Kaman Corp (KAMN) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kaman Corporation Quarter One 2008 earnings conference call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in the listen-only mode. We will be facilitating a question and answer session towards the end of today's 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. Eric Remington of the Kaman Corporation. Please proceed.

Thank you, Michelle, and good morning, everyone. This is Eric Remington of Kaman Corporation and I would like to welcome you to the Company's 2008 first quarter conference call. This call 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 there after will be available until May 9th at this site. Conducting the call today are Neal Keating, Chairman, 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 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 the expectations reflected in its forward-looking statements are reasonable, we can give no assure that such expectation for 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 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. With that I will turn the call over to Neal Keating. Neal?

Thanks, Eric, and good morning, everyone. Before we get started, let me just layout the format of today's call. I will begin with a brief overview of our results and then get into a bit more detail on our business segments. I will then turn the call over to Bob, who will discuss some financial issues and then I will come back to wrap things up before we take your questions. I want to start by saying that we are disappointed that issues in our Aerostructures and Fuzing segments prevented the improved operational performance and strategic progress that we are making from being fully evident in the financial results. Specifically, operational difficulties at our Wichita facility and continuing profit margin issues for the Joint Programmable Fuze program, both of which we will discuss in more detail, significantly impacted the quarter.

Overall our aerospace businesses delivered top-line growth in excess of 11%, driven by strong performance at Specialty Bearings, increased shipments of the JPF and continued ramp up of the Sikorsky BLACK HAWK program. Our Industrial Distribution segment increased both revenues and profits, despite the challenging market condition. And in addition, we completed the acquisition of Industrial Supply Corporation early in our second quarter and look forward to their contribution going forward. Looking at the results of our operating segments more closely. Our Aerostructure segment saw sales increase driven by the BLACK HAWK program, while the C17 and 777 programs continued to contribute meaningfully to sales as well. Our relationship with Sikorsky continues to b successful and to grow. During the first quarter we delivered 27 cockpits versus 20 in the first quarter of last year, bringing total deliveries since program inception to 185. To date we have received orders for 311 BLACK HAWK cockpits from Sikorsky and expect to continue delivering 9 to 10 cockpits per month throughout 2008.

At Jacksonville the C17 program remains an important contributor to our results, although as we reported earlier at lower margins than during the first half of 2007. We expect this program now to run into 2009, as we have just received purchase orders for 10 additional ship-sets. Also, as we announced last year, we signed a seven year follow-on contract with Boeing for the production of wing trailing edge assembles for the 767 and 777 programs. We are very pleased to have signed this extension with Boeing, which gives us added visibility for future production levels at our Jacksonville facility. These programs are indicative of our performance. The Aerostructure segment is capable of delivering and it is in part because of our strong performance on these programs that we were able to secure additional business on major programs in 2006, specifically the MH92 tail rotor pylon program for Sikorsky and subassembly programs for Boeing 787 with Spirit AeroSystem and [Cheng Yeng] aircraft.

Unfortunately, and as we highlighted to you during our fourth quarter conference call, the simultaneous ramp up of these programs has been more difficult and taken longer than originally estimated. The net result is that on these programs we have incurred about $4.5 million in charges and expenses related to tooling and production inefficiencies during the first quarter, resulting in an operating loss for the Aerostructure segment as a whole of $1 million. Let me be the first to say that this performance is unacceptable and we have under taken a number of actions that should result in the successful resolution of these issues. Chief among these was a decision to transfer operational control of our Wichita facility to our management team in Jacksonville. Having gone through similar growing pains at our Jacksonville facility a few years ago, we believe we have the operational knowledge and experience to push through the necessary initiatives and changes and they are on their way to achieving these goals.

It is premature to say that these issues have been solved, but we feel we now have the right team in place to do so and expect to have resolution during 2008. Turning to our Fuzing segment. Net sales rose solidly in the quarter driven mainly by JPF programs from the U.S. military. Profitability in this segment declined compared to a year ago, primarily due to a shift in mix of JPF sales from foreign customers in the year ago period to the U.S. government in this year's first quarter and the fact that we are nearing completion of the facilitization program in Middletown. There was also a slight impact from the sale of our 40-millimeter product line. While we believe the JPF program holds significant long-term profit potential, initial sales to the U.S. government are essentially breakeven. However, during the quarter we made significant progress in reducing the production issues that we faced with the JPF.

We have instituted a number of enhancements that have improved the overall process and we achieved a record production rate of almost 5000 fuzes during the quarter. As I mentioned earlier, another element of this initiative has been the facilitization program, which includes the establishment of a second production site at our Middletown facility, as well as a redesign of the fuze itself that we believe will ultimately result in a simpler solution with fewer technical issues. Overall our goal for the JPF is to achieve a monthly total production rate of 2000 fuzes. I toured the JPF line in March and was very impressed with the progress since my last visit in January and our team is committed to achieving the required monthly production goal by the end of this year. As we mentioned before, on December 31, 2007 we sold the 40-millimeter product line in Orlando. We believe the 40-millimeter product line was non-core to our ongoing business and its sale allows management to focus its attention on the JPF.

Net sales in the Helicopter segment declined versus the first quarter of 2007, driven in part by our depot level maintenance program for Egypt, which had revenue from startup nonrecurring work in the first quarter of last year. This program is preceding well and it has a solid outlook through 2010. In addition, our joining and subcontract work for Sikorsky exited the ramp up phase and reached a more steady state level. Operating income in the Helicopter segment improved in the first quarter as the year ago period included a charge of $2.5 million related to the Australian helicopter program. Clearly, the major news during the quarter was our announcement of a settlement with the Australian government over the SH-2G(A) program. I won't get into all the details of the settlement here. Briefly though, the agreement states that ownership of the 11 helicopters will be transferred back to Kaman along with spare parts and associated equipment. Kaman will then look to sell the aircraft to another customer or customers and will share the proceeds of each sale with the Commonwealth under a preestablished formula.

