Kaman Corp (KAMN) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 Kaman Corporation Earnings Conference Call. My name is Francine, and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to the host of today's conference, Mr. Eric Remington, Vice President of Investor Relations. Please proceed, sir.

Thank you, Francine, and good morning everyone. This is Eric Remington of Kaman Corporation. And I'd like to welcome you to the company's 2008 Third Quarter Conference Call. This call is being web cast over the Internet at www.kaman.com and an online archive of this broadcast will be available within one hour of the conclusion of the call and will be available until November 7th at the 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 assurance that such expectations or any of these forward-looking statements will prove to be correct.

Important risk factors that can cause actual results to differ materially from those reflected in the company's forward-looking statements are included in our earnings release filed yesterday and in filings with the Securities and Exchange Commission.

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

Finally, our discussions 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 web cast section on our web site.

With that please turn to turn Exhibit One and I'll turn the call over to Neal Keating. Neal?

Thanks, Eric, and good morning everyone. Given the state of the financial markets and broader economy, I would have to say that we are very pleased with Kaman's performance in the third quarter. I'll get into the specifics behind our performance in a moment, but in brief it reflects continued excellent performance at Industrial, Distribution and Specialty Bearings, solid execution in other portions of our aerospace segments and continued progress in addressing the issues at our Wichita facility that we've been contending with throughout the year.

Although not a third quarter event, we continue to invest in our future growth through strategic acquisitions and announced our Industrial Distribution segment into the Puerto Rican market, with the acquisition of INRUMEC, which we completed earlier this year.

Sales for the quarter came in at $335.1 million, a gain of about 22% compared to $274.9 million last year, reflecting a combination of both organic growth and our recent acquisition. Excluding the contributions from Brookhouse and ISC in the period, organic growth was a strong 11.5% for the quarter.

Operating income was $24.4 million in the quarter and included approximately $3.9 million in costs incurred at Wichita as we continue to manage through those issues. Net income for the third quarter was $13.5 million, or $0.53 per diluted share including a charge to unwind a hedging contract at Brookhouse, which had an after tax impact of $0.05 per diluted share.

Bob will discuss this in more detail in just a few minutes.

Now let's get into some details on the individual segments. I'm sure you're all looking for an update on what's been going on within the Aerostructures business, so let's start there. Just as in the second quarter, out performance in aerostructures was impacted by continued operations inefficiencies in our Wichita facility that reduced profitability by about $3.9 million.

We have made and continue to make concrete progress at Wichita. During the quarter our efforts resulted in a key customer removing us from probationary status, allowing us to resume production on all of their programs. We also successfully passed the AS9100 audit in August. And I am pleased to be able to say that we received our recertification in late September, actually slightly ahead of our previous schedule.

While we are making progress, we are not done yet and we still expect it to take the rest of the year to resolve these issues in Wichita. Additionally we believe it will take added base to return the facility to more acceptable performance levels.

I'd like to take a minute to discuss here why Wichita is so strategically important to us. This will be a cost effective facility located in the second largest aerospace market in the United States. The business provides us with the capability in composite structures that is critical to aircraft manufacturers as carbon fiber becomes an even more significant aspect of aircraft design and manufacturing, keeping us competitive into the future.

Finally we believe we are making the right investments in both people and equipment to restore profitability, enhance its competitive position in the marketplace and prosper in the future. The balance in the Aerostructure segment performed well, reflecting continued solid performance on the BlackHawk program as well as the C-17 and 777 programs for the Boeing Company.

On the BlackHawk, we delivered 31 cockpits to Sikorsky during the quarter, up from 23 a year ago. To date Sikorsky has placed orders for 549 cockpits, against which we have 248 deliveries. This continues to be an excellent program for Kaman and we expect to continue delivering under the current contract through at least 2010.

On the C-17 we received an order for an additional 10 ship sets during the third quarter as a result we now have firm orders on this orders for shipments through the end of 2010. Also during the quarter we hosted a ceremony at our Jacksonville facility with officials from Boeing and the US Air Force to launch Kaman's participation in the A-10 program. The event was a success and we think all visitors went away being impressed by our capabilities and our workforce.

This is a great program for Kaman. Not only does it play to the competencies of our Aerostructures business, but it will also add significantly to our backlog. Initial deliveries on the program are expected to begin in 2010 and full production rates on the a-10 contract should be reached in 2011.

The third quarter also marked the first full quarter of contribution from Brookhouse. While it is still early in the integration process, both sides are already seeing benefits from the combination as Brookhouse provides an entree for Kaman into opportunities in the UK and Europe that we did not have before. And Brookhouse as part of Kaman is itself now able to pursue contracts that it would not have had the scale, breadth or global reach to win previously.

We believe our platform diversification and weighting toward defense should buffer us somewhat from the challenges that may face the commercial aviation market due to the current economic crisis. Including Brookhouse, about 35% of our sales in aerostructures are to be Commercial Aerospace sector and these are spread across a number of platforms from Boeing, Airbus and others.

