Kaman Corp (KAMN) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth quarter 2007 Kaman Corporation earnings conference call. My name is Cerrita and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards 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 presentation over to your host for today's call Mr. Russ Jones of Kaman Corporation. You may proceed.

Thank you and good morning, everyone. This is Russ Jones of Kaman Corporation and I'd like to welcome you to the Company's 2007 fourth quarter 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 available until March 7th., at this site. Conducting the call today are Neal Keating, President and Chief Executive Officer and Bob Garneau, Executive Vice President and Chief Financial Officer..

Before we begin , let me take a moment to reference to 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 it's forward-looking statements are reasonable, we can give no assurance that such expectation 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 the statements made in this conference call remain operative at a later time. The Company undertakes no obligation to update any information discussed during 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 website. And with that, please turn to Exhibit one, and I'll turn the call over to Neal Keating.

Thanks, Russ and good morning, everyone. I'm very pleased to be conducting my first earnings call as CEO of Kaman Corporation. Already, I've met quite a few of our investors at the conferences I've attended with Russ and Bob and I look forward to getting to know many more of you in the months ahead. This morning I'm going to review our results for fourth quarter and full year 2007 and Bob will go into some detail on the numbers. I'm also going to make general comments about what I found here in my first months at Kaman, and give a perspective on my priorities and where I see the Company. I will also talk a little bit about how I think the current economic situation may affect the Company and we will finish up with a Q&A session to address your question. Starting with the a high level revenue of the numbers on Exhibit one, the fourth quarter was once again a period of strong financial performance for Kaman. On consolidated basis net sales from continuing operations rose nearly 9% to $272.3 million while net income from continuing operations grew 33.3% to $9 million or $0.35 per diluted share. Bob will get into the details, but I should mention here that these numbers include and are therefore after charges in both periods for Australian Helicopter program.

For the year, sales from continuing operations grew 9.5% to $1.1 billion and net income from continuing operations rose 48.1% to $36.5 million. Once again, net of the Australian charges taken in both years. If you would turn to Exhibit two, we can look at these results on a segment by segment basis. At Aerostructures, our fourth quarter sales were up 20.7%. However, our operating income while improved sequentially from the third quarter of 2007 was down 9.7% from the fourth quarter of 2006. For the 2007 full year, sales were up 30% and operating income was up 14.6% over the full year 2006. The reduction in fourth quarter operating income in 2007 was due to certain adverse adjustments resulting from the simultaneous ramp-up of three major new programs at our Wichita facility which we commented on in our third quarter call and at that time, we stated in expectation that these issues would continue into 2008.

Performance of the segment overall; however, continued to be driven by the success of our Black Hawk tactic program for Sikorsky, good performance on the Boeing C17 Military transport and Boeing Commercial Aircraft contracts. I will say a little bit more about those in a minute, but first, let me give a little more color on the issues at Wichita where we've had very good success in winning important new business, specifically two contracts involving the new Boeing 787 and one involving a Sikorsky Helicopter for the Canadian Maritime Forces. All three are good programs for command , but we have encountered both customer design issues and other issues as we've ramped up to rate production. I have personnel spent a great deal of time in Wichita since I arrived at command and have brought in teams from across the Company including our helicopters and specialty bearings businesses in Connecticut as well as Jacksonville operations to help support these efforts. We have also invested in additional manpower as well as new machinery and equipment that will enable to us improve throughput and product quality while reducing our costs over the longer-term. While the financial impact in 2007 was a disappointment; we are making meaningful progress and I expect we will resolve the remaining issues during the course of this year.

Taken a minute to circle back to the segment's major ongoing programs; we delivered 86 cockpits under our Sikorsky BLACK HAWK Program at Jacksonville in 2007 compared to 56 cockpits in 2006. And we expect to meet Sikorsky's projected need for nine to ten completed cockpits per month this coming year. In all, through the end of 2007 we delivered 158 cockpits under the program since inception. In December of 2007 as you have likely seen, we signed a memorandum of agreement with Sikorsky that brings the potential total value of the program to approximately $250 million more than double the amount projected when we began to ramp this program up in 2005. So this is a very good program for us now with continued prospects for the future.

Also, in December of 2007, we signed a seven year follow on contract with Boeing to supply wing components on the Boring 777 and 767 Aircraft. That will extend work we have been doing for sometime at Jacksonville and while we do not have Boeing's permission to disclose the numbers on that; it does provide the segment with some visibility for the years ahead. In the same vein, the extension of the C-17 program beyond 180 Aircraft has moved that program completion date from the middle of last year through the balance of 2008. And the discussions in Washington for further extension of this program have continued. The new C-17 ship sets in the present program extension are at somewhat lower price than we had through Aircraft 180 and so program margins were affected after the first half of 2007.

Moving onto the Fuzing segment, fourth quarter sales were up 51.8% and operating income was up 50.5% over the fourth quarter of 2006. For the full year 2007 sales were up 23.1% and operating income was up 36.1%. Sales increases were driven primarily by our JPF fuse and 40-millimeter product lines. The fourth quarter increase in operating income was driven primarily by our traditional Fuzing products while for the full year the increase in operating income was driven by the JPF and 40-millimeter programs. The JPF product continued to mature both in our factories and in the market while experience periodic production interruptions over the course of this year including in the fourth quarter of 2007 we made progress on production improvements and enhancements to the fuse. We continue to invest in increasing our capacity to support both U.S. Government and Foreign Military sales. Deliveries are increasing and I am pleased to report that the JPF has demonstrated excellent field reliability. As we've reported before we expect that there will still be some quarter to quarter variability in our JPF program going forward.

Helicopter segment sales for the fourth quarter were down 37.6% and operating income was down 64.2% from the fourth quarter of 2006. However, for the full year 2007, sales were up 3% and operating income was up substantially to more than $2.6 million from a slight profit for full year in 2006. The lower sales for fourth quarter were a function of unusual high sales in the fourth quarter of 2006, including the sale of our last available K-MAX Helicopter, delivery of a large spare parts order to Australia and lower subcontract sales in the fourth quarter of 2007 with the completion of a program for the U.S. Military and somewhat lower sales associated with the Black Hawk joining and installation program for Sikorsky. A principal factor in the Increase in operating income for the year was the lower charges associated with the Australia program which I will comment on more in just a minute.

First, I want to let you know that the work for Sikorsky is going well and we have a memorandum of understanding with Sikorsky that involves joining approximately 60 helicopters per year for them through 2010. In addition, work on the Egyptian SH-2G program continues to progress well, both on the depot level maintenance contracts and also under an upgrade program that has increased the total program potential to approximately $80 million. Nearly 3/4 of that work lies ahead for completion between now and 2010.