Transfer of the aircraft and spare parts is subject to U.S. government approval, which could take several months to achieve and is the responsibility of the Australians. We have already had contacts from foreign governments interested in the aircraft and we are developing our marketing plan for them. We strongly believe that these are highly capable aircraft that would be valuable to a customer for a range of mission requirements. However, I think it is important to point out that this could take some time and as a result the agreement with the Commonwealth doesn't require a payment for three years. Overall, we believe this is a good resolution that brings to a close what has been a difficult contract for the Company. Had this gone to arbitration, resolution would have been measured in years, not months. This agreement removes a material uncertainty and limits our risk exposure. Second, this program was a major distraction for management.

That cloud has been lifted and now we can concentrate on remarketing the Australian aircraft and continue to pursue new opportunities utilizing our subcontract and systems integration capability. Specialty Bearings was a bright spot in the quarter, as the segment once again generated record sales and operating income levels in the period. Relative to a year ago, sales rose on solid demand across our customer base, while operating income increased substantially. Demand was strong across the customers and markets we serve and Kamatics continued to build on its reputation as a provider of high quality products with shorter lead times than the competition. Backlog in this segment remains strong and our market diversification should help limit risk in a fluctuating economic environment. Overall, this business had a great quarter and we look forward to continued solid performance during the remainder of 2008.

Our Industrial Distribution segment had a solid first quarter as well, posting record sales in the period of $182.2 million. This was a 5% increase over 2007. And since there was one fewer sales day in the first quarter of 2008, the daily sales rate improvement was actually 6.7% over the comparable period in 2007. Demand in the market continued to come from food and beverage, mining and chemical industries. This was somewhat offset by continued soft demand from housing and construction materials. Our focus in Industrial Distribution has been on further penetrating the market for national accounts and the segment's results in the first quarter demonstrate our progress on this front, as sales from these customers grew about 20% versus the first quarter of last year.

In order to support this goal, we have invested in the people and infrastructure necessary to continue building out our national footprint in support of our recent national account wins, as well as support additional new programs. During the quarter we opened another new branch, which makes 10 since the beginning of last year and Bob will discuss the impact of these investments in a few minutes. In addition, we had a successful quarter with our national accounts with the addition of New Page Paper and renewals with Campbell Soup, Del Monte, Titan Cement, and National Gypsum. As you know, our strategy has been to supplement our organic growth with acquisitions, which we did by acquiring Industrial Supply Corporation based in Richmond, Virginia. ISC will bring about $55 million in annual sales through six branches in Virginia and North Carolina.

The transaction actually closed on the first day of the second quarter and it will help enable us to capitalize on the leverage of scale in this business. ISC brings with it a strong customer base in compelling markets, broadens our product offerings in fluid power, material handling and industrial MRO supply products and expands Kaman's footprint in a region of the country where we had had a somewhat limited presence. Finally, ISC brings with it an excellent management team who will begin managing the combined businesses of ISC and KIT in the region. Let me take a moment to comment on the acquisition landscape more broadly.

The credit crunch combined with general uncertainty regarding the macroeconomic picture have combined to limit the participation of financial buyers in the M&A market and to make potential sellers re-think what they are willing to accept for their businesses. As a result, it would appear valuations have gotten more realistic, which is encouraging for companies such as Kaman, which are well capitalized and possess solid business prospects. While there are most opportunities in the M&A marketplace, we will continue to remain very strategic as we assess potential opportunities for both of our businesses. With that, I will turn the call over to Bob Garneau. Bob?

Thanks, Neal. Let's begin by turning to exhibit one. We will start with a review of consolidated results then go on to the segment detail. On a consolidated basis net sales rose 7.2% to $285.8 million from $266.5 million in the first quarter of last year, driven by growth in both of our businesses. For the first quarter net income from continuing operations was $8.9 million, down slightly compared to $9.1 million last year. Diluted earnings per share from continuing operations were $0.35 in the first quarter of 2008 compared with $0.37 in the first quarter of 2007. Earnings from continuing operations exclude the contributions of the Music segment that was sold at the end of 2007. Additionally, the first quarter of 2007 included approximately $2.5 million in charges that related to the Australian helicopter program. Now, if you will turn to exhibit two, I will review the results on a segment basis.

In our Aerostructures segment net sales rose 14.4 compared to a year ago, primarily reflecting the continued successful ramp up of the BLACK HAWK program for Sikorsky. While the increased revenues did add gross margin dollars, they were off set by charges in Wichita and certain favorable prior year adjustments at Jacksonville that contributed to the higher overall operating margin in 2007. Accordingly, for the quarter, this segment generated an operating loss of $1 million compared to an operating income of $4.6 a year ago. The charges of $4.5 million in Wichita consisted of $2.5 million for tooling that had to be replaced and program costs of $2 million, principally as a result of ramp up of the three large programs that were awarded in 2006. Fuzing segment sales were up 30.4% from a year ago, primarily reflecting the higher JPF sales to the U.S. military.

