Kaman Corporation's (KAMN) CEO Neal Keating on Q4 2016 Results - Earnings Call Transcript

| About: Kaman Corporation (KAMN)

Kaman Corporation (NASDAQ:KAMN)

Q4 2016 Earnings Conference Call

March 1, 2017, 08:30 AM ET

Executives

Eric Remington - Vice President, Investor Relations

Neal Keating - Chairman, President and Chief Executive Officer

Robert Starr - Executive Vice President and Chief Financial Officer

Analysts

Edward Marshall - Sidoti & Company

Pete Skibitski - Drexel Hamilton

Shannon Burke - Gabelli

Robert Magic - CJS securities

Robert Kirkpatrick - Cardinal Capital

Chris Dankert - Longbow Research

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Four 2016 Kaman Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Mr. Eric Remington, Vice President, Investor Relations. Sir, you may begin.

Eric Remington

Good morning. Welcome to the Kaman Corporation fourth quarter 2016 earnings call. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer, and Rob Starr, Executive Vice President and Chief Financial Officer.

Before we begin 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 2016 annual report on Form 10-K and the current report on Form 8-K both filed yesterday evening together with our earnings release.

In addition, we expect to discuss certain financial measures and information that are non-GAAP financial measures as defined in applicable SEC rules and regulations. Reconciliations to the most comparable GAAP measures are included in the earnings release filed with yesterday's 8-K, a copy of which can be found in the Investor Relations section of our website.

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

Neal Keating

Thank you, Eric. Good morning and thank you for joining us on today's call. We closed 2016 focused on executing our key strategic and operational initiatives that formed the foundation for continued profitable growth. Our results reflects strong performance in aerospace and a difficult backdrop in distribution combined with effective cost controls across the Company.

At a consolidated level, these factors led to fourth quarter of $433 million, a modest decline from the prior year. GAAP diluted earnings per share were $0.53 with adjusted diluted earnings per share of $0.56. The comparable amounts in the prior year were $0.32 on a GAAP basis and $0.69 on an adjusted basis.

Results for the fourth quarter reflect differences in product mix particularly in aerospace when compared to the prior year. As well as certain expenses that we do not expect to recur going forward, positioning us to achieve increased earnings and cash flow in 2017.

Most importantly, we delivered higher consolidated gross margins of 31.3% in the quarter. 310 basis points higher than the 28.2% recorded a year ago primarily driven by our ongoing productivity initiatives at distribution and improved margin at Aerospace.

As we move into 2017, we expect the cost associated with distributions initiative, which were $4.6 million or 180 basis points in the quarter to be significantly reduced providing a positive impact and operating margins.

Turning to the full-year many of the key trends that persisted in the fourth quarter also shaped our 2016 results. On the top-line total sales were $1.8 billion, which was up 1.9% compared to the prior year. Higher sales was driven by 17.5% increase in Aerospace volume, which was comprised of 7% organic growth and the contribution from recent acquisitions. This strong aerospace performance was partially offset by a 6% full-year sales decline and distribution.

Full-year GAAP diluted earnings per share were $2.10 or $2.25 adjusted compared to $2.17 or $2.42 adjusted in 2015. Lower earnings per share with the result of lower operating profit levels of distribution, which included $12.6 million in cost associated with our productivity initiatives, a more normalized tax rate in the year and higher levels of diluted shares associated with our convertible debt.

Before moving on to segment level details, I would like to take just a moment to discuss our cash flow performance and touch on the dividend announcement that was issued yesterday. In 2016, we generated $108 million of cash from operating activities and $78 million in free cash flow, marking our third consecutive year of free cash flow generation in excess of 130% of net income. This strong and consistent cash flow provides the opportunity to position our Company for future growth.

During the year we invested $30 million in our operations through capital expenditures, repaid over $20 million in debt and increased our cash on hand by $25 million. This level of cash generation has also allowed us to return cash to shareholders through dividend and our stock repurchase program, which combined returned a record $33 million to shareholders in 2016.

Given our consistent cash generation over the last several years and our confidence in the sustainability going forward. Our Board of Directors increased the quarterly dividend 11% to $0.20 per share. Our third dividend increased in six years.