On the Australia program in November 2007 the Commonwealth held elections and the labor party which had been the opposition party was successful. Under the new government, new Ministers of Defense and Procurement were appointed. I've just returned from a trip to Australia and while three, I was advised by the new officials that they are reviewing our program along with several others and a determination will be made about its completion. A point I want to leave with you is that initially we face significant technical risks with this program until the software was completed. Now we have overcome the majority of the technical hurdles and the inventing is done. We believe we have performed our obligations under the program and that the SH-2 Helicopter is the most efficient and cost effective method to achieve the Commonwealth's operational needs. We do not know what the decision will be. The program may be canceled or it may go forward. If the commonwealth decides to cancel the program we are hopeful that they will work with the Company to negotiate a mutually acceptable termination. In any event, the Company will pursue all avenues available to it, as needed, to protect its legal rights.

With that, let me move on to the specialty bearings segment which is the largest of our Aerospace Industry segments. Fourth quarter sales were up 12.8% and operating income was up 48.9% over the fourth quarter of 2006. Full year sales for 2007 were up 16.7% an operating income was up 44.6% over the full year of 2006. These strong results, all records for the segment, were driven by higher shipments of our airframe bearing products to customers across a wide spectrum of commercial and military programs. The segment continues to develop new customers and applications and with the recent facilities expansion capacity is in place to meet demand and ensure that shorter lead times for the customer remain a competitive advantage. As you know, our products have long been used in aircraft built in North and South America and across Europe. We are now beginning to see the results of our marketing efforts into new emergent regions including Russia where we have numerous applications on the new Russian [Soyuz]100 seat regional airline, and in China, where we are participating on ARJ-21. Two small initial positions but important new platforms as we build our business for the future.

That brings us to the Industrial Distribution segment where our fourth quarter sales and operating income accelerated nicely and were up 10.4% and 7.7% respectively over the fourth quarter of 2006. For the full year 2007, sales were up 5.2% exceeding $700 million for the first time and operating income was down 6% due both to expense the Company has incurred to bring several large account wins online in 2007 and a one-time gain recorded in 2006. Industrial Distribution's performance was particularly notable given the uncertain macroeconomic conditions affecting the period, 2007 was the fourth consecutive year of record sales for the Industrial Distribution segment driven both by an emphasis on less cyclical industries such as food and beverage and by success in National Account competitions. Our National Account sales have been growing at double-digit pace and are driving market share increases. National account competitions will continue to be a key priority of this Company going forward and we will continue to invest the resources necessary to support the growth of this business. We intend to augment our organic sales growth through acquisitions and believe that the current economic uncertainty will provide for improved prospects and valuations.

Our strategy also includes internal investments such as is construction of our new Southeast Distribution Center in Savannah, Georgia, the second largest port on the East Coast. This new 46,000 square foot facility which will include a a co-located branch facility to serve the local market scheduled to open in June and will provide improved customer service and an expanded next y delivery capability to our roster of customers in the southeast. The Industrial Distribution segment growth also includes the expansion of our catalog. In the past 12 months we have added over a dozen new product lines and value added services and are currently engaged in the largest product line expansion in our history. This involves, as a partial list, Fluid Power, Electrical Product Offerings, System Engineering resources, Oil Purification systems and Industrial Automation products. Clearly we want to be able to expand the portfolio of products and services we can deliver to our customers and become their supplier of choice.

Before I turn the call over to Bob, I would like to take a minute to offer some observations on what I found since my arrival here at command. I spent a significant amount of time making the rounds, meeting our people and touring our facilities. I am very pleased with what I've seen and the progress the Company has been making. I am impressed by the energy of the people I've met, their dedication to meeting customer needs and to building a stronger, more efficient Company for shareholders and I am particularly impressed with the flexibility and willingness of our senior managers to adjust priorities and to think in new ways in response to our continually changing environment. A lot of the credit for this is due to Paul Kuhn and the team he has lead for nearly nine years as command CEO. Paul is in the room with us today and in fact, today is his last day before retirement.

Before we discuss our financial and operational results, I'd like to take a minute to recognize Paul's contributions and thank him once again for his hard work and commitment to Kaman over these past years. Paul led this Company through a period of dramatic transformation that included a fundamental realignment of our Aerospace business, the acquisition of companies that have extended our capabilities in areas targeted for growth, the application of lean principles throughout, our recapitalization into a single class of common stock and the realization of a desire to find a strategic buyer for the Music Segment. Paul's leadership inspired outstanding performance throughout the Company and lead to strong improvements in financial and operation results and he's created a solid foundation for Kaman's future. And so, Paul, I'm sure the whole team joins me in wishing you a very happy and healthy retirement. Would you like to make a

Thanks, Neal. Good morning, everyone. Among the many rewarding aspects of my job over these past years has been the opportunity to tell our story to you folks. I really appreciate the time that you spent with me looking into the Company and the constructive dialogues that we've shared. This assignment has been both exciting and personally rewarding for me and I've enjoyed my involvement in the numerous changes that have incurred throughout the Company. I have to tell you that I feel very, very good about both the team that remains here under Neal's leadership and the opportunities that are being presented to the Company to support its growth strategies. Thank you again very personally for all of our continuing interest in Kaman. Thanks, Neal.

Thanks, Paul. I'll be back to wrap up and give some thoughts regarding 2008 but first I'll turn the call over Bob who will go into detail on our financial results.

Thanks, Neal. As most people now know, we sold our former Music Segment on December 31, 2007, and therefore the segment has been classified as discontinued operations in the reports we filed yesterday. This will prompt us to highlight continuing operations in our discussions today, but I will take a few minutes to go over the contributions from discontinued operations before we go on.

If you would turn to Exhibit three, we have a table that shows both the amounts contributed by the discontinued operations and the gain realized from the sale of those operations at the end of the year. Net earnings from continuing operations and diluted net earnings per share from continuing operations are given in lines one and five. Lines two and six show that discontinued operations contributed $3.5 million net of taxes in the fourth quarter of 2007, compared to $2.9 million in the fourth quarter a year ago. And for the full year $7.9 million for 2007, compared to $7.1 million in 2006. This resulted in $0.14 per share in the fourth quarter of 2007, compared to $0.12 in the fourth quarter of last year. And for the full year periods $0.31 per share in 2007, compared to $0.29 per share in 2006. Incidentally, all the per share figures I mentioned are for fully diluted earnings per share. The sale of our Music to Fender for a cash payment of $119.5 million represents a price exceeded published Street estimates and recognized the value we had worked to create. As shown on lines three and seven that price resulted in a gain net of taxes of $11.5 million $0.46 per share. Some of you have asked what the sales were for the Music Segment and although, they are not included in GAAP presentations let me mention that sales for segment were $58.7 million for the fourth quarter and $214.1 million for the full year 2007. Altogether therefore, for the fourth quarter of 2007, total net earnings including continues operations, discontinued operations and the gain on the sale of discontinued operations was $24 million as shown on line four compared to $9.6 million for the fourth quarter of 2006. And for the full year was $55.9 million for 2007 compared to $31.8 million for 2006. In terms of earnings per share online eight, this translates to $0.95 per share in the fourth quarter of 2007, compared to $0.39 per share in the fourth quarter of 2006. And for the full year periods $2.23 for 2007 versus $1.30 for 2006.