However, because JPF sales to the U.S. government are essentially at breakeven, operating income in the Fuzing segment was down compared to a year ago. Also, in 2007 we benefited from JPF sales to foreign customers and earnings from the JPF facilitization contract in Middletown, which contributed to those higher operating margins. In any given period it is important to remember we will need to meet U.S. government needs before pursuing foreign sales orders. In February we received an order for option 5 from the U.S. Air Force, which has a total value of $26.8 million and brings the total value of all U.S. government JPF orders today to $155.7 million. We have been making improvements on the manufacturing side, but we do continue to see interruptions from time to time. In addition, as we have mentioned before, we can expect shipments of the JPF to continue to be lumpy.

In the Helicopter segment net sales for the first quarter were lower than last year, while operating income improved compared to the loss in the prior year, which was pretty much due to the charge of $2.5 million taken on the Australian program in 2007. Once again, the big news in this segment is the settlement with Australia on the Seasprite program. Neal walked through an overview of the agreement and while we are still working on the final accounting for the transaction, it is important to note that we believe the value of the inventory we are receiving exceeds the value of the $35 million receivable that we will forego and the guaranteed payments of $37 million. Accordingly, we do not anticipate taking a charge when we take title to the aircraft. I would like to take a moment to discuss the tax impact of the transfer of the Australian helicopters to the Company, which once again is a work in process.

We have previously disclosed that at the final completion of the contract we expected to record approximately $6 million in look-back interest from the IRS. The termination of the contract will cause us to forego that look-back interest. For tax accounting purposes, termination of the contract will also cause a reversal of approximately $50 million in accrued contract losses previously taken. We anticipate all of this will result in a tax payment of about $13 million, net of certain foreign tax credits, that will be due upon the transfer of the inventory. Although we will have to make a cash payment, we expect no impact on current earnings and we believe that we will ultimately recover this as we sell the helicopters. Conclusion of the Australian contract also means the closing of a service contract that generates about $13 million in annual revenues for Kaman.

We would expect to eventually replace this service revenue upon the subsequent sale of the aircraft. Specialty Bearings continue their outstanding performance with sales increasing 12.8% and operating income rising at nearly double that rate. And compared to the fourth quarter of 2007, sales and operating income increased 20.9% and 32.9% respectively. This performance demonstrates the leverage inherent in this business, as operating margins expanded on the sales increase. Backlog remains solid and provides us with good visibility for the remainder of the year. Turning to the Industrial Distribution segment. Sales rose 5 while our operating margin remains steady at 5% of sales compared to the first quarter of last year. However, this was a 100 basis point improvement over the 4% we reported in the fourth quarter of 2007.

Neal mentioned the incremental cost associated with our investments to support the national account program. We have been very successful in winning national account business and to that end have opened branches in markets where we do not have a current presence. Since the beginning of 2007 we have opened 10 of these greenfield branches, a high number for us as we typically open two to three branches a year. On the day we open a new branch we begin to incur all the operating costs for maintaining that branch, but sales and profitability take time to ramp up. While we believe these investments are prudent and sound in the long run, the higher number of openings has had an affect on our operating profit and margin growth. Although corporate expenses ran a little higher in the quarter compared to the prior year, we expect them overall for the year to be slightly lower in 2008 than in 2007.

The balance sheet highlights are shown on exhibit three. We continue to operate the business from a position of financial strength with a capacity to invest in the future growth initiatives. Cash and cash equivalents total $28.3 million, while total debt was $14.4 million. Shareholder equity was $403.9 million. Touching on cash flows. Net cash used in operating activities was $45.6 million for the first quarter of 2008, which was high for us. There are several special payments made during the quarter I would like to point out. First of all we made a tax payment of $13.7 million, of which $11.3 million resulted from the gain on the sale of Music. Also, to support the [bureau] program, we purchased the K-Max from the U.S. government at auction for approximately $4.5 million.

Another item was a surf installment payment to our former CEO of $4.3 million. Beyond that accounts receivable grew substantially due to the higher sales in the first quarter over the fourth quarter, which is consistent with prior years. Additionally, inventory grew at Fuzing largely due to the purchase of materials to support the increased JPF production and also some delays in foreign sales. As to the end of the quarter, we had $161 million available on our $200 million revolver. With that I will turn the call back to Neal.

Thanks, Bob. Let me conclude by saying while our first quarter results were mixed, we are already in the process of dealing with the root cause issues impacting performance. As I said earlier, I believe we made significant progress during the period with the negotiated settlement of the Australian program, the acquisition of ISC and the continued success of our national account initiatives. Demand across the Aerospace segments remains strong and our combination of commercial and military customers, along with our diverse product portfolio, gives us the balance to grow through the market cycle. The prospects for Specialty Bearings continue to be strong with the conclusion -- and with a conclusion to the Australian helicopter program in sight, we can turn our attention to growing our outsourced business.

In Aerostructures we are committed to solving the issues in Wichita and in Fuzing we continue to make steady progress on the JPF. There is no doubt that the economic picture has clouded and that this has implications for the Industrial Distribution market. Having said that, I believe KIT's first quarter performance is indicative of the benefits of its position in the marketplace. The markets that have been driving demand continue to look solid as we move into the second quarter and the pressures of the marketplace are concentrating business into fewer larger players, such as Kaman, who have the size, breadth and financial strength to support our customers' changing needs during these challenging times. Our focus going forward will be on further broaden our geographic reach, product offering, and array of value-added services to continue to support the successful pursuit of our national account strategy.

If markets remain soft, KIT is well positioned to take share from smaller competitors, grow its customer base, and leverage the eventual recovery. Our efforts at Kaman have positioned the business for long-term success throughout the market cycle. We believe there are a number of opportunities ahead for us and look forward to reporting on our progress. That concludes our formal comments and with that I will turn the call back to Eric.

Thank you, Neal. That wraps up our prepared remarks, now we will open up the line for questions. Operator, may we have the first question, please.