Overall while the macroeconomic environment is certainly a cause for caution and concern we believe the aerostructures segment is well positioned given current market dynamics.

Command Precision products, the former Fuzing segment turned in a strong performance in the period as the third saw a 47.5% increase in sales and much better margins driven by a strong performance in our Legacy missile fuzing business.

In the 2008 second quarter we saw JPF production rates meet our stated sustainable goal of 2,000 fuzes per month and we actually exceeded that goal in the third quarter. While there may still be some lumpiness in our production rates going forward, this is certainly an encouraging sign and puts us in an excellent position to be able to fulfill our obligations to the US military and complete some higher margin FMS sales in the fourth quarter.

As reported earlier we still believe that our decision to re-compete the JPF for Option six will result in a higher price from the US government, however, we will not see that price before 2010.

In the helicopter segment depo level maintenance and upgrade work for the Egyptian government and our subcontract work for fuselages and mechanical assemblies for Sikorsky continued to be the primary revenue drivers for the segment in the third quarter.

While sales in this segment were lower than a year ago due to termination of the Australian program, the segment saw a substantial increase in profitability. In part this improvement reflects the lack of charges relates to the Australian Program in the current period versus an $800,000 charge last year.

However, the segment's results also reflect improved performance on subcontract programs. In addition we are pleased with the progress we've made on the settlement with Australia. As part of a multi-step process we have received the necessary approval from the US government to physically transfer the aircraft back to Kaman and as a result we are in the process of preparing the aircraft for shipment back to the United States.

We expect to take physical delivery this quarter at which point we will request the US government to approve the commonwealth transfer of title to Kaman.

We have also been active on the marketing front, and while I would caution you that we are in the very early stages of this process, we have been pleased by the level of activity to date. For example at the end of September we displayed one of the Australian aircraft at the Black Sea show in Bucharest where several nations expressed interest.

We've received approvals for 38 marketing licenses and are beginning to have conversations with some of these countries regarding the aircraft. I would reiterate, however, that the sale of these aircraft is a longer term proposition.

Rounding out my discussion of aerospace, our Specialty Bearings segment recorded another quarter of excellent performance driven by increased shipments across several of the markets that they serve. Sales in the segment were up nearly 20% compared to a year ago and slightly better sequentially than the performance achieved in the second quarter. While operating margins declined slightly from second quarter levels as expected, the overall performance of the business continues to be very strong and our backlog remains robust.

Moving on to Industrial Distribution, this segment once again performed very well in a challenging market environment. Our total revenue growth of 14.7% was evenly divided between continued robust organic growth and the contribution from ISC, which again performed in line with our expectations and was slightly accretive in the quarter.

We believe our third quarter organic growth rate of 7.1% following last year's 8.4% is near the top of the industry and speaks to the competitive in roads we are making. Even better operating profits grew at a faster rate indicating that we have become more efficient converting these sales into profits.

From an end markets perspective, the countercyclical sectors that have been a demand driver for KIT in recent periods including mining, energy, and food continued to be strong in the third quarter. In addition, KIT's performance reflects the continued success of our national accounts strategy.

We were pleased to sign a number of renewals during the quarter including Del Monte foods, Titan cement, Solo cup and the Campbell's soup company; clear indicators that our commitment to service and the expansion of our distribution network is generating results.

On the subject of expanding our national footprint, just after the close of the quarter we announced the acquisition of Puerto Rico based Industrial Rubber and Mechanics Inc, or INRUMEC. If you missed our press release on this, INRUMEC, which had sales of $13 million in 2007, is one of the leading distributors in Puerto Rico, with a rich operating history dating back to 1963. As is the case for KIT, INRUMEC is widely diversified across a number of industries including food, beverage, pharmaceuticals, cement and aggregates.

This is another great transaction for Kaman that does a number of things for our business at once. It broadens our geographic footprint, immediately giving us leading presence in the important Puerto Rican market that would have taken years to build out organically. And allowing us from day one to support our current customers and national accounts with business on the island.

I've mentioned in past calls that a period of economic softness provides us with the opportunity to take market share from smaller players. We believe this secular trend continued in the third quarter with KIT gaining share based on our national reach, financial strength, and purchasing power.

Furthermore, the recent events in our financial and credit markets have underscored just how important liquidity and access to capital are in this and every other business. While I can't tell you what the ultimate impact on the economy will be, I can say that we expect our scale and financial strength to enable us to take advantage of opportunities that will come from smaller less well capitalized participants. And we think we will come out of this period in a significantly enhanced competitive position.

I'll be back in a moment to wrap things up, but now I'd like to turn it over to Bob Garneau to walk you through the financials in more detail.

Thanks, Neal. I'll start today with a discussion of our performance for the quarter on a consolidated basis, after which I'll get into more depth on each of the segments. To begin with Exhibit one, as you have seen, it's a recap of the sales and net earnings as reported for the third quarter of 2008.

If we move on to Exhibit two, there we have prepared a non-GAAP reconciliation to show the effect of the add back of the million six pretax loss on the derivative contract, which equates to $0.05 per share diluted to the third quarter results. On the right side of that exhibit we have shown the 2008 figures where we add back to $800,000 Australian contract loss, which equated to $0.02 per share.

