Kaman Corp (KAMN) 2006 Q3 法說會逐字稿

Good morning. My name is Lawrence, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Kaman Corporation third quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS.]

Thank you. It is now my pleasure to turn the floor over to your host, Russell Jones of Kaman Corporation. Sir, you may begin your conference.

Well, thank you, Lawrence. And good morning, everyone. This is Russ Jones of Kaman Corporation, and I'd like to welcome you to the company's 2006 third quarter results conference call. The conference is also being webcast over the Internet at www.kaman.com and an online archive of this broadcast will be available within one hour of the conclusion of the call and will be available until November 8th at this site.

Conducting the call today are Paul Kuhn, Chairman, President, and CEO, and Bob Garneau, Executive Vice President and Chief Financial Officer. Following their prepared remarks, they will take your questions.

Before we begin, let me take a moment to reference the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. Although the company believes that the expectations reflected in its forward-looking statements are reasonable, we can give no assurance that such expectations or any of these forward-looking statements will prove to be correct.

Important risk factors that can cause actual results to differ materially from those reflected in the company's forward-looking statements are included in our earnings release filed last evening and in the company's filings with the Securities & Exchange Commission. These documents and the exhibits we will refer to in this morning's discussion can also be accessed on the company's web site which, again, is at www.kaman.com.

The information contained in this conference call is accurate only on the date discussed. Investors should not assume that the statements made in this conference call remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call.

Finally, our discussion today will include certain non-GAAP measures related to company performance, reconciliation of this information is provided in the exhibits to this conference call, and is available through the webcast section on our web site.

With that, please turn to Exhibit 1, and I'll turn the call over to Paul Kuhn. Paul.

Thanks, Russ. Good morning and, again, welcome to our 2006 third quarter conference call.

Yesterday afternoon Kaman Corporation reported third quarter 2006 net sales of $307.6 million, an increase of 10.6% over the $278.1 million reported in the third quarter of 2005. This performance was generated by solid results across most of our businesses.

We generated operating income of 16.2 million or 5.3% of net sales in the third quarter of 2006 compared to an operating loss of 4.4 million last year, and we achieved net income of 8.7 million compared to a net loss of 3.6 million. When making comparisons, bear in mind that our year ago third quarter includes about 11 million in charges related to the Australian Helicopter Program versus about $2.5 million in the third quarter of this year. In addition, year ago results include about $5.5 million in corporate expenses related to stock appreciation rights and a recapitalization that didn't repeat in the 2006 quarter. As a side note, sales, operating income and net income for the third quarter all exceeded second quarter results.

With 24.8 million average common shares outstanding our EPS were $0.36 diluted in the third quarter of 2006 compared to a net loss of $0.16 per share on 22.9 million average shares outstanding in the third quarter of 2005. Overall, we feel these results reflect the continued progress we've made in executing our strategy to take advantage of organic and acquisition growth opportunities, reduce costs, and increase efficiencies in each of our segments. We feel that we are making the most of the generally positive conditions we've been experiencing in our markets.

I now refer to Exhibit 2. The Aerospace segment performed well in the third quarter, with net sales growing 20.8% from year ago levels. Our Aerostructures Division has come a good distance from the difficult process of closing an old Connecticut plant in 2003 and moving to expanded modern facilities in Jacksonville, Florida. Our cost structure is more competitive today and our facilities are top flight. For the third quarter the Division reported a 45.9% increase in sales over the previous year quarter, driven by production of BLACK HAWK cockpits for Sikorsky and additional shipments on our Boeing 777 program. Both the metals oriented Jacksonville facility and the composites oriented Wichita Facility participated in the increased sales of business this quarter.

The two largest programs at Jacksonville are the C-17 wing structure assembly program for Boeing and the BLACK HAWK cockpit program for Sikorsky. As we mentioned in the release, we received notification from Boeing in August that it anticipates the government will order at least an additional 18 C-17s. If this were to happen our work on the C-17 program, which is currently expected to conclude in mid 2007, would continue at least through 2008. During the quarter we received a release for additional BLACK HAWK cockpit from Sikorsky, and that program continued to contribute solidly.

