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Kaman (NYSE:KAMN)

Q4 2012 Earnings Call

February 26, 2013 8:30 am ET

Executives

Eric B. Remington - Vice President of Investor Relations

Neal J. Keating - Chairman, Chief Executive Officer and President

William C. Denninger - Chief Financial Officer and Executive Vice President

Analysts

Arnold Ursaner - CJS Securities, Inc.

Edward Marshall - Sidoti & Company, LLC

Matt Duncan - Stephens Inc., Research Division

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

R. Scott Graham - Jefferies & Company, Inc., Research Division

Derek Jose - Longbow Research LLC

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Operator

Good day, ladies and gentlemen, and welcome to the Kaman Corporation's Full Year and Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host for today, to Mr. Eric Remington, Vice President of Investor Relations. Please proceed.

Eric B. Remington

Good morning. Welcome to the Kaman Corporation Fourth Quarter and Full Year 2012 Conference Call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer; and Bill Denninger, Executive Vice President and Chief Financial Officer.

Before we begin this morning, please be advised that this call may contain certain forward-looking statements such as 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 any forward-looking statements made due to several important factors described in the company's latest filings from the Securities and Exchange Commission.

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

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

Neal J. Keating

Thank you, Eric. Good morning, and thank you for joining us today. Overall, we delivered a good performance in both the fourth quarter and for the full year of 2012. Adjusted earnings per diluted share were $2.18 for the year and $0.61 for the fourth quarter.

Full year sales reached a record $1.6 billion, and for the first time, our Distribution segment exceeded $1 billion in sales.

Each segment increased its full year profit contribution, with Aerospace delivering a $6.9 million or 7.9% increase in the operating profit dollars, while distribution operating profit dollars increased $4 million or 8.3%.

In distribution, sales from continuing operations were up 8.8% for the year and 8.6% in the fourth quarter. Full year growth was provided by acquisitions, with organic growth essentially flat, as we experienced a slowdown in the second half of the year and a very weak December.

The slowdown is macro related, but has impacted each of our end markets differently. Important end markets that have exhibited weakness include coal mining, semiconductor, solar, food processing, pharmaceuticals and government sales. The performance of these markets have been somewhat offset by strength in primary metals, and we have begun to see some improvement in cement and housing related industries, as well as power generation, other infrastructure and wastewater treatment.

Sales weakened as we progressed through the fourth quarter, and December sales seem to have been impacted somewhat by the timing of the holidays, which we believe resulted in more extended plant shutdowns than is typical. While we've seen a slight sequential uptick in January, our organic sales were 6% below January 2012 levels.

Given these lower sales levels, we are taking a number of management actions, including facility consolidations and headcount reductions, which will better match our cost base to current revenues.

These actions will enable us to improve profitability for the balance of 2013, and to deliver improved operating leverage as organic growth returns.

Looking back, despite the industry-wide slowdown we experienced late in the year, 2012 was still a year of significant progress for Kaman distribution. Strategically, we have transformed this segment into 3 robust product platforms, which differentiates us in the marketplace and significantly increases the size of our served market to $35 billion.

Our national reseller relationship with Parker Hannifin is progressing, and during 2012, we successfully converted much of our existing fluid power business over to Parker. As expected, this resulted in flat year-over-year fluid power sales and has positioned us for growth in 2013.

And in December 2012, we announced another significant step in repositioning distribution through a national agreement with Schneider Electric. This agreement provides Kaman with a broad line of electrical components and automation products that we will now be able to offer to both our MRO and OEM customer base.

Schneider is a global leader in automation, control and energy management, and we are very pleased to become their partner in the U.S. market.

We recognize that based on our current conditions, 2013 will be challenging for our distribution business, but are confident that we have built a strong foundation of differentiated products and services that will enable us to accelerate our growth as markets recover.

Our Aerospace segment. Adjusted sales were up for the year by $30.9 million or 5.6%, despite a $53 million headwind from lower BLACK HAWK cockpit, unmanned K-MAX and missile fuzing revenue. The improved performance was driven by the JPF program, which achieved 27,000 unit deliveries for the year.

Record sales for our bearing product lines, and double-digit growth in composite structures. During the year, we also secured several program wins, including new composites work in the U.K., continued success in new aircraft platforms for our bearing product line, and continued foreign demand for the Joint Programmable Fuze.

The performance of the 2 unmanned K-MAX aircraft in Afghanistan continues to be extraordinary. The aircraft are approaching the 1,000-mission mark and continue to deliver an innovative, reliable and low-cost alternative for cargo resupply.

We are pleased to report that this performance has led to several recent recognitions. These include being nominated for the prestigious Collier Trophy, the greatest award in aviation, and to Popular Mechanics Best of What's New compilation and a recent profile on Fox News.

Together with Lockheed Martin, we continue to work with the services regarding the future of the program, and are confident in the value we can deliver.

Sequestration is clearly at the forefront of discussions today in Washington and across the country. While the 2-month delay enacted by Congress did provide a short-term reprieve, it now appears more likely to happen. However, there is still little clarity on how cuts will be implemented, so it is difficult for us to predict specific program impacts or the timing of those reductions.

What is clear is that we still expect to be able to grow our defense-related revenues in a declining defense spending environment. We are maintaining our $20 million to $25 million estimate for a full year impact of sequestration, so, an impact of less than 2% of expected consolidated revenues for 2013.