If we turn to Exhibit three we show the non-GAAP reconciliation for the nine months, which includes the goodwill impairment charge of $7.8 million, which is not tax deductible and equates to $0.31 per share diluted for Wichita in addition to the derivative loss.

The nine months of 2007 reflects cumulative charges for the Australian program of $5.6 million, which equates to $0.14 per share diluted and it included the $800,000 that we previously mentioned. I would also like to point out that through the first none months of this year we have taken $10.1 million in charges as special costs related to the operational issues at Wichita that have not been added back to these non-GAAP analyses.

If you turn to Exhibit Four, I will discuss the highlights of our segment results. In the aerospace segment, aerostructures segment, sales growth in the period primarily reflected the contributions of Brookhouse in its first full quarter with Kaman as well as the organic growth related to the Blackhawk program at Jacksonville.

Brookhouse contributed $15.2 million sales for the quarter, was profitable and was slightly accretive from an EPS standpoint. You should note that the charge taken for the derivative contract is below the operating profit from continuing operations line and is not in the segment number.

Also as previously pointed out, the decline in opearting income reflects the inefficiencies and charges in Wichita that continued to affect the segment. Of the $3.9 million in charges taken in the quarter, $1.8 million represented inventory adjustments with a balance being programmed and overhead rates adjustments.

The inventory adjustment essentially deals with one of the two significant risks we identified in Wichita earlier in the year, the second being the final pricing on the TRP contract.

In Precision Products net sales rose 47.5% in the third quarter of 2008, reflecting the strong JPF sales growth which was driven by the continued solid production and delivery performance of the fuze.

Operating income, while up in absolute dollars was down slightly as a percentage of sales; this was due to the fact that the higher sales for the JPF fuze went primarily to the US government which are essentially at a break even margin.

We do believe however, that our strong production performance puts us in an improved position to begin allocating certain of these fuzes to foreign militaries in the future, which will carry the higher operating margins.

Also please remember the 2007 comparative numbers still had the 40 millimeter product line figures in them, which equated to $3.9 million in sales.

In the Helicopter segment net sales we down slightly from the third quarter of last year. This sales decline reflects lower spare parts and service revenue related to the Australian program as our activity there winds down, as well as lower sales on the Egyptian contract due to some non-recurring work performed on this contract in 2007.

Sales to both Sikorsky and DHI were higher in this quarter. Operating income in the Helicopter segment improved over the year ago period due in part to the increase sales just mentioned but also due to the absence of the $800,000 charge the Australian program incurred in the third quarter of last year.

We again saw strong performance from Specialty Bearings segment in the quarter with sales increasing 20% over the third quarter of last year driven once again by strong demand across all our markets. We indicated in the 10-Q that sales for the fourth quarter would be slightly lower than the fourth quarter of 2007, in fact we expect the sales to be slightly higher in this period.

Operating margin was 37% of segment sales from 35.3% of net sales a year ago. Again we are very pleased with the performance of this segment. Net sales in the Industrial Distribution segment came in at $214.3 million compared to $178.1 million the third quarter of last year. This strong topline growth rate of $14.6 represented another solid quarter for KIT.

Of this growth about 8% resulted form the contributions of the IFC acquisition, while the remainder was organic growth generated through the success of our national account programs and the other factors that Neal described earlier.

Operating margin improved 10 basis points to 5.2% of sales from 5.1% of sales in the third quarter of last year. The improvement in operating margin relative to the year ago period reflects leverage from higher sales and a slower pace of greenfield openings compared to last year.

We are also beginning to see more positive contributions from the new branches opened during 2007.

Turning to Exhibit Five, corporate expense declined relative to the third quarter of 2007 coming in at $7.4 million versus $9.5 million a year ago. This improvement reflects the lower, the effective lower projected incentive compensation in 2008 as well as better experience under our group health insurance over the prior period.

Last quarter I indicated that you should expect corporate expenses to be between $9 million and $10 million per quarter, while that should hold true for the longer term, lower incentive compensation and one time items for 2008 should keep the fourth quarter down in the low $8 million range as well.

Also as you can imagine, the severe downturn in stock prices has had a large downward impact on the investments in our pension plan as it most likely has had on many such plans in existence today. We are still assessing the impact of this on our plan, but this most likely will lead to higher pension expense and cash contributions in the future depending upon the timing and extent of the market's rebound.

Fortunately we were reasonably well funded going into this market melt down. Let me take a minute now to walk you through some balance sheet and cash flow items highlighted in Exhibit Six. The business used cash of $38.5 million for operating activities through the first nine months of 2008; primarily reflecting the working capital investments necessary to fund the sales growth seen in our operating segments along with a tax payment resulting from the gain from the sale of music and lump sum retirement payments made to two former executives.

We used a combination of cash and bank debt to fund $111.9 million in investing activities in the first nine months in the year, primarily for our acquisitions of Brookhouse and ISC along with our capital expenditures.

Overall our balