Kaman Corp (KAMN) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Kaman Corporation Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Jamie Coogan, Vice President, Investor Relations. Sir, you may begin.

Good morning. I'd like to welcome everyone to Kaman's Second Quarter 2017 Earnings Call. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer; and Rob Starr, Executive Vice President and Chief Financial Officer.

Before we begin, I'd like to note that some of the information discussed during the 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 2016 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 and information that are non-GAAP measures as defined in applicable SEC rules and regulations. Reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K.

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

Thank you, Jamie. Good morning, and thank you for joining us on today's call. I'd like to begin today with a review of the second quarter results and provide an update on important programs and drivers for the balance of the year. Second quarter results came in slightly stronger than expected, primarily due to the margin benefits resulting from Distributions productivity initiatives, which bolstered year-over-year performance. While it's still very early, we are pleased to see the improvement in profitability at Distribution for the quarter. At a consolidated level, our net earnings were $13.5 million or $0.48 per diluted share and marked a strong sequential improvement over our first quarter results.

As a reminder, our volume and mix forecast in 2017 for Aerospace will lead to earnings that are back half weighted, with some sequential improvement in the third quarter, but still heavily weighted to our fourth quarter.

On a comparative basis, in the second quarter of 2016, consolidated net earnings were $16.5 million or $0.59 per diluted share, or $0.64 per diluted share when excluding $0.05 of acquisition-related costs. Lower earnings per share compared to the prior year was largely attributable to a decrease in operating profit at Aerospace due to JPF customer mix for the quarter, offset by increased operating profit for our bearing products, structures programs and Distribution.

Turning to Aerospace. Sales were $170.3 million for the quarter, down 7.7% compared to the prior year. Contributing to the lower sales was the shift in mix of JPF sales from DCS in the prior year to USG Option 12 in the current period, as well as lower overall JPF shipments during the quarter.

Aerospace operating income for the period was $26.3 million or 15.4% of sales compared to $30.5 million or 16.5% of sales in the prior year period.

Year-over-year, profit headwinds related to the JPF program were partially offset by an increase in sales for our bearing products, leading to margin improvement in our self-lubricating bearing products and our high precision miniature building products, which we acquired with the GRW transaction. Additionally, we continue to gain traction on our efforts to improve the performance of our structures programs, which delivered strong year-over-year improvement.

Before turning to Distribution, I'd like to highlight some positive developments at Aerospace for the balance of 2017 and beyond, beginning with K-MAX. In July, Lectern Aviation of China accepted the first 2 K-MAX aircraft off our reopened production line, which marks an important milestone for our aerospace group. Additionally, due to the increased interest and demand for these aircraft, we announced that we are extending their production at the K-MAX into 2019. Our team continues to identify potential customers and is working to secure additional orders for the aircraft.

Turning to our JPF outlook. In the balance of the year, we expect increased profitability as our mix shifts to DCS shipments. This includes $93 million in orders that we had discussed last quarter for which we are awaiting an export license. During the second quarter, the Congressional notification period concluded with no formal objection, and shortly thereafter, we submitted all of the necessary documentation for an export license, which is progressing through the normal approval process. We anticipate receipt of the export license shortly and will begin deliveries in the second half of the year. Longer-term, there continues to be a strong level of interest for the JPF. Currently, we are in negotiations on Options 13 and 14 of our U.S. government contract, as well as a DCS order with a foreign customer, which will give us backlog into 2020.

In addition, during July, the U.S. Government issued a solicitation for production for Options 15 and 16 of the JPF contract with quantities as high as 25,000 units per option, and we continue to see strong demand signals from additional international customers. Lastly, as we look into 2018 and '19, we are encouraged by the anticipated growth of a number of platforms that will enable continued growth in our bearing product lines, such as the Airbus A350, Bombardier C-Series, G7000 and the Joint Strike Fighter.