At Wichita we have reported this year on two composite program wins involving the Boeing 787 Dreamliner that looked promising, and a new Sikorsky program for the [MH-92], so activity levels there have also increased. Significant capacity exists at both Jacksonville and Wichita to take advantage of new opportunities as they arise.

The quarter also saw improved performance from our Fuzing Division, which achieved a 38.7% increase in sales over the previous year quarter. This was driven by higher production volume and shipments AT our Middletown Facility for missile fuzing and memory programs.

We also continued to make incremental progress solving produceability challenges and increasing production quantities for our Joint Programmable Fuze Program at the Dayron Facility in Orlando. The value of JPF contracts with the U.S. Government to date has become quite meaningful at $76.9 million. We have had a number of small initial orders from foreign military, and we expect demand to remain strong for the product for a long while to come.

The Fuzing Division will tend to experience fluctuating performance on a quarter-by-quarter basis due to the requirement that fuzes be bought off by the customer and delivered in lots that may complete on one side or the other of a quarter's end. In addition, this technology is still new, and we find we still have to interrupt production from time to time to work through technical issues that can arise this early on in the flight, the product.

That brings us to the Helicopters Division which posted an 8.3% sales decline for the quarter. This was due to the benefit in the third quarter of 2005 of higher SH-2G sales involving both the Australian program and spare parts shipments to New Zealand.

I will assume that everyone who is listening to this call is familiar with the SH-2G Helicopter Program for Australia, which has been in a loss position for some time now. If you're not, you can find sets of material on it in our various press releases and MD&A discussions, and all of that is available through our web site.

During the quarter we took an additional $2.5 million charge for estimated costs to complete the program. Formal qualification testing of the completed software is continuing at the offices of our subcontractor [CSC Australia] in Sydney. To date, this has been going as expected, and is being observed by the Australian Government.

As this proceeds, we continue to work with the Australian Government to resolve flight safety questions that resulted in the grounding of the aircraft earlier this year. The cause has been an [anomalous node] from the aircraft airspeed sensor which was rectified with the redesign component.

The Commonwealth is reviewing all of its options with regard to this program, including an evaluation of possible alternatives. We believe that the Commonwealth will confirm its attempt to complete the program. Meanwhile, they are continuing to develop new work scope related to their certification requirements, and we are working with them to address these scope changes, as well.

Also at the Helicopters Division our Egyptian FH-2G Helicopter Refurbishment Program is moving along nicely, and we have announced government funding to provide for long lead procurement and other work related to planned upgrades to the helicopters. The Division has cut costs and has been executing on a business model that I'm finding increasingly interesting as we bring the Division into the subcontracting market. One result of this is that we have achieved the opportunity to do work for Sikorsky at the Bloomfield Plant in Connecticut.

At Kamatics and RWG we saw another quarter of strong performance, with net sales increasing 14.6% from year ago levels. The results continue to be driven by a healthy aerospace market and by a growing recognition of the special capabilities provided by our very high end and cost effective proprietary products.

Prospects remain good for business growth. Over the past couple of weeks we have moved into an additional 25,000 s.f. of capacity in Bloomfield in order to take advantage of opportunities we're seeing in the marketplace. And we are building an additional 10,000 s.f. with occupancy expected during the second quarter of 2007.

Switching segments, our Industrial Distribution segment continued to deliver strong performance in the third quarter of 2006, with sales of 6.6% relative to a year ago. This segment is heavily influenced by overall economic conditions. During the past quarter we observed some softness in housing related industries, such as producers of roofing materials, but then on the other hand we continued to find strong demand from our customers in the energy and raw materials industries.

We're moving forward with a key strategy in the segment that is aimed at expanding our nearly 200 locations, reach geographic footprint for better market coverage, and we are also working to increase our market share in industries such as coal mining, oil exploration, and petroleum production, and the typically less cyclical food processing industry.

Moving on again, Music segment sales increased by 8.8% in the third quarter over the year earlier quarter, which gives us the benefit of a full quarter of sales from our August 2005 acquisition of Musicorp. Sales for the base business before the acquisitions were up about 3% as broader economic factors, such as higher fuel costs affected consumer purchasing decisions. The first two months of the third quarter were softer than we had anticipated but these were followed by a strong September, which actually set record sales levels as retailers placed significant orders in preparation for the holiday selling season.

