that that will come in at -- at lower margin performances. So it will certainly contribute to earnings, which is for us what's important, but that may cause some pressure on our -- our overall margin percentage. And that's why we have talked about the target range being in the upper teens. We would like to see it be in the upper teens because of a stronger contribution of revenues from our aerostructures business.

Okay. Great. That's all really good color, Neal. I appreciate it. I'll get back in the cumulate thanks, guys.

Thank you.

Thank you, Ryan.

Our next question comes from the line of Steve Levenson from Stifel. Your line is now open.

Thanks. Good morning, Neal, Rob and Eric.

Good morning, Steve.

Good morning, Steve.

There was just a small mention of foreign exchange in the press release. Can you give us an idea how that's really -- a little more detail on how it's impacting things? And are there any actual opportunities for you to shift production over to the European plants a little bit or buy materials there where you can get advantage from the dollar?

No. Good question, Steve. In terms of the foreign exchange impact we had about a $2.5 million topline impact in the quarter. the overall profit impact was -- was not all that considerable which is why it didn't get a lot of press. We do continue to monitor it. We do -- as any company would -- have positions in place to help mitigate some of that impact. We are constantly working with our European counterpart part mirrors to make sure we understand our exposures.

To your second question, Steve, we certainly look at opportunities to create natural hedges in terms of where we procure and looking at our cost structure, but if you were to lock at our businesses there's somewhat limited opportunity to really shift a whole lot of work from the US to our international locations just given different capabilities and machining and really kind of the CapEx that would be required to do that. We view it as -- we clearly look to mitigate the foreign exchange risk through whether it's financial instruments or just kind of natural offsets by procuring in local currency in our foreign locations.

Yes, Steve. We would have some additional costs to go through first article inspection and certification if we were to -- to move some production from one plant to another and -- and so that -- that would probably offset the -- the additional -- the advantage we might get. So I think longer-term if we look at a five year time frame, we would like to have multiple certifications for products at different plants, but right now I don't see us doing that in the near-term.

Okay. Got it. Thanks. And the K-MAX question. I know that's exciting to restart production and the firefighting sound like a good application. Will you be using a bucket or have you or do you plan to design an integral tank? Is that even possible with the airplane?

We would typically use a buckets although we have in certain situations used a water cannon that does use -- I am not actually sure if it's totally internal storage for the -- for the water or retardant or if it's external buckets that they pump up from but normally for forest fires we're going to use a Bambi bucket.

Got it. Thanks a lot.

Thank you, Steve.

Our next question comes from the line of Pete Skibitski from Drexel Hamilton. Your line is now open.

Good morning, guys.

Good morning, Pete.

Good morning, Pete.

On the aerospace guidance for the topline reduction of let's call it $15 million to $25 million is it kind of $10 million in fusing shifted into 2016 and $10 million in SH-2 is that kind of the right ballpark to think about?

Yes, Pete. This is Rob. I think it's certainly I don't think you are far off the mark, but it really comes down to a few different areas, particularly in the (inaudible). I mean certainly as Neal mentioned on Peru timing is having an impact. Missile program is probably our most significant impact in terms of the reduction in the outlook. We've also had some timing on a couple of commercial programs. So if you this I about Bell commercial demand has been relaxed little bit pushing some things into 2016 as well as the A330 rate reduction has also impacted us to some extent. So those would be the major contributors to the reduction in the outlook.

Okay. Okay. And are you done with New Zealand at this point or is there maybe one more quarter left on that program?

Yes. We inspect to complete the delivery of the last two aircraft during the third quarter. There will be some revenues passed there but not -- but not a lot. So I would say the vast majority of the revenue from the SH-2 New Zealand program will come to a conclusion in the third quarter with some trickle-ons in the fourth quarter maybe even a little until next year but not much.

Okay. And you booked some revenue on Peru already. Is that correct?

Yes, we did.

Yes, we have.

Okay. Okay. Last one maybe for Neal. Hey Neal, do you guys see any impact to you guys from Lockheed?

Actually we -- we would view that as a net positive, Pete. Clearly we're a very -- very large and strong supplier to -- to Sikorsky which I think is demonstrated by how long we have worked with them on the UH-60 program. And we don't talk about it a lot but we do an awful lot of work for them on their blades, their helicopter rotor blades as well. So Sikorsky is a really good customer for us and we have a -- a very strong high level relationship with Lockheed on the -- on the unmanned K-MAX program obviously. So we -- we feel that -- that that over time will be a net positive for us. We were glad to see that Lockheed was the successful bidder.

Okay. Thank you, guys.

Thank you, Pete.

