Kaman Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Kaman Corporation (KAMN)

Kaman (NASDAQ:KAMN)

Q1 2013 Earnings Call

April 30, 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.

Matt Duncan - Stephens Inc., Research Division

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

Edward Marshall - Sidoti & Company, LLC

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

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

Michael Callahan - Topeka Capital Markets Inc., Research Division

James Foung - Gabelli & Company, Inc.

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 First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the conference over to your host for today, Mr. Eric Remington, Vice President of Investor Relations. Please proceed.

Eric B. Remington

Good morning. Welcome to the Kaman Corporation first quarter 2013 conference call to discuss our earnings results. Conducting the call today are Neal Keating, Chairman, President, Chief Executive Officer; and Bill Denninger, Executive Vice President and Chief Financial Officer. Before we begin this morning, please note that some of the information discussed during today's call will consist of 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 2012 Annual Report on Form 10-K, Form 10-Q in current report on Form 8-K filed yesterday evening together with our earnings release.

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 release, 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. Sales for the quarter were $388 million, slightly higher than prior year, and diluted earnings per share were $0.26. Sales were in line with our expectations and earnings were slightly better than expected due to a favorable sales mix of Aerospace programs, which more than offset weaker than expected performance in Distribution, where pre-tax earnings were impacted by a $3 million restructuring charge.

Looking at Aerospace, sales were flat with the prior year at $130.9 million. During the quarter, we achieved higher sales of bearing products in JPF fuzes, which were largely offset by lower deliveries of BLACK HAWK cockpits, reduced engineering services revenues and lower sales for the Egyptian SH-2 and blade erosion coating programs. Our bearing product lines delivered a solid quarter, benefiting from continued strong demand, including higher sales from large commercial aircraft and several nonrecurring military programs, including retrofit programs for the Tornado and drive shafts for several helicopter models. We have experienced strong top line growth for a number of quarters now, and based on recent order intake rates, we expect that rate of growth to moderate over the second half.

During the quarter, we delivered 4,620 JPF fuzes, approximately 200 more than in last year's first quarter. Our expectation for JPF deliveries remain 18,000 to 22,000 fuzes for the year, down from a record 27,500 delivered in 2012. Despite the lower deliveries, we expect program revenue to be flat to up slightly due to a higher mix of higher profit direct commercial sales in 2013. This includes deliveries under the $35.5 million order announced in January and a recently awarded commercial order of approximately $20 million for an unnamed customer.

While our backlog increase of $7 million in the quarter was primarily related to JPF, we also have a number of newer programs and sales opportunities in various stages of development. We have increased our business development investment, including the creation of a new sales organization. These efforts have significantly benefited our pipeline with outstanding bids having more than doubled over the last several quarters. Additionally, we are making initial deliveries or ramping up production across a number of programs, including the AH-1Z cabin, Lear 85 composite door, G [ph] 7000 and 8000 fixed leading edge, Trent 700 and the [ph] cell panels and the G280 winglet program. To date, we have experienced little in the way of program reductions or cancellations related to sequestration as the government grapples with its implementation. Until we learn more, we have no reason to change our estimate of an annualized impact from sequestration of $20 million to $25 million. One concern we do have relates to the furlough of government employees and its resulting disruptions. These furloughs could cause delays in a variety of areas including contracting, payment processing and approvals. These delays have the potential to be disruptive and add additional volatility to the timing of revenue recognition and earnings.

Our announcement a few days ago that the New Zealand government had approved the purchase of 10 SH-2G(NYSE:I) aircraft was a milestone for the company, and we expect to be under contract in the next few weeks. As most of you know, 5 years ago, we mutually agreed with the government of Australia to terminate their program, which capped the company's risks and potential loss from the original contract. However, it did not eliminate our total exposure. Now with the imminent resale of the aircraft to a country with a long service record with the SH-2, we are approaching a favorable and final resolution to this program.

At Distribution, sales from continuing operations were up 1.8% with the contribution from acquisitions offsetting a 5.9% decline in organic sales. Further, daily sales have been essentially flat for 3 consecutive quarters as we continued to experience weakness in many of our end markets, each of which has been impacted differently by market conditions. But we believe there are reasons for optimism. Daily sales appeared to have bottomed in January and our sales comparison trends improved on both a year-to-year and sequential basis as we move through the quarter. We have also begun to see some improvement in our OEM markets, which were the first to turn negative. This is supported by several months of favorable book-to-bill ratios and growing backlog in parts of the segment. When we look at our 10 large end-markets on a year-over-year basis, 5 are up and 5 are down. The up markets include primary metal manufacturing, paper and nonmetallic mineral product manufacturing. Down markets include food, beverage and tobacco and mining. Encouragingly, none of our top 10 end markets were up sequentially from Q4 to Q1, with mining as the only exception, demonstrating a low single-digit decline. We also sense more confidence in the marketplace, all of which lends support to our outlook.

However, based on our assessment of market conditions during the fourth quarter of 2012 and January of this year, we took a number of management actions later in the first quarter, including facility consolidation and headcount reductions to better position the company going forward. These actions will enable us to improve profitability for the balance of 2013, and to deliver improved operating leverage as organic growth returns in Distribution.

As a final comment, I would like to address our CFO transition. Two weeks ago, we announced that Bill has decided to retire and the Board has appointed Rob Starr as our next Chief Financial Officer. Rob is already transitioning into his new role, and we expect the handover to be seamless. Over the last several years, we developed a succession planning process and plan for key positions throughout the company. Bill has built and developed an outstanding team of finance professionals throughout the organization, and we were pleased that we have qualified internal candidates for the CFO position. Rob has been our Treasurer for the last 4 years and has been a great addition to our management team. To those of you who have not yet met Rob, I'm sure you will have the opportunity over the coming months. I know he will be an outstanding CFO, and I am very much looking forward to working with him in the years to come.

Before I hand it over to Bill, I'd like to say a few words about him. Bill tried retirement once before. Lucky for us, he wasn't ready yet and we were able to convince him to join Kaman. Shortly after I became CEO, we lost several long-serving senior financial executives to retirement and Bill's past experience as the CFO of a publicly traded company was very reassuring to me at the time. That experience has proven extremely valuable over these last 5 years. All of us at Kaman will miss Bill, but I know now he is ready to enjoy his retirement. I thank him for his service and wish him health and happiness in his future adventures. With that, I'd like to turn the call over to Bill for his last call as command CFO. Bill?

William C. Denninger

Thank you, Neal. On our last earnings conference call, we've provided an outlook for 2013 and indicated that we expected to earn about 10% of that full year outlook in the first quarter. At $0.26 per share, we did slightly better than that. Results for the quarter include $3 million or $0.07 EPS in cost to the higher end of our estimate relating to the restructuring at Distribution. These costs, which are included in the segment operating expenses, consist of severance and facility consolidation expense. Distribution operating margin in the quarter was 1.8%. Excluding the restructuring costs, margin would've been 3%. We expect to begin recognizing about $2 million of expense savings per quarter from restructuring beginning in the second quarter. This, combined with higher anticipated organic sales volume and the corresponding expense leverage is expected to improve operating margin sequentially as the year progresses.

Cash usage in the quarter was in line with our expectations, and we are reaffirming our full year outlook of $35 million to $40 million in expected free cash flow. Our effective tax rate in the quarter was 31%, reflecting the reversal of reserves related to a favorable state tax audit settlement. Our annualized to normalized tax rate remains at approximately 35%. With this release, we are reaffirming our full year outlook. We indicated in February that we expected first quarter net earnings to be about 10% of our full year total. As I said, we came in slightly better than that, and this was mainly driven by the timing of revenue recognition on certain Aerospace programs. So we are not raising our full year expectations.

The revenue mix in Aerospace, which heavily weighted towards the second half of the year in the Distribution. As we've said, we expect sequential improvement in organic sales growth throughout the year. We continue to expect 60% to 65% of our full year earnings to be recorded in the second half.

The announcement of the New Zealand government authorization to enter into a contract for the SH-2G(I) helicopters has generated lots of questions about contract accounting and the cadence of revenue, earnings and cash flow. These are questions we are eager to answer, however, these elements are still being negotiated. I would like to summarize for you what program information we're able to provide today.

First we expect total program revenue to be about $120 million over a 3-year period. The contract is expected to include the sale of 10 aircraft, spare parts, full mission flight simulator, training and in-country support over the 3-year period. Our 2013 outlook does include $20 million in program revenue, most of which is expected to occur in the second half.

The value of the SH-2G(I) inventory on our balance sheet at the end of the quarter was $53 million, and we do expect most of this to be relieved over the life of the program.

Through the end of April, we have made our contractually required payments of AUD 39.5 million to the government of Australia. Over the life of the New Zealand contract, we expect to make additional revenue sharing payments of about USD 5 million to Australia. Finally, we expect after-tax cash proceeds over the life of the program to approximate $60 million to $65 million. In an effort to maintain the program schedule on our 2013 outlook, we have already begun some work under the anticipated contract. While this does create some exposure until we actually have a contract, it allows us to maintain the delivery dates promised to the New Zealand Defense Force.

Before I close my formal remarks, I'd like to make a personal comment. I came to Kaman 5 years ago because I knew it was an outstanding company and I thought I could leverage my experiences to help make a difference, to help make it even greater. I saw an opportunity to be part of a new management group that was committed to building a stronger, more profitable and better capitalized company, which I believe we have done. I'm most proud of the team that we have built. That team, under Rob's guidance, is more than ready to help lead the company into the future. The culture at Kaman is special, and I understood that on my first day on the job. And I'm grateful to have been part of it if only for a short time. Finally, I'd like to thank Neal and the Board for their confidence and support. Thank you, Neal, for the opportunity. We made a great team and we had a great run.

With that, I'll turn it back over to Neal. Neal?

Neal J. Keating

Thanks very much, Bill. Overall, we're satisfied with our start to the year. Our outlook calls for, and we are expecting, significant operating performance improvement as the year progresses, and our team is focused on execution. We will continue to face near-term challenges, but we have positioned the company for continued long-term growth and improved profitability. With that, I'll turn the call back over to Eric.

Eric B. Remington

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Arnold Ursaner.

Arnold Ursaner - CJS Securities, Inc.

My questions relate to the margin in Aerospace. Two specific things, one is within Specialty Bearings, you mentioned you had some one-time award or one-time work, perhaps, if you can quantify the magnitude of that? And then, again, related to the margin in Aerospace, depending on if you did sell an AH-1Z in the quarter, it would have impacted your tooling, which is tied to the first delivery. So could you comment on both of those please?

William C. Denninger

Arnie, I think in terms of the one-offs in Specialty Bearings, it looks to me to be about $2 million to $3 million in the quarter. And the AH-1Z, we are not projecting to collect on that tooling in Q3 when we ship the third unit, it's a contract terminology.

Arnold Ursaner - CJS Securities, Inc.

So it had -- it did not have a negative impact in the quarter as -- recognizing the tooling, is that correct?

William C. Denninger

It did not have a negative impact, right.

Arnold Ursaner - CJS Securities, Inc.

Got it. And the $2 million to $3 million was revenue in Specialty Bearings although, obviously, very high-margin as well?

William C. Denninger

Yes.

Arnold Ursaner - CJS Securities, Inc.

And then, just a clarifying question, I think you mentioned in your prepared remarks that as it relates to the contract, you would only have approximately $5 million more of payments, U.S. dollars, you would make to Australia. Should we, therefore, assume that if you do get $120 million of proceeds, the balance will go to you?

William C. Denninger

Well, there's other factors that I've said on the opening. We expect $65 million to $70 million, roughly, after-tax cash proceeds.

Operator

Your next question comes from the line of Matt Duncan.

Matt Duncan - Stephens Inc., Research Division

Neal, in your prepared comments, you mentioned that your sales trends improved a little bit through the quarter at KIT. Is there any way to quantify sort of the level of improvement that you saw and what does April look like so far --

Neal J. Keating

We improved from organic sales, Matt, improved about 2% from January run rate to March run rate. April, obviously we don't have final numbers in yet, but we did see continued improvement in the organic sales growth rate. So again, not close but some improvement there, and also saw improved backlog in our -- continued improved backlog for the OEM portions of that business as well. So we continue to be encouraged. We'd like to see a little bit more underlying improvement. Bill?

William C. Denninger

Just to clarify, April is less of a negative organic growth than the first quarter.

Matt Duncan - Stephens Inc., Research Division

So full second quarter probably is still going to be a little bit negative for the organic growth rate and it should flip to a positive in the 3Q, I guess, it sounds like your expectation?

William C. Denninger

That is a reasonable expectation, yes.

Matt Duncan - Stephens Inc., Research Division

Okay. Neal, is there any way, as you look at the timing of the Easter holiday, with Good Friday falling the last sales day of the quarter, is there any way to quantify the impact that might have had on you guys?

Neal J. Keating

Matt, we actually thought quite a bit about that and there were a few things that added some noise to the first quarter. First of all, we had one less sales day, and while that, typically, wouldn't be a big deal and particularly, in our Aerospace business, you and the others that follow us know that sales days are really important in the Distribution business. So that, we think, had about 1 -- from 64 to 63 days is about 1.5%. So that impacted us. And I think you're right, the timing of Easter holiday probably, also had an impact. Good Friday was our last business day, and although we were open, a number of our customers probably weren't. So that's not overly helpful when you consider that the last day of the last week of the last month of the quarter is usually our biggest sales day. So we think that, that did have a little bit of an impact. We probably had a little bit of a headwind from the timing of the sale of our Canadian operations. We haven't spun up the source point alliance fully yet. And finally, I think that we would have our heads in the sand if we think that the restructuring that we went through during the first quarter also didn't impact our performance somewhat. So I think there were a number of factors that impacted first quarter.

Matt Duncan - Stephens Inc., Research Division

Okay. And then, last thing for me and I'll hop back in the queue. If I look at your segment margin guidance at KIT, you're -- at 1.8% this quarter, you're going to need be, I think, at the low end of your revenue guide, your operating margin would have to be 6.2% for the next 3 quarters, on average, to get to the low end of that range. And another way to look at this is, is if I adjust the first quarter margin to both take out the restructuring charges and give you the benefit of the $2 million in savings on a quarterly basis that you're going to get from those actions, that would put the first quarter at 3.7%. So help me bridge the gap a little bit from both that adjusted 3.7% and the 5.1% that you had last year to get to that 6.2%, you'll need to get into that range. Can you help me sort of think through how you get there?

Neal J. Keating

Absolutely. Matt, you're absolutely right. The first thing that we need is an improvement in underlying organic sales growth rates, because if you go back to the second quarter of last year, we did 5.1%, 5.0%, I think, adjusted, take Canada out. And we had a 3.3% organic growth rate. So clearly, getting back to that organic growth rate would be very critical to our ongoing improved operating leverage. Obviously, our restructuring cost coming out will give us about $2 million of savings per quarter, as you've said. And also, we are expecting to have some improvement in our gross margins during that period of time. So we've looked at our guidance very hard. We've looked at where we are today. And your math is correct about what we have to deliver for the balance of the 3 quarters to get to the 5.2% to 5.4%. But that's clearly still what our stated intention is.

Operator

Your next question comes from the line of Jeff Hammond.

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

So just back on the restructuring. Can you kind of just walk through how the $3 million spend turns into $8 million annual cost. I mean, that just seems like a really compelling payback.

William C. Denninger

It's strictly savings and salary and benefits related to the initial cost of the $3 million. We took out about 120 people.

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

Okay. And then, the facility closures were just some branches?

William C. Denninger

Yes, branches where we have done acquisitions and found that we could consolidate. I think there were a total of 5 different situations like that, that we accrued for.

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

Okay. And then, you mentioned some of the distraction and timing, but it just seems like over a fairly persistent period of time, you're underperforming your competitors. And I just want to understand, are we choosing to walk away from business? Are we seeing some share loss? How do you kind of reconcile your growth rates relative to the 2 other big competitors?

Neal J. Keating

Jeff, I'll tell you, I don't know that on a growth rate basis, as we look at the numbers, that we've really underperformed. I think that we've had 2 quarters of declining organic sales growth while a couple of our competitors were at 5 when they last reported. So we're happy to sit down and go through those numbers. But I think what's most important to us is that we recognize that we have a couple of things that impact our business probably differently than either of our 2 larger competitors. First of all, the end markets that we are traditionally strongest in, such as: food, beverage, mining, paper, have traditionally been strong, especially food, beverage and tobacco are down markedly over the past 4 quarters. So that impacts us. Energy being up, automotive being up are not great for us simply because we don't have a lot of exposure to that. The other thing that is relatively new for us as we've expanded into the electrical and automation markets, Jeff, is that we have a higher percentage of our sales coming from OEMs, and that business, we recognized, would be more cyclical. It was very strong in the first half of last year, but it was actually down 15% in the second half of 2012. It's been weak in the first quarter, although, improving through the quarter in 2013. So I think the end market mix impacts us pretty significantly, and I think, as well, our increased exposure to the OEM market has impacted us as well.

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

Okay. You said food and beverage down markedly. I thought that was a market that's generally much more stable in this kind of environment. What's going on there?

Neal J. Keating

You're exactly right. It's one that historically has been very stable, but if you look at what Procter & Gamble has been doing, look at the case count coming out of the breweries or the soft drink area, or even Pepsi and Anheuser-Busch. None of those companies are talking about increased case count output, and we have seen that reflected back through into our sales. But you're exactly right. That's an area that we'd really focused on for a number of years, even preceding my being here and done very well. And it served us very well probably up until the last, arguably, 4 quarters.

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

Okay. It sounds like given, kind of, the start of the year, you feel maybe more comfortable with the lower half or lower end of Distribution. Can you maybe just talk about moving pieces in Aero and just relative to how you thought the year would start to play out? Any kind of puts-and-takes and any biases within that range?

William C. Denninger

With the SH-2G(I), it was a bit of a question mark now that, that looks like it's going to happen. I have no reason to think we won't be at the higher end of the Aerospace range.

Neal J. Keating

We did a little -- as we outlined in our prepared remarks, we did a little bit better on the mix of Aerospace programs than we'd expected. We've had very strong business levels from the military, as Bill said, up $2 million to $3 million. So we think the timing of that was a little bit earlier than we had anticipated. We are anticipating some ramp-up in the AH-1Z in the back half of the year. So we're comfortable with where we're -- what we're putting forth as our outlook for Aerospace, but we did actually do a little better in the first quarter than anticipated.

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

Okay. So maybe higher part of the range in Aero, lower part of the range in Distribution?

William C. Denninger

I think that's fair at this point.

Operator

Your next question comes from the line of Edward Marshall.

Edward Marshall - Sidoti & Company, LLC

I wanted to focus kind of on Industrial Distribution, if I could. The restructuring efforts that you did in the quarter, is there anything else to follow going forward or are you're efforts done for now?

Neal J. Keating

We're done.

Edward Marshall - Sidoti & Company, LLC

Okay. I also kind of wanted to look at, it's been a quarter or 2 since we've had the Parker deal as well as the Schneider deal. And I wanted to kind of get maybe a high-level understanding of what opportunities you think these businesses are providing for you. Or have you noticed any kind of additional wins with customers or additional businesses coming in? Anything you can add there?

Neal J. Keating

Sure. I'll start with the Schneider one to begin with. As you know, the Schneider Electric and Florida Bearings acquisitions came in very close timing to one another. And actually, we've been able to work a quite large wastewater treatment order down in Florida, and we now have done all the electrical and automation panels for that wastewater treatment facility as well. So I think that the incremental add for us on that single program was approximately $1 million or $1.2 million. So the opportunity for synergy sales is really clear for us now that we have the Schneider and Zeller Electric capabilities within the Industrial Distribution group. So we feel good about that. It's an early win, but it's a great example of how we can now leverage that capability on a much broader geographic area and improve our competitiveness in those local markets. So we have a lot of work to do there to get our people trained on a more broad basis, the electrical and automation products that we can now sell from Schneider. But we're well down the path on those training programs. And on the fluid power area with Parker, we feel very good about the progress that we've made. Our Catching business improved throughout the quarter and looks good from year-to-year. We've had a number of meetings with the senior management at Parker and have gotten feedback that we've fulfilled all the goals that we've set together. We are going to continue to improve in that area, but we think that we have some opportunities to add to our Parker locations in the near future.

Edward Marshall - Sidoti & Company, LLC

That's good news. A question on the pension. I believe there's a step change in the pension as we move through, it's either this year or next as some amortization from the carryforward rolls off. Can you give me a point of clarification as to when that pension amortization's rolling off?

William C. Denninger

We are seeing about a $2 million reduction in pension expense this year versus last year. And we expect that pension expense to continue to drop as the plan has been frozen.

Edward Marshall - Sidoti & Company, LLC

Okay. And then, finally, a point of clarification, the $60 million to $65 million in profit, I guess, that you're receiving from the New Zealand helicopter program, is that entirely your share? My understanding is there was some -- and I know you've made some payments and you're going to make another $5 million payment, but my understanding is there are some profit-sharing in there as well.

William C. Denninger

Yes. That's net of the $5 million additional profit-sharing payment we need to make to Australia. So that's ours. And Ed, to be clear, that's cash flow, not net income.

Operator

Your next question comes from the line of Steve Levenson.

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

In relation to the SH-2s, is there an MRO opportunity beyond what's spoken for in the contract or is all the MRO over the 3 years covered in the contract?

Neal J. Keating

Steve, I would say that the MRO for the next 3 years is going to be covered in the contract. They will procure, as part of the contract, a number of spare parts that will be able to meet their service requirements for a while. But certainly, one of the key advantages for us here in putting those aircraft into the flying fleet down in New Zealand is the ongoing service and support revenues. As you probably remember, we're coming close to completing the Egyptian SH-2 depot level maintenance and upgrade program. Now those aircraft were flying for about 8 to 10 years before they came in. But that was an $85 million program for us for 10 aircraft. So while not over the next 3 years, certainly, after that term, we would see increasing opportunities for service and support revenues to support the New Zealand Defense Force.

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

Got it, thanks. And is the cash expected to come in ratably over the 3 years or is it skewed one way or the other?

William C. Denninger

Right now we're still working out the details of the contract and I can't give you a solid answer on that yet.

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

Okay. Good enough. It seems like you're working on quite a few more composite programs than you have been in the past. With some new planes coming out and some new revisions. For example, Boeing, I guess, hasn't formally introduced, the 777X, but they've done everything but formally introduce it. Do you see any opportunities to provide parts there and how might the acquisition of your logistics business out there in the Seattle area, that seems to have a real good relationship with Boeing, help you?

Neal J. Keating

Steve, the engineering -- we're waiting for Boeing board to officially productize the 777X to offer it for sale. Hopefully, they will do that at their next board meeting. We certainly can't be sure of that. But we believe that, that will provide us an opportunity to increase our current staffing levels for our engineering business. You're exactly right, that's going to be very key to us. And the next version, the -9 or the 787 will be important for us. They have a very good relationship with Boeing. In fact, they were awarded Supplier of the Year that we announced, I think it was early last week. So very well-positioned to benefit there from an engineering perspective. And we have invested within the Aerospace group in -- over the past year, in a rejuvenated and expanded business development sales and marketing force, and we are beginning to see the benefits of that and we certainly hope to see more of it on the next versions of the Boeing aircraft.

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

Got it. Last one, what's in the M&A pipeline these days?

Neal J. Keating

We have a very active pipeline on the Distribution side of our business today, primarily focused around both fluid power and electrical automation companies. Although, we are very anxious to expand our footprint in the traditional mechanical power transmission, motion control businesses as well. But very active and very busy there. And also on the Aerospace side, active primarily in the Specialty Bearings product lines area. Obviously, we believe that we've got a great capability there from a technology and engineering and manufacturing, and we would dearly love to be able to acquire another bearing company, where we could bring those capabilities to bear and improve the business that we would acquire and expand our overall Specialty Bearings product line sales.

Operator

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

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

My Aerospace questions have been answered, so I just wanted to ask a couple on Distribution side. Could you guys tell us how much of your Distribution business is to OEMs and even if you're not, could you kind of tell us what the tone of their business is? I know it's a little -- start and stop for you, but obviously, they're a big engine, a big cog in the industrial economy particularly on the MROs, so I was just kind of wondering what the tone of your conversations was with them?

Neal J. Keating

Scott, in the last quarter, our OEM sales made up about 25% to 27% of that business. And we believe that tone has improved markedly over the last quarter. It hasn't come through in sales yet, but we've had positive book-to-bill, I think, in each of the last 3 months. So every month of the quarter and was also looking good in April when we met about a week ago. So we believe that, that tone has shifted somewhat to a more positive side after being down for the second half of 2012.

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

Okay. And further on that, your delivery rates with respect to the rest of the business with this -- the consolidation, this -- I'm sorry, the 3 platforms and kind of how you're operating that business a little bit differently. Have your delivery rates been affected by that or are they improving? Is that an opportunity to gain some new business?

William C. Denninger

I don't think our delivery rates are really an issue, Scott. I mean, in the higher value add business, we do quote and then, maybe a lead time to get parts and do the assembly and fabrication, but I'm not aware that we're either competitively advantaged or disadvantaged from our lead times.

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

No, I wasn't implying disadvantaged. I was just thinking that as you're doing a restructuring, you're taking out some heads that maybe, there was a little bit of an opportunity to push them up a little bit further, cash or something there, but if not, not. That was really all I had. I was just curious about the next layer on the ID side.

Operator

And your next question comes from the line of Michael Callahan.

Michael Callahan - Topeka Capital Markets Inc., Research Division

Just a couple of quick defense questions here, I guess. First on the JPF program. Can you speak a little bit about the order flow you saw throughout the quarter, and then, if there was any, I guess, change once they finally passed the appropriations bill? And how comfortable you guys are with your outlook, especially, when you kind of hit more difficult comparisons towards the end of the year?

Neal J. Keating

Mike, we feel pretty confident in the range that we gave, I think topping out it was about 8,000 units for the year. And we haven't seen -- 16,000 to 18,000 for the year -- we haven't seen -- I'm sorry, 18,000 to 22,000 for the year. We haven't seen any impact, to date, from any of the sequestration in Washington. What we did say is that we had a $30 million, roughly $30 million, $35 million order, and then, we also had one that had not been previously announced for another $20 million. So we feel good about the backlog that we're building. We probably would have the opportunity to get to the upper end of our range for unit deliveries if we have additional, in particular, foreign demand, during the course of the year. But we certainly do feel pretty confident in the backlog there. It's now about $106 million. And actually, as we've commented in our prepared remarks, a lot of the backlog increase of about $7 million from the end of 2012 was in the JPF area. So that's really pretty solid for us.

Michael Callahan - Topeka Capital Markets Inc., Research Division

Okay, great. And then, I guess, the only other question I had, a program we haven't talked about in a while, the A-10. It looks like it got some additional funding for '13 and likely in '14 as well. Have you guys heard anything on your end or is that likely to step up through the end of the year? Just your thoughts there.

Neal J. Keating

We're planning to deliver around 33 units for the year. So...

William C. Denninger

Full rate production's 38. So we aren't seeing any impact at all with this funding at this point.

Michael Callahan - Topeka Capital Markets Inc., Research Division

Okay. Did you see -- and you saw some of that in the last year though, right, on that program?

Neal J. Keating

Actually, it wasn't so much that we had reduced funding, as it was a pushout with first flight of the aircraft. So this was a fairly complex program for Boeing, taking a relative, in fact, quite an old aircraft, reengineering it, don't go into a 3D model, and it did cause some challenges through the engineering phase for Boeing in first flight. But that's really what drove the delay as opposed to funding.

Operator

And your next question comes from the line of Jim Foung.

James Foung - Gabelli & Company, Inc.

Just going back to the sale of the SH-2G, could you talk about what you plan to do with the cash as you accumulate that over the 3-year period?

William C. Denninger

The net cash proceeds after tax, we expect to be in the $65 million range over the 3-year period, James.

James Foung - Gabelli & Company, Inc.

Right. But what are your plans for the proceeds?

William C. Denninger

Initially, reduce debt unless there's a strategic acquisition that we're ready to pull the trigger on.

James Foung - Gabelli & Company, Inc.

So you're going to look for, as you indicated earlier, in fluid power and distribution, possibly a more bearing business in Aerospace.

Neal J. Keating

Absolutely, that's right, Jim. Those are the key areas for us where we see that we can improve the relative competitiveness of the 2 businesses and that's where we would focus those efforts.

James Foung - Gabelli & Company, Inc.

Okay. And then, how about the last aircraft, any kind of imminent plans that you might be able to sell that last SH-2G?

Neal J. Keating

Absolutely. Clearly, we're focused right now on fulfilling the requirement for New Zealand on the 10 aircraft. But we will continue to market that 11th aircraft. And now, it would be most likely that it would go to one of our current operators.

William C. Denninger

And James, it's on the books for around $2 million, so it's not going to be a big drag from a working capital point of view.

James Foung - Gabelli & Company, Inc.

Right. Okay. How soon do you think you might be able to sell that aircraft or is it just too early right now to comment?

Neal J. Keating

Jim, it's really too early to tell. We're going to focus on the delivery of these first 10 aircraft and make sure that we fulfill all of our requirements to the New Zealand Defense Force on those aircraft, and through that period of time, we'll worry about where we might be able to effectively place the 11th aircraft. But right now we know that we've got a commitment to New Zealand. They fly 5 of our aircraft today, they have since the late 1990s. And we're focused on fulfilling that contract with them.

James Foung - Gabelli & Company, Inc.

Okay. Great. And then, can you just talk a little bit about Unmanned K-MAX? I haven't heard that in a while. Could you talk about, maybe, the progress you're making trying to sell some more of those helicopters?

Neal J. Keating

Well, Jim, we continue to make progress, albeit slowly. In fact, we were very pleased that last week, the Secretary of the Navy actually mentioned the Unmanned K-MAX in his prepared remarks in front of the House Armed Services Committee. So I think that -- we realize that, that is an important step. There's actually a Marine Corps media day today or media briefing today that's featuring the Unmanned K-MAX. It came out last night that they're going to say that we're now over 3.2 million pounds. So it continues to operate extraordinary well in theater. We are adding additional capability to the aircraft back here today for an advanced Army program. So we continue to work it, but we certainly are anxious, as a number of others are, to see if we can't move this towards a program of record.

Operator

[Operator Instructions] Your next question comes from the line of Derek Jose.