Musicorp was Kaman Music's largest distribution competitor. We have pretty much completed the integration of Musicorp. We've closed three warehouses, systems have been integrated, and we have completed the personnel adjustments that were planned. Musicorp broadens the segment's customer base, giving us more opportunity to sell to the smaller retailers which make-up a large portion of their customer business, and we think this will bring meaningful benefits over the long term.

Musicorp sales for the quarter were weak, as the smaller retailers have been more deeply affected by this year's downturn in consumer spending on music products. Now, we think these same customers are likely to recover more quickly as consumer spending increases, and Musicorp should reap the benefit when that happens.

Wrapping up this part of the call, we delivered strong performance in the quarter. Credit certainly has to be given for the generally good market conditions we have had to support our efforts, but underlying all of this is the benefit of work we've done to position all three of our business segments for growth and improved operating performance. In short, we have improved the company and taken advantage of opportunities.

With that, I'll turn the call over to Bob Garneau, who will review our financial results in greater detail. Bob.

Thanks, Paul.

If you would turn to Exhibit 3. Net sales for the Aerospace segment increased to $85.4 million in the third quarter of 2006, compared to 70.6 million in the third quarter of 2005. Strong growth in Aerostructures, Fuzing, and Kamatics more than offset slightly lower sales for the Helicopters Division.

Operating income for the segment in the quarter was 11.8 million, compared to an operating loss of $300,000 in the third quarter of last year. And the operating margin segment rose from a negative .5% to a positive 13.8. These results include the affect of a 2.5 million charge for the Australian program in the third quarter of 2006 and an 11 million for the Australian program in the third quarter of 2005. That difference plus stronger operating performance at most of the business units drove the increase in margins.

The Aerospace segment represented 27.7% of total sales for the quarter, compared to 25.4 a year ago. In our Industrial Distribution segment net sales increased to 166.7 million in the third quarter of 2006, compared to 156.5 million in the year ago period. Operating income rose 64.7% to 8.5 million or 5.2% of sales, from 5.2 million or 3.3% of sales a year ago. To put that increase in a useable framework, please recall that earnings for the third quarter of 2005 included a onetime increase in freight expense that had reduced earnings for the year ago period. We also tend to generate increased margins on incremental sales, so an increase in sales helped.

The Industrial Distribution segment represented 54.2% of sales in the quarter versus 56.3% last year. You might notice in your analysis that Industrial Distribution sales were slightly lower in the third quarter of 2006 than they were in the second quarter of 2006. Our sales per day were actually higher by a small amount in the third quarter, but the second quarter had two additional selling days.

For the Music segment net sales increased to 55.5 million in the third quarter of 2006 compared to 51 million a year ago. The increase was driven by 14.1 million of Musicorp sales, representing a full quarter of results for the acquired company, up from 10.7 million, representing a partial quarter for the third quarter of 2005.

The Music segment's operating income increased to 3.8 million in the third quarter of 2006 from 3.4 million in the third quarter of 2005. The operating margin improved slightly to 6.8 from 6.6% in the year ago quarter, driven by cost reduction efforts and higher sales volume. The segment represented 18.1% of the 2006 third quarter sales, about the same as a year ago.

If you would turn to Exhibit 4. I will comment principally on the third quarter numbers, but we have included the nine-month figures in the exhibit, as well, for your reference. Total corporate expenses, shown at the bottom of the page, declined to 7.8 million in the third quarter of 2006 from 12.5 million in the third quarter of 2005. Most of the corporate expenses actually are fairly stable, and we give the sum of those aspects on the top line of the exhibit and we labeled them corporate expense before breakout items. The items we have broken out are the components of the overall corporate expense that have been the moving parts.

One reason for the decline in the corporate expense, is since the third quarter of 2005 we incurred 1.1 million in consulting and legal expense for last year's recapitalization. There was no additional expense for this in 2006 and, in fact, you will note in the nine-month column that we actually had a $500,000 recovery of certain of those expenses earlier this year.

An even bigger expense for the 2005 period that is absent this quarter involves stock appreciation rights, or [SARS]. SARS has been a significant expense in 2005, driven by a sharp increase in the price of Kaman shares last year. Kaman has not issued SARS since 2003, most of those that have existed had been exercised, and going forward these will be much less of a factor.