Turning to Distribution. Organic sales, per day, improved 2.6% sequentially, but were down 2.6% when compared to the prior year. As expected, the productivity initiatives we have implemented have put modest pressure on our top line performance. However, the offsetting benefits of these programs were clearly demonstrated in the quarter as we were able to grow operating profit by 15.4% compared to the prior year despite lower volume, and expand operating margin by 90 basis points to 5.7%. The effort was broad-based across our locations and included a shift in our approach to focus on the most value-added and profitable product categories, coupled with enhancements in our analytics to help better identify opportunities that can provide value to both Kaman and to our customers. In the prior year, we recorded $2.1 million of cost associated with the implementation of these initiatives, and when we adjust for these costs in the prior year results, we see similar operating margin to those achieved in the second quarter of 2017, despite the lower year-over-year sales volume. This speaks to the impact of these initiatives and demonstrates our ability to sustain the performance improvement.

And now, I'll turn the call over to Rob. Rob?

Thank you, Neal, and good morning, everyone. I'd like to begin by providing financial details and adding some additional context to our results, before discussing our outlook for the remainder of 2017. Our GAAP diluted earnings per share were $0.48 compared with the prior year level where we achieved $0.59 on a GAAP basis and $0.64 on an adjusted basis. This year-over-year decline was anticipated due to the change in the quarterly pattern and mix of deliveries in 2017 relative to 2016, most notably, in our JPF program. Gross profit in the quarter was $135 million or 30.1% of sales compared to $143.8 million or 30.5% of sales in the prior year. Our continued strong gross profit performance was led by Distribution, partially offset by an unfavorable mix in Aerospace, particularly the mix of Joint Programmable Fuze, UST volume relative to the prior year. Operating income in the second quarter was $27.4 million or 6.1% of sales compared to $29.8 million or 6.3% of sales in the prior year period. The lower operating margin and profit was the result of lower sales compared to the prior year and affects the gross profit discussed partially offset by lower SG&A. SG&A in the second quarter was $107.6 million or 24.0% compared to $113.9 million or 24.2% in the prior year. Lower SG&A relative to the prior year stemmed from the absence of a significant portion of the cost associated with our Distribution productivity initiative in the prior year and improved operating efficiencies across the company.

Before handing the call back over to Neal, I'd like to take a moment to talk through our outlook for the rest of the year. Based upon our first half results, as well as the issuance of our convertible notes this past May, we have made a few modest revisions to our full year outlook. Beginning with Distribution, we are raising the low end of our operating margin range to 5.0% to 5.3% from 4.9% to 5.2%, previously, while modestly tightening our revenue range to $1.1 billion to $1.125 billion from the prior range of $1.1 billion to $1.15 billion. The midpoint of our operating income outlook for Distribution remains on track from our prior outlook as we've been able to offset the impact of slightly lower sales growth with improved margin performance. We continue to expect Distribution's year-over-year daily sales rate to turn positive in the second half of the year. Our Aerospace guidance remains unchanged with the sales in the range of $730 million to $760 million and operating margins of 16.5% to 17%.

As we have detailed on this call, higher profit contribution in the second half is expected to come from a shift to shipments of higher margin, DCS fuze orders combined with continued strong execution in our bearing product lines. A highlight in the quarter was execution of our 7 year 3.25% convertible notes due 2024. This is a capital raise that will help us meet our long-term strategic goals. Following the completion of our convertible debt offering in May, our full year interest expense for 2017 will now approximate $19 million from our previous guide calling for $16 million. The majority of our increase is the result of the timing of the transaction and while this led to a modest headwind to our reported interest cost, we were able to secure as after tax long-term cash rate of approximately 3.4% over the life of the notes, when you include the cost of the [cap call], while extending the weighted average duration of our debt portfolio to about 5 years. Excluding the cost of the cap call instrument, the annual after-tax cash rate of the note is approximately 1.6%, largely in line with the after-tax interest rate of the 2017 convertible notes and the amount we paid down on our current facility. Our full year consolidated tax guidance is unchanged at 34.5% and our weighted average diluted share count remains unchanged at 28.5 million shares.