We also recognize that we are going to be in an environment of lower defense spending in the coming years, and we're pleased that over the past 3 years, we have grown the commercial portion of our Aerospace business to 40% from 28%.

As we look at 2013, we expect further improvement in each of our businesses. In Aerospace, we expect our sales to come in within a range of $620 million to $635 million, or up 7% to 9%. This growth will be driven by the contribution of the AH-1Z program, composite structure programs, bearings and anticipated revenue from the sale of our SH-2G aircraft.

Larger-than-anticipated impacts from sequestration, or delayed recognition of SH-2 revenue, would cause us to come in closer to the lower end of the sales range. We expect operating profit margin at Aerospace to be between 16% and 16.5%.

The Kaman distribution, sales from continuing operations should grow by 7% to 10% to a range of $1.08 billion to $1.12 billion.

Sales growth is expected to come from acquisitions completed in 2012, and accelerated organic growth in the second half of the year. We expect the operating profit margin to grow year-over-year to a range of 5.2% to 5.6%.

Even at the low end of our sales and profit margin percentage ranges, we expect higher contribution of operating profit dollars from each business during 2013.

And now I'd like to turn the call over to Bill for some additional color on the numbers. Bill?

William C. Denninger

Thank you, Neal. As Neal said, I would like to walk through the numbers in a little more detail.

Fourth quarter and full year results have been impacted by the sale of our Canadian Distribution branches, which are reported as discontinued operations, and by several adjustments in the Aerospace segment.

We have prepared a number of non-GAAP reconciliation tables as Eric referenced, and you should refer to those as I plan to discuss the adjusted numbers.

Please turn to Table 1 on Page 5 in our presentation, so that I may walk you through some of the adjustments in Aerospace.

During the fourth quarter, we resolved a claim with a customer relating to a contract termination that was several years old. As part of the settlement, we received cash of $2.5 million, which was recorded as sales. We had backed that out to arrive at adjusted Aerospace sales of $578.3 million for the year.

The settlement also caused us to write off program related inventory of $5.8 million. That against the settlement received from the customer, we took a charge of $3.3 million, which has been added back to operating profit as an out-of-period item in our reconciliation.

You'll also note in the table that we recorded severance in the Aerospace segment in the fourth quarter of $455,000. This was a severance that we discussed in the third quarter, which at the time was recorded in corporate, but was allocated at Aerospace in the fourth quarter.

In December, we sold our 7 Canadian Distribution branches to Wajax and entered into a strategic alliance called Sourcepoint Industrial, under which each organization will support the other on its home market.

With the breadth of Wajax footprint in Canada, we can now offer our U.S.-based customers service across all of Canada. Likewise, we will be able to offer Wajax customers in Canada who have operations in the U.S. our services for more than 220 locations here.

I would like to run through some of the numbers related to the Canada transaction. Please turn to Table 2 -- or Table 3 on Page 7 in our slide presentation, which is in U.S. dollars.

You will note that Canadian branches generated $20 million in sales in 2012, which have now been classified as sales from discontinued operations in our financial statements.

The operations divested recorded an operating loss of $1.1 million in the fourth quarter that was primarily the result of the sale triggering a pension funding requirement. We've identified these costs from the line titled, Costs Associated with the Disposal of Discontinued Operations.

When you net these 2 lines together, you will see the Canadian operations generated operating profit of about $400,000 in the fourth quarter and $1.6 million for the full year. The sale generated cash proceeds of $8.7 million before tax.

Moving on, our cash flow performance was stronger than expected in the fourth quarter and for the full year. Free cash flow from continuing operations was $34 million in the fourth quarter and $52 million for the year, for a conversion rate of 96%.

This reflects cash flow collections from the strong performance of the JPF program in the second half; lower receivables at distribution due to lower Q4 sales; collections on several other larger programs; and a focus across the organization on working capital.

Neal reviewed our 2013 outlook for each of our segments, and now I would like to provide additional details.

We expect a significant imbalance in our quarterly performance during 2013, starting with a very weak Q1, which we expect will generate only about 10% of full year earnings, and then we should see a sequential improvement in sales and earnings as we progress through the year.

This Q1 shortfall is due primarily to negative organic sales growth, and to restructuring costs of $2.5 million to $3 million, at distribution. We expect to fully recover those costs and then some during the latter quarters of 2013.

Total sales volume at the beginning of the year of fuzing and composite programs are also expected to impact a weak Q1. While the sales imbalance will not be quite as dramatic as net earnings, we expect sales to be down slightly on a sequential basis from Q4 2012 to Q1 2013.

Our effective tax rate in 2013 should approximate the normalized rate of 35%. The tax rate was lower in the fourth quarter of 2012 due to the reversal of reserves, unrecognized tax benefits related to the expiration of certain statutes of limitation.

The cash flow in 2013 is expected to be between $35 million and $40 million after a continued high level of CapEx of $40 million to $45 million and a $10 million pension contribution. The 2013 CapEx plan includes about $12 million for IP projects in both segments and about $8 million for a new facility for our bearings business in Germany to support growth there.

While in summary, 2012 was another good year for Kaman, we are anticipating continued growth in both sales and profits in 2013. Thank you, and I'd now like to turn the call back over to Neal. Neal?