The other categories broken out include stock option expense which is relatively small. Basically, we issue options once a year at our February Board meeting, with pricing established at the mean of the high and low price for that day. Option expense is recorded at fair value based on a [black shoal's] analysis. A similar expense can be expected each year going forward but this will depend partially on the total number of shares that we issue, as well as the valuation assumptions.

The amount of FAS87 pension expense that we record on our books is based on an actuarial calculation provided by our external actuaries. What you see on the exhibit is the corporate portion of the total pension expense. Most of our pension expense is allocated to the segments and included in their operating results.

You can find more information on our pension expense on page 12 of the company's 10-Q, which was filed with the SEC last night, but let me give you a brief explanation. For 2006 the total estimated FAS pension expense, FAS87 pension expense, was approximately 12.5 million compared to 10.2 million for 2005. The total amount that we plan to contribute into plan is 19.8 million compared to 4.7 million for 2005, based upon certain funding requirements and allowable IRS deductions. The [9.8 million] contribution is allocated to the segments and to the corporate office based upon their respective payrolls.

The difference between the FAS87 expense and the plan contributions is also recorded on corporate's books. The affect of the higher contribution in 2006 as compared to the FAS87 pension expense is that the total amount of pension expense at the subsidiary level has increased and this resulted in a decrease in the corporate pension expense detailed on this exhibit.

Our Supplemental Employees Retirement Plan, or FAS87 [SERP] expense, is also based on an actual calculation provided by our external actuaries. All SERP expenses are maintained on the corporate books and relates only to certain members of senior management and is driven by the total eligible compensation of that group.

That brings us to Exhibit 5, which is a GAAP reconciliation applicable to the three and nine-month periods. The results we reported last night are all GAAP figures. However, we know that some shareholders add-back or subtract various items from the reported GAAP results, and we thought this exhibit might be helpful.

The single item for the third quarter of 2006 is the 2.5 million charge on the Australian program that amounted to $0.06 per share diluted. Without the Australian charge net earnings for the quarter would have been 10.5 million rather than the 8.7 million reported, and $0.42 per share diluted rather than the $0.36 per share diluted.

For the nine month period there were four items, including Australian charges, amounting to $0.19 per share and SARS expense of another $0.01 for add-backs. And then we would subtract a gain of $0.04 per share from a capitalized freight adjustment in the first quarter, and $0.02 per share for the recovery of litigation expenses for the recapitalization in second quarter 2006. With these, net earnings for the nine-month period of 2006 would have been 25.9 million or $1.05 per share rather than the 22.1 million or $0.91 per share diluted that we reported yesterday afternoon.

I'll add here that the effective tax rate for the quarter was 39.5% compared to 58.7% a year ago. As I mentioned on our last call, the higher year ago tax rate reflects the non-deductibility of the recapitalization expenses and much of the stock appreciation expenses a year ago.

If you would turn to Exhibit 6, our borrowings remain at about the same level they were at the beginning of the quarter, at 97.7 million. The increase over the 64.8 million borrowed at December 31st, 2005 is due primarily to increased accounts receivable resulting from higher sales level and a significant reduction in accounts payable primarily in the Industrial Distribution and Music segments in the early part of the year.

Shareholders equity at the end of the quarter has increased to 287.7 million. You are probably aware that FAS158, which was just issued, spells out new rules for pension accounting that requires that the difference between pension plan projected benefit obligations and the market value of pension plan assets will be recorded on the books as a liability, however, not as a borrowing, and as a reduction to shareholders equity beginning with fiscal years ending on December 31st, 2006.

Our current estimate is that this will initially amount to somewhere between 10 to 20 million, with a final figure depending on market driven variances and interest rates and asset values between now and yearend. Overall, we believe this will have a small impact on our financial ratios.

Our debt to capitalization ratios remain moderate at 25.4 at the end of the third quarter. This figure does not include 23.6 million in letters of credit outstanding at the end of the quarter. With these letters of credit the debt to capitalization ratio is still moderate, 29.7% at quarter end.

We were asked at the last conference call, so I want to repeat once more that we have, that once we have acceptance of the first aircraft on the Australian program we expect a substantial payment from the Australian Government, and that should reduce our debt levels by approximately 22 million.

Capital expenditures and depreciation and amortization for the nine-month period are running at normal levels and may exceed last year's levels by a small amount as the year closes.

Summing it up, we had a good quarter and our financial structure remains strong. That concludes the financial discussion, and, with that, I'll turn the call back to Russ. Russ.

Well, thanks, Bob.

That wraps up our prepared remarks, and we'll now open the line for questions. Operator, may we have the first question, please?

[OPERATOR INSTRUCTIONS.]

Your first question is coming from Arnie Ursaner of CJS Securities.

Hi, good morning.

Morning, Arnie.

The first question I have is just a mechanical question on the Kamatics expansion, if I recall, you have 100,000 s.f. and you're adding roughly 25 now, 10 more? It's on a base of 100, is that correct?

Yes.

Okay. The second question I have is Music, two questions related to that segment. You indicated you had a record September, could you give us any feel for what you're seeing preliminarily in October, and whether these trends have continued? And, well, why don't we start with that?

Actually, October did not come in as strong as September did. Don't have any anecdotal information to share with regard to that. It's a matter of, I think, the level that the smaller retailers are willing to stock-up to. I think after their initial stock-up they're going to be replacing on a very closely, as required basis. So it wasn't surprising, I think, that October was a little bit lighter, and we're anxious to see what's going to happen in the November and December timeframe.

Okay. Given the facilities that have been closed, obviously, it's a very leverageable business when you get some reasonable volume. What do you think your best view is of, you know, margins on the course of an annual basis in Music with the cost-cutting you've put in place and with the mix change driven by Musicorp?

Our interest when we took the – made the acquisition was to increase our sales and to be able to bring up the acquired sales up to our operating level. So if we accomplished that I think that would be our initial objective. If we gain a little bit beyond that, that would be great.

A few more follow-ups related to your press release. I know you pick your words very, very carefully, so I want to follow-up on that. And regarding the BLACK HAWK cockpit you used to describe how many were expected to be finished by yearend. You've indicated you've gotten an additional sizable award, but you no longer tell us approximately how many will be done this year. Can you give us any feel for when the additional revenue from these will kick-in?

The additional requirement is just a tack-on to the end of the quantities that they've already released to us. Originally they released 80 out of what we anticipated was going to be 300 and some units.

Right.

They've been, recently increased that by about 28 units to the point where we now have 108 on order. That will allow us to complete this year's requirements and to move into next year, you know, with quantity in backlog. This is a difficult one to predict exactly how many. We're still acting in kind of real-time response to Sikorsky as they dictate which models they want and the speed at which they want them. I think the bottom line is that we are at the capability of delivering about eight a month, and we think that that's going to be the average kind of rate going forward that they're going to be expecting.

Final question relates to the SH-2 program, there is some, again, change in the language versus what you've had in the past, where the RAN is asking you to develop additional work scope related to the certification. And I wanted to drill-down a little bit on that because I think, again, to the extent the SH-2 program were completed, investors would react favorably. Is this additional work scope likely to extend the length of time it takes you to resolve the contract? And – I'm sorry.

The answer, first of all, let me just say that the reason for the additional work goes back to the fact that when we contracted with them, their certification requirements, their air worthiness requirements were different than they are today. So when we give them a product to our contract it actually does need what they need to meet in order to fly the aircraft. They've recognized that for a long time.

We're in the process now of identifying with them what that gap is, and that's additional work that they're talking about us doing. The amount of work that's going to be asked of us will dictate the length of time that it will take to do it, and we're actually sending a team over there next week for discussions with them on how to resolve the other contractual issues. So I can't really answer that this week for you.

Thank you.

Your next question is coming from [Robert Petasik].

Good morning, gentlemen.

Hi, Rob.

Can you talk a little bit more about where the Joint Programmable Fuze stands in terms of its production rate, and give us kind of a little bit more of an update as to where you think you are in terms of solving some of the issues that you've had with this program?

Yes, we came out of last year at a rate that was approximately an 500 a month capability, and we're coming out of this year at about a capability of running around 1,000 a month. Eventually, between the two sites we'll have a capability, I'm talking about Middletown, as well as the Orlando Facility, we'll have the capability of running about 2,000 a month.

