Kaman Corp (KAMN) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter Kaman Corporation earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Russ Jones of Kaman Corporation. Please proceed, sir.

Well, thank you, and good morning, everyone. This is Russ Jones of Kaman Corporation and I'd like to welcome you to the Company's third quarter 2007 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. It will be available through November 9 at this site.

On the call today are Paul Kuhn, Chairman and Chief Executive Officer; Neal Keating, President and Chief Operating Officer; and Bob Garneau, Executive Vice President and Chief Financial Officer.

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 certain 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 yesterday and in the Company's filings with the Securities and Exchange Commission.

In addition, 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. 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 the conference call and is available through the Webcast section on our website.

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

Thank you, Russ, and good morning, everyone. Yesterday afternoon, Kaman reported that the third quarter 2007 earnings per share diluted including discontinued operations were up 30.6% over the year-ago third quarter, and for continuing operations alone, were up 46.2% over the year-ago third quarter. In a minute, I will review our results in some detail, but before I start, I just want to take a minute to introduce Neal Keating. Neal is now onboard as our new President and Chief Operating Officer. He'll assume the additional role of CEO by the end of this year and I will retire, as you know, early in 2008.

Neal is an unusually good fit for Kaman with significant relevant experience in both the aerospace and Industrial Distribution industries. Speaking I think, for all of us here at Kaman, we are glad to have Neal onboard and it's a pleasure to introduce him to you. Neal, would you like to say a few words?

Thanks, Paul, and good morning, everyone. Before Paul and Bob take you through the quarter, I just wanted to briefly say how pleased I am to be here. I have spent the last few weeks traveling to our different facilities and getting to know our management teams and employees. And I have to say that I'm very excited about what has been going on. We have got great people running businesses with excellent reputations in the marketplace. Needless to say, I see a lot of opportunity for Kaman and look forward to helping the Company get to the next level. For now, I will continue to spend my time getting immersed in the businesses and their plans, and working with Paul and the rest of management towards a smooth transition in January.

Thanks, and I look forward to speaking with you on our 2007 fourth quarter conference call in March.

Thank you, Neal. I'd like to mention that while Neal will not be taking questions on today's call, I expect he will begin speaking with investors before the next conference call.

Now let's turn to the results. The announcement earlier this week of the signing of an agreement to sell our Music Segment does not have any financial effect on the third quarter, but does require that the Music Segment be classified for the third quarter and prior reporting periods as a discontinued operation.

I'm going to give the performance totals for the whole Company, which will include both continuing and discontinued operations. Later on in the call, Bob will run through an exhibit that breaks that down for you so you can see the sales and operating income for continuing operations alone.

Looking at Exhibit 1. The third quarter was another strong period for Kaman Corporation, driven once again by the performance of our aerospace businesses. Total net sales for the third quarter were $331.9 million, an increase of 7.9% over the $307.6 million reported for the third quarter of 2006. Net earnings for the third quarter were $11.7 million, an increase of 34.3% over the $8.7 million reported for the third quarter of 2006. Diluted earnings per share were $0.47, an increase of 30.6% over the $0.36 per share diluted reported for the same period last year.

If you'd turn to Exhibit 2, I'll review briefly the performance of each of the segments in continuing operations.

Sales for our Aerostructures segment increased 19.9% in the third quarter over the third quarter of 2006. Operating income, on the other hand, decreased by about 50% for the quarter due to very specific circumstances that Bob will get into. But I think it is important to point out that operating income for this segment is still up more than 25% for the year-to-date period.

Growth in Aerostructures segment sales continued to be driven by our Sikorsky Black Hawk cockpit contract. We delivered 23 Black Hawk cockpits during the quarter compared to 11 the previous-year quarter, bringing total produced through the end of the quarter to 133 cockpit. This program continues to go very well for us and indications are that the customer's requirements will be in the 8 to 10 cockpit per month range for the year ahead.

Along with the Sikorsky contract, our production of structural wing subassemblies for the Boeing 777 commercial airliner and Boeing C-17 military transport remained important and stable elements of the business base. These are the segment's three largest programs. The current C-17 contract now extends through 2008 and communications from Boeing indicate that the program could extend beyond that.