Turning to our operating segments, beginning with distribution, organic sales during the quarter were down 3.4% or 4.9% on an organic sales per day basis as the industries we serve continue to experience weak market condition. Many of our key markets were under pressure, when compared to the prior year including paper manufacturing, mining, transportation equipment and chemical manufacturing.

These headwinds were partially offset by an increase in non-metallic mineral products, fabricated metals and merchant wholesalers durable goods, which were bright spots in the quarter. The overall tone during the quarter improved with five of our top 10 industries either flat or slightly positive year-over-year.

Our distribution segment operating margin came in at 2.2% of sales or 2.4% when adjusted to exclude restructuring and severance cost, both lower than the prior year. There were two primary causes of this margin decline, first is the loss leverage and lower organic sales which includes a 50 basis point impact from reduced vendor incentives and second cost related to our productivity initiatives focused on process improvements and data analytics.

While these productivity initiatives impacted our 2016 operating expense, they have strengthened our distribution operations as we move into 2017. Adjusting for these costs as well as restructuring cost, we expanded operating margins by 50 basis points for the year in a declining sales environment, a very solid result.

Turning to our aerospace segment, fourth quarter revenues were $176 million down $10 million relative to the fourth quarter of 2015. Revenues were negatively impacted by lower JPF shipments partially offset by a full quarter of contribution from our 2015 acquisitions. As a basis of comparison, we shipped nearly 10,000 fuses in the fourth quarter of 2015 compared to approximately 5500 units in the fourth quarter of 2016.

Looking at the balance in aerospace starting with specialty bearing products we had a strong year capped by record quarterly shipments of our self lube bearings. We continue to ramp up new programs that our German bearing facility and our 2015 acquisitions were accretive to EPS and adjusted EBITDA for the quarter and for the year.

We have also made considerable progress on the relaunch of the K-MAX and closed the year with six aircraft under contract and a deposit on the 7th aircraft. The first airframe manufactured in Jacksonville arrived in Bloomfield in the fourth quarter and we remain on-track for our first delivery in the first half of 2017.

Moving to our largest single program, the Joint Programmable Fuze, there are a number of factors that can impact performance from quarter-to-quarter and I would like to walk you through some of those to better understand 2016 and our expectations for 2017.

We delivered almost 5500 fuses in the fourth quarter and over 31,000 for the full-year. while fuse deliveries were favorable to our top-line during the year, mix presented a headwind with 63% of our 2016 shipments going to the U.S. government versus 54% in 2015.

As we mentioned last quarter, we are awaiting an export license for a $93 million direct commercial sale order from the State Department, which based on our current expectations has been delayed into the second half of 2017.

As you can see from our program backlog of $175 million, demand for the joint program will fuse remain strong and we are in ongoing negotiations with the U.S. Air Force and other customers for additional orders that would provide visibility into 2020. In the year ahead, we are very focused on execution, to drive sustainable long-term growth and improvement in our operating results.

There are many areas of positive momentum in our business including the underlying margin improvement in our distribution segment and exciting program development and opportunities including our bearing products, K-MAX, JPF in a number of our structures program.

As Rob will detail in his discussion of our outlook we are focused on margin improvement and volume stabilization and distribution and sales growth in our Aerospace segment.

And now, I will turn the call over to Rob. Rob.

Robert Starr

Thank you, Neal, and good morning, everyone. I would like to begin this morning by touching on our fourth quarter results, which came in lower than our prior forecast. This was driven primarily by two factors, we incurred higher than forecasted implementation cost relating to our productivity initiatives as the distribution team achieved better than anticipated results. Additionally, JPF unit deliveries in the quarter were approximately 3,000 lower than we had estimated in our latest outlook. We anticipate shipping those units during 2017.

We remain highly focused on expense management and have successfully reduced our core SG&A spend by 2% over the prior year while continuing to invest in both distribution and in critical product development such as new specialty bearing applications and advanced fusing technologies at acquisition products. Our balance sheet remains strong with our leverage well within our long-term target range providing us excellent strategic flexibility.

I would like to focus a balance of my remarks on our outlook for 2017, and capital deployment priorities. Starting with aerospace, we expect continued strong sales growth in 2017 primarily from higher volumes for the Joint Programmable Fuze program, additional revenue from the K-MAX improved programs and higher shipments of missile fuses.