Unfortunately, we've run into several circumstances over the last several months after we had certified the fuze, itself, in regard to some very small and intricate vendor supply parts that actually will determine whether the fuze performs as it needs to perform. And we've had to send teams of our people, our engineers, quality people, as well as government representatives into these plants when that occurs to resolve what the issue is and get it resolved.

I, to me, I mean I still look at that as somewhat of mentality issues associated with a new product. I think that we will work through those. What we have, again, some in the future, I would expect that we will, and I expect that the government who needs these fuzes very badly and want them very badly will work with us hand-in-hand to resolve the issues and keep us in production.

Have you had to swap-out subcontractors yet?

We did a total review of all of the subcontractors after we made the acquisition, and we have, in fact, added a number of them to a second source type of mode, so that we have both from the standpoint of the quantities that we need, but also if we should run into difficulties we have another source that's able and actually in production. So all of the critical parts [have been sourced].

Okay. And then you talked about the fuzing, revenue fuzing program is recorded on delivery of the product to the customer and fuzes are shipped in lots that take longer than three months to produce. Can you give us a little understanding, a little more understanding about that? You know, how big a lot do you produce before it's shipped in general? Help me understand that?

Let me see.

I mean if you're producing roughly 1,000 a month, that would tell me that it's more than 3,000 in a lot.

Yes, well, we wouldn't – we don't necessarily ship the whole, all of the quarters, so I'm not referring to that, but we do manufacture in quantities that are, you know, in the several weeks' worth or closer to monthly times, depending on the size of the lot. And then they grow through what they call a lot of acceptance test, a lab test. And they take a sample, a random sample from that lot, and we can afford zero failures. So if any one of those, that can range anywhere from half a dozen up to maybe 20, if any one of those should fail the whole lot is held until the problem is understood, there's 100% sorting of whatever the problem is, and confidence that we can proceed without that repeating itself.

Okay. And you mentioned in the industrial distribution section of your commentary of your press release that industrial production remains positive to showing signs of having peaked. You're talking about trying to expand in some natural resource areas, as well as in the less cyclical food processing area. Are there acquisition opportunities for Kaman in this segment here to be able to grow through the next downturn in the industrial production?

The answer to that is yes. The industry is still heavily fragmented and there are quite a few small and medium sized distributors out there. But this whole industry kind of grew-up together and we're finding that a number of these ship-and-orders that got into the business about the same time we did are now coming of retirement age and where they don't have family members that want to continue, they come on the market. They have been coming to us in the past just by the nature of our known acquisition program, and we have quite a list that we've identified of potentials, that we continually evaluate and are always in discussion with someone.

Okay. And then, finally, I think, Bob, in your remarks you mentioned that or you characterized the debt to total capital as moderate. Can you give us an idea for the right investment of capital, be it an acquisition or internal or whatever, what is the, kind of the limit at which you would feel comfortable in terms of either debt to EBITDA, or debt to capital, or whatever, depending on how you want to answer it?

Well, sure. Debt to total capital, we've – we're currently running in the low 20s, and when you add all the numbers and we get up to the higher 20s, and we kind of think if we got up to 40 or 45% that that would probably be about, maybe 50% would be, you know, as high as we'd probably feel that we'd go, depending on what the use and what the result would get from investing that capital. So it would depend. But in terms of comfortability, if we're up around there is where we would start to look closer.

Okay. And then a final question in the aerospace side, with respect to Kamatics, bringing on new production space always is fraught with peril, was there an affect on either production or profitability in the quarter of Kamatics from the incremental 25,000 s.f. that was brought on just after the end of the quarter?

No, we really – that was very quick activities, the kind of things that we moved over to that building were relatively easy to move, and it was all done ahead of the people move, and it was right across the street, so it happened very quickly and uneventfully.

Great. Thanks so much, and congratulations on a good quarter.

Thank you.

[OPERATOR INSTRUCTIONS.]

We have a follow-up question form Arnie Ursaner of CJF Securities.

Hi. A couple of quick follow-up questions. On MD Helicopters, obviously, your relationship there has been improving, and I know you have had a reserve in the past. Did you pick-up some additional MD Helicopters revenue in the quarter that's of note?

I don't know that it's, you know, how much of note it is, but we have gotten a good contract from them and we're beginning to produce blades for the 900, which is the piece of work we have with them.