Neal J. Keating

Thanks, Bill. Overall, we closed the year on a strong note, with a solid quarter and good performance from both of our businesses. No doubt, we are facing near-term challenges and have built a strong team to manage through them, and have positioned the company for continued growth and improved profitability.

Finally, I would like to welcome Scott Kuechle, the former Chief Financial Officer of Goodrich Corporation, to the Kaman Board of Directors. We're very pleased to have had Scott join us last week. And we know that his financial expertise and experience building Goodrich into one of the premier global suppliers to the Aerospace industry will be invaluable in the future.

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

Eric B. Remington

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Arnold Ursaner.

Arnold Ursaner - CJS Securities, Inc.

I guess a follow-up question on regarding the significant imbalance in Q1. 2 very specific questions related to that. The AH-1Z, depending on when you had tooling costs, did that hit in Q4 or will that hit in Q1? It's obviously dependent on your first delivery.

William C. Denninger

Arnie, we're expecting to ship that probably in March, maybe April. Right now, the deadline -- the targeted shipment date is March.

Arnold Ursaner - CJS Securities, Inc.

So the cost for tooling is embedded in the Q1 view?

William C. Denninger

Yes, it is.

Arnold Ursaner - CJS Securities, Inc.

Okay. And also, related to Schneider, are you going to be stocking products at various locations in the U.S. in Q1, is the cost of that embedded in your guidance?

William C. Denninger

You mean inventory cost or...?

Arnold Ursaner - CJS Securities, Inc.

Yes, inventory costs and whatever other expenses to roll it out.

William C. Denninger

Yes, that will be built in our plan, yes, sir.

Arnold Ursaner - CJS Securities, Inc.

Okay. Two more very quick questions. On JPF, you shipped 27,000, but I thought your production capability was less. I assume you had inventory and -- or have you been able to increase your production capability in JPF?

Neal J. Keating

No, Arnie, we say that our production capability is about $24,000 -- excuse me, 24,000 units at the high side, but working extra shifts, we're able to up that some, and that's what the team was able to do really across the second half of 2012 to meet customer demand.

Arnold Ursaner - CJS Securities, Inc.

Final question is a real quick one on Parker. You indicated you had 19.4% growth in the year, that was more than offset by declines in your other Fluid Power brands. When do we anniversary that?

Neal J. Keating

Now.

Arnold Ursaner - CJS Securities, Inc.

So are you hopeful that you can continue to have solid double-digit growth from Parker?

Neal J. Keating

Absolutely, Arnie. We recognized going in that we were going to have a high hill to climb in converting accounts from competitive lines that we have been promoting for many years to the Parker line. And that was the main focus of our activities in conjunction with the Parker field sales organization during 2012. And now we're pleased with the progress, and, as importantly, Parker is pleased with that progress, and we think we now have a firm foundation on which we can grow in 2013. So we considered that we would be flattish during '12 and begin to grow in '13, and that continues to be our expectation.

Operator

[Operator Instructions] Your next question will come from the line of Edward Marshall.

Edward Marshall - Sidoti & Company, LLC

I just had a couple of questions surrounding the guidance. So the industrial sales growth that you project for 2013, looks like organic is about 1% to 4%. Obviously, Zeller is in that number, in the full year number as well. Are there other future projected acquisitions related in that number, or is that 1% to 4% all organic?

William C. Denninger

The organic in terms of our internal plan, Ed, is about 2.5% and there are no additional acquisitions assumed in our outlook.

Edward Marshall - Sidoti & Company, LLC

Okay. And then on the Aerospace side, you mentioned a $20 million to $25 million impact from sequestration. Is that included in that number? If sequestration was to go through we'd actually pull that out?

William C. Denninger

That would bring us in at the lower end of our sales range, if sequestration were to take a full effect.

Edward Marshall - Sidoti & Company, LLC

Okay. And you mentioned $0.06 to $0.07 of restructuring or at least, that's the after-tax impact of the $2.5 million to $3 million in the first quarter. Assuming that 10% run rate, that's included in your guidance, correct?

William C. Denninger

Yes, it is.

Operator

Your next question will come from the line of Matt Duncan.

Matt Duncan - Stephens Inc., Research Division

Neal, I want to dig in on KIT a little bit here, and I appreciate the color you gave us on sort of how that looked through the quarter. It sounds like January started a little bit soft, too. Is there any way that -- you called out the holiday timing as an impact in December. Is there any way to sort of quantify the impact fiscal cliff may have had there?

Neal J. Keating

I think, Matt, that, that's a little bit difficult. But the way we characterize it is that we saw the fiscal cliff really impacting us in a couple of different ways. I think that everybody, our suppliers, our competitors, all talked about deferred capital spending at our customers. And that impacts both our MRO segment, Matt, as well as our OEM segment, because if customers aren't buying equipment and installing it, it hits us in both areas. And that's what we saw in the fourth quarter. Interestingly, we had, in our MRO segment, organic growth in the first and second quarters, as well as into the third quarter. It was the third quarter that we really saw dramatic decline in our OEM business, not only for U.S. customers but for export businesses as well. So we saw dramatic decline in the third quarter in our OEM segment, and that continued into the fourth segment. In fact, overall for the year, our MRO segment was up just a little bit over 5%. So it's hard for us to break down what the timing of the holiday and the fiscal cliff impacts were. But we were down in December of this year. Last year, we were up, so that was a little bit more difficult to comp for us as well.