Net sales for our Fuzing segment were flat for the third quarter compared to the year-earlier quarter. Since this is one of our growth segments, our expectation was that it should have been better. Bob will discuss the reasons why this did not occur in the third quarter. However, operating income was up; about 10% over last year's third quarter.

Net sales for the Helicopter segment grew 18.1% for the quarter and we reported operating income of $2.3 million compared to an operating loss of $1.1 million last year. The sales and earnings growth was driven by our depot maintenance and upgrade programs for the Egyptian SH-2 helicopters and by our Sikorsky Black Hawk fuselage joining and installation programs at the Bloomfield plant.

While there is an extensive commentary on the Australia program in the third quarter 10-Q and in each of our quarterly and annual filings of the pass several years, let me take a minute to update you on where things stand as of now. We continue to be in negotiations with the customer to find a mutually acceptable path forward to complete this program. Among the matters now being discussed are -- the approach that will be taken to complete Formal Qualification Testing of the integrated tactical avionics system and payment responsibility for additional work the Commonwealth has indicated it might want. Secondly, the approach to conducting additional work scope and preparing for current aircraft certification requirements. As we have discussed previously, this additional work scope would involve development and testing of new software and hardware for the aircraft's automatic flight control system at an estimated contract value of $37.7 million, for which the Commonwealth would have payment responsibility.

And thirdly, development of a mutually agreed-upon payment and performance schedule addressing these and other remaining program tasks. Progress in resolving these issues has been painstakingly slow. But the body language on both sides indicates a strong desire to go forward with the program.

Moving along to our Specialty Bearings segment, the third quarter of 2007 set another sales record with 17.5% increase over the third quarter of 2006. Operating income was up 55.7% over the previous year period and the segment ended the quarter with a record backlog.

We are continuing to benefit from a strong market environment, our positioning as a market leader and from our focus on process improvement, operating efficiencies and customer service, which have allowed us to manage a high level of order activity and backlog, as well as maintain delivery schedules which remain among the shortest in the industry. We have also been opening up new markets for our products while ensuring a high level of performance for existing customers. The 35,000 square feet of additional space we have added over the past year at the Bloomfield location should provide us the capacity we need to meet market demands over the next few years.

For our Industrial Distribution segment, sales for the third quarter of 2007 were up 6.8% compared to the third quarter last year, and operating income was up 5.3% compared to the prior-year period, due to increased sales volume in our cost control programs, offset by initial startup costs to support new national account contract awards. We are ramping up sales for these new accounts and they are beginning to contribute toward our segment results.

Economic conditions remain mixed. Customer industry groups showing strength included food processing, mining, oil exploration, and electrical power generation. Other industries have experienced a decline including the buildings material industry with respect to new home construction, and the machinery and automotive industries.

Acquisitions are an important part of our strategy for growing this business along with our competitions for new national accounts. It is difficult to predict when a specific acquisition will occur, but we are in conversations with several possible candidates and believe we will have the opportunity to add a number of desirable new markets to our footprint through acquisitions. Also during the quarter, the segment was awarded a four-year renewable contract Proctor and Gamble, one of our largest national account customers.

I'm not commenting specifically on music here as they are now classified as a discontinued operations. In his report, however, Bob will present the numbers. Let me say that music followed the normal seasonal patterns and is now in its traditional busy sales season as we approach the holidays. Kaman will realize and book all of the sales and earnings results for music to the date of the closing with Fender, which is targeted for December 31.

Summing up, the third quarter remained on the path of progress that we have established. Our aerospace businesses in the aggregate performed well and we are well positioned in our markets. We have an increasingly favorable reputation and we continue to reap the benefit of solid market conditions across our aerospace segments.

Our Industrial Distribution segment continued to do well, notwithstanding mixed market conditions. And we found a strategic buyer for our music business, which has been part of our longer-term strategy. And we will now be focusing on our core businesses of aerospace and Industrial Distribution.

Not only is our business performing well, but we continue to operate from a position of financial strength with low leverage and investment-grade debt rating, and access to the capital markets to support our growth objectives. As a reflection of the Company's improving financial performance and future prospects, the Board of Directors increased the Company's quarterly dividend rate by 12%, to $0.14 per share with the first payment of the new higher rate distributed to shareholders in late October.