Before we move on, I should mention that historically, the share count difference between our basic and diluted earnings per share has been mostly due to the number of shares issuable on conversion of our 6% convertible subordinated debentures into common stock. We call those debentures for redemption in the four quarter of 2007. And prior to the December 20, 2007 redemption date all but a very few took advantage of their right to convert their bonds into common stock rather to redeem their bonds.. As a result there will only be a small difference between basic and fully diluted earnings per share calculations going forward and that will only be affected by a small number of outstanding stock options.

Now if you would turn to Exhibit four, we have included a GAAP reconciliation to show the effect of the charges we have taken on the Australian Helicopter program. The exhibit starts online one with our earnings before income taxes, net earnings and earnings per share diluted as reported for continuing operations for the three month periods ended December 31, 2007 and 2006. Line four gives the same data for the 12 month periods ended December 31, 2007 and '06. Lines two and five add back the Australia charges for each of these periods. There's quite a bit of material on this program in our quarterly filings, particularly in the MD&A sections and this has all been updated in the 10-K we filed yesterday afternoon.

This morning there are a couple of points I would like to make. First, is the charges are lower than they have been in previous periods. If you'd look at the line two on the exhibit, you'll find the charges for Australian program were $0.02 per share in the fourth quarter of 2007, compared to $0.05 per share in the fourth quarter of 2006, and on line five of the exhibit were $0.15 per share for the full year in 2007, compared to $0.23 per share for 2006. As you may know, the Australian program has been in a loss position for some time. And it has still hard for us to predict the final time line for the program. We believe we have essentially completed our work under the original contract and with the exception of a certain amount of regression testing left to complete. We do not believe additional charges will be necessary in future periods, but if future delays or issues stretch out the time line and cause us to incur costs above those we would have provide fot we would then have to book additions to loss reserve to provide for such costs.

Another point to make that it is not on this exhibit is that we had a $0.06 per share gain from the sale of our 40-millimeter asset business and that you may wish to back out in your models. The 40-millimeter programs were part of the 2003 day run purchase; however, they were not cordware bond Fuzing product line.

With that, please return to exhibits five and six. For a discussion of our fourth quarter and full year results by segment. Exhibit five presents data for the fourth quarters while Exhibit six presents data for the full year. You may find it helpful to toggle between these exhibits during my comments. Starting with Aerostructures, this segment continued to make progress on profitability improvements through operating efficiencies and further development of key customer relationships at our Jacksonville facility. If you will recall, three years ago following our move from an old plant in [Montville], Connecticut to expanded facilities in Jacksonville we went through a period of requalification of processes and program ramp-up issues that affected our profitability. That period is now behind us and the plant the operating efficiently and profitably. I would remind you that our C-17 program extension at Jacksonville; however, is at a lower margin commencing with ship sets delivered after the first half of 2007. We're now going through a process at the Wichita facility that has some parallels to the ramp-up a few years back at Jacksonville. As we ramp up new programs and upgrade procedures at Wichita. For the quarter and also for the full year has entailed higher costs and various inefficiencies at that location and have also effected our margins for segment.

Turns to our Fuzing segment, the principle drivers of the sales increases for the Fuzing segment have already been mentioned including the JPF and 40-millimeter programs. I would like to add three points. First our operating margins were lower in the fourth quarter this year due to production interruptions and differences in the business mix for the quarter. Second, I mentioned the sale of our 40-millimeter assets. The gain of $2.6 million is shown online seven of Exhibit five. That gain was not part of the operating performance improvement reported on line two. Sales of the 40-millimeter products were $12.2 million for the full year 2007. The third point I would like to make about Fuzing is that we continue to work toward resolution of our warranty and contract dispute concerning the FMU-143 program. During the fourth quarter we initiated termination of the contract due to the material breeches of the agreement on the part of the U.S. Army sustainment command. At about the same time they advised us they intend to terminate the contract for default. The matter is now in the litigation process and we have included the discussion of the matter in the MD&A that was filed yesterday. We had also previously reported on DCIS investigation involving certain warranty issues relating to this program. About a week ago we received a letter from the Government closing the matter in favor of the Company.

Moving along to the Helicopter segment ,sales were lower in the fourth quarter of 2007 due in part to a spare parts order from Australia in the fourth quarter of 2006.. We also sold our last available K-MAX Helicopter in the fourth quarter of 2006 and somewhat higher subcontract orders from Sikorsky in the year ago period, as previously mentioned. When we realigned the former Aerospace segment into four business in 2005, the Helicopter segment had been designed with a view that it could function as a services and support operation and hopefully achieve break even results. With the Egyptian Helicopter upgrade program getting underway and agreement with Sikorsky for BLACK HAWK journey work through 2010 and the reduction in charges to the Australian program that I discussed on the GAAP reconciliation. This segment is operating more efficiently and is showing greater potential.

Our Specialty Bearings business continued its record performance, as Neal said and this supported excellent operating margin performance for the quarter and years periods to levels that we belive are sustainable for as long as the present Aerospace cycle continues.

For Industrial Distribution segment on line six, the decrease in operating margins that we experienced for the year was partially attributable to additional startup costs for new branch openings and other implementation costs that we have incurred to support several new National Account contracts that were awarded in late 2006 and 2007. Additionally, during 2007 we experienced an increase in overall operating expenses and higher personnel costs primarily driven by the increased head count necessary to support our growing business base.

For the fourth quarter, specifically, you will see that our margins are somewhat lower than for the full year periods. This is due to a range of factors, including seasonality in the case of sequential quarters as there are three fewer selling days in the fourth quarter and generally lower business activity during the holiday season. Operating margins for fourth quarter periods were affected by that and also by the expenses we incurred in the ramp-up of both new National Account programs and an increase in our overall business levels. The increase in sales for fourth quarter and full year periods was due to the ramp-up of our new National Account customers. I mentioned a gain on the sale of the 40-millimeter product assets on line seven when I reviewed Fuzing and that moves us to Corporate Expenses on lines five and six. There's a table on page four of our earnings release that breaks out elements of the corporate expense that have tended to vary from period to period. The two most significant variances in the full year periods were a $3.1 million decrease in pension expense due to an in the discount rate and good investment performance in 2007. And a $2.9 million increase in our group insurance expense for 2007, due to a continuation of the higher claims that we experienced during the year.