Matt Duncan - Stephens Inc., Research Division

And Neal, you said January was down about 6%. What were the months of the fourth quarter? What did those look like sort of as you ran through the quarter?

Neal J. Keating

Yes. Okay, Bill's got it.

William C. Denninger

Yes, October, we were down about 3.8%. Again, this is organic same-day sales. November, down 5.5%, and then December, down 9.4%. So we're down about 6.5% for the quarter.

Matt Duncan - Stephens Inc., Research Division

Okay. So it's bounced back a little bit in January. Is there any way to sort of look at what that trend looks like so far in February?

William C. Denninger

We think it's very close to the trend we saw in January. We haven't closed the books yet, but that's the way it's looking.

Matt Duncan - Stephens Inc., Research Division

Okay. And then last thing for me, Neal, you called out sort of some cost-cutting that you're doing at KIT, can you talk a little bit more about how many branches you may be looking at closing, sort of what level of headcount reduction? And then looking at the 2014 goals that you guys had laid out, obviously, the slowness in the macro is going to make those a little bit tough. Do you still have those same goals? Have you attached a new timeframe to them? Just give us a little bit of an update there as well.

Neal J. Keating

I'll back up to the first part of the question. How I'd like you to characterize the branch actions is really going to be consolidations. For an estimate [ph] currently, we are not planning to exit any of the geographic markets that we participate in. There might be a small branch where that would be the case. But that's not really what we're looking at here. As you know, we've done a number of acquisitions in recent years in areas where we have other locations. So we're looking to consolidate offices, and there's -- we could -- my preference would be not to name those locations right now, but it's really going to be in a geographic area where we have a number of branches. And we're able to consolidate those, that's really where we're going to focus. And I am going to stay away from quantifying the people side of the equation. After we've completed all of our actions, we will come back out and be able to provide a much more detailed assessment of those actions. And then on your 2014 goals, we've thought about that a lot. And we're sitting here right now, we may modify those a little bit in the future. You're absolutely right that the recovery has been much lower than we would have anticipated when we set those goals back in the 2009 timeframe. We can all look at 2% or lower GDP rates in that period of time. And certainly, that's impacted the market, and therefore, our organic growth part. But we've done well on the acquisition side. We have to focus and improve our organic growth rates, and we're not stepping away from those yet.

Operator

The next question comes from the line of Jeff Hammond.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

So I just wanted to dig in a little bit here on the Aerospace bridge. It looks like you're calling for 7% to 9% growth. And if you could just walk through some of the big buckets of growth, because it seems like the JPF numbers that you gave in the 10-K suggests a tough comp there. It seems that just overall, defense spending is a headwind, BLACK HAWK seems like a headwind. So maybe just walk through some of the big pieces of growth and maybe how much you have in there for the Australian helicopters and anything for unmanned K-MAX, that'd be helpful.

William C. Denninger

All right, we can do that. AH-1Z, we're looking at the total number of shipments of 6 cabins this year that should be around $8.5 million. 777 Fixed Trailing Edge we did 94 in 2012, we're looking at 99 in 2013. The value per ship set's around $300,000. A-10, 25 in 2012, 34 in 2014, ship-set value around $450,000. JPF, while the number of units is going to down, we have about 20,000 in our plan. A significant portion of them were DCS related, which means typically higher price, so we're not necessarily looking at a dollar volume drop there. SH-2G(NYSE:I) we have around $20 million in the plan toward the end of the year. Specialty bearings, sales up mid-single digits, composite sales up about 10%.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And then so you mentioned that the SH-2G that, that comes latter part of the year?

William C. Denninger

Yes.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

And so you're anticipating that you're selling some of the -- some but not all of the...

William C. Denninger

We think it's probably going to be a 2- to 3-year sale process. We do have to modify the aircraft. We're hoping to have a signed contract, probably in Q2. And then we'd hope to book some shipments toward the end of the year, as I said.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And then just to be clear on distribution. So the guidance, the full year guidance includes the $2.5 million to $3 million charge that's in 1Q?

William C. Denninger

Yes, sir.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

But when you report, you'll kind of spike that out as a onetime item?

William C. Denninger

Right.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And then can you just -- because it seems like you're off to a slow start, you got fairly muted growth, core growth for the year. If you kind of include that charge, you've got pretty healthy margin expansion, underlying margin expansion in KIT. So can you just walk through how you get the higher margins in a pretty muted demand environment?

Neal J. Keating

Jeff, it's going to be driven by a couple of things. As you know, our outlook for the year includes the contribution of acquisitions that we did in the second half of 2012. Those acquisitions are higher than our average margins, which certainly helps us. We have been able to increase our gross margin as well during the year, which helps us. But the consolidation and headcount reductions that we're undertaking in that business are really what's going to better match our cost structure, as we said, with our current revenue levels. We do anticipate that we will have some organic growth coming in the second half of the year. And we're really going to benefit from that operating leverage in the second half of the year to improve the operating performance and margin of the business.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay. And then just on M&A pipeline, I think the hope was after a year with the first Parker deal, you'd be able to reassess and maybe there'd be more opportunities there. Can you just talk about pipeline in general within distribution?

Neal J. Keating

Sure. Jeff, we'll talk about the Parker side, first. In fact, we've met with Parker management recently, and they have been very supportive of our increased acquisition efforts, and, in fact, have helped us in those efforts. And we expect that in the first half of this year, we'll be able to -- we would certainly hope to be able to talk about additional Parker locations that we've been able to acquire and bring into the Kaman portfolio of businesses. And also, in the, if you will, in the legacy MRO power transmission business, we have a number of smaller deals that we're very active with right now. Of course, based on valuation between us and the buyer, you can never be sure. But we also believe that, with the acquisition of Zeller and the entry into the more of the electrical and automation market that now some of those distributors will come on our radar screen as well.

Operator

Your next question comes from the line of Peter Skibitski.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Guys, I just want to make sure I understand distribution organic growth in the fourth quarter. Was it -- did it decline for all 3 of your platforms in distribution in the fourth quarter?

Neal J. Keating

I think that the way we would look at it from a product perspective, I would expect that our Fluid Power was probably flattish. Our Bearings and Power Transmission was probably where we went down. If you look at some of the SKF announcements or Timken announcements for the fourth quarter, they were down pretty markedly. For us, we have a big positive impact year-to-year on the electrical and automation side simply because of acquisitions. So I would say that we're probably flat on organic, probably, in electrical. But I don't know that we have it to that level of detail, Peter.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Okay. And then your 2013 assumptions, are you assuming all 3 platforms grow organically? Does one grow faster than another? Can you give us some color there?

Neal J. Keating

Sure. We are assuming that they would all grow organically simply because of the relative size of them. I would expect that our Fluid Power product lines would probably grow more on a percentage basis, probably followed by our electrical and automation lines. And just given the underlying dynamics of a lower growth power transmission motion control market, I think that, that would probably be the lowest of the 3 growth areas. Hence, why we've really focused our acquisition efforts in the higher margin and higher growth Fluid Power and electrical and automation markets.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Understood, understood. And then can you update us on how the integration of Zeller is coming along and maybe what its revenue contribution is expected to be in 2013?

Neal J. Keating

From an integration perspective, we're very pleased with Gary and the entire Zeller team and the capabilities they've brought to us. We've had a number of joint programs that they've done to enable us to -- historically, we have done a fair amount with water and wastewater treatment plant in terms of providing equipment. Now with Gary -- with the Zeller team and their capabilities, we're able to provide entire engineered systems. So we're very pleased with the pipeline of synergies sales opportunities and, in fact, some early orders leveraging both Zeller and the Florida Bearings acquisition that was also done in the second half of 2012. So we feel very good about that. I know that when we acquired Zeller, we said that they were about $80 million in sales. And we would -- we typically, after we acquire, Peter, we don't break that out after we acquire them. But we certainly expect positive growth for that business in 2013.

Operator

Your next question comes from the line of Steve Levenson.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Could you talk a little bit more about the alliance with Wajax and how significant you think that might be, maybe not so much in 2013 but looking forward? And if you can give us detail about when you think you'll really begin to see some benefits, that'll be great.

Neal J. Keating

Sure, Steve, we can. We've actually worked with the Wajax management team for a number of years where they've supported plant locations for our national accounts up in Canada, where we really didn't have any coverage. And we took a step back and decided that there wasn't a company that we could acquire in Canada that would really get us to the scale that we felt we needed to be at to be competitive in that geographic market. So it became clear to us that a relationship with Wajax really made sense. And that was the genesis for the concept of the alliance Sourcepoint Industrial. So now we feel that we've really leveled the playing field, if you will, for us to be able to effectively compete for customers with locations in both the U.S. and Canada through this alliance with Wajax. And if you put it in perspective, before we had 7 branches in Canada, now we're teamed with Wajax, they have 65. Our combined businesses now have over 250 engineers, $250 million in inventory. So we feel that it really provides us a much better offering for those accounts, again, with locations both in the U.S. and Canada, for Wajax and also for Kaman. We would expect that we would be able to make up -- you're right, it will start slowly like anything does in this area, but we would expect in 2 to 3 years, we would be able to offset the $20 million of lost revenues from the Canadian operations, obviously with a higher return on invested capital. And it could be significantly higher than that if we're successful with the number of large, particularly, mining accounts.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Can you also talk a little bit about bearings? I guess, I thought you might have a little bit more than mid-single-digit growth in 2013. Is there something holding it down? Is it slowness or inventory in the supply chain? Or are you just being maybe a little conservative?

William C. Denninger

We saw a fallout from bearing order rates in the second half of last year. I mean, it didn't go negative, I think they were negative in the third quarter or slightly positive in the fourth quarter. So based on that downward trend in incoming orders, we think single-digit, our mid-single-digit is reasonable. We hope there's some upside there, to be honest.

Operator

And the next question comes from the line of Scott Graham.

R. Scott Graham - Jefferies & Company, Inc., Research Division

So kind of piggybacking on that last question, maybe more as to the why. I understand your reference to Temkin. Certainly, we've seen that as well. Why do you think that, that segment of your distribution business has weakened into the fourth quarter? Certainly, fiscal cliff was a factor here. But it looks like the industrial environment is a little bit better post the fiscal cliff, yet that category doesn't seem to be seeing it. Why would you say that's the case?