Let me end by saying I remain encouraged, particularly by the tone of the aerospace markets we serve. And I remain confident that we have the right products and services and are on the right track to continue the progress that we have made.

With that, I'll turn the call over to Bob who will review the financial results.

Thanks, Paul. If you would turn to Exhibit 3, let me start with a review of our GAAP reconciliations for the third quarters of 2007 and 2006. At the top, you will find the earnings as reported. This includes both continuing and discontinued operations. Earnings before income taxes were just under $19 million. Net earnings were $11.7 million and net earnings per share diluted were $0.47 in the third quarter of 2007 compared to earnings before income taxes of $14.4 million, net earnings of $8.7 million and earnings per share diluted of $0.36 in the third quarter of 2006.

The one adjustment we are highlighting for the quarter is a loss reserve for our Helicopter program with Australia. For the 2007 third quarter, this amounted to $768,000 before taxes and $461,000 after tax or $0.02 per share compared to a higher adjustment of $2.5 million before taxes and $1.5 million after tax or $0.06 per share for the third quarter of 2006. Without that adjustment, we had earnings before income taxes of $19.8 million, net earnings of $12.2 million, and net earnings per share diluted of $0.49 versus the $0.47 reported for the third quarter of 2007 compared to earnings before income taxes of $16.9 million, net earnings of $10.2 million, and net earnings per share diluted of $0.42 for the third quarter of 2006.

If you would now turn to Exhibit 4. I'll review our segment results for continuing and discontinued operations in GAAP format. Please bear in mind that these results are before the allocation of corporate expenses to the segments.

The Aerostructures segment generated net sales of $25.7 million versus $21.5 million a year ago, and operating income of $1.6 million versus $3.5 million a year ago. Operating margins were 6.3% compared to 16.1% a year ago. The low earnings for the quarter reflect a period of higher manpower and production costs along with inefficiencies caused by the task of bringing several new programs online at once at the Wichita facility. We are finding that the ramp up of these programs is going more slowly than we had originally anticipated and believe the process will continue into 2008. Related to this, we have written off certain inventories including quantities of shelf life limited materials and parts that were purchased in excess.

The Fuzing segment generated net sales of $22.1 million versus $22.3 million a year ago, and operating income of $2.7 million versus $2.4 million a year ago with the increase being due to the product line sales mix during the quarter. Operating margins were at 12.2% compared to 11.0% a year ago.

We continue to make production improvements and enhancements on the JPF Fuze system, and this has resulted in a significant increase in production during the year. I think most of you are familiar with the tendency of this business to produce somewhat lumpy quarter-by-quarter results, due both to the segment shipping patterns and the periodic production interruptions we have experienced on the JPF program. We remain subject to these interruptions and had one early in the third quarter, which lasted through late August. This is the principal reason for the flat third quarter sales comparison.

We have indications that the product is being actively deployed and is working well. Orders for the Fuze to date total $127.5 million under U.S. government contracts for production through 2008. And we have been receiving initial orders from Allied Militaries. We are actively pursuing these foreign sales and believe that over the longer-term they will provide the greater percentage of program profits. In the meantime, we are busy satisfying the requirements of the U.S. government and are working to improve the profitability on our U.S. government sales.

For a final note on Fuzing, as you have seen in our quarterly reports, Dayron has had a contract dispute with the U.S. Army Sustainment Command regarding the FMU-143 contract for some time. Recently, we initiated cancellation of the contract due to what we consider to be material breaches of the agreement by the customer. The Fuze has not been in our sales mix for a couple of years.

Our Helicopter segment generated net sales of $18.2 million compared to $15.4 million a year ago. Operating income was $2.3 million compared to an operating loss of $1.1 million a year ago. In both periods results were affected by pretax charges on the Australian program you saw in the previous exhibit of $768,000 in the third quarter of 2007 and $2.5 million in the third quarter of 2006. The operating margin, including the effect of these charges, was 12.5% compared to a negative 7.0% a year ago. The costs we incur on the Australian program are largely a function of the billable hours our subcontractors put in to bringing the program to completion. We have estimated what remains to be accomplished and the charge we took in the quarter brings the reserve for Australia, including amounts previously reserved, to $8.9 million, which is what we believe it will take to bring the program to a conclusion.