Turning to cash flow. We generated $10 million of cash in the quarter, in line with our expectations. This pattern is not unusual as we will typically use cash during the first half, with incremental improvement as the year progresses. We continue to expect free cash flow between $70 million and $100 million, approaching or exceeding 100% of net income once again this year. Our 2017 year-end leverage is expected to approximate 2x debt-to-EBITDA, the low end of our targeted range.

With that, I'll turn it back to Neal, for his closing comments.

Thanks, Rob. Half way through the year, we are executing well and are well-positioned to deliver on our full year outlook. We're excited about the opportunities at both segments and are pleased to be in line with our expectations as we enter into the back of the year. And in closing, I would like to thank our investors for their interest and support and each of our more than 5,300 employees around the world for their dedication and commitment to delivering world-class products and services to our customers every day.

Now I'll turn it back over to Jamie for questions. Jamie?

Operator, may we have the first question please?

(Operator Instructions) And your first question comes from the line of Edward Marshall with Sidoti & Company.

Listen, I'm curious at the low end of the Aerospace guidance, you're showing about $30 million of sales growth year-over-year, but yet you're flattish, actually down $1 million on the income at the low end. I'm curious, I know that the mix in JPF, but is there anything else there that some pressure to that operating line for Aerospace?

Yes. Ed, this is Rob. It's a good question. I think the -- would say structures has improved as we've talked about year-over-year, but there's still a reasonable level of volatility in that as we look at the balance of the year in terms of establishing our range. So that's certainly put into it, and certainly, this far out there are a number of discrete items in Aerospace side that can still move the margin and that's why the range is -- we decided to leave it where it is.

Got it. And then when we look at the $93 million JPF order, I'm curious, how fast can you ship that? How many quarters would it be for you to exhaust that backlog?

Yes. Ed, I mean, that backlog, if all goes according to plan, can -- likely be done within a quarter if needed. It really comes down to the shipping capacity, but we do have plans in place to certainly ship that over the second half of the year.

Okay, and just a question on the -- it survived the congressional vote and I'm curious about your thoughts on why the attention this time around? Was it the customer? Was it the size? Do you think the opposition gets stronger or weaker going forward? Any kind of color that you could add there?

Ed, as you know, it's a very politically charged environment in Washington right now. And I think that it was a combination of just simply that, in combination with the end customer.

And our next question comes from the line of Robert Majek with CJS Securities.

It's actually Chris Moore for Robert. May be just talk a little bit more -- it looks like you had a great quarter in terms of the operating margins on the Distribution side. Just trying to get a sense as to what's possible 2 or 3 years out from operating margin standpoint? Is 6% or 7% the ceiling? What do you think is realistic?

Chris, what we've talked about is our medium-term goal is to get to that 7% operating margin. So that's, clearly, what we remain focused on. And when we cross over 7%, we'll decide what the next target is.

Got it. Are there a couple -- 1 or 2 kind of key milestones to get to that 7% level or?

I'd tell you, Chris. Right now, it is -- I think that the biggest driver will be a combination of return to organic growth with the demonstrated ability to sustain the discipline around the productivity initiatives that we've been working on for little bit over the last year.

Got it, got it. And just kind of staying with the Distribution. In terms of -- from a channel partner perspective, what kind of -- what are you hearing there in terms of strengths and weaknesses? And just trying to get a feel for how things are looking for coming into Q3?

From a supplier perspective, everybody is looking for some continued growth in the second half of the year. We've been up sequentially from the fourth quarter to the first quarter, and then again, from this first quarter to the second quarter. So we see, from our key suppliers, a belief that there will be continued growth, although, it will be at a relatively muted level.

Got it. And the last question, from a M&A standpoint, just -- from a kind of overall perspective, is it active or is it just kind of a slow time for you guys in terms of what the pipeline looks like?

Chris, I would say that it remains active, as I think we've demonstrated. We've taken advantage of opportunities when they arise, for example, the last 2 acquisitions that we did in Aerospace were both within, I think, about 6 weeks of each other. So we have trouble with when the companies end up coming out for sale, so that's kind of outside of our control. What is within our control, of course, is the level of rigor and discipline we put around how the capabilities that, that company would offer will supplement what we have today. So we continue to be active, but we just haven't been able to get one across the finish line here in the last several quarters.

And our next question comes from the line of Ryan Cieslak with Northcoast Research.

That's my first question, I just wanted to go back to the Distribution sales trends and just maybe if you could give some color, Neal, or Rob, on how the quarter progressed by month? I know last conference call, I think, you had mentioned July was positive year-over-year. So looks like it slowed down a little bit at least in the months of May and June, and just some may be color of what was driving that? I know, obviously, some internal initiatives you guys are working on, but any color on that would be helpful.

Yes. No, Ryan, good question. So as we touched on in our first quarter call, we did see a year-over-year improvement in April. We did fall back a bit, most notably, in the month of May. May was certainly a weaker result relative to the prior year as well was due -- leading to the 2.5% year-over-year decline. In terms of the drivers there, what I can tell you in the quarter, we've got to look at some of the broad product lines. As part of the productivity initiative, we are, certainly, in terms of product categories and other sets of demographics, looking at opportunities where we can be most relevant and most competitive and where we feel that we are not well-suited. And that we have, certainly, as part of this, selected to not compete in certain low margin unprofitable circumstances. So in terms of the product categories, bearings and power transmission was down year-over-year for the quarter. Fluid power was actually up, so that's encouraging. Where we saw the most in terms of product categories decline were MRO supplies in some of the electrical products, where as you can imagine, some of those are very generic items where pricing is really the key competitive differentiator. So overall, we're very pleased with the performance, sequential growth in the quarter over the first quarter and expect continued sequential growth as we go through the balance of the year.

Okay, great. And then any color on July, just where that ended up at this point? Either on a year-over-year basis or...

Yes, July was, essentially, flat year-over-year.

Okay, so then, if I look at the guidance. It implies, at least the Distribution in the top line, a decent bump up in terms of the year-over-year trends improving for you guys. What should be may be the main drivers there? How should I think about what drives that improvement following what's been maybe a subdued second half -- sorry, first half for you, relative to, maybe, what you're expecting here in the back half?

Yes. I mean, Ryan, keep in mind in the back half of 2016, we did see a pretty meaningful step down in our volume, from a daily sales rate of almost $4.5 million in Q2 to $4.2 million in Q4 of last year. So the comps get significantly easier as we move through the balance of '17. And that combined with sequential growth consistent with what we've delivered over the past couple of quarters is really what drives that. So there isn't a specific product category or customer base that's really that we can identify other than based on the information we have from the field and the leads and opportunities that we have in front of us. We're very comfortable that we would continue to see sequential growth as we move through the balance of the year.

Okay, great. And then lastly on Distribution. How should I think about the -- where you're at with the productivity initiatives at this point? Is it -- are pretty much in the late innings or is there more to do where you can see incremental benefits at the margin level into the back half of the year?

Ryan, we think that -- we don't think we're in the late innings. When we look across the product categories that we've worked so far on, there's certainly platforms and product categories that are still ahead of us. So we wouldn't say that we're in the late innings at all. We're very pleased with the performance improvement the team has been able to deliver. The decision-making process that they had in place around the opportunities that they pursue and how we work with our customers to reduce our combined cost in the cost to serve area. So we feel pretty good that there's additional opportunities available to us in the future.

Okay, great. And last one for me, Neal, just on Aerospace. Not looking, obviously, guidance for next year, but may be just -- may be how should we think about starting to frame up Aerospace into 2018? And maybe some of the puts and takes, at least, at the very high-level regard to the various platforms that may be a rolling off a little bit, but obviously, there's ones that seem like there's some positive momentum continuing to build with JPF and certainly K-MAX well. Just some color on that might be helpful in thinking about 2018 right now.

Okay, so you don't want me to give guidance for '18 but you'll ask me about it. There's -- I'll tell you, I'm going to refer back to the script in large part, Ryan, because it's really why we talked about some of the longer-term opportunities that we see in Aerospace business, in particular, I'll highlight just a couple. There's been a lot of discussion and talk around the JPF. And I think when we look at the combination of being in the final negotiations on Options 13 and 14 with the U.S. Government right now, with the solicitation that came out just within the last 30 days for Options 15 at 16 with unit demand up to as many as [12 and 5000] in each of those 2. And the level of continued opportunity and negotiations that we are in with foreign militaries highlights the longer-term strength of the JPF product line for us. The second is, that you're right, we were really pleased to deliver the first 2 of the new K-MAX aircraft to Lectern just last months, and we know that we will have the opportunity to continue that production now into 2019. So we're pleased, not only with a new aircraft production and deliveries, but clearly, what that means for us longer-term for the ongoing service and support for those. And while we've had some transition in Commercial Aerospace with 777 rates coming down, somewhat. What we're really excited about is the combination of the increase in the narrow body product lines at both Boeing and Airbus, where our content is relatively low. But when you're talking about increases of 10 or 12 aircraft a month, that adds up very quickly for products that we're very efficient at making, and also, the strength of the Airbus A350, the new C-Series beginning to be delivered. And again, while it's relatively small for us, it's nice to see the Joint Strike Fighter tick up, because that helps us a little bit in the structures area, and certainly, in the bearings area as well. So we're -- as we look out to '18, we have a number of positives and we've got some planning to go through in the second half of the year as to how we can be structured to take best advantage of those opportunities.

And our next question comes from the line of Steve Barger with a KeyBanc Capital Markets.

Just to make sure I heard correctly in terms of the cadence in the back half, you expect to grow sequentially growth in 4Q versus 3Q, so a shift from the normal seasonal pattern, it ramps through the back half?

Yes, Steve, just I -- clearly it's a little difficult to predict given the short cycle nature of the business what'll eventually unfold, but we're not anticipating as a pronounced decline that we saw last year in this year's fourth quarter. Those year-over-year comparisons, certainly, are looking favorable at this point as we gather information out of the field.

The way you're modeling it internally, though, would you expect revenue to be up in 4Q versus 3Q or are you just won't make that...?

I don't think you'll -- based on current expectations, we don't think there'll be a material difference.

Okay, if Distribution revenue growth remains weak, how much margin expansion can you drive from your productivity initiatives? for instance, if the revenue comes that low-end, could you be at the midpoint or higher on operating margin this year, or would that be a stretch?

Yes, I mean...

I think that'll be a stretch.

I think that'll be a little bit of a stretch there, Steve. I mean, certainly, we're very focused on operating expenses. I mean, the team has done a really great job at managing their G&A. So certainly, if market conditions don't materialize, as we anticipate, we will certainly not be sitting back. We'll be looking at how do we just manage our discretionary expenses to really deliver on the bottom line.

Understood. So if -- and I know you expect sequential growth in 3Q. If that is a fairly modest increase you would not expect to see the same year-over-year increase that you got in 2Q?

In terms of the year-over-year -- you've got to keep in mind -- and last year, we saw a sequential 2.5% daily sales decline to 4.35% in last year's third quarters, Steve. So even if we were hold flat with where we were second quarter, they'll be flat year-over-year, all right. So we certainly are basing all indications, we would anticipate sequential growth. So that's really what's driving the year-over-year favorability.

Understood. And just one question on JPF. Just -- you've talked about going through the normal approval process. We've heard the news reports about a lot of deputy level jobs having not been filled in Washington, so far 6 months in. Does that have an impact on your confidence during the process? Or -- and making that 4Q shipping timeline? Or is that kind of a separate issue?

I think that in this case, at this point, we would believe that it would be a separate issue. I think that, that would have had more impact earlier in the process than in the export licensing itself.

(Operator Instructions) And our next question comes from the line of Chris Dankert with Longbow Research.

I guess, you know what -- the first thing I'm looking at here -- just -- in reference to the A-10 program. I think in the -- the materials you released, I guess there's about 5 in backlog right now. I think your production capability is a little bit more than that in the quarter. So does current guidance imply that program rolling off in the back half of the year right now?

Yes, it does.

Okay, okay. Just wanted a bit of point on that, and I guess...

No. You're exactly right, Chris. It does reflect it rolling off in the second half of the year and there being a line gap before the -- before we would restart.

Okay, got it, got it. And I think the total number of chip sets in the potential run, of what 242? Something like that if I'm remembering right?

I suggest...

That's exactly right, good number.

You got -- we got that seared in your memory and you do too, that's good.

Right. And then I guess, just back to KIT, I guess any comment on price impact in the quarter? Kind of what you're in the back of the year? I think there's been some expectation for a bit more inflation now as demand is starting to come back, are you seeing that expectation right now?

Chris, for the first time in a long time. We're beginning to see some price inflation in that channels, so obviously, we're pleased to see that because we can benefit from it. We also want to highlight that we may have some near-term margin squeeze as we get price increases and because of the contract period with our customers, would not be able to pass all of those price increases on. But we certainly would intend to be able to take full advantage of those price increases going forward. So it's nice -- actually, after a long period of time of no price inflation to see, at least, a little bit of it beginning to show up.

Got it, got it. And I guess just to circle back on EBIT margin at KIT. I guess, typically, you see kind of a seasonal step down into the back half of the year, just given the way volumes move. But I guess that we've got a fairly flattish, total sales number through 2Q through 4Q, does that mean we can see a pretty stable EBIT margin in that business? Or is it going to be a bit of a seasonal move to that?

Yes. Chris, I think, where we're expecting right now is a fairly stable operating margin profile. The implied back half of the year is roughly around 5 2 or so. So certainly, for the first 2 quarters, on the year-to-date basis, we're at 5%. We had a very strong second quarter as we just published. But we certainly feel much better about the resiliency of the business, just given the team's efforts on whether be it on the productivity initiatives or the types of business they're pursuing, so we feel really good about where the business is headed.

Understood. And then I guess the last one for me. Looks like you were able to ship out a couple of DCS JPFs in the quarter. I guess, is that a catch up from the prior contract? Or -- where were those headed that you didn't need the export license?

No. We would need an export license in any case, but that was an export license that was granted earlier. And you're right, that was a good catch. We -- normally, we have some DCS shipments in a quarter, but many times we do. The first quarter was atypical, in fact, the second quarter, as well, was atypical with as high a percentage of USG sales. I think it was like 96% to 98% of our sales in the first half of the year were U.S. Government as opposed to a slightly higher mix of DCS sales, but that would have been covered with the prior export license, granted either earlier this year, or more likely, during 2016.

We have a follow-up question from the line of Ryan Cieslak with Northcoast Research.

Just really quick, Neal, in your prepared remarks, you mentioned some of the MRO products being still slow on the Distribution side and pricing been competitive. Can you just -- where exactly are you seeing the most competition right now? Is it from some of the nontraditionals coming into the space? Or is it some may be some of the smaller mom and pop local guys that are maybe being most competitive at this point?

Ryan, it varies. So as you know, it varies so much by local market that I wouldn't want to characterize that in one way or another because I think it could be proven to be wrong. If you went to Chicago versus Boston versus Dallas, so I think it's a combination of things. I think, what's interesting though is that when we look at the -- we've talked a lot about our productivity initiatives and what we're trying to accomplish through those. And I think our results in the second quarter demonstrated how we're able to do it or that we were able to do it. We just -- we know that whether it's in our automation control and energy platform, where we've been historically had a presence in commercial construction for things like panelboards, switchboards, even lighting. We're not going to be as competitive, nor quite frankly, do we want to be than a lot of the electrical distributors that focus and specialize in that area. We've really deemphasized that over the last year. It's impacting our top line, but we're seeing much better results at the bottom line. And then, in some of the MRO supply areas that were down, it's -- they are areas, in many cases, Ryan, that are classified for us as MRO supplies. But there's specific products that we source for customers. And that is a service that we have historically provided, it's very important. But it's also service that we want to get compensated for, and if there are personal protective devices et cetera, that historically we've sourced, that they can buy more effectively from another source than Kaman and have us put that work in. We're happy to have some of our customers do that.

Okay, great. And then just really quicker one last I have for Rob. Last quarter, I think you gave some color around, the earnings cadence was roughly 50% the full year, potentially coming into the fourth quarter. I know it seems maybe the second quarter was a little bit ahead of expectations, but any updates there? Or how should we think about maybe the cadence by earnings in the third and the fourth quarter?

Yes. Ryan, that cadence remains largely unchanged, which is why we didn't really provide an update, plus minus couple of percentage points, which is common levels of noise at any given quarter, it remains unchanged. So we still are expecting roughly 70-plus percent in the back half of the year, largely weighted to the fourth quarter with approximately 50% the fourth quarter.

And we have a follow-up question from the line of Edward Marshall with Sidoti & Company.

Piggybacking on that question just a bit. The unusual -- I mean the $93 million order is unusually large DCS order for you. Yet it's coming in the fourth quarter and it's really a big contributor to the earnings power of the business. Knowing that it's kind of unusual in size, once we look out to 2018, is there something that you guys see that makes up kind of that shortfall on the profit line that could -- that can help earnings in -- within Aerospace for 2018 and beyond?

Ed, we'll start on a couple of things. A, it's a larger-than-normal DCS order historically, there's no question. As you know, we've seen some significant increases in demand in JPF from the U.S. Military and our foreign allied militaries. So the first question will be whether or not, we continue to see relatively larger DCS orders than we have historically, simply because the demand for both current usage as well as building inventory levels is higher than it has historically been. The second thing is that it's interesting because it's a larger single order for us, but it just so happens that we're going to ship all of it in the -- we intend to ship all of it in the second half of the year. Normally, we would have it be more spread out during the year simply because of the way that the cadence fell this year and having to fill -- fulfill our requirements for Option 12 for the U.S. Government as well as the initial delay in the licensing or the approval and now licensing process. So we will talk, obviously, at our first quarter call about what our expectations are. But as we've tried to highlight in any -- every way that we can, we feel very good about the near-term and medium-term future for JPF. And it will be a mix of both U.S. Government and foreign military orders.

And when you say foreign military, you mean FMS or DCS?

Combination of both. There will be FMS and there will be also DCS orders simply because of the timeframe in which FMS orders can be served through the current DOD contracting process.

Okay, and as we moved through, say, Option 15 and 16, you talked about, maybe, the size that talks more about the length. But when I think about the size, I think about room for, say, DCS shipments in a particular given year or given the government's order parameters. Would you have enough room to kind of in orders of 25,000 plus fuzes have room to ship something of this magnitude DCS order in the future in a particular quarter or a year?

We were very pleased with the rate at which the team has been able to increase production, and the continuation of the very high reliability levels that we're delivering in the field. And we feel that we can continue to increase production rates, certainly, above where we are today to support demand from both U.S. and foreign customers.

And what's the rate amounts now?

We did about 16,000 in the first half of the year, about flat with last year and we're at -- our outlook is 34,000 to 37,000 units for the year.

Ed, we've been able to flux as high as nearly 1,000 JPFs in a week in terms of stress testing the supply chain. so just to echo Neal's comment, we have more than sufficient production capacity at this point based upon our demand outlook.

And we have a question from the line of Peter Skibitski with Drexel Hamilton.

Neal, on the HN, it looks like there's some decent amount of support for funding additional A-10 orders. I'm wondering, depending on when we -- I'm guessing the '18 budget won't get approved for a while. So I'm just wondering how -- can you keep the line open until late this year, early next year until we may get another order? Or kind of how much fiscal pressure just kind of will pull you through if you don't get another order until next year.

Pete, we're -- we've anticipated and planned for our line gap in the A-10. We will complete the delivery of the existing order commitment later this year, and then, have a planned for line gap and we feel very comfortable and that's incorporated into our outlook.

Okay, okay. Got it. And then on the H-60 contracts, it looks to me like the original Sikorsky order was kind of averaging around 50 helicopters a year. And I think they was something there for Saudi Arabia and there was talk of options as well. I wasn't sure if you guys would take part in the Saudi deliveries or not, but can you give us a sense of what this order implies? Does it imply a kind of 50 units a year for you guys with the potential for outside? Or should we think about it differently?

I think you've got it about right. The base demand would be about 50 a year. We could flex up about with an additional 20, so through about 70 a year. And I don't know that we could make any statements at this point in the process, really, as to whether or not any of that incremental demand would be for Saudi.

Okay, okay. Got it, got it. But we had you -- the margin distribution was outstanding this quarter. I think I might be at all time high if my model's right. Is there any reason you can't replicate that again? Especially, if volumes get better?

If volumes get better, yes. We've given our outlook for the balance of the year and nudged up the lower end of our outlook. But we're very pleased with the performance in the second quarter, and we certainly, we would like to see a return to organic growth and know that the team can convert that at a disproportionally high rate to profit.

Got it, got it. Okay, lastly I'll give Robert one. Robert, Anything with regard to the changes in revenue recognition that are kind of coming down the pipe? I don't if you guy are planning that to hit in 2018? Or are you expecting any kind of meaningful changes in the income statement when that comes through?

Yes. Now Pete, good question. We are certainly very focused on the new revenue standard. We have certainly, setup a group here that has been very focused on implementation because as you would expect, it impacts a number of areas including our IT systems. In terms of the overall impact, we're still assessing what that impact is for 2018, once we have a more definitive handle on that, we'll certainly, as required, disclose that in our financials. But certainly, this is a high-level effort and has significant resources on this, so we feel really good about where we are relative to the implementation because this -- looks like if this will go live in 2018, current indications are that (inaudible) will not provide another extension as they did earlier this year.

Okay, okay. And Robert, on the cash flow guidance. Obviously, you've got a bit of a hill on the second half of the year. I'm guessing that the DCS fuse order in the fourth quarter is potentially a big pacing item there. And I'm just wondering how confident you are in collecting that receivable in the fourth quarter to meet the cash guidance?

Yes. There are couple of things, Pete, that are impacting our cash flow guide. As you mentioned, we certainly have, as most years, a pretty significant hill in the back half of the year. But really, what's going to drive that, certainly, the DCS orders to a point, but the orders that would ship later in the year, we're largely going to likely collect those in '18 in any event. Really, what's going to also drive is that the bearing, increase in bearing sales, as well as improving sales and execution on collections and Distribution. So there are number of things, and also, we did have some impact on timing around K-MAX this quarter. We had roughly about $10 million of cash flow to move into the third quarter, just based on the timing of the delivery of the first 2 K-MAX. So K-MAX can also impact the timing here.

And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Jamie Coogan for any closing remarks.

Thank you for joining us on today's conference call. We look forward to speaking with you again when we report our third quarter results.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.