Now let me just run through some balance sheet items quickly on Exhibit seven. Cash and cash equivalents on line one, totaled $73.9 million at the end of 2007. Primarily reflecting the cash received from the sale of the music business after paying down our domestic revolving credit borrowings. Notes payable and long-term declined to $12.9 million after the debt pay down and conversion of our debentures that brought our debt to capitalization ratio to an essentially non-leveraged 3.2% at the end of the year.

In January, Neal, Russ and I visited with Standard and Poor's for our annual debt rating review and we have since been notified that our BBB minus stable rating has been reaffirmed. We have a 200 million revolving credit agreement in place with a 50 million accordion available. It is our intention to use our borrowing capacity and other means of assessing capital for strategic purposes as Neal said. The extent of leverage we would be comfortable with will be a function of the specific circumstances but we would be comfortable at higher leverage ratio than you have seen in the past several years. In all, we are pleased with our financial performance for 2007 and with that I'll turn the call back to Neal. Neal?

Before I turn the call over for questions, I want to summerize and add a few additional thoughts. The significant transformation of our Company over the past several years, combined with the strong progress reported during 2007 provides a powerful foundation for continued growth.

Across our Aerospace business we have a strong mix of Military and Commercial customers, a growing backlog in our Speciality Bearings business, strong demand for our Joint Programmable Fuse and visibility into upcoming requirements that is reflects good potential for several of our major Military and Commercial Aerostructure's programs. While the uncertain economic environment is a significant concern, I believe these factors will help to mute the impact on our Aerospace business inside the near-term. This is also a business where we will increasingly focus on balancing our organic growth with acquisitions that enable us to expand our capabilities and increase our footprint on key platforms. A slowing economy will certainly impact our Industrial Distribution business as our customers include industries such as housing that have already been significantly affected. Mitigating this impact I think will be the continued success of National Accounts program which is focused on less cyclical industries such as food and beverage. The continuing strength of our business in the mining sector should also help us weather a downturn.

Long-term, we will look to build scale to improve profitability. With a strong balance sheet, we can supplement good organic growth with additional acquisitions that expand our geographic footprint, improve market access and enable us to better serve our customers both large and small. No matter what economic climate we face, we will continue to execute on our long-term growth strategies. As we do this, we will look to the talent and dedication of all employees. Although we are a Company with powerful technology platforms and state of the art facilities our ultimate success requires positive enduring relationships between our people and our customers. These relationships are built on credibility and strong performance which we must demonstrate day in and day out. Building on the momentum we've achieved will require flawless execution on our existing programs and winning new business based on superior performance. That concludes our formal comments and with that I'll turn the call back to Russ. Russ?

Well, thank Neal, that wraps up our prepared remarks. Now we'll open up is line for questions. Operator may we have the first question please.

(OPERATOR INSTRUCTIONS). And your first question comes from the line of Arnie Ursaner of CJS Securities.

Bob, I know you gave us is sales number for the 40-millimeter in Q4 of 12.2 million. Was there an operating contribution embedded in the number there from the 40-millimeter sales as well?

There was an operating contribution. We gave sales. We just thought that might be a helpful number to have and that was part of the contribution to Fuzing.

Do you have the operating profit contribution from the 40-millimeter??

I don't have that with me.

Okay. The other questions I have relate to margins in both relate to Industrial Distribution. You had the strongest rate of growth I've had looking at your model four years and you've always talked about volume being a key component to margin improvement. Given the incredibly strong revenue growth, what expenses are incurring that are holding back margin and how likely are they to continue?

Arnie, this is Neal. I think that there's a couple of things we'd ask you to keep in mind in that analysis. One is that you're exactly right. Exceeding 10% all organic growth was a significant achievement for us. As we've commented through the year, most of that is driven by new National Accounts. And through the course of the year, we've talked about starting up some four to five branches to support those accounts and in addition to that we had four additional for a total of nine branches that we opened during the year and we also commented as well today about the efforts going into a new Southeast region distribution centers. So those are the incremental expenses that we have had on a year-to-year basis that have impacted the margins in that business. As we continue to grow that we will of course have better conversion of those incremental sales to profit. The other thing I'd ask you to look at as well, Arnie is that the fourth quarter is typically based on seasonality. Lower margin for us. And as you did a comparison I'm sure against last year in the fourth quarter, the operating margins were in the 4.1% range last year. So we were within 10 basis points of that.

What do you think the margin will be in '08? Again, I'm trying to get a feel for how long these expenses, the impact to margin will continue as we look at the balance of '08.

We would expect -- we don't really comment on margins going forward. Although, we certainly would expect them to improve in the first half of the year as these facilities begin to get more volume through them. And we actually saw that I think when you look at the fourth quarter where the profit conversion was up almost 8% versus the 10% sales growth.

Okay. Another question I had is regarding the Black Hawk Helicopter program, obviously, you're continuing to make exceptional progress and I found that a little inconsistent with the comment tha there was a slowdown or lower subcontract sales. Can you help us understand kind of how those two equate?

Yes, the comment that we made on the slowdown in the helicopter was specific to the helicopter business, not the Jacksonville Aerostructures business.

So what is causing the lower subcontract sales?

Actually, as was talked about at the end -- in the fall through the four of last year was that Sikorsky was having difficulty procuring cabins. So that slowed down some of the joining process for us.

Okay. I'll jump back in queue. Thank you.

Your next question comes from the line of Mario Gabelli of Gabelli & Company. You may proceed.

I would be remiss, since I was on, Paul, I believe your first call. I'm delighted to be able to be on your last call. I want to thank you for kind of the struggles you had in terms of converting the A to B and a few other things you've been able to accomplish and the breaking out segment earnings particularly the bearings over a period of time. A lot of companies don't do that . Could of hidden those margins. So thank you. On behalf of our clients who are fairly large shareholders in your company. Neal, can you talk about your vision. You gave motherhood and apple pie as your comments and maybe your not ready to do this, what's your philosophy towards the use of leverage? You're currently have about 60 million net

Mario, I think that we clearly feel very strongly we have a great ability to be able to leverage our balance sheet to be able to accelerate the growth in our business.

We all understand that but the question is do you want to do that? What's your personal philosophy? When the Board was looking to hire you were they looking at your execution skill sets, your acquisition skill sets? Kind of look at what you're planning on doing in the first year or two of your stewardship of my clients assets?

I think that when they looked at hiring me, it was a combination of two things. Number one, the track record that I have for growing businesses because scale is important for both of our Industrial Distribution business as well as our Aerospace business. You'll find I'm not afraid to leverage a balance sheet where the math works for acquisitions that add capability and shareholder value. The second thing is that I think as importantly, the execution skills that I bring. As you look at it, we have some businesses today that are operating well. We have some that frankly we know that we can improve. And being able to generate the needed improvement in these is going to help to generate an overall improvement in total return. So I'm not at all risk averse in terms of investments to growing a business. I think that I do bring the experience where you have to make sure that you have a good strategic framework in which those acquisitions fit. And also that you've done adequate due diligence on the properties itself and how you're going to integrate it to deliver the value that you expect.

What's your philosophy with regards to use of cash flow to look at your own company. If you look at the Kamatics and I can probably sell that to anyone anyone (inaudible) event in at a in today's world. The economic value of your enterprise, why -- you didn't have one discussion or comment on whether you would recommend to the Board of shareholders that you might consider some kind of a stock repurchase. What's your philosophy? Is the stock too high? How do you view that element?

At this point, while it may be on the table for a future meeting, we haven't discussed that, simply, I believe because the number of shares outstanding today.

You mean there's too many or too few?

I think too few.

That's an interesting comment. I think we have to have a discussion off line on that subject. Your backlog in the Kamatics business is terrific. Your margins were fabulous, congratulations. And I've got a lot of nits but let me let other people ask to fill in their models.

Great, thank you.

Your next question comes from the line of Matt Duncan of Stephens, Inc. You may proceed.

Good morning, everybody. A few questions here. One thing that we're still trying to get our arms around is margins? So a couple questions about that. First, if I look at your gross margin and back out Australia charges and kind of normalize Fuzing and Aerostructures. It looks to us that you gross margin would of be sort of 28.5 to 29% this quarter. I'm trying to get a sense of number one, is that relatively accurate? And number two, where should we be thinking about the gross margins of your business going forward?

When you say that you're normalizing, I mean, we think a couple of things. We think that they are low on several of the businesses. And you've normalized Fuzing and Helicopters, you said.

Fusing and Aerostructures. So I'm looking at Aerostructures once we get these new programs around. Fuzing if you had not had a production issue with the joint programmable fuse this quarter. Basically saying if Aerostructures goes back to a mid-teens operating margin and Fuzing is pack to a 12, 13% operating margin.

Yes, and so then the total, the Aerospace -- you're looking at that or you're looking at operating margin before we get into corporate expenses?

I'm really trying to think more about what gross margins would have been. It's going to impact your cost to sales. Aerostructures you've got ramped up costs. I'm just trying to think about going forward. How we need to be modeling margins. They've been kind of trending down. And I would think that they should start turning the other way pretty quick here.

It's a business by business thing. And our specialty bearings of course, are higher. We will make improvements in the helicopter overtime as we eliminate the losses and move into some of the programs. And in terms of Aerostructures, would get -- would improve more to what you see in the 2006 thing. I think when you look at a blended rate, and I guess that's what you're after you see in aerospace it's going to be in the high teens like it's been over a longer period of time. And Industrial Distribution I think is as we grow, we eventually will move those up. Again, size and scale are important.

Those are operating margins. Fair enough. Moving on then, looking at the Industrial Distribution operating margin for just a minute here. In 2006 from the third to fourth quarter that margin was down 110 basis points and the same held true this year. I'm just trying to get a feel for other than seasonality and obviously being familiar with the distribution business I understand that the fourth quarter can be seasonally challenging on sales, your sales were down 4 million sequentially it not a huge decline. But 110 basis point decline in operating margin. Is there anything structural about your distribution business? Are you accruing for bonuses that maybe you are accruing high enough so there's a catchup showing up in the margin in the fourth quarter. Is there anything structural about the fourth quarter that would bring it so much below the rest of the year when sales were only down about 4 million sequentially and basically flat with the first and second quarter.

There's nothing structurally that would bring it down. I thinks the seasonal issues that affect it. And to the extent that we are opening branches and we are putting people in, I mean I think there was some fourth quarter hit particularly this year or impact irreconcilable difference say particularly this year. But I don't think there's anything structural.

So in all likelihood see your operating margin for distribution jump back up here in the first quarter.

Traditionally it would.

Okay. I just wanted to make sure that was still the case. On Aerostructures when do we feel like these new programs will be ramped up to get operating margins for that segment kind of back to the 2006 type level?

There are a couple of issues there. Certainly, we think it's for the most part issues that will extend through the first half. And that's of 2008. That's pretty much I think what we believe we're working with.

Okay and a last question. Neal, you've been in command about five months now. If you can talk about some of the opportunities for improvement. Some specific opportunities for improvement that you have identified. Whether it be revenue growth opportunities or margin improvement opportunities that you have identified in your time so far?

I think first of all the key opportunity for us is to accelerate our organic growth rates through acquisitions. And we've been spending a tremendous amount of time and particularly in the last couple of months focused on that, both in our Industrial Distribution and Aerospace business. I think that we certainly have the balance sheet strength and leverage to enable us to do that. We have businesses again, as I've said that are driven in large part by scale. So I think that that is incredibly important for us going forward. The second is in terms of operational improvements, we've hit on a number of this this morning. Number one is our Aerostructures business in Wichita, that is incredibly important to us because of the programs that we've got in there. Depending on the day of the week. Boeing's backlog for 787 approaches 800 to 850 aircraft. We need to make sure that we have been able to meet the customer expectations with a high quality product and be able to get our costs down for doing that and it's going to have a disproportionate impact of the profitability of that location. So that combined with Fuzing and consistent production of the JPF fuse.

Those are the two areas right now that we're focused on from a margin improvement perspective. And I think the third area would be we have a great position and franchise in our Specialty Bearings business. We have had good organic growth rates but what opportunities do we have to accelerate the growth for that business and still sustain those margins? When we talked about the new platforms on both the [Soyuz] ARJ 21 aircraft are indications of that but accelerating the growth of that business because of the margin conversion there is important to us.

Maybe just one more thing on acquisitions since you seem to be talking about that quite a bit. I'm curious when we should expect to see an acquisition and what's your philosophy on the right multiples to be paying for these businesses are and I'll let that be my last question. Thanks, guys.