Paul has described the process currently underway with the Australian government. All I would add is that we believe the risks are lower than they were a couple of years ago, but there will still be risk in this program, at least until the current negotiations are resolved and we're able to move forward and complete the program.

The Specialty Bearing segment generated net sales of $30.7 million compared to $26.2 million a year ago, and operating income of $10.9 million for the quarter compared to $7.0 million a year ago. Margins for the segment were 35.3%, up from 26.7% a year ago. As Paul indicated earlier, this segment is performing exceptionally well.

Our Industrial Distribution segment generated net sales of $178.1 million in the 2007 third quarter, up from $166.7 million in the year-ago period. Operating income was $9 million compared to $8.6 million a year ago, and operating margins were 5.1% this year compared to 5.2% a year ago. The sales trend for this segment tends to flow with the economy, tracking the U.S. industrial production index. This means the segment tends to a lower period-by-period volatility, greater predictability, and sustained profitability over time.

In addition to tracking the general economic trend, however, this segment is getting an increment of performance enhancement through the new accounts we have been winning and also through the expanded geographic footprint we are achieving as we open branches to service these new accounts. The benefit of the top line growth we have been getting, along with the benefit our cost control discipline, is evident in our operating margins. To illustrate the improvement in the trend, for the year 2004, the segment's operating margin was 3.3. And for the year 2005 it was 4.7.

The next line on the exhibit shows our corporate and other expenses, which includes corporate compensation, casualty and group insurance costs, certain pension costs, legal, audit and similar general expenses of the Company. For the third quarter of 2007, these expenses totaled $9.5 million compared to $8 million for the same period last year. The 2007 figure is a little higher than usual due to a number of small variations and some one-time items such as costs associated with our leadership transition. Going forward, these are generally fairly stable and should not be impacted very much by the sale of the Music Segment.

That brings us to the totals for continuing operations. Sales for continuing operations were $274.8 million in the third quarter of 2007 compared to $252.1 million in the third quarter of 2006. Operating income from continuing operations was $17 million for the quarter, compared to $12.4 million in the year-ago quarter. And the operating margin was 6.2% compared to 4.9% last year.

Discontinued operations represent the sales and earnings of the entire Music Segment and there's nothing else in that number. Adding those in, our third quarter results for continuing and discontinued operations include sales of $331.9 million for 2007 compared to $307.6 million for 2006, and operating income of $20.7 million compared to $16.2 million, and operating margins of 6.2 compared to 5.3 in the 2007 and 2006 third quarters.

I will comment only briefly on the next two exhibits, which have been put in for your reference. Exhibit 5 presents the sales and operating income for our discontinued operations quarterly for 2006 and to date through 2007.

Exhibit 6 shows the assets and liabilities of discontinued operations held for sale at the end of 2006 and at the end of the third quarter of 2007. As a general rule for music, we build working capital assets as inventory shipments arrive for the holiday selling season. September 30 is generally a high point for quarter end assets for this business. And with the selling season, December 31 tends to be the asset low point. The net assets held for sale represents Kaman's investment in the business.

Turning finally to Exhibit 7, we have provided highlights from the balance sheet along with capital expenditures and depreciation information. Notes payable and long-term debt outstanding were $99.9 million at the end of the third quarter of 2007; not a lot higher than a year ago. Shareholders equity has grown normally, principally through the growth of retained earnings. Our debt to capitalization ratio remains moderate at 23.1%, somewhat lower than a year ago, and that provides considerable room to fund growth initiatives through our $200 million revolving credit facility.

Our initial use of net proceeds from the sale of the Music Segment will be to pay down our revolving credit borrowings resulting in considerable capacity to invest in our core businesses. We generally like to (technical difficulty) our capital expenditures in balance with our depreciation and amortization, but we have been budgeting capital expenditure increases of a few million on an annual basis to deal with the growth in the business.

For a final point that might be helpful, the effective tax rate from continuing and discontinued operations in the third quarter of 2007 was 38.2%. While the adoption of FIN 48 may lead to greater volatility in the tax rate by quarter, we anticipate that the overall rate for 2007 will remain below the 39.2% effective tax rate of 2006.