Our next question comes from Scott Graham from Jeffries. Your line is now open. Scott Graham^ Hey. Good morning.

Good morning.

I wanted to ask about the tax rate again. So what you have you have here in your guidance is GAAP tax guidance. Yes?

Yes. That is GAAP.

So it would imply sort of a what I'll call it 33%, 34% second half rate.

That's correct. I think you can --

Got you.

35%, yes.

Okay. Okay. 35?

Yes.

Is it you say?

Yes between 34 and 35, Scott.

Yes. Understood. The next question is, Neal, in the past you have been kind must have to kind of go through some of the programs that you are working on, things in the pipeline, things that are hoped for. I was hoping you would be able to do that again for us.

Well, I'll give it a try. We -- we clearly are working to -- to gain additional presence with Boeing on the 777X program both from an engineering perspective up front, from a tooling perspective as various players go into production, and also to try to expand our -- our work share beyond the fixed trailing edge. So obviously a focus on Boeing commercial and also increasingly with Rolls-Royce primarily for the A330neo we have -- as you can see from our reduced outlook and as Rob commented, we got hurt a little bit more on the A330 reduction in rate than we would have anticipated. Maybe that was a little bit of poor planning on our part. Maybe it was -- but it ramped down a little bit more quickly than we had anticipated, but we -- we're working very hard have had some success building on our relationship with -- with Rolls-Royce on the A330.

And on -- we talked a little bit about Bell Helicopter. Again, on both commercial and military a very important customer to us. They are working on the new aircraft for them the Relentless, the A -- their 525 aircraft and we've got a very strong position with them on that aircraft so we were glad to see that have its first flight and -- and that will be coming -- I believe that they are going to begin delivering that in late 2017. So hopefully the timing for the oil patch will be good for them.

We've also built a nice position on the P-8 and as that ramps up for both US and -- and foreign demand such as India that will be important to us and we're also trying to expand into companies like [Savka] and others in Europe our to expand our footprint and also while it's relatively low rate we were -- the 767 -- for the 767 we were glad to see Federal Express give an order for 50 aircraft I think with options for 50 more. So if they take that rate from effective one to two that will be a plus for us and also the tankers.

So I apologize for going on so long, Scott, but that's kind of the breadth -- I think it really speaks to the breadth of different programs that -- that we're on today and those that we're hoping to get on.

Nope. That is what I was looking for, Neal. Thanks. Last question and this is kind of maybe for both of you and it was I think addressed a little bit earlier.

This distribution margin I know has been stubbornly locked in this sort of 5% area plus or minus. I was just wondering if you look at this -- at this -- at the benefits that you expect from ERP and from better operating leverage when the sales come. But in this environment it just seems like the sales are just not going to come for a while longer. I was just wondering if the environment had -- has made you look -- go back and maybe look at what you can do -- I don't mean -- I don't mean little things. I mean something more Draconian to permanently push this margin up 100, 150 basis points and to do so faster than what the plan is. Just I know we're relying on operating leverage here and I know that the ERP system is going to give you some great tools to further enhance the margin, but I guess maybe over the next six to nine months it just doesn't feel like we're going to gets a lot of pop out of sales across industrial distribution overall. I was just wondering if something had -- if that had maybe stirred a relook at distribution.

Scott, I don't think it's -- it's caused us to relook at distribution. Clearly a number of the things that we're implementing right now are -- are having an impact. I think that when we think about year to year impact for us on increased pension costs and ERP depreciation this year, we have set it 30 to 40 basis points and obviously we're not getting the -- the benefits yet of the ERP system because such a small percentage of our -- of our business is on it today. But if we look at the -- the business going forward, we -- we know that we will begin to get benefit of that. Also next year our pension expense will roll off and that can have between a 30 and 40 basis points impact right there. So if we were to use your 100 basis points, Scott, just notionally we can get not quite but almost halfway there simply by the reduction in our pension expense. And also this year we haven't talked about it very much, but -- but our healthcare is up pretty significantly from year to year as well.

So what we feel is that at the topline the mix of our businesses between bearings and power transmission with our very strong fluid power business and automation control and energy businesses that we have the right collection of products with the right emergent opportunities to really meet our customers' needs and be able to generate higher levels of growth. Now, you're right, the environment is not great, but we continue to have positive organic growth were quarter to quarter. That's helped us. We have seen some underlying improvement in our SG&A, part of it is consolidation of systems so we're beginning to see some of that, but we're in the very early stages of that and then finally as pension rolls off it will be a big plus for us.

So I don't think it has caused us to rethink our strategy frankly at all. We need to go faster on a number of our infrastructure efforts, but -- but the strategy the same.