(OPERATOR INSTRUCTIONS) Your first questions comes from the line of Arnie Ursaner of CJS Securities, please proceed.

Question I have is, it is sort of important to understand the potential value you could realize on the sale of the helicopters eventually. Can you give us some feel or sense of the number on the formula you have with the Australian government? Again, you may not be able to give us the exact percentage that they would get versus you, but some sense of that would be pretty important to determine the eventual outcome for you as a company.

Arnie, what we are able to disclose is that initially it starts at a 50/50 split and then it moves in increments in favor of the Australian government after a certain level is reached. However, as part of that agreement they have asked that those numbers be held as commercial in confidence, which obviously we have to honor. Our expectation is that as things progress, more information may be able to be released over time. I do apologize. That's the most guidance we can give you at this point.

Well, the other question would be it is material from you from an SEC public reporting kind of view. So how do you get around that issue?

Hi, Arnie. As we start to get into selling and making things, I suspect we are going to be forced to talk more about how those profits are distributed and that will come out as we go through the transactions, but currently I don't think there is anything that forces us to need to say perspectively what we paid Australia.

Sure, that's fair. Neal, going back to Wichita, you obviously have been talking about the problems you have there. Perhaps take an extra minute and walk us through the issues, whether they are volume, whether they are cost, whether it is labor issues and how we should expect these to generally get resolved over the next six to nine, 12 months.

Sure, Arnie, I will give that a try here. As we have said and highlighted, I think, certainly in the fourth quarter and I hope consistently since that call, we have run into a number of issues and they are primarily related to ramping up of what our three new very complex programs at a facility without adequate infrastructure and experienced management compounded by the inevitable customer changes that you experience on a new aircraft program. If I were to break them down into parts, we had -- we had inadequate engineering capability to understand that what was going to be required from a tooling requirements perspective in order to achieve both the manufacturing in life and tolerances that we needed on some of the mold and assembly tools.

And that has impacted us significantly in this quarter, as we have had to go out and now order replacement tooling for mold tools that weren't able to hold tolerances and also to order additional tooling because we were not being able to get the required rate or life out of other tools. We also had issues in inventory, management and purchasing, where we would acquire material and either order improperly or handle it improperly, so that in particular in areas where we would have prepreg composite material or adhesives, we would exceed the allowable life of the product, so we would have to scrap that. Perhaps even more importantly was that we didn't have the infrastructure to adequately to train new employees as we ramped up and that really hurt us in production efficiency in scrap and rework.

So those are the issues that we have encountered that have led to the charge that you saw in this quarter and obviously we have talked about some of the things that we are doing to overcome those with the additional management and resources that we are putting into the facility. Our expectation going forward is that -- we have said that we experienced -- we expect that we will continue to experience issues there during the first half of the year. I continue to believe that. I think that there is risk, but I'm confident in the leadership that we have in place and as you can imagine with the frequent reviews that we have with the progress that is being made. So our belief right now is that if we don't encounter any other significant issues that we haven't uncovered yet, that we would demonstrate recovery in the second half of the year.

Perhaps to try to quantify it, Neal, if you ex-out the charge, your adjusted operating margin in Aerostructures was a little over 12%, last year was 18%. When Wichita is more appropriately up and running, perhaps in '09, do you see your operating margin in Aerostructures returning to that 18% level?

I think that 18% would be high, Arnie. I think that mid-teens would be our target for it.

Okay. I will jump back in queue. Thank you.

Your next question comes from the line of Matt Duncan of Stephens, please proceed.

Just to follow-up on that line of questioning that Arnie was on there. The 12% margin you would have had this quarter, I'm trying to get a sense, Neal, of -- you are talking about kind of second half recovery, does that mean you can be back to the mid-teens and operating margins for Aerostructures the second half of '08 or do we need to be thinking more towards '09? I'm kind of curious more what the trajectory should look like in the recovery of the operating profit there. I was surprised to see a loss this quarter and I understand the reasons behind that. I'm just curious how you expect that to ramp back up. Is this going to be something where you are going to flip a switch and the problems are fixed or is this more of a progression over time?

It will be more of a progression over time. The number that I referenced with Arnie, I think, is what you should look for, expect from us for '09. But you should see a trajectory that would take us towards that beginning in the second half of this year.

Do you expect Aerostructures to be profitable in the second quarter?

Hi, Matt. The reason we were not profitable and by Aerostructures we have got the two pieces and we are not -- was because of the size of the loss and we do not expect it to repeat that in the second quarter. Saying that, we still have got issues that we have got to get through that we aren't totally through yet. Right now the outlook is that we would not have -- we would not repeat a loss of that kind of a magnitude in the second quarter.

Maybe the right way to think about this then is if you broke out that charge by saying that $2.5 million of the $4.5 million was from added tooling equipment. That would be kind of what I would view as more of a non-recurring charge, whereas the program cost of $2 million that's kind of just the stuff you have been experiencing the last two quarters you have had some issues. Maybe if we just thought about adding back that $2.5 million to the $1 million loss that gets you to about $1.5 million in operating profit if no revenue growth. Is that probably the right way to think about it?

I think that is fair. Now saying that, I think everyone is going to work very hard to improve on all those things, but still there are some things that we have got to work through that will get worked through in those periods that we just don't have a total handle on yet. But I think that's a reasonable assumption to go forward, the one you have presented.

And then improve off of that. Okay, fair enough. Moving onto Fuzing for a minute. The margin there I understand kind of guess was held back because the sales volume is the mix more U.S. government, which is lower margin sales. At what point in time do you expect the mix to shift more towards foreign governments? Is it kind of mid-year once you have got the capacity to do that and when that occurs, just looking back in time you have had margins at Fuzing kind of in the mid-teens, I guess, prior to the last couple of quarters. Is that sort of the level that you can recover to in Fuzing in '09 or maybe when do you think margin will start to go back up at Fuzing?

Our expectation is that we would be able to increase our production volume to the point, Matt, where we would be able to get a higher level of foreign military fuze sales in the second half of the year. So that answers the timing question that you had. I think in terms of normalized margin rates that we would get to, I think it would be lower teens rather than mid to upper teens, which I think you may have said.

So kind of 12%, 13%, something like that.

I think that's fair.

Fair enough. Moving on. Neal, you talked a little bit about in the distribution business you are still seeing weakness in kind of the markets that have been weak. Were there any other additional end markets that started to show a change in the quarter or is it still pretty similar to what you were seeing late in 2007 in terms of the markets that are strong versus the ones that are showing some weakness at KIT?

There has been no change. The markets that have been strong for us continue to be strong, mining in particular and also food and beverage. But mining has been extraordinary strong for us. We continue to see very difficult markets in the housing and building material markets and the automotive markets and, as you know and as we have talked about, those are markets that we have historically not been very strong in, so it has had a somewhat muted impact on us.

Neal, as I look at your business, the new national accounts agreements that you guys are ramping and adding these new locations for, those are food and beverage agreements, correct?

They are predominantly -- you are exactly right, they are predominately food and beverage.

Those are the good exposures, so I guess kind of it sounds like for the rest of '08 you think kind of maybe this 5% or 6% type growth is doable for you guys?

Yes and remember, we will be adding -- we will also -- two things to keep in mind, Matt, one is that these started to come in last year. Some of that will be as we get into the third and fourth we will be -- some of this new account stuff will already be in there and we also will be adding ISC.

Sure. Oh, yes. No, I'm just thinking organically. Obviously, ISC is going to help push the rest of the business up. Where are you in terms of ramping the new national accounts from an expense standpoint and kind of where do you think the lever point is in terms of starting to see the operating margins for the KIT business start to show some meaningful improvement?

They vary from branch to branch depending on the presence of whether we did it as a pure greenfield or whether we did it in conjunction with a national account. And the majority of them are in connection with a national account and what typically happens is that we start with the expenses on day one, as I indicated, and then they ramp up over time and that time can be from one to three years, but generally it is somewhere in that period that they turn profitable and then start contributing. It does take a little bit of time. The way we typically look at this is over time they just kind of roll in and the ones that are rolling in add profits and the new ones diminish it a little bit. But because of the larger number it has had a little bit more of an impact. Again, I would look to somewhere in the neighborhood of between one and three years before they really start contributing which is --

Fair enough. A couple more things and I will get back in queue. One just kind of housekeeping item. Are you guys prepared to talk at all about what the earnings accretion from ISC could be in '08 and in '09.

We are still working on that. We are going through the valuation now and I expect that we will be able soon to talk about the earnings accretion in '09, which will be the first full year and I think this year we will have some accretive earnings but probably not much.

Last thing just back to one thing on Wichita real quick. In the third quarter of 2007 and the fourth quarter of 2007 you had also had some issues there. You are telling us there were about $4.5 million in charges there this quarter. I don't recall if you guys broke out sort of any type of charges in the third and fourth quarter. Was there anything that you would term kind of a charge from those quarters or would you really think that this $4.5 million in charges this quarter was sort of non-recurring?

The ones last year tended to be more in line with the $2 million with a cost growth type things and they -- the tooling I think we can pretty much single out as being, the other ones tend to go from just EAC, where we do update estimates and that's essentially what we do is we look at these contracts on a quarter by quarter basis and to the extent that we have a estimate that goes higher, we accrue for it and that's where some of these charges are coming from and where the majority of these charges are coming from and they relate to inventory. They relate to overhead rates and things like that as the business has slowed down a bit.

Bob, are you guys renegotiating those contracts at all with those customers to try and help the margins for those contracts?

We do have -- as you can imagine one of the things we didn't really get into was a lot of what's gone on with new programs is you go through a variety of changes and that's been part of what is complicated these is that these programs have come with a lot of changes that have gotten in and we are in the process of going through that with the customers and looking for repricing, yes. That's part of what we still have got to work through.

Okay. Appreciate the answers, guys, thanks.

Your next question comes from the line of Steve Levenson of Stifel Nicolaus, please proceed.

Thank you, good morning. Just to make sure I'm clear on this, in other words there are some reserves related to those charges. Some of it has to do with what you might call inventory costs that you may yet recover or these are all charges that you fully expect to be the end.

No, we don't expect to recover the charges that we have taken. These are charges that we have got to bring us up to date. Again, we do that at the end of each quarter we look at these. So these aren't things that we think we reserved a lot for and will turn around. These are things that we will work through and we will work very hard to make sure we don't repeat these charges as time goes on.

Okay. Thanks. On the Seasprites you talked about government approvals and I guess there is some documentation that has to be filed by the Australian side of things. Do they have an incentive to do that. Do you expect there to be anything that hinders your obtaining government approval?

Steve, they absolutely have an incentive to do it because the sharing of the revenues is incumbent, obviously, on the transfer of the assets to us and then our marketing plans going forward, which they will also support us with. I think that they have already started the process. We do not anticipate issues with it and this is one where it is in the best interest of both parties to get it done quickly.

What do you see is the competition for selling those helicopters. Are they, for example, used Sea Hawks or other foreign helicopters or does it come down just to a matter of pricing them right with the buyers that you think are out there?

Good question. There is always going to be a range of competition for us in the marketplace as we go to re-sell the helicopters. I think that, obviously, we have an advantage here from a couple perspectives. One, we do have highly capable aircraft with very modern avionics. We also have them available now for people and the third is that while certainly our initial efforts will be with some of the existing fleet operators for the Seasprite, one of the advantages that we have with this program is that we essentially have a turnkey aircraft capability that we can provide. Not only the aircraft themselves and the spare parts, but also all of the training equipment, including a full motion simulator. So it is one where if there is a new government customer, we have the entire package that we can provide to them at a very competitive price and while some modifications may be required to meet their specific mission requirements, a fairly short lead time as well. So we think we have some advantages.

Thank you. Last one on the Specialty Bearings. I know you recently completed a new bay in the factory. Would you say that is operating at full capacity now or do you have a ways to go on that? Do you see demand picking up that you might see additional expansion up there?

Another good question. If you were to come up and visit us you would see that right now the Specialty Bearings team here in Bloomfield is going through, as we speak, some relay out of their facility that is enabling them to improve the material flow and their output. So we don't look at it so much as -- have we filled the space? Absolutely. Are we at maximum capacity? I don't believe so. And they are taking some steps right now in the natural progress of their lean activities that involves some layout changes that will enable them to increase capacity within the same footprint. I think we have said before that we have got capacity for the next several years and I feel confident that that's the case. I'm looking forward to the opportunity to have to add to that plant.

Okay. As far as materials go, how is the availability and pricing?

To be frank, in all of our discussions with that team we have not had a lot of discussion around either limitations with getting material or that the material that they are using is having an extraordinary impact on them. Haven't seen it yet, but I'm not saying that we won't encounter some of it just with the dynamics of the commodity market today.

Are there passthroughs with any customers or all customers or none for increased material costs?

I would believe that we would have some passthrough on the --

Plus it turns over pretty quick. It doesn't tend to be too big of an issue.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Edward Marshall of Sidoti & Co., please proceed.

Good morning, gentlemen. Quick question on Specialty Bearings. Margins seem to have ticked up in the first quarter when you compare that to the first quarter, in fact, most of the year in 2007. Is this something that we can find sustainable throughout the remainder of '08 and into '09.

Ed, we typically do a little bit better in the first quarter and I think if you kind of look at the way the pattern went last year, you will kind of see a similar pattern but I think the first quarter tends to be a little bit stronger.

Is there also some seasonality in the third, because that looked like it was the highest of the margins for 2007 at 35%?

Not particularly, maybe some. I mean, we do -- some of it depends on some manufacturing things and we do have things with the summer being vacation time and things like that. But for the most part, there is not too much seasonality with it.

So the blended rate for the year of 2007 is probably the run rate going forward, would that be fair to say?

I think that's fair.

You mentioned backlog in that segment. I don't see that in the Q that was released last night. Do you have a number for that?

We don't release an updated number. You will see it in the K and it probably hasn't changed a whole lot. I think orders remain strong so -- .

Okay. And refresh my memory, the housing, automotive, construction and the Industrial Distribution segment, what is the percentage of the makeup of your total revenues there?

Our housing related we had said last year that it was about 10%. I think that as we reassess it now looking at the year as a whole that was about 7% and frankly auto was negligible for us. We don't have much presence in the Michigan market and limited in the Tennessee market as well. So auto would be negligible.

Okay. Thank you, guys, very much.

Thank you.

Your next question comes from the line of Robert Kirkpatrick of Cardinal Capital, please proceed.

Good morning. It is interesting to hear so many questions about Kaman. Returning to Wichita for a minute, do we anticipate that there will be the possibility of more charges in the next quarter, assuming that you don't uncover anything? In other words, is there any accounting reason why there were -- charges would not have been taken this quarter?

We think we are up to date on the charges. As we go forward, we are improving operations. So we do assume that we won't get them all right in the second quarter. So there will be some more of what we have seen in some cost growth areas, but it will be all what comes out of the second quarter. We are up to date as the end of the first quarter and what we do, Rob, is we kind of look at it, what do we have to do to finish the contract? So anything where we have slippage in the second quarter from where we looked at it at the end of the first quarter, we would factor in an estimate to complete type of an adjustment on the contract as contract accounting. So chances are we will continue to have some of that over the next quarter or two, but that's the stuff we are working very hard to get inline and the team from Jacksonville is leading that.

Okay. And then Neal, how has the difficulties in Wichita affected the Sikorsky relationship, particularly with respect to the BLACK HAWKS and the joining that you have been doing in Bloomfield?

Rob, it is one where certainly being late on the tail rotor pylon for the Canadian maritime program is not something that you ever want to encounter for any customer, let alone one of your biggest customers. However, they recognize that our Jacksonville facility is one of their best suppliers and, in fact, my discussions with Sikorsky over that really influenced the decision to consolidate operational management underneath the Jacksonville leadership team. So while I think that their expectations are that we will make some significant improvements quickly on the TRP for them, they believe that we have the right people with the right level experience now to make sure that we are ready to support them over the life of that program and hopefully extensions that would use that same composite tail rotor pylon as they continue to market that maritime aircraft.

Does the suspension of the ISO9000 certification for that facility, what do you have to do to earn that back and what has been the impact on the businesses that occurring?

There has been a number of impacts as you can imagine. Number one, it slows down the shipment schedule because we have to do inspections of each individual part before they are released for shipment. It slows down the top-line revenue and increases our costs. We have been putting significant effort into the revamping our quality systems there, which were sufficient but it was one where our training, as I mentioned in my earlier comments, our training was not sufficient and also our follow-up and monitoring of the quality processes was not as good as it needs to be. Those are the things that we have to improve in right now and if you were to ask us what our number one priority is right now for the facility, it's that exact item.

The fact that one of the -- I think your K says, excuse me, your Q says that one of the customers has put it on probation status.

Correct.

What does that mean.

What that means is that that requires us to go through a third party certification of the product before it ships from the facility.

And that's something you are paying for?

That's correct.

And is that all part of the extra $2 million in costs that we were talking about.

Yes, it would be.

Okay. And is that something new that will start in the second quarter or was that something that occurred during the first quarter in terms of needing the third party certification.

It occurred during the first quarter and I expect that it will continue through the second quarter.

Okay. Switching over to the Joint Programmable Fuze. Why is the Joint Programmable Fuze still at breakeven and when should that change? Is that a volume per month thing or is that something about moving through certain number of lots that have been ordered?

I think that we have worked through a lot of -- I mean, we continue to have interruption and things in things like that, which do put some addition to the costs. But as we have said before, we really need to address the pricing and look for ways and we are doing some of that and we will continue to do that.

So you need to address the pricing as well as -- part of that is through the redesign, Bob?

Part of the redesign is to make the cost less, but we are also looking at ways that we can increase the pricing on the outlofts.

And Neal, does your longer term lower teen margins assume that the Joint Programmable Fuze stays around breakeven or does that assume that it comes up to the margins that you think it can get it up to?

I think it assume two things or it is based on two things. One is being able to get some of the price increases that we are working with the U.S. government on right now and also a higher mix of foreign military sales. In the first quarter we had very, especially compared to a year ago period, we had very low number of fuzes that were sold FMS. That is really where the margin improvement would come from in the near-term is really mix.

Okay. Switching over to KIT. How does the accounting work, Bob, in the second and third quarter? Should we see immediate accretion from the volume flowing through the system or is that not necessarily something we should expect in 2Q and 3Q.

No, what ends up happening is that you go through the valuation, you typically -- the inventory gets marked up a bit. And so it takes a turn or turn and a half before you really get that through the system. So it is really later in the year where we will start to see improvement on the earnings line.

So more fourth quarter event?

Yes.

Great and then do you want to mention anything more about the joint venture with Lockheed given the fact that you are willing to put up some cash to buy some K-MAX helicopters back for this bureau program. Can you give us any type of update on that.

Sure we would be happy to, Rob. Actually we had a joint demonstration with Lockheed just last month, I think it was the 23rd at Fort Eustis, Virginia, where we actually had a 45 minute flight of an unmanned K-Max helicopter that integrated the Lockheed Martin mission management system and they moved around 3000-pound sling loads and they were able to actually modify the mission during flight so that if they had to change the mission profile or way points that it was going to to be able to demonstrate that kind of flexibility in the mission management system and how it is integrated into our aircrafts. There is no question that it is early in that process, but we continue to get very, very strong support from Lockheed Martin, I think which was indicative of not only us buying an aircraft but them buying two aircraft as well to support this program and the integration of their systems onto the aircraft is proceeding and frankly it was a pretty impressive demonstration.

Great. I see that you bought these at a government auction. I assume that the government is not necessarily using e-bay these days but that there is something equivalent.

Exactly. It was surprisingly equivalent. They were aircraft that were acquired from a Department of State auction. They were down in Columbia. So we just recently got them back up here.

Thanks so much. I will yield to someone else.

Thank you, Rob.

Your next question comes from Jerome Lande of Millbrook Capital, please proceed.

Good morning. Apologize if I cover something that has already been covered, I had to jump off for a second. But I am still not totally clear on the use of cash in the quarter. Can you give a little bit more detail on the receivables jump, the inventory jump as well, though it sounds like you are attributing some of that to the Wichita situation?

Actually, we are attributing most of it to the receivable piece which a big piece comes from distribution comes about and that's where the largest number was. Comes about from the fact that they have -- fourth quarter sales are lower than the first quarter and also here's the holidays impact the sales, they come down. We typically have good collections those last couple of weeks in December and the receivables come down and then they build back up with the higher sales in the first quarter and that's really where a large piece comes from. We also had a little bit of that in the Specialty Bearings side, where we had increased sales. But the interesting thing is even with these increases that nothing happens in terms of day sales outstanding that says anything is out of line.

I'm sorry, go ahead.

Secondly, what I did say was that on the inventory side as we are ramping up the production on the JPF and we are seeing higher inventory numbers there and that's the other, one of the other larger jumps in the usage.

I guess the question is kind of the rest of the year and what you expect cash flow-wise. In some years you recouped that seasonal receivables shift you are talking about, some years you don't. What are we looking for this year?

I would think that the traditional pattern would be that we would recover the receivables as we go on in the year and particularly as we get at the end of the year. And in terms of the issues at Dayron, we are working very hard to improve the cash usage down there, the Dayron, the Fuzing piece.

Got it. Thanks. You mentioned earlier total orders for the JPF of $155 million. How much has been delivered, how much of that is yet to be delivered?

We are actually back -- the last two options 4 and 5 are not delivered yet. We are into option 3, I think, is where we actually are delivering now.

And can you quantify that in terms of dollars?

Option 5 was around $28 million and I don't have -- hold on just a second. $60 million approximately in total in backlog.

And can you discuss backlog for the entire enterprise?

I don't have all those numbers right in front of me. We do have all the backlog numbers in the 10-K by operating segment. I don't have those numbers right here in front of me. Do you have a specific question?