That concludes the financial discussion. The Company is in good financial condition, has good access to the resources needed to move forward with our strategies, and our operating performance has continued to improve. In short, to echo what Paul has said, it was another strong quarter for Kaman.

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

Well, thanks, Bob. That wraps up our prepared remarks and we will now open the line for questions. Operator, may we have first question, please?

(OPERATOR INSTRUCTIONS). Matt Duncan, Stephens, Inc.

Congrats on some nice progress in the quarter. Neal, welcome aboard. The first question I've got, Bob, probably for you, just to help us kind of think about modeling going forward and stripping out music. Can you talk about what the gross margin and then SG&A kind of the percent of sales looks like for music versus the rest of your business? Just to give us an idea what margins ought to look like on those two lines going forward?

As you know, the music business is principally a distribution business. And consequently, the operating margins and the operating expenses look a lot like they do on the KIT piece. So, as a practical matter, when you strip music out, you're not going to see much of a change in the gross margin level.

Okay. So that should stay relatively similar but you might get more SG&A leverage?

Might get a little bit more, yes.

Okay. That makes sense. You mentioned inventory obsolescence reserve was up this quarter because of the Aerostructures issue. I'm trying to figure out, number one, can you tell us how big you -- how much you increased that by?

Without getting into the specifics, you can -- the sense, you can see roughly the difference between years. And the amount of the adjustment for inventory was a moderate part of the difference. It related to some materials that just ran out of shelf life, you know, consumables and those kind of materials. I don't have a specific number for you, though.

If you'd gone ahead and reserved I would assume for what you talk about you think it's going to be into 2008 sometime before you kind of get these things up and going good. Have you gone ahead and reserved inventory through kind of when you think you'll be up and running so that we shouldn't see another inventory reserve?

I don't believe you will see another inventory reserve. I think that what we're talking about on the 2008 is more of the manpower issue and getting up to speed on that side of it.

Okay. So, then theoretically the operating margin for Aerostructures should improve sequentially by a meaningful amount because you don't have another inventory reserve?

I think that's right.

Okay, fair enough. We'll move then. Looking at the acquisition pipeline that you guys have, now that you're going to have quite a bit of dry powder once this music sale closes, obviously the focus is going to be on accretive acquisitions for the other two businesses. Paul, you mentioned a little bit about you're in discussions in Industrial Distribution. Maybe could you talk about what your acquisition focus is for the Industrial Distribution business? And then also for aerospace. And just give us a sense of what all you guys are looking at right now, as much as you can.

For the last several years, our biggest focus has been on filling up some holes that we had geographically across the United States. With the increase in the amount of national accounts opportunities that's been available to us, it's been incumbent on us to have presence where those customers' plants are. So, our first order, first priority was to find companies that had presence in those areas that we were not. We've made a couple in that regard and improved our footprint materially. The ones that we are in discussion with are along that same line of filling in parts of the United States where we feel we need to be stronger.

As we kind of run out of opportunity there, the next level of priority was to move into the fluid power side of the business. We kind of dabble in it but we don't have a very strong presence. So we will be looking for opportunities on the fluid power side. That will probably carry us for awhile going forward.

And then in aerospace as well, are you considering acquisitions there or are you more focused organically there for now? I know the acquisition focus is Industrial Distribution.

Yes. To be honest with you, we needed to get our total house in order on the aerospace side after we made the transition to the four divisions. And we have had some opportunities within those divisions that has taken all of our energy to bring up to rates and profit levels that are acceptable. I think with the Neal coming onboard now, one of his early activities will be to make the assessments of each of the current businesses that we have and to define for himself and the Company which are the areas that provide the best opportunity for us to expand in. But to answer your question, right now we are still focusing on absorbing what we have.

Two final questions on KIT, and then I'll hop back in queue. You talked a little bit about what you're seeing from some of your end markets now, obviously you've got a little bit of weakness in automotive and housing and machinery. As you look forward to 2008, what is your general feel on where the economy is headed and what it means for KIT going forward?