Neal J. Keating

Scott, a lot of this business is replacement business, hence, maintenance repair and operations. I think that in the fourth quarter, plant utilization was down. We did see extended shutdowns. So if they're not running the plants, we're going to have lower maintenance and repair. We were in the same camp as you were, where we expected that there might be a significant bounce-back after the first of the year, and we saw a slight uptick, and another slight uptick in February, but not the kind of bounce-back that a lot of people were talking about in the fall timeframe. And now, people are talking about it occurring in the second half of the year. So I think it has more to do with the combination of lower plant utilization, combined with, to some degree, technological substitution as well, where people are going to more fluid power or electrical-based motion control as opposed to historical mechanical motion control.

R. Scott Graham - Jefferies & Company, Inc., Research Division

That makes as much sense as anything I've heard. So on the restructuring for the first quarter, is that going to really kind of hit the more of the legacy business? Or is that kind of spread out so that your 3 platform distribution business is in fact 3 separate platforms? Just a little bit more on the specifics of that.

Neal J. Keating

Scott, we are not going to do peanut butter across the board. It is going to be a combination of how we are doing in geographic markets, and how we see the potential for future growth in those markets. I would expect it will impact -- it will certainly impact all 3 product platforms, but it is not going to be a peanut butter approach.

R. Scott Graham - Jefferies & Company, Inc., Research Division

Fair enough. The last question is the free cash flow has a continuing improvement versus where it was 1.5 years ago here. It's been actually a terrific come-back on a trailing 12-month basis, so I'm just wondering, this is probably more for you, Bill, what are some of the tenets of that improvement, as the year, particularly in the second half of the year, which was a really good cash flow period?

William C. Denninger

All right I think that the key drivers there were good collections and higher shipments in JPF where we get progress billings. There was an across-the-company focus on receivables collection late in the year. Lower sales at distribution did result in lower receivables, slightly higher inventories. It came from a number of different locations, there wasn't 1 big driver, but those were really it.

Operator

Your next question will come from the line of Derek Jose.

Derek Jose - Longbow Research LLC

I was wondering if you could guys could touch on the tax rate for the fourth quarter a little more in terms of that onetime benefit? Is there anything more specific than what you mentioned?

William C. Denninger

There were 2 or 3 situations where we had reserves set up and statutes of limitations ran out and we no longer needed those reserves and we could, took them through the profit.

Derek Jose - Longbow Research LLC

Okay. And in terms of going back to the accounts receivables, how much of that was -- maybe I missed this, but pulled forward from the first quarter of 2013?

William C. Denninger

It's roughly $10 million to $12 million of distribution is the kind of number we're looking at.

Derek Jose - Longbow Research LLC

Okay. There was none from the Aerospace that was pulled forward?

William C. Denninger

Not pulled forward, no. I mean distribution, I think, to the extent sales moved out into the first quarter, so the collections.

Derek Jose - Longbow Research LLC

Okay. So then if you, say, reverse that, and you pulled it forward, was fourth quarter, actually, if you kind of exclude the collections and you just kind of look at the actual demand, notably weaker, and that first quarter may be more of a significant improvement if you had collected those in the first quarter over the fourth quarter?

William C. Denninger

Sorry, I'm not really following the question.

Derek Jose - Longbow Research LLC

Sure, I'm sorry. In terms of actual demand, if you had switched the collection from first quarter to fourth quarter, is fourth quarter actually weaker than what you would say, what you were saying, and first quarter actually might be doing a little better if the sales were collected in the first quarter rather than the fourth quarter?

William C. Denninger

I'm still not following, maybe we could take that off-line, I'm sure that we can answer that.

Derek Jose - Longbow Research LLC

No problem. And have you been approached by Parker again for any situation similar to the Catching? I know that anniversary-ed, and I know that part of the agreement had to do with them, you guys being, say, a preferred purchaser.

Neal J. Keating

Derek, you are correct, and during the fourth quarter of last year we met with members of the Parker management team, certainly to review our performance. We were performing well as judged by both Parker and Kaman. And they have supported us in continuing to acquire a number of Parker distributors, and depending on -- if we're able to come to agreement on valuation, we would expect to be able to add some Parker locations during 2013.

Derek Jose - Longbow Research LLC

And if I remember correctly, you could only add 1 every year. Has that changed? You kind of -- it seems like you're indicating that there may be an opportunity to add more than 1 Parker distributor?

Neal J. Keating

That's true, Derek. I think how we characterize it was that it would take a year before we would be able to do another one. I think for couple of reasons. Certainly, we needed to prove to Parker that we could provide the benefits that we thought we could. And also, for us to bring our people up to speed, quite frankly, on all of the Parker product lines. And that is -- was not an insignificant task during the year. Our expectation is that there would be multiple Parker distributor locations that we would be able to acquire of varying sizes. There are a number of smaller ones that would fit quite well. We would certainly also be anxious to be able to have a larger transaction, as well, kind of in the size range of another Catching or even larger.

Derek Jose - Longbow Research LLC

And this is currently not in the numbers, I'm assuming?

Neal J. Keating

That's correct. We don't have any acquisitions in our numbers, Derek.

Derek Jose - Longbow Research LLC

But this is definitely a change from 2012, given it seems like that the size of the Parker opportunity, not even if you exclude the organic growth potential, which seems like it's double digits, it seems like the Parker opportunity this year is even greater than it could've been a year ago.

William C. Denninger

With acquisitions, I think that's...

Neal J. Keating

With acquisitions, absolutely.

William C. Denninger

Yes.

Operator

And your next question will come from the line of Matt Duncan.