But you in the past had taken the $20 million or so reserve?

Yes, and that goes back, and that was kind of equally spread between the fuselages that we were building for the 500 and 600 models, as well as the blades for the 900, and we sort of wiped the slate clean, we recovered part of that money a year ago when we recontracted with them, with the new buyers, and we're working on a program for blades with them now on the 900.

But we shouldn't expect the reversal of any additional money?

No, we got that last year. We picked up, I think, about 7 million back of that 20 million we wrote-off.

Okay. The 8380 is having all sorts of problems, and I know you, I believe you've been involved with that from the Kamatics' point of view. Is there any way you can shed some additional light there on – I assume it's had no impact yet, but how it may impact your view of the business?

You know, we're on the 8380, both our facility over in Europe and also Kamatics. And, as you said, it really hasn't had that much of an affect on us this year. I won't say that we won't notice it. I think we're talking about a couple million dollars of sales a year. I don't think it's going to make the difference to the point where you'll notice it, at least at this juncture.

I know you know that when we do analysis we do an adjusted Aerospace segment margin where we X out things like the SH-2 write-off. It was down a little bit this quarter. And kind of a follow-up to Rob's question was it more driven by fuzing or was there some other issue that may have impacted margin that is more sustainable, that we should be thinking about?

No, I think there's a couple of things that entered into that, Arnie. Number one, I think that if you look at the sales, the sales were substantially higher in our lower margin businesses, both Fuzing and in the Aerostructures, and down a little bit in the Kamatics and RWG combination. So that's just, by the nature of higher sales and a lower margin is going to have, you know, a detrimental affect on the margin.

The other thing is I think that in the second quarter we actually did have some higher sales than what we would have planned for that quarter, and it was a result of -- what I think occurred is that we're well known in the industry for having very short lead-times. And when our customers run into problems with their other suppliers they tend to come to us to bail them out. When that happens we take advantage of it, and it does add some additional sales and also those are usually fairly good margins.

The other thing is that that our customers, our customers because of the ramp-up that has gone on in the industry actually did pull-in some sales from the third quarter that are second quarter, so that kind of affected the two of them.

I think the other thing, though, is that the third quarter just by its nature includes the vacation months, and we actually have a shutdown in our European facility and heavier vacation time in our Kamatics Facility over here. That tends to reduce the base and gives us a little bit of a hit on our overhead rates for that period.

So I think that everything is still working the way that we want it to, and I've made this comment about the margins of the aerospace business being somewhere in the mid teens range. Now, we've been able to do a little bit better than that over the last several quarters, but I've got to tell you, until these new Divisions that we've created are really fully operating at full steam , they're not adding a bunch of new people, we don't have the potential for these infant mortality issues associated with new hires, until we're beyond that I still think that we're comfortable in more in that mid teens range than we are in the upper teens range.

There's nothing to be embarrassed about high teens margins, which you have been showing on an adjusted basis, and those are very, you know, well above average in the space.

I final question for you, Paul. It's been a year since you went through the multiyear process to get the super voting shares eliminated. Now that it's a year behind you, we've not seen any acquisitions or divestitures, so I guess the broader question is to the extent you really spent a lot of money, time and effort to get rid of the super voting shares, what actions are, you know, is there anything that's holding back some of the actions perhaps you had contemplated along the way, other than just timing or?

No, I think that's just it. I think the answer is timing. One of the benefits that we did expect that we would get from the capitalization was the ability to bring in investors that were not able by their own charters to invest in companies where they didn't have any voting capability. So that certainly has been a plus for us. The – and that's been borne out by quite a number of meetings that I've had with investor groups.

The fact that we haven't made an acquisition is just a matter of how they fit and the timing. We completed the Musicorp acquisition, so, and while we're one of the tactics that we have taken is that we won't overburden ourselves with issues that are going to make us fail. So Music has gone through theirs, we're very actively looking and in discussions with people in the other two businesses, so they will come about.

Okay, thank you.

There appear to be no further questions at this time. I would like to turn the floor back over to Management for any closing remarks.

Well, thank you very much for joining us today, everybody. We'll look forward to speaking to you again in the future. Bye.

This concludes today's Kaman Corporation third quarter 2006 earnings conference call. You may now disconnect your lines at this time, and have a wonderful day.