Derek Jose - Longbow Research LLC

I was wondering if you guys could clarify your comments on gross margin from earlier, that you said it's going to improve in the back half of the year? Is that for the whole company driven by Bearings and Aerospace or is that just for one specific segment?

Neal J. Keating

That's primarily for our Industrial Distribution group.

Derek Jose - Longbow Research LLC

And why is the gross margin going to improve in the back half of the year?

Neal J. Keating

What we're hoping to have it improve through the back half of the year are driven by a couple of things. Primarily, it will be product mix and the second is that we're getting good growth from the new acquisitions that we've added, which happen to be at a higher gross margin than our underlying business. So the mix there between the fluid power and electrical and automation and service support businesses versus traditional Distribution.

Derek Jose - Longbow Research LLC

And just kind of on that same tone, how do you see pricing in terms of those markets right now? Are you able to pass through pricing or have you been -- or have you had to hold some back, given that the market's still been a little slow through the early part of the year?

Neal J. Keating

It's a really good question. Last year, early last year, we were able to pass through pricing. We have not been able to, I would say, for the past 2 quarters.

Derek Jose - Longbow Research LLC

For the past 2 quarters, okay, that's helpful. And I guess, lastly, in terms of your relationship with Parker, and we talked about the acquisition pipeline, how much of that is being driven by Parker right now? How big of a say or how much are they bringing to you, so to speak, in terms of opportunities considering that it's been over a year since Catching?

Neal J. Keating

Derek, they are bringing a number of opportunities for us. I think we're working very constructively together in that. One of the things that we have to keep in mind is that these are privately held companies and they decide the timing on which they're going to sell. So as I commented earlier, we're talking with a number. We feel very good about our opportunity to close some in the near-term. But again, we will go through periods of time where we're ready and anxious, and if the owner of the company is not quite ready to sell yet, it's still not going to happen.

Derek Jose - Longbow Research LLC

Okay. And these are similar companies in the size and scope as Catching?

Neal J. Keating

There's actually a range, Derek. There are some that are smaller and some that are larger as well. I don't mean to be vague, but that's actually the universe of companies that we're looking at today.

Operator

Your next question comes from the line of Robert Kirkpatrick.

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

There were also 2 aircraft that were possibly to be sold to a country in South America. Can you update us on the status of that?

Neal J. Keating

Yes, that was 2 SH-2s for Ecuador. And that has not progressed, Rob. We think the probability of that is relatively low.

Operator

And your next question comes from the line of Brian Campbell.

Unknown Analyst

My question was previously answered just a moment ago about the Catching deal. And I guess, just a little more follow-up there. You have anniversary-ed the year requirement to do further deals. Are you able to do more than one now going forward or is it still kind of a steady pace of moving slowly with Parker Hannifin?

Neal J. Keating

Brian, I think it would be more than one deal. And I think it will also vary, somewhat, with size. Clearly, if we're doing smaller transactions, we would expect to be able to do a number of them in quick succession with one another. I think what would be important for us to keep in mind, though, is that if we were to do a larger acquisition of a Parker distributor, we would also, if you will, take a bit of a timeout from additional acquisitions until we assured ourselves that we had properly integrated that new company into our fluid power platform of businesses. So we're working on more than one at a time today, but again, if we are successful doing a larger transaction with a Parker distributor, then I wouldn't be surprised if it would be another year or so after that until we get back active in that area.

Unknown Analyst

Okay. Has there been any disruption with that deal itself and maybe you happened to do shed past products that were competing?

Neal J. Keating

Absolutely. There was significant disruption last year and still some continuing disruption through the first quarter of this year as we transition from competitive products to Parker product line because obviously, a number of our legacy suppliers, really, they've not provided the support, and we told them that we're moving away from them. So that has continued less in the first quarter of this year than the second quarter of last year, but still, a little bit of a drag that we expect will turn to a positive in the second or third quarter of this year hopefully.

Unknown Analyst

Okay. And then, last question. Just on free cash flow guide for the year, and maybe I missed it, but is the guidance given not inclusive of the sales of SH-2s?

William C. Denninger

It is inclusive.

Unknown Analyst

Okay. So remind me the numbers again, Bill?

William C. Denninger

$35 million to $40 million full year free cash flow. And the number for the SH-2s, as I recollect, is around 10 for this year.

Operator

And I would now like to turn the call over to Eric for closing remarks.

Eric B. Remington

Okay. Well, thank you for joining us for today's conference call. We look forward to speaking to you again when we report second quarter results in July.

Operator

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

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