Partially offsetting these increases is a projected $10 million negative impact from foreign currency exchange rates. Achieving our sales range outlook of $720 to $760 million will depend impart on the time to receive of government approvals for a large DCS JPF order that Neal referenced earlier and the booking of additional K-MAX orders by the end of the year.

The outlook for Aerospace operating margins at 16.5% to 17% is keeping with our long-term target range for the segment, although it is a bit lower in our adjusted 17.2% we achieved in 2016. This is primarily a result of lower profit contribution from JPF as Neal described earlier and higher K-MAX revenues that margins that are below segment average.

Before moving on to distribution, I thought it would be helpful to provide more context on our expectations for the JPF program in 2017. As we ended 2016, we completed option 11 deliveries to the Air Force and began shipping under option 12.

Option 12 pricing, which is based on higher initial order of quantities from the Air Force is lower than option 11 and is expected to having unfavorable margin impact of approximately $7 million in 2017.

In addition we are obligated to completed option 12 deliveries by the end of the third quarter, which will require us to dedicate product capacity to the Air Force in the first part of the year. Overall, we expect JPF volume to be higher in 2017 with the range of 33,000 to 37,000 fuses.

Distribution sales are expected to be in the range of $1.1 billion to $1.15 billion. This reflects negative sales growth of slightly less than 1% at the low end and positive sales growth of 4% at the high end and is reflective of the challenging markets we continue to experience.

Operating margin and distribution is expected to between 4.9% and 5.3% significantly better than the adjusted 3.9% we achieved in 2016. This level of profitability reflects the continued contribution from a productivity initiatives and the absence of the cost associated with implementing the program.

Corporate expense levels in 2017 are expected to revert back to more normalized levels with our current expectation at 55 million. I2016, we benefitted from a number of items including better than expected group health experience that are difficult to anticipate whether they will recur in 2017.

The primary factors driving higher expense in 2017 are healthcare, regulatory compliance and incentive compensation. As noted in our earnings release, our diluted share count assumption for 2017 is approximately 400,000 shares higher than 2016. This increase primarily relates to additional dilution from our convertible debt instruments based on our current share price.

Future share price movements will impact our diluted share count going forward. As you are aware, we have historically earned greater than half of our full-year earnings in the second half. we anticipate this pattern to be more pronounced in 2017 due to a number of factors more so within aerospace.

The items having the most impact on our 2017 earnings cadence are the normal cyclicality of bearing product deliveries and margin patterns and a mix in timing of JPF deliveries with all of our projected direct commercial sales occurring in Q3 and Q4.

Also impacting our cadence is a push-out of missile fuse deliveries from the first quarter into the second quarter. Our expectation is that we will recognize less than 10% of our full-year net earnings in the first quarter and approximately 50% of our net earnings in the fourth quarter.

We expect our strong free cash flow generation of the last several years to continue with additional contributions from our 2015 acquisitions. We are projecting 2017 free cash flow to be between 70 million and a 100 million approaching or exceeding 100% of net income once again this year.

Based upon current projections, we anticipate our 2017 year-end leverage will be at approximately two times debt-to-EBITDA, the low end of our targeted range. This will allow us to continue deploying cash to organic growth opportunities and strategic acquisitions. These investments will be balanced with the returning cash to shareholders as evidenced by a dividend increase in share repurchase program.

With that, I will turn back over to Neal for his closing comments.

Neal Keating

Thanks Rob. I would like to close with just a few comments highlighting both our near-term performance in several ongoing developments that will help drive longer term growth across Kaman.

The diversity of our products and the markets we serve has been one of our key strengths and 2016 was no exception. Our distribution business has dealt with more challenging market conditions than anticipated, but we remain focused on long-term operational improvement to drive stronger return on investment.

Aerospace delivered a solid performance led by bearings and JPF and we are encouraged by the contributions of our late 2015 acquisitions of EXTEX and GRW. Looking at 2017, we expect operational improvement for the full-year to continue across our businesses and product lines as we negotiate some quarter-to-quarter volatility.

Overall, we saw terrific progress in 2016 and are positioned to end 2017 even stronger. We have a great team in place and I have confidence in our strategy to drive long-term shareholder value.

With that, I’ll turn it back over to Eric for questions. Eric.

Eric Remington

Thanks Neal. Chelsie may we have the first quarter please.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions]. And our first quarter comes from the line of Edward Marshall with Sidoti. Your line is now open.

Edward Marshall

Hi, guys. How are you? Good morning.

Neal Keating

Good morning, Ed.

Robert Starr

Good morning, Ed.

Edward Marshall

So, I guess the first question, standard on the export license and understanding that the JPF and foreign military sales are delayed because of that. Is this export license related to government’s first packing order or is this something that is a new customer and therefore it’s taking a little bit longer to get to the red tape?

Neal Keating

Ed it’s Neal, it is a new customer for us, we are a new allai for the U.S. government. I think that as we went into the election and now post election timeframe, a number of other factors had moved up on the agenda in Washington and some of more normal activities related to foreign export licenses had been somewhat delayed. That’s why we believe that it may be in the late second quarter or early in the quarter that we may actually have this export license move through the process, but it is not something that is new.

Edward Marshall

Okay. Is it a philosophy that changed from the current administration versus the prior administrations, that may have put some delay or is it just more or about the quantity of work that’s actually means?

Neal Keating

I don’t think it has had to do with necessarily a change Ed, I think it’s more posturing actually at the end of the last administration and now there is a lot of things that need to move through the process and while this is a very high priority for us, it’s probably going to be a little bit further back in the line for the legislators right now.

Edward Marshall

Got it. And were there the other foreign military sales in the quarter aside from this that had received recent export licenses in the quarter or in the first quarter of this year?

Robert Starr

Yes, Ed this is Rob. We did ship a small amount of DCS fuses in the fourth quarter, which as you would appreciate do require export license, so we were able to in the fourth quarter. As of this part, we are not anticipating any direct commercial sales to occur in the first quarter, or really very nominal amount in the first half. It’s really all backend loaded in the third quarter and fourth quarter, just based on expectations for timing of receipt of that export license.

Edward Marshall

Got it. And if the export license became approved, would you out an announcement stating that that would be approval and anticipate shipping [Indiscernible]?

Robert Starr

Ed, I don’t know that we would necessarily put out a press release if it’s approved, but we would certainly comment on it as soon as we could in a call or other open environment.

Edward Marshall

Okay. Because I am assuming that it would change the cadence of the year for you as far as the recognition of EPS?

Neal Keating

It may, if it were to come earlier, we would certainly work to feather in those deliveries earlier in the year then we currently anticipate, but as Rob outlined as well, we have a requirement to deliver the entire current options for the U.S. Air Force before the end of the third quarter, so we will be focused on fulfilling that commitment.

Edward Marshall

Got it. Okay, thanks very much, guys.

Eric Remington

Okay. Thank you, Ed.

Operator

Thank you. And our next question comes from the line of Pete Skibitski with Drexel Hamilton. Your line is now open.

Pete Skibitski

Good morning, guys.

Neal Keating

Good morning Pete.

Robert Starr

Good morning Pete.

Pete Skibitski

Hey, Neal, I guess we have had a real delay here in the fiscal 2017 DOD budget and we have seen JPF backlog kind of come down. Are you expecting if we get approval here of the 2017 budget over the next couple of months that you would get a fairly quick replenishment of JPF backlog at that point?

Neal Keating

That’s what we would anticipate Pete, you are right we are currently and we even commented on current negotiations with the U.S. Air Force, so we would expect as you know those come in large chunks, we have been working down the last large chunk, but we are in current negotiations and we would anticipate that we would have an order shortly.

Pete Skibitski

Okay, great. And then for you or Rob, I am a little surprised that you guys said the aerospace sales guidance depends on K-MAX, I was assuming kind of a slow start to the program this year. So, I was wondering how many deliveries for K-MAX you are factoring into your guidance and kind of how the prospects are for incremental sales.

Robert Starr

Sure, yes Pete this is Rob. In terms of K-MAX, the reason we referenced that is those programs are currently being accounted on a cost-to-cost basis. So upon signing of another contract, we would be able to recognize revenue upon the inventory that we are currently building to really process the line.

So in terms of the expectations, we the expect to begin delivering K-MAX at roughly one unit every other month beginning sometime in the second quarter or sometime in the first half. So we would expect to see somewhere in the range of call it three to four K-MAX deliveries this year.

But the revenue side is going to be also dependant on our ability to executing new contracts and we have a number of opportunities that we are pursuing with the number of interested potential customers. And next week do have the Heli Expo conference which is an important conference for us in the helicopter space.

Pete Skibitski

Got, I, very helpful. Thank you. I will stick one last one in maybe for Neal. Neal, just in aerospace broadly we are seeing a ramp in the Airbus A320 Neo and pretty soon the 737 Max. I’m just wondering if I have lost track, can you talk about your content on these new aircraft, maybe the bearing content and kind of how that compares to prior generation aircraft?

Neal Keating

Sure, Pete in fact that got a lot of attention since the Wall Street Journal article from last week. We have a relatively low amount of content about $35,000 to $50,000 on the narrow body aircraft. So we certainly like it when they go to 40 aircraft a month, but it’s certainly much less than we would have on for example an A-350, which helped drive some of the increase in our self lube bearing revenues from 2015 to 2016.

So, relatively small just because it’s a smaller aircraft and still important to us based on the volumes that they are going to be shipping those aircraft or delivering those aircraft at in the coming years.

Pete Skibitski

Okay, thanks guys.

Eric Remington

Thanks Pete.

Operator

Thank you. And our next question comes from the line of Shannon Burke with Gabelli. Your line is now open.

Shannon Burke

Hi good morning.

Neal Keating

Hi, Shannon.

Robert Starr

Good morning.

Shannon Burke

So just actually more on Pete’s question on the K-MAX. Is there a large capture fee included upon delivery of [indiscernible] or how does the cash play?

Robert Starr

Yes, Shannon for the K-MAX there is a milestone payments, so upon contract signing we received a certain amounts and then as we hit key production milestones and certain delivery is one of those. Certainly a very large percentage of the overall cash flow relating does come up on delivery, as you would expect, but we do receive meaningful in process payments or advance payments from our customers on the program.

Shannon Burke

Okay, great. And then could you comment on how many order you would need to book to meet the guidance based on your cost deposit planning.

Robert Starr

Sure, we currently anticipate roughly on the range of somewhere between three and four orders on K-MAX that is the key top-line metric for us and certainly we would also have a cash flow benefit to that. What is really important is that to make sure that our production cost stay in line and that we are able to get the aircraft off the line because we have six firm orders and one under deposits. So we are in pretty good shape as it relates to 2017 Shannon, I mean there is a little bit of [Technical Issues] execute those contracts, but we feel very confident in our ability to get there.

Shannon Burke

Okay great. And then just switching to distribution, you states that the cost for these productivity initiatives were slightly higher than anticipated. What exactly happened there, did you have to implement something out, that is something goes on and are these costs fully completed?

Robert Starr

Shannon, actually nothing went wrong, things went a little bit better than anticipated and as you can see from our underlying performance in distribution they really made significant progress during the year. The impact from the overall performance in particular in the fourth quarter, which that they reach levels that resulted in higher costs, so it had a disproportionate impact on the fourth quarter as we trued up for the full year, but those costs we believe are now behind us, the vast majority of those costs are behind us. So it’s really been an investment to build a much stronger business, which I think is indicative from the underlying gross margin improvement, that we demonstrated year-to-year.

Shannon Burke

Definitely. Okay, great. Thank you so much

Robert Starr

Thank you, Shannon.

Eric Remington

Thanks, Shannon.

Operator

Thank you. And our next question comes from the line of Robert Magic with CJS securities. Your line is now open.

Robert Magic

Good morning.

Neal Keati

Good morning, Rob.

Robert Starr

Good morning, Robert.

Robert Magic

Just following-up on the previous question, how should we think about any lingering cost impact specific to Q1?

Robert Starr

Yes, Robert, this is Rob. We certainly in conjunction with this productivity initiative program has invested in a infrastructure to support this program going forward, this is really important for us. We anticipate that as we mentioned that the vast majority of the expenses were incurred in 2016 there will be some ongoing costs that are reflective in built into the outlook that we have for 2017 for distribution, but I would say roughly what our magnitude is that 75% to 80% of the costs are behind us as we move into 2017.

Robert Magic

Thank you. And then on top line trend in distribution organic sales per day were down, 5% or so in the quarter. Can you perhaps break that out by months or maybe comment if that year-over-year comparison got worse or better as the quarter went on and then maybe discuss on what you are seeing so far in Q1?

Robert Starr

Sure, it was actually very interesting, for each of the month in the fourth quarter, we were quite literally down about 4.8%, I mean there was nearly similar performance month-to-month and we certainly were anticipating a strong result on what we got missing the low end of the range by just a bit.

In the first quarter, we are also running about mid single-digits but I would point that our expectations for the first quarter daily sales rate is below prior year and we expect that to improve as we move through the balance of the year. So we are actually tracking fairly close to our internal expectation so far through the quarter.

Robert Magic

Thank you. And then obviously you saw Trump’s defense plan, I appreciate the fact that details are as far as at this point any thoughts on how that might impact you at this point in time?

Neal Keating

You know Roberts, it’s certainly an environment where higher defense spending is good for us. You know obviously for Lockheed Martin and Sikorsky with the Black Hawk we benefit greatly from that. As you know, we are a key team mate with Bell on the AH-1Z for the marine core. So as they continue to increase requirements for the marine core and also for foreign military sales, that’s certainly good for us.

We are seeing another 15% unit volume increase in JPF from 2016 to 2017 after a 25% increase from 2015 to 2016. So that and if we keep the A10 program going, it’s certainly going to be favorable for us, but as you said we need to have the proposed budget turn into a real budget and then have it come through the appropriation process.

I think perhaps one of the most significant advantages for us would be that if we actually have a defense budget as appose to operating under a continuing resolution that it would provide the opportunity for the U.S. marine core to initiate a new program of record for the unmanned K-MAX.

With a continuing resolution, the only way that you are able to start a new program is under an urgent operational need, which is how we were able to deliver two aircraft to the marine core for use in Afghanistan that are now out in [indiscernible]. But we see certainly advantages to higher defense spending and certainly other key advantages to actually having a budget.

Robert Magic

Thank you.

Operator

[Operator Instructions]. And our next question comes from the line of Robert Kirkpatrick with Cardinal Capital. Your line is now open.

Robert Kirkpatrick

Good morning.

Neal Keating

Good morning Robert.

Robert Starr

Hi Rob.

Robert Kirkpatrick

I was wondering if you could talk a little bit about the plans for the convertible debt which is coming due shortly and how you are thinking might be looking at addressing that kind a of review the potential possibilities.

Robert Starr

Sure. Rob, we are certainly currently reviewing our alternatives and if you take a look at Kaman and standing in the capital markets we do have a number of options available to us, ranging from replacing it with another convertible note or perhaps even considering a high yield offering or even just replacing it with bank debt.

So those are kind of our three broad options that we look at, I don’t think we are going to do anything exotic. We are in good place, the capital market environment and today still remains very favorable and as you would anticipate looking at the general pricing levels, even though treasuries have sold-off since the election, overall corporate spreads have tightened in as much if not more.

So we feel very encouraged by the conditions and we are working with our financial counterparties on addressing the upcoming maturities. So certainly we will be keeping everyone informed as we move through that process and certainly as we announced what we are going to do with that upcoming maturity.

Robert Kirkpatrick

And is the straight equity offering on the table as one of those possibilities?

Robert Starr

At this point I would say that’s highly unlikely, certainly we appreciate the value of the currency, but I think we review that certainly more in line with something more strategic and refinancing the existing debt on the balance sheet.

Robert Kirkpatrick

Great. Well that leads into the second question, which is I was wondering if Neal, you could talk a little bit about the M&A environment that’s out there at this time, and whether the changes in Washington both actual and talked about respectively, has caused any changes in that M&A environment?

Neal Keating

You know, Rob, I will start with the second part of the question, I can’t say that we have seen any change in the M&A environment, due to the transition of administration or any other proposed either tax or export, import discussions that we have heard about, that we have all heard about.

But I would say that obviously we did two very important acquisitions late in 2015 including GRW, the largest acquisition, we had ever done and we very consciously took a step back so that we could focus on the integration of those businesses and we are sure that we have to focus on delivering to the acquisition plan we presented to our board, we just crossed over that that year and we did meet those expectations.

So we are very interested and now very active again in the M&A area, we have looked at a couple of aerospace businesses that would fit very nicely with our engineered products focus, they continue to be highly priced, but we will continue to be active and pursue those that we think can make sense and where we can deliver value as we have with the last few.

So that’s really it, certainly tax live changes would impact those returns, but until we know what it’s really going to be, we haven’t brought any of those new calculations into our existing analysis.

Robert Kirkpatrick

Great. Thank you so much. I appreciate the answers.

Neal Keating

Okay. Thanks, Rob.

Eric Remington

Thanks Rob.

Operator

Thank you. And our next question comes from the line of Chris Dankert with Longbow. Your line is now open.

Chris Dankert

Hi good morning, guys. Thanks for taking my question.

Neal Keating

Good morning, Chris.

Robert Starr

Good morning, Chris.

Chris Dankert

I guess first thought, you are in negotiations now, so I’m sure there is limited on what you can say as far as JPF and the USG order, but I suppose, should we expect a pricing and the feature looks more like option 12 than I think in the past or any commentary there, sort of pricing looks like for the JPF going forward?

Neal Keating

Chris, I don’t think we can comment on that. It will be when the contract is awarded, there will be an ability for people to look at that and work backwards and understand what that pricing is, but at this point in time at the stage of negotiations, we are really going to shy away, in fact we are not going to make any comment on pricing.

Chris Dankert

Understandable. Thank you so much. That’s really all I had left. So thanks again, guys.

Neal Keating

Thank you, Chris.

Eric Remington

Thanks Chris.

Operator

Thank you. And we have a follow-up question from the line of Pete Skibitski with Drexel Hamilton. Your line is now open.

Pete Skibitski

Yes, hey Rob did you guys change your methodology which would cause a backlog at distribution, it looks like those numbers got restated?

Robert Starr

Yes, we did have a bit of changes in the methodology so we did have a bit of a catch up adjustment that we made on our backlog. So certainly that’s really kind of been indicative of what backlog levels that we have had in terms of how we have recognized which we didn’t make a change. Those are firm just similar to how we view our aerospace backlog, those are all firm POs.

Pete Skibitski

Okay, okay understood. And then just wanted to get an update on SH-2 Peru program, I wasn’t sure how far along we were if that was going to be a big ramp in 2017 and ramp back down in 2018. I just wonder if you can give us an update on how far along in that I think roughly 50 million program you are right now.

Robert Starr

Yes, Pete we are I would call it towards the middle innings on that program, but we do expect to see a year-over-year positive increase on the top-line relating to Peru this year. We do expect that to contribute positively to the top-line.

Pete Skibitski

Okay, then it should end in 2018?

Robert Starr

2018 is probably if I estimated at this point, it’s difficult to say based on how the program will completely unfold Pete, but I would say it’s probably on level its where we are going to see in 2017, not materially different.

Pete Skibitski

Okay. And then last one just as Neal mentioned the AH-1Z earlier, anybody can add to this, but I know there are a lot of international opportunities for AH-1Z sales. And I’m just wondering how you guys are thinking about the prospect of improving that margin there to above zero if it did more volume would help or create some sort of contractual change, just curious as to how things are looking there.

Neal Keating

Sure, Pete. Obviously what we would be looking at is two factors. One as we go past our current contractual commitments with Bell is that we will benefit hopefully from slightly higher pricing as well as being well down our learning curve. So we will attack both sides of that, both price and the cost side, where I think we have made some actually some good progress over the course of the last six to nine months.

Bell is very encouraged by the reception of the aircraft in the world market today, in fact there was news this morning about Australia and competition in Australia including the AH-1Z. So we feel very good and we are doing everything that we tend to support them in those efforts.

Pete Skibitski

Okay, and so the improved pricing that kind of starts in 2018 to take effect, is that accurate or?

Neal Keating

That would be right Pete.

Pete Skibitski

Okay, that’s great. Thank you so much guys.

Neal Keating

Thank you Pete.

Robert Starr

Thanks Pete.

Eric Remington

Thank you Pete.

Operator

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back to Mr. Eric Remington for any closing remarks.

Eric Remington

Thank you for joining us for today’s call and we look forward to speaking with you again when we report our first quarter results in May.

Operator

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

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