Matt Duncan - Stephens Inc., Research Division

Just, Bill, I want to follow up a little bit on the guidance to make sure we're understanding this correctly. So the first quarter, you're going to be down a little bit from the fourth quarter on the top line, is that correct?

William C. Denninger

Correct.

Matt Duncan - Stephens Inc., Research Division

Right. Can you talk maybe about -- it sounds like, then, in Aerospace, the year starts pretty slow, just like it does in distribution, and there's a build from there. Maybe if you can give us a little color on how much sort of, of revenues in earnings you expect the total company to record in the first half of the year versus the back half of the year, just to kind of help us get the shape after the first quarter?

William C. Denninger

Yes, I can tell you on the profit side, Matt, it's about 40% in the first half.

Matt Duncan - Stephens Inc., Research Division

So 30% of full year profit then would have to come in the 2Q, right? Because you said about 10% of profit would be in the 1Q.

William C. Denninger

Roughly true, yes.

Matt Duncan - Stephens Inc., Research Division

Okay. And then I guess, would it have that same sort of -- I guess it sounds like there may be each of the last 3 quarters of the year from an earnings perspective are going to be fairly similar at about 30% each?

William C. Denninger

Yes.

Matt Duncan - Stephens Inc., Research Division

Okay. And then in terms of revenue, just any thoughts on how quickly the build may occur?

William C. Denninger

I don't have that number in front of me.

Matt Duncan - Stephens Inc., Research Division

Okay, fair enough. And then on the impact of Sandy in the quarter, obviously, you guys would've had, I think, some impact, especially in KIT, where I know you've got a pretty heavy focus in the Northeast U.S. is there any way to think about how that impacted you guys? And then have you seen any material impact in the first quarter from the winter storm that hit a couple of weeks back? I know it hit Connecticut pretty hard.

Neal J. Keating

No, Matt, interestingly, we haven't. If you go back to Sandy, we did an analysis after that, and we knew that we lost some business because plants were shut down. And then we felt we gained it back so we were flattish. But we didn't see an uptick. Unlike some of the suppliers, Matt, that you're familiar with in the utility industry, where a storm impacts their revenues pretty significantly because of the utility rebuild requirements and the timing with which those happen, we haven't seen a lot, and I can't say that we've seen much in the first quarter either. While we did have a pretty significant storm here back a few weeks ago, there wasn't a lot of damage to facilities. We didn't have the roof collapses and other things. While traffic was shut down for a couple of days or 3 days, it was primarily over a weekend. So we shut down a little bit early on Friday and we were open Monday morning, and I don't think we were atypical.

Matt Duncan - Stephens Inc., Research Division

Okay, that's helpful. And then last thing for me, Bill, on the guidance. You've given us obviously the segment guides and a lot of line item guide to kind of help us get to an earnings number, but I want to make sure I'm interpreting it correctly. It looks like the EPS numbers, roughly $2.20 to $2.50, am I in the ballpark there?

William C. Denninger

I would not argue with you.

Operator

The next question comes from the line of Jeff Hammond.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Maybe just to close the loop on aero. Can you just talk about some of the bigger headwinds? From a line item, maybe touch on BLACK HAWK and anything else that's a drag?

William C. Denninger

BLACK HAWK, we're looking at currently at about 116 cockpits this year, we did 124 last year. And other than just general sequestration, I don't see any other significant headwinds.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Okay, great. And then can you just talk about the big moving pieces in CapEx? Looks like that's bumping up quite a bit?

William C. Denninger

Yes, and really, the single biggest driver there is about $8 million for a new facility in Germany to cover the growth we're seeing there on the bearing side. I mean, our maintenance CapEx would probably be in the $20 million area. So we got the IT spend I mentioned of $12 million, and another $8 million for the bearings facility. Those really are the bigger chunks.

Neal J. Keating

We've got maybe a little bit, maybe another couple of million incremental for some expansion here on specialty bearing, and in the Bloomfield campus for Specialty Bearings as well. So that's capital that we look forward to spending, quite honestly.

Operator

The next question is another follow up from the line of Edward Marshall.

Edward Marshall - Sidoti & Company, LLC

There's consolidation in the industrial space, I mean, you've been consolidating yourself. You've mentioned the phrase several times today about agreements on valuation, and I just wanted to be clear on something. I guess, a competitor, or maybe I should call them a peer, had what I call an eye-popping valuation for 1 of their businesses. I understand that's a different type of distribution business than what you are, but I just want to be clear to make sure that you're not seeing those types of valuations in the space and that's not preventing you from further acquisitions going forward?

Neal J. Keating

No, you're correct, Ed. We are not seeing those eye-popping kinds of valuations. We were -- we looked hard at that on Monday morning. But that's not anything close to what we're seeing.

Operator

And your next question comes from the line of Peter Skibitski.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Just a follow up on the fourth quarter for Aerospace revenue. Revenue came in a little bit lighter than your expectations, maybe $5 million to $7 million. Was there a couple of programs the split out there? Or could you talk about what happened?

William C. Denninger

It really was 1 program, and that related to the first shipment on the AH-1Z, which takes with it, I think, it was $8.5 million, and that moved into the first quarter out of the fourth quarter.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Okay, got you. And then on JPF, I think at year end, you had about $65 million in backlog. Are you expecting additional orders, maybe in the first half of the year, to get to your expectations for the full year revenue?

William C. Denninger

Yes, I mean, we did announce an order of $35.5 million, I think in January. There's another order out there for around $20 million that we're hoping to book soon, and then we have the USG contract, which should generate orders sometime in the second or third quarter. So we're in very good shape from a backlog point of view on JPF.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

Okay. So that $35 million is incremental to the backlog that's in your K?

William C. Denninger

Yes.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

I see, okay. Last question, small question, can you give us, specifically, your bearings growth for the year in 2012? Or maybe give us a ballpark, I think you're expecting mid-teens. I'm not sure if you hit that or not?

William C. Denninger

It was mid-teens.

Peter J. Skibitski - Drexel Hamilton, LLC, Research Division

It was mid-teens. Okay.

Neal J. Keating

Yes, sales growth. And that varies a lot, those really are collection of product lines sold between military and commercial at obviously various sum.

Operator

We have another follow-up question from the line of Arnold Ursaner.

Arnold Ursaner - CJS Securities, Inc.

I just wanted to spend a moment on your margin assumption in Aerospace. Obviously, you indicated BLACK HAWK cockpits might be down. But you also indicated, I think, bearings should be up, and that's your highest margin business. I'm just sorting through the other pieces. JPF, the margin maybe you'll have less revenue in total because you have fewer units. You may or may not, but I would assume the margin on what you're selling there is much higher. I guess, I'm trying to understand why your margin wouldn't be higher, because on an adjusted basis in Q4, you were almost 18%.

Neal J. Keating

Arnie, I think it's going to be driven primarily by increased volumes from start-up programs. Obviously, AH-1Z, the initial deliveries for that are lower margins. We also talked about a significant amount of our growth coming from our composites programs. Those are also early productions so also lower margins. So we're pleased that we're able to continue to grow that business and expand our commercial mix, but we also have the downward pressure of those new programs coming in at lower than the margins that you talked about certainly with bearings and JPF.

Arnold Ursaner - CJS Securities, Inc.

So what do you think the quantification on the margin hit from start-up costs would be, and are they expected to be completed by midyear?

Neal J. Keating

I don't know that they'll be completed by midyear, Arnie, because we will have several different programs that will go through qualification and early shipments in the first half of the year, and begin to ramp up in the second half of the year. I think it's going to be a phenomenon that we'll experience throughout 2013, and that's why we've really put the guidance at the level that we have.

Arnold Ursaner - CJS Securities, Inc.

In your mind, is it 100-basis-point or more hit to margin in 2013 for the start-up expenses?

William C. Denninger

That's probably a reasonable estimate, Arnie.

Arnold Ursaner - CJS Securities, Inc.

Okay, and just take perhaps the next 30, 40 seconds and remind us of the balance sheet impact when you make an eventual sale on the SH-2, how that reverses certain accruals that you've made over that past few years?

William C. Denninger

The 11 aircraft and related equipment are on the books for $53 million, so that will be relieved. We would generate from the sale on an after-tax basis probably around $60 million, $65 million based on our understanding of the current negotiations. And that would take place over a 2- to 3-year period, starting, we hope, this year.

Arnold Ursaner - CJS Securities, Inc.

And none of that is embedded in your guidance for the upcoming year?

William C. Denninger

No, we do have about $20 million of SH-2G(I) sales in this year's guidance or outlook.

Arnold Ursaner - CJS Securities, Inc.

And if you can do $20 million of sales, does that in fact reverse the accruals that you've made?

William C. Denninger

Starts to.

Arnold Ursaner - CJS Securities, Inc.

Okay. And remind us again of any cash obligations you have to the Australian government this year?

William C. Denninger

Right now, it's $6 million, probably.

Arnold Ursaner - CJS Securities, Inc.

And you, in the past have tried or talked about getting a tax reversal on the losses you had for that program. Is that some...

William C. Denninger

We actually got it about 3 years ago, and we recorded it.

Neal J. Keating

Yes, we had a $6.6 million cash refund from the IRS, in fact, as Bill said, about 3 years ago, Arnie.

Arnold Ursaner - CJS Securities, Inc.

Sorry, I forgot that.

Neal J. Keating

That's quite all right. We liked that day.

Operator

And the last question will come from the line of Robert Kirkpatrick.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Could you talk about whether pension is a headwind for you guys in the coming year as well? And whether there are other corporate costs we need to keep an eye on?

William C. Denninger

Well, pension is actually a pretty good story despite the trend in interest rates. I mean, our pension expense in 2013 will drop about $1.5 million from 2012, and continue downward. The plan is fully frozen at the end of 2015. Because of recent legislation, we are not required to make any cash contributions in 2013. We've elected to do so, we're going to put $10 million in, because we think it's the right thing to do. But the pension expense will go away starting in 2016, and cash contribution should trail downward as well, hopefully, as interest rates improve or increase, I should say.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Okay. And are you expecting higher interest rates for the year in your estimate for interest expense?

William C. Denninger

No, sir. Not in 2013.

Operator

And that concludes the question-and-answer portion for today. I'd now like to turn the call back to Eric Remington for closing marks.

Eric B. Remington

Well, thank you for joining us for today's conference call. And we look forward to speaking to you again when we report first quarter results in April.

Operator

Thank you, ladies and gentlemen, this concludes today's conference call. Thank you again for your participation. You may now disconnect, and have a great day.

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