I can't say that I have any better feel for that than anybody else (technical difficulty) in reference to the talking heads [on] Wall Street. Anecdotally within the Company we are seeing that the fourth quarter so far has kind of been following the third quarter's level of activity. The softness isn't any worse than it was in the third quarter and I'm hoping that it doesn't deteriorate beyond what it did.

What is good for us going forward is that we are adding a material amount of new sales brought on by the new national account wins. And I think for the fourth quarter and the first couple of quarters of next year, they will help in giving us the kind of quarter-over-quarter sales improvement we need to offset standard cost increases that we have. So I feel in light of everything that is going on, I am not terribly pessimistic, at this juncture, anyway.

And then lastly, again, along the lines of what we're seeing in the economy, you guys actually had a very nice acceleration and growth for KIT sequentially. It was up 2.4% in the second quarter, but 6.8% here in the third quarter. Is there anything other than the national accounts business and an extra selling day that helped out there? Or is it just kind of general blocking and tackling?

I think that's what it is. And again, I think it is heavily towards those new accounts that we've added.

Congrats again on a good quarter.

Arnie Ursaner, CJS Securities.

This is actually [Fred Bonacore] calling in on behalf of Arnie. Just wanted to keep on that theme, talking about the national account wins that you've had some success with. Do you have additional opportunities to win national accounts? And can you give us a little bit of view on what that national account pipeline looks like? Thank you.

That's a little bit of a hard one. There are a couple -- we don't like to get into discussions of where we are obviously, for competitive reasons, so I really don't want to get too deeply into that. I do think that we are witnessing this general trend in that direction and as shown by what we have experienced over the last couple of years, I don't think that that is going to dry up very quickly. And I would expect that there will be continuing opportunities in 2008 to add more.

In the meantime, we fight very hard for the ones that we already have. An important note that I didn't make in the call was that we were able to re-up on our P&G contract, which is, in fact, our largest contract. So without dodging your question I think that there are opportunities and we continue to go after them. And we are winning more than our share.

Excellent. That's helpful. Thank you very much.

Steve Levenson, Stifel Nicolaus.

Just a question on the Aerostructures side of the business. You have explained about the inventory and I guess now there is a little bit left on the inefficiencies. Are those on specific programs like 787? Does it have anything to do with Boeing's delaying the rollout of the plane? And how do you see that picking up? Will it be a return to more normal margins in a hurry? Or over a few quarters?

Steve, this is Bob. Generally they are attributable a lot to the new programs, simply because the Company has grown significantly from these new programs. So what we are faced with is a rather sizable increase in the workforce and training them and bringing them up to speed. And that is a lot of what we're talking about here. Now there has been some delays. The 787 hasn't caused the delay that you might initially think from having the first one deferred, but it's just the programs have rolled out, there's been some slows from the customer. There's been our getting our people up to speed. And that is generally what it is. That will work through the part of 2008.

Okay, thank you. Can you give us an update on what is going on with the A-10 program?

We do not have official word from the customer with regard to that program. Unfortunately, that's about all I can say to it.

Okay. In the Specialty Bearing side, could you tell us what the new bearing markets are that you alluded to earlier? And do you find you're taking share? Are your products pushing some of the other ones -- or pushing down into other levels that you weren't penetrating before?

The answer to the first part of the question is foreign markets. We've been working both in the Russian market and in the Chinese market and are finding successes there. So that's really great. On the other piece of the question, I think that what's going on there is that -- I forgot the second part of the question.

Marketshare, and are you penetrating other markets that were maybe not going for your high level?

Oh, marketshare, marketshare. Yes. What's been really interesting along that line is that with the advent of the 787 and other programs growing as rapidly as they have at Boeing, we have in fact been asked to go down into the next level below us strictly because our leadtimes are so good and our responses are so fast, that -- and our reliability and our delivery is so good, that the customers have actually been pulling us down into that part of the marketplace. So we are pleased with that. Whether we'll be able to continue that over the long haul, I'm not sure. But right now we're taking advantage of it.

Okay. Last question on the FMU-143 Fuze, I'm pretty sure you mentioned that it's not really a part of the sales mix but what sort of exposure is there or do you actually expect to recover some additional monies?

We think that the delays and deferrals on this program have been caused by the customer. And consequently we don't see any exposure at this time.

Very good. Thanks very much.

Edward Marshall, Sidoti.