Okay. Thanks.

Alright. Thank you, Scott.

Thank you. (Operator Instructions). Our next question comes from the line of Rob Crystal from Goldman Sachs. Your line is now open. Please go ahead.

Hey, guys. How are you?

Good be Rob.

Hi Rob.

Neal, I had a question on the 777X. What about the bearings piece? I don't know if you touched on that maybe I misheard you but do you have bearings content, do you think you will have bearings contents, et cetera? Is it --

Yes. We -- thanks Rob. We do and we will and hopefully a higher percentage. Rob Patterson will talk to me sharply later today since I hadnt mentioned that. So thank you.

Tell him he owes me.

All right.

In terms of the bearings business if we think about back in 2008 when you last disclosed the business I think it was like $141 million in revenue and like $50 million in EBIT. Given where we are in the aerospace cycle is it reasonable to think that if we were to see that business today that we should think it has substantially more profitability today in dollars than it did back in 2008? Recognizing you play not want to give the exact numbers for competitive reasons but just to give us a ballpark?

Rob you're' absolutely right. The profit contribution in dollars is significantly higher than it was. I think your starting points for revenues might have been a little bit high.

Okay. And then when we there I about the cash flow this year, Rob, is that a sustainable free cash flow level if you will from the idea of is there working capital benefit in there or is it just more basic pure cash from operations minus CapEx?

Rob, good question. I think the outlook would reflect in our view a fairly sustainable level of free cash flow going forward. There's not a tremendous level of working capital relief in that number. We do have as we pointed out a fair amount of investment on the AH-1Z program in particular our larger aerostructure programs and that program does continue our improvement a little bit on the working capital side, but not kind of any dramatic reduction in working capital for the rest the year. And on the SH-2 which was another major release of inventory, we're towards the tail end of that. We certainly feel that when you look at the -- the bearings and JPF and others that we have some very strong cash flow producers and distribution continues to improve their cash flow production. So we feel it's pretty sustainable.

Okay. And then last one. I might have missed this also. But from the distribution side you referenced rebates being a little bit soft in the quarter. Can you give us a sense, you know drives towards Scott's question about the -- the margins of that business. did that cost you 10 basis points, 15, 20, some -- some ballpark that we can think about just because it looked like the performance was very strong in a very difficult environment. Thanks.

Yes. Your first number is pretty close. It was about right. Let me put it that way.

Okay. Awesome. Thanks, guys.

Thank you, Rob.

Thanks, Rob.

We have a follow-up question from the line of Pete Skibitski from Drexel Hamilton. Your line is now open, sir.

Just a quick follow-ups. K-MAX -- this is the first time I've heard mentioned about an Asian opportunity. Any sense of if you guys could maybe size that for us?

Right now it's -- it's low single digit aircraft, but it's with a country with vast potential.

Okay. Got it. Got it. It would be a good foothold, I guess.

Yes.

And then last one I think you guys had more sites going live with the new ERP system in this quarter in the third quarter. Can you give us a sense of if there is any risk to guidance based on that go-live scenario?

Pete, we are, but it's a relatively small part of our business. We continue to improve every time that we have one of these smaller go-lives. So I don't think that we've -- we've really assessed that we have any -- it would have any impact on the guidance that we have provided.

Okay. Great. Thank you.

Thank you, Pete.

Our next follow-up question comes from the line of Ryan Cieslak from KeyBanc capital. Your line is open, sir.

Hey, guys. Just two quick follow-ups if you will. I have a follow-up on the ERP side of things. Neal how should we be thinking about the rollout into next year? Maybe just an update on that and remind us how the stages there will play out into next year on the ERP side.

We'll have a number of relatively small segments of the business go online between now and -- and this time next year. During the second half of next year is when we will start to accelerate with relatively large portions of the business going online. When we get together on the next call, I think we will have a better -- I will have a better number at my fingertips as to what percentage of our business we would expect to have on -- on our new in-floor platform by the end of next year.

Okay. And then the last one I have is just on the share repurchase authorization. It seems like there was some modest activity you guys had in buybacks this quarter or in the second quarter rather. Just your view on maybe the approach to buybacks into the back half of the year would be helpful.

Yes. No, Ryan. We purchased about 90,000 shares in the second quarter and I would inspect a similar rate of repurchases per quarter in the back half the year.

Okay. Thanks, Rob. Thanks, guys.

Alright. Thank you, Ryan.

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

Thank you for joining us for today's call. We look forward to speaking to you again when we report third quarter results in October.

Thank you. Ladies and gentlemen, this does conclude the program. Thank you for participating and you may now disconnect. Everyone have a great day.