I would just say stay tuned on the timing for them. And I don't mean to be coy there. But I think we all recognize the confidentiality there. Two very different multiples and approaches The Industrial Distribution business typically you would pay between $0.28 and $0.33 to $0.34 for each dollar of revenue. Again, varying somewhat based on the product mix and the profitability of that business. And frankly, on the Aerospace side those multiples continue to be high today and they are all over the map, depending on the specific technology that you're acquiring. I think that to put a range around that is a little bit difficult right now because of the range of businesses that we're in. And what that would imply for a range of multiples for Specialty Bearings business, for example, versus an Aerostructures business.

Thanks for the comments.

thank you and your next question comes from the line of Robert Kirkpatrick from Cardinal Capital Management. Please proceed.

Good morning and let me add my appreciation to Paul. It's been many years that we've had questions going back and forth.

Thanks.

A couple of questions. Would you care to comment on the tone of the discussions with Australia? And maybe if there could be a discussion of the cash that is at risk. How would that not be able to be satisfactorily resolved.

Sure, Rob. As I said, I was just done there two weeks ago. The tenure of the discussions were constructive. They were interested to learn what the status of the program was today, how far we thought we were from completion of the product and the capability for the Commonwealth. They are very interested in the current issues that we faced in achieving completion. And they were obviously struggling with a number of very difficult defense procurement decisions that sit on the table today for the new administration. I think in the press they've discussed 10 troubled programs down there varying across (inaudible) to the new F-18E procurement they have gone through, et cetera.

I think that they have a number of very difficult decisions ahead of this them. The discussions we had were again I would say very constructive and we look forward to working with them hopefully now in the near-term to be able to get direction as whether they feel that they still need the capability that we can deliver with our [C-Spride ] helicopter or whether they're going to cancel the program. And I'll let Bob comment on the specifics related to any cash impacts we would have.

Hi, Rob, a couple of things and we've talked before. We have a receivable due from them on the completion and delivery of the helicopters. And that's 40 million offset by a couple of 8 and $10 million items which nets it down a bit. And there's a letter of credit that we have got in the neighborhood of 16 to 20 million. If things were -- those are vulnerabilities. We don't think they're issues we're overly concerned about, we think that and certainly are hopeful if we have to work through something that we would work through those issues as well. So we don't see too much of a cash type of an impact from something like this if the program goes forward then we will collect those over the normal time that we finish the additional work.

Okay. And Neal, would you care to comment also on the process that you expect for the Fuzing contract that has been either discontinued or suspended in terms of the process that you go through, the timing, and then again if Bob could adjust the dollars at risk.

On the 143 program, Rob, currently, we are not delivering those fuses. We have not delivered those fuses for a number of years. So they were talking about actually rejecting lots of fuses that were delivered over a time frame from five to two or three years ago. So it's not a product that we currently have in production.

And we do have some inventory, Rob. And we would expect to deliver that. It's at a point that we work through these issues. And we do have a small warranty accrual to fix the fuses and we had a couple of disclosures where they wanted instead of having us fix them to send them back and we sent them back and then they charge us to fix them. But that's all what the lawsuit is about. And that will be resolved as we go through the lawsuit aspect of it. We don't believe that we've got a financial exposure on that. We believe we are correct on our position.

Okay. And thirdly, there is a -- there's been a sequential decline in sales I believe in Kamatics every quarter in the last fiscal year. Is there a seasonal reason for that? Or is that just that you caught up with the production backlog as you opened the new facility at the beginning of the year?

I think, Rob, on that that if -- I mean, the decreases are pretty small. The fourth quarter comes down a little bit and that's because there's a few holidays and less work days there. But there's nothing traditionally seasonable about that and any reason for sales coming down.

Part of that also is timing of a requirements where as we've said our lead times are fairly short. Our customer -- while they push for delivery in the fourth quarter they also experience fewer working days in the fourth quarter. So I think that has something to do with it as well. I think what you would expect for our Kamatics business would be really a plan that would be fairly stable in each of the four quarters of the year. You are right. We came down a little bit sequentially during the course of the year. But frankly, I think the difference from the first and fourth quarter was about 4 or 5% and in some of that may have had to do with making up for some short shipments in December of the prior year everyone.

And we do have a record backlog so it's not a case that the business is coming down.

Yes, I noticed that your backlog for Aerospace in total was well over 1.2 and looked like it was very solid across a number of categories. Finally, Neal could you comment maybe more generally on the M&A environment, not necessarily speaking to one side or the other, but in terms of there's been concerns about liquidity in the environment -- in the market and has that resulted in any greater opportunities for Kaman to look at potential acquisitions or in perhaps fewer competitors as you go out and begin to have any discussions that you would have.

I think that it has impacted, Rob, and in exactly the manner that you said. There was interesting comments from a number of Aerospace that happened to be leaders in the last week or so. Saying that there is less impact right now from a number of the private equity firms that had been very active over the course of the last past three to five years. Which makes it a better environment for the strategic investor. And I think that carries across to our Industrial Distribution area as well. So I think we see that. I think that the uncertainty right now or the apparent slowdown has also opened up some people's eyes in the Industrial Distribution side where they are more likely to look at selling companies. A lot of privately held companies or closely held companies in those business today. And the valuations I think will be better. So I think it's a positive.

Okay. First of all, Russ, congratulations. I understand you'll be retiring at the end of March. Has been any discussion about a replacements for the prime Investor Relations contact?

Well, thank you very much, Rob for that. Maybe I'll turn that to Bob to say what we've done in that area.

We've actually got a person identified. We haven't released anything on it. But we to have a person and he's out with us in the next few days as we go out and meet folks. And he's an internal candidate, Rob. So we listened.

Great. Thank you. I'm sure he'll be very helpful. And Russ, thank you for being helpful as you have been for many years with Kaman, we appreciated it.

It's been a pleasure. And this fellah has already been on the road with us and has a lot of skills. He's a CPA, he's got all the kind of credentials that you'd be looking for.

Great, thank you.

Your next question comes from the live of Steve Levenson of Stifel Nicolaus. You may proceed.

Good morning. I should say good afternoon. Let me first say thanks to Paul and Russ and I'll miss talking to you guys. And for Neal, I know most of the questions have been asked. Can you give us additional details on the back log and where that lies? And I was going to follow up with a M&A question.

I think from a backlog perspective, we spoke about our Specialty Bearings business being at a record high. And that makes up about 20% of that backlog and as you would expect for their busy it's fairly broad across industries and customers. Our Aerostructures business predominantly around Sikorsky. Boeing C-17 and Boeing Commercial Aircraft as well. Both the 767 and 777. I'm sure you saw the announcement as we commented today that that contract extension. And in the Fuzing business predevelopmently around our JPF fuse and in our helicopters business we have parts of the of course the Australia program still in there. We have the Egyptian Depot level maintenance and upgrade program, not the whole thing in there. And joining work and installation work planned in '08 for the Black Hawk. that we do here in Bloomfield

Thanks, based on what they told you about 767 do you want to handicap who is going to win the tanker contract?

I tell you. This is one where you can be wrong and wrong quick if they go ahead with the announcement at the end of the day today. I think it would be -- I think it would be difficult in today's environment for that contract to be awarded to the Airbus side.

I hope that will work out for you then.

We hope so. There's two things. We do 767 work in Jacksonville that would go on the tanker. We do the for the [ruddervator] for the refueling boom in Wichita which we'd be very happy with. The flip side is if by chance it does go the other way, you can be sure that they will be looking very quickly to establish dollar denominated local sources of supply for the components on that that they can move to fabrication or construction or assembly in the states. So we'd certainly be active with that as well.

Okay. Thank you. On the M&A side given your druthers would you buy on the Aerospace side of the business or Industrial Distribution and can you give us an idea where you really see the low hanging fruit? Not necessarily meaning the best margin but the best benefit for Kaman right now?

I think an important thing to keep in mind is that they really are not mutually exclusive. We feel that acquisitions will provide significant opportunities for us on both of our businesses and frankly, can help us improve our margins significantly. I don't mean to say I'm agnostic to either but I am agnostic to either side, what we're really going look hard and focus on is the math of the deal. And where -- how it really fits for us. And how effectively we're going to be able to integrate them. So I think that when you look at the Industrial Distribution side, the key things that we look at is number one, we would like to fill out our geographic footprint. We have said many time that were in 70 of the top 100 markets in the United States. And we think that provides us a key opportunity for expanded growth. The second thing is, as has been commented about, the ability for us to drive incremental revenue through that fixed cost base is what's going to drive is margin improvement. We have also commented about having to open new branches to serve our National Accounts. If we already had locations there, we would be on the other side of that economic equation. Where instead of investing to open a new plant we'd have incremental revenue going through an existing facility and that's pretty important to us. And the third would be those acquisitions that enable us to expand into higher margin area such as fluid power that we have a fairly small presence in today. All of those things combined with the strong management team are the things that we look at. On the Aerospace side, I think that, again it's an area where we got opportunities. If we could grow our Specialty Bearings business that would clearly be attractive to us because of the track record we have there and the capability of the team in our specialty bearings business to drive improved operational performance. And then you look at the dynamics of the industry today and recognize the drive towards composite structures and we frankly have a fairly small presence a today in the composites area. And that would be one we think would be very appropriate to invest to grow.

Thanks for the very complete answer. One last thing I forget to ask. What are the lead times on the Kamatics Bearings right now?

I guess it would vary. And it would vary by whatever. But I think they try to get them out in weeks rather than in months.

And they're holding pretty steady?

And they're holding pretty steady. They do very good at that.

Thank you very much.

Your next question comes from the line of Margot Murtaugh Snyder Capital Management. You may proceed.

Thank you very much. I was just wondering if we're headed for recession this year or next what happens to your Industrial Distribution revenues and margins, and in 2008 how much incrementally is coming from the National Accounts, do you think? So if you could talk about the outlook for Industrial Distribution in a tough economy.

Margot, it's interesting because this is something that of course you'd expect us to spend a lot of time on and we do. We got together with the leadership of that business back in late October, early November, asked them for a very detailed contingency plan, that would enable us to deal effectively with a downturn in the business when and if it occurred and we reviewed that right after the first of the year. At the same time, as you saw in our numbers today, we exceeded a 10% all organic growth rate in the fourth quarter of '07. We have not yet seen that slowdown.

If it is happening, I think that the smaller local distributors are the people that are bearing the brunt of that. They either don't have the ability to support National Accounts as those National Accounts drive towards consolidated purchasing, or their ability to drive pricing from suppliers disappears because they're not demonstrating the growth. Right now we have not seen that slowdown come through in our numbers yet. I can tell you we're ready for it, when and if it comes. But we haven't seen it and we watch those numbers daily.

Okay. In 2008 is there a lot of incremental revenue coming from the new accounts? Or did you get most of that in 2007? Any thoughts there?

We've commented that we've had in excess of double-digit growth in our National Accounts. We see that continuing and as we commented through the year, we've ramped up a number of new branches to support those accounts. I think that we see those continuing to grow at those rates in through 2008. The other thing is that we happen to have a fair amount of strength in mining in the commodities area, predominantly in copper and gold, and that has obviously gone very, very well for us over the course of the last year. And we don't see those commodities slowing down any time soon. The other thing we've touched on a couple times is that our national accounts have really enabled us to increase our presence in the food and beverage industry which is as we all know typically less cyclical than others.

Can you quantify what percentage of your business is to natural resource companies?

We don't break it down to that level. But I will give you a little bit of insight I think and if we were to combine our food and beverage and mining businesses together, that approximates 20% of your total business in Industrial Distribution. Okay And your margins have been below your competitors in the past, you have implied that there's potential to get those up margins up. I don't know how many percentage points. But is there still a goal in that regard for margins in Industrial Distribution.

I don't think we publicly stated a goal. We see there's significantly room for improvement. We think that if you look at our two major competitors, either AIT or Motion they are between 150 and 250 basis points better margins than we have. And I think we should be able to cut into that.

Okay. And then one small question. D&A for this year and capital expense for 2008. Do you have those?

The answer is yes. But it's going to take us one moment.

What percentage of your Industrial Distribution is related to housing and housing related businesses?

We've reported that's about -- that has historically been about 10% of our business. That's off about 40 to 45%.

Okay.

Luckily for us as opposed to some others, we were not very strong or dependent on the housing market or the automotive market.

Okay. That's good. Okay. And anything on those numbers.

Margot, you asked what capital expenditures were for '07?

No, what the projected for '08 and also D&A for '08?

I would say that those again in terms of the capital expenditure, again, these aren't typical numbers we give out. If you look at our historical trends, it would tend to follow that with the one exception that we have mentioned that we are negotiating with the government on the government property acquiring the way that would work is that would become a capital expenditure which would increase the number for 2008. Although not necessarily expenditure because it involved kind of a long-term commitment to dealing with environmental issues. So that would be spent over a longer period of time. In terms of the G&A there's nothing there other than the normal growth of the business that would affect G&A going forward so the percentage would follow the trend.

I mean D&A, for the new company.

Depreciation, okay, sorry. Again, that would tend to follow our historical trends.

Okay. Even without music? You spend about 10 million I believe.

That's continuing operations. It would be about the same. Music is not historically had much depreciation.

Okay. Great, thanks very much.

Your next question comes from the line of Tim Hasara of Kennedy Capital. You may proceed.

Yes, I'd like to follow-up on the question wrap to buyback. How you're defining that you have not enough shares outstanding.

Well, I think we started by saying a little bit that we hadn't spent time with Neal talking about that. And that's not been a conversation that we've necessarily had. So in terms of a stock buyback, we the sense we've gotten is that there are adequate shares out there and that when in the market is look for shares and we haven't necessarily had too many shares and so we necessarily haven't looked at cash as shrinking the size of the Company but more towards growing going forward and that's been our plan with the cash that we're looking at. Use it to grow before we use it to buyback shares.

Certainly, that's not how you answer the question not enough shares outstanding. I guess when you do a buyback you looking for the return on investment on that buyback and you're looking to buy the stock at a discount to its net asset value and you implied that you would, the way I understood it, issue stock here for an acquisition based upon that premise. And who's given you the sense that there's enough shares outstanding or not enough shares outstanding.

I'm sorry if it came across that way, Tim. If we take a step back, what we really have to do and of course are doing is looking at the best way to accelerate the value of the Company. And in conjunction with the Board, discussions would take place across all of the appropriate ranges of options available to us to do that.

Okay. And then just to clarify. With respect to a buyback, you answered the question you thought there was not enough sharing outstanding. And I'm just curious why you said that, how you're defining that?

Just from liquidity perspective, the number when your look at.

With respect to large cap or small cap. As a small cap manager you're average trading volume is roughly in line or greater than you market cap with respect a everything out there. I'm curious how you defining that are comparing to GE or what are you doing?

I don't think I'd be comparing to GE.

Then what are you comparing it to? Or how do you make that statement?

Tim, it was a statement that if historically when we talk to guys like yourself, the biggest problem we've had is that people want to buy the stock and can't find it. I think that's what kind of motivates--

I just can't buy that, how can you buy that argument?

It's true. That's the comments that have come back.

So if a comment came back and said sell your stock -- use your stock at $15 a share, then you'll pick that up as well?

It's not so much that that was a statement that Neal made, but asked by Mario A or B that was just a fast answer. I think the underlying answer is that that is a very important issue that requires a lot of careful thought and it's not off the table of the those kinds of thought processes. We don't want to get into an argumentative kind of a discourse here.

Definitely not. But if you want to answer a question, you have to at least support the question. And that's really all I'm trying to get at is where that came from and support that. I understand what you're trying to get at, thank you.

Your welcome.

Thank you, Tim.

And your next follow-up question comes from the line of Arnie Ursaner of CJS Securities. You may proceed.

First of all for Bob Garneau, you mentioned that the CapEx will (inaudible) keep an eye on the historic trends. I've kept an eye on your stock for about three or four years and I wouldn't really know how to answer that so perhaps you could expand a little on what CapEx is likely to be in the upcoming year.

In terms of the we spent about 12 million in the year 2006. And about 14 million this year. And so I would expect that and we have spent a little bit more because of some of the earlier years, we would spend a little bit less. So I think in that 12 to 14 million range is where we'd be comfortable generally going forward. We try to not get too far ahead of depreciation so that the two are somewhat kept somewhere in the same range. The one thing that could make it change a bit going into 2008 would be the government property that we are discussing. And are in the process of cornering.

Okay. Again, I'm going to ask a relatively direct question, hopefully to get an answer. Are you losing money in Wichita now?

No.

Okay.

And we talked about the third quarter where the third quarter was we had encountered some issues. We worked through most of the issues in the third quarter. We worked through more issues in the fourth quarter although less than the third quarter. And we see that they will come down but they will be some impact in the first and second quarter of 2008.

You're segment had had roughly 15% margin last year. Given the negative hit from Wichita, when does Wichita improve to the point where you return to 15% type margin in that business?

I think in the third quarter is where we get back to where, third and fourth quarters.

And going back to the acquisition targets or opportunities. Given the math that you gave us Neal, would imply that you could very, very comfortably buy 2 to 400 million of distribution revenues. To the extent that you layered on3 to 400 million of distribution revenues and exceeded a billion, going back to Margo's question. You have two public competitors and you've consistently said volume is the key. There should be a very sizable incremental margin on acquisition revenues. If you got to a billion of revenue. What do you believe your margin would be in distribution?

I think I'd like to look at the math on that part in making a comment. It would also depend on if you make that in two larger acquisitions or multiple smaller acquisitions. So there's a number of elements that would go into that. Think that you did some work on that recently that probably isn't too far off.

I thought it was pretty conservative. But wanted to give you an opportunity in a very public forum to respond to it.

Well, I think that your work was pretty good.

Okay. And I also want to extend my thanks to Paul and Russ. I remember our first meeting getting through the door was a big challenge to keep an eye on you. We have gone a long way and I really thank both of you for your help in helping us create a winning stock. Thank you.

It's been a pleasure, Arnie

And your last question is a follow-up from the line of Matt Duncan of Stephens, Inc. You may proceed.

Just a couple of quick housekeeping item just to help us out with our models. Bob, the tax rate jumped around a little bit in '07. What should we be thinking in '08?

We think it's going to stay at a somewhat traditional rate of between 36 and 37 and the trouble with the new account tax rules are that when something happens in the a quarter, you have to recognize it in a quarter and that tends to give you some volatility in that range during the number. But generally, it will be in that rate.

Okay. I think previously we were talking about closer to 38, 39%.

And they have come down and particularly with the higher earnings the tax rate is trended down a little bit.

Okay. Fair enough. And then another question kind of going back to Specialty Bearings another person earlier was noticed that sequentially we've had decreases in that business this year. The thing I want to hit on the typically from your fourth quarter to your first quarter of the next year those revenues have a pretty substantial jump. Should we expect that trend to hold true?

I think that the large jump that you saw last year, Matt was probably more due to the additional capacity that had been added during the preceding period.

And it depends on the timing of getting things out. Sometimes at year ends, we run into either issues on our side or with a customer who doesn't want to get something. And sometimes that does impact the fourth quarter, first quarter relation.

Okay and I also noticed from '05 to '06 it was up 3 million sequentially fourth quarter to first quarter and then last year it was more like 5. I'm just trying to make sure that's a trend I should have in my model.

One of the things we do there, Matt we used to have a summer shutdown in July we don't do that anymore but around the holiday season you're going to lose some time and we do have some things that tend to be because of overall less economic activity out there, I have some things that slide into the first quarter.

I appreciate it guys.

Thanks.

I was expecting the operator to come on in. But thanks for joining us today everyone. And we'll look forward to speaking with you again. Bye, bye.

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