Really just as sales continue to ramp and your growth has been good, what if there is any material change?

We are getting good strong orders in Specialty Bearings, nothing else has changed significantly. I guess the one place that I had mentioned that would have an impact on backlog is where the service contracts and helicopters will be going away and there will be a period of time before that is replaced with other customers who acquire the helicopters and look for similar services.

Since you brought that up on the services, obviously there is a -- well, I shouldn't say obviously. It would appear that there was probably going to be a markdown in the value of the helicopters, vis-a-vis what Australia paid for them years back. Services, is there a similar deflater we should expect in the ongoing servicing for these once they find a new home?

In terms of -- it will vary, in Australia, we actually had a facility. Probably, depending on how the helicopters get sold. If they were all to be sold in one lot, we could end up with a similar situation. If we sell three here and four there, we might not duplicate and have the customer needs. So that one we will kind of play out as we determine where we ultimately sell these helicopters.

Just to clarify the language here, when you say similar do you mean a similar deflation in value of the services contract or similar to the $13 million that you are no longer going to book?

No, in terms of when you talk about a similar deflation. I mean, they paid a lot of money for these helicopters. A lot of it was -- it was $600 million, $700 million and it had to do with -- a lot of it was developing the I-TAS system. We don't expect that we would turn around and sell them for $600 million or $700 million. The number would be substantially below that, but that will be determined as we play that out and at this point I can't really tell you. We are actually -- we will certainly are going to try to go out and do the best we can with these in terms of selling them and as we do that, we will report it.

Thanks. Question for Neal, when you think about the additional opportunity out there in national accounts, are you able to quantify that and give us a sense of how big a boggy this is?

We haven't done that. We have been successful with our national accounts, in particular over the course of the last 18 to 24 months. So I don't know that I can tell you that there is a BOGEY that we aim for. We pretty much kind of take them one at a time and work very hard to keep them when they are ours and work -- and --

Ladies and gentlemen, please stand by. We will return to you momentarily. Once again, ladies and gentlemen, thank you for your patience. We are experiencing technical difficulty and we will return to the program shortly .

Are we back?

Not yet.

Sirs, you may proceed.

I'm sorry, are we back?

Yes, I think so.

Well, I can't resist for those of you that have followed us for a while saying that Russ would never have let that happen. (laughter) Are there any additional questions?

Operator, are there any additional questions at this time?

Yes, sir, you do have a question from the line of Margot Murtaugh of Snyder Capital, please proceed.

Thank you very much and hello.

How are you today?

Fine, how are you?

Great, thank you.

So you talked about trying to get pricing on the JPF from the government. What is the timing? What are the prospects of this?

I think it will be as we go forward it -- and it will come in stages. So -- and it's -- it will happen as we go forward with the options and it will come in pieces. It is not going to be next week or next quarter.

Okay. And then I think you said -- your production now on the JPF is $5000 a month, did you say?

No, we achieved $5000 for the quarter, Margo.

And your goal is to get to $6000 a quarter.

By the end of the year, yes, that's correct.

And do you have firm foreign orders that are on hold? Are you implying because you have to get the government work done first?

I'm not going to tell you that we have any meaningful backlog today for foreign orders. But there is -- we have had foreign sales in the past. We expect to have them in the future but it is predominantly right now driven by the fact that we need to meet the demand for the U.S. government prior to being able to effectively market to foreign militaries. We are a little bit hamstrung as we ramp up but again, I would say that we had -- we demonstrated good progress in the first quarter of this year.

And we do have orders in the queue, smaller ones and they kind of get filled fit in as we work through achieving the government contracts and that's similar to what we have experienced in the past.

Do you need more capacity to -- I mean, once you got the -- let's see how does that work. I'm just trying to understand how you do the government work and the foreign work. Is $6000 a month kind of your goal for the near-term of production, the $6000 per quarter.

That is our current goal and again, that's the level at which we will --

That's really what we are targeting and we have added -- we are in the process of adding the second line right now that will enable us to get to that $6000 and it really comes down in large part to consumption by the U.S. government and we all know what that means to us right now in terms of our action both in Iraq and Afghanistan. It is really going to be -- it is really going to depend on U.S. government requirements.

And I think the other thing to point out is that they did provide us with a facilitization contract a year and a half ago and used that to set up a second site so that we are actually producing in two sites and that's partly so that there are two sources generating fuzes and also to help us find ways to design the fuze more efficiently for production purposes.

Okay. Also in the past you have talked about doing more assembly work in Connecticut for Sikorsky. Is that coming along or what's the progress there?

We do, Margo, we do work in two locations for Sikorsky. We do, as we have talked about quite a bit, in our Jacksonville facility we do all of the cockpits for the BLACK HAWK and we have a requirements based memorandum of agreement with Sikorsky where we will be doing about five joins a month through the course of this year here in Bloomfield and some installation work as well. That continues to be a business that is important to us. Are we working with Sikorsky to try to increase that? Absolutely. We think that we have got tremendous amount of capability both here in Bloomfield as well as Jacksonville and Sikorsky's business is growing so rapidly right now that they certainly need good suppliers with a demonstrated track record to help support them and I think we are well positioned in both Bloomfield and Jacksonville to do that.

And finally, your tax rate was 35% I believe. Is that the ongoing rate?

Yes, it might go up a bit to 36%, but somewhere in that neighborhood.

Thanks a lot, guys.

Thank you, Margo.

And that does conclude the question and answer session. I will now turn it back to management for closing remarks.

We apologize for the technical difficulty. Thanks for joining us today on the conference call and we look forward to speaking with you again when we report second quarter results. Good-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day