Kind of just sticking with the Special Bearings segment here. Aerospace bearings have been showing leadtimes of about 110 weeks or greater at some points. Are you guys feeling constrained by any of that? I understand you say you're moving down into some of the markets or being pulled down into some of the markets there. Are you feeling any of that constraint anywhere else?

No. Not that -- but we've had a couple of instances where we've had trouble getting materials. But generally, we've been responding with much faster leadtimes than that and that's been helping in terms of our ability to take on extra sales.

Yes, it's not been a material issue for us.

Well, the constraints is actually on the customer side -- that they're feeling some constraints on the customer side and I am wondering, have you -- do you guys have enough capacity to meet the demand that you're seeing?

Hold on a minute. Are you referring to some of the other bearing companies like [Tim Kininos] that are really having long lead times in some of their parts?

On the aerospace parts, yes.

Yes. From our standpoint, it really is just internal manufacturing leadtimes. Our leadtimes are a fraction of what we have seen existing in the marketplace. And it's only because of the methodology of our manufacturing. We've absolutely embraced lean unbelievably well in our companies and Specialty Bearings is probably our leader in that regard. So, our advantage there is purely our own manufacturing capability; not from a material standpoint.

And that's why we're seeing a boost here in the margin, I guess, is the lean, the Six Sigma that you apply there?

Absolutely. Absolutely.

Do you think that that type of margin is sustainable going forward? Or should we see that tick back down to around the 32, 33 range, if you're willing to comment on that?

I think we're up in rarefied air there a little bit. There are some circumstances where on the longer contracts, which we don't have that many of but we do have prices that are flat, where the costs do go up but the price remains flat so you lose a little bit margin. But I honestly don't see a material change to our current set of margins, at least for the foreseeable future.

(OPERATOR INSTRUCTIONS). Robert Kirkpatrick, Cardinal Capital.

Could you talk a little bit about each of the aerospace subsegments and how large they could be if you were running each of those businesses at capacity? And that's in terms of annualized revenues.

Let's see. Where are we at right here, this quarter? I guess publicly I've gone out and said that each of our businesses, at least as I see them right now, have opportunity or more than opportunity, have a good probability of growing at a double digit rate. I continue to feel that. I don't think that I would want to put an upper limit on it because what I've said before is that from the standpoint of our good performing businesses, we're not going to let capacity stand in the way of growth. That we can create the capacity and as the opportunities evolve for us, we will do that and for whatever capital is required to make sure that we can grow those -- at whatever ability in the market will provide to us. I don't know how to get deeper into that than that.

Maybe a way to do that would be to talk about at what level of capacity each of those businesses is kind of operating at? I mean are they all -- are they around 30 or 50? Are they up around 80? How long would we have to go before we could expect you to be investing material and not just capital?

Again, if I look it them, and I'll do it individually -- our Aerostructures business, we have leased facilities down in Florida. To expand materially down there would just require leasing another building and bringing on some more people. The amount of equipment that's really necessary in that kind of work, what we have has substantial capacity left, but to increase that capacity is not a material cost event. So we're not going to be held down by capital constraints there. I already mentioned that in the bearings business that we added some 35,000 square feet last year. I expect that will carry us for a couple of years. We may have to add some at that point depending on where the markets go. But again, we did -- we added that prior floorspace from existing facilities on our campus. And we still have room to grow within our own campus. And we have space -- or opportunity on that building to add space. And again, the cost of doing that was not really a material events.

On the Fuzing side, we have capacity both at our facility in Florida and Middletown. If you visit our Middletown factory, you'll find that it is probably being utilized maybe 30% or 40% of its floorspace. So I think we have plenty of room there to grow.

And helicopters, again, we're using the hangars that we have for the opportunities at Sikorsky and again, I think we have ample room for what I perceive as the growth that that division could experience. So to be honest with you, I don't see from a -- from the aerospace side, I don't see a material infusion of capital that -- a giant step that's going to occur over the next couple of years. We are putting in the additional couple millions of dollars to get some new equipment and replace some old stuff. But that's standard fare.

Okay. And following on to the helicopters, are you seeing particularly large opportunities and/or new opportunities on either Augusta, Westland or Eurocopter these days?

So far we have nothing to report that we've been successful in bringing them down into this area. But we continue to work well with Sikorsky to expand on work that we've already started with them. And we legitimately feel that we have more opportunities there.

Okay. And then finally, how much of the effect of the new national accounts was actually recorded in Q3? Did you get the full benefit of that or is that really something that (multiple speakers)?

No, it will be a couple of quarters I think before we're at full -- probably first quarter-ish when we're hitting on all cylinders with those accounts.

Margot Murtaugh, Snyder Capital.

Just one simple question. You mentioned that there might be some one-time items in corporate expense due to compensation. Can you separate that out?

I mean there was just one and that was relating to bringing Neal onboard and just the standard things that you'd expect.

Well, I mean, so, will corporate expense go back down to the $8 million type level? Or, I mean, was that any -- I'm just trying to figure out what kind of --

You can see some of the items and actually in our press release we have -- we've got a breakout. But the corporate expenses have moderated quite a bit. And there are less and less special items all the time. And so they should get back closer to probably where they were for the comparable period.

Okay. And could you discuss the outlook for Helicopter Division beyond this year? Where is the business coming from?

We have several different areas that we feel that division can participate in. The first is in the aftermarket of the helicopters that we have out there to begin with. And we have -- and that generates not a tremendous amount of revenue but certainly an adequate one to maintain a small division. That includes the aircraft that we have with Egypt and Poland and New Zealand. And hopefully within the next year in Australia.

Beyond that, it's a matter of utilizing our engineering capabilities and our manufacturing space and our prior experience of being a prime in the helicopters to use our capacities and capabilities for the likes of Sikorsky and potentially the other primes that are out there. When we first broke up these divisions, our intent was to provide an opportunity for the other pieces of the Company to grow at greater rates than they had previously. And to use the new cost structure that we've been able to provide to them to be more competitive. We've been successful in doing that.

The helicopter piece of it, we are now just, after being separated and finishing up the greater part of the Australian issue, are now in the process of defining their own opportunities for growth. I feel that they will contribute. I don't look at them as being the drivers of our aerospace group of companies going forward.

One thing, Paul, that might be helpful to point out is that on the helicopter side, for the last year or so we haven't been recording any revenue or very little revenue in connection with Australia because of the loss position it has been in. And should we move ahead with further work there, that would kick in.

(OPERATOR INSTRUCTIONS). Matt Duncan, Stephens, Inc.

Just a couple of housekeeping items here. What was the actual depreciation and amortization the quarter?

Hold on, we're digging. Why don't you give me your next question and then I'll get that one to you.

Sure. The next one is about the cost structure for the helicopter segment, kind of going back to that. Was there anything that you've changed about your cost structure there that allows you to return to an operating profit in that division? I guess it's been a long time since you had one. So that's nice progress to see. Was there anything that changed that helped you get there specifically, other than the Australian charge going down?

The Australian charge went down. Otherwise, there's the programs that we've been working on. We're starting to pick up some work with Sikorsky on that. And so that's helped a bit. And that might be the major thing at this point. We are working on Egypt, and that continues, the [Utlin] and upgrade work there.

Outlooking sequentially at the revenue and operating profit I guess last quarter it was in a small loss, even including Australia. But it just seems like here for the last few quarters, the margins have been getting better, even stripping out Australia. So I was just kind of trying to get at what's driving that. It sounds like it's Sikorsky, so.

Yes, Sikorsky has kicked in a bit, yes. And the answer to your first question is $2.4 million.

Okay. And then lastly, you say your backlog for Kamatics is up, can you tell us what that dollar amount is?

I don't have it here in front of me, let me -- but I can say that it supports the growth level that I've said -- the double digit growth level (multiple speakers) at least for next year.

Steve Wortman, Lord, Abbett.

Just curious how long the Egyptian work is going to last for?

We haven't talked a whole lot about that. It kind of comes in, in pieces. But it is an [EDLOM] program and it is an upgrade program. And so -- I mean, we think that this could go on for another two, three years.

I would now like to turn the call back over to Russ Jones for closing remarks.

Well, that wraps up to call. Thank you everybody, for being onboard today. We'll look forward to speaking with you again.

Thank you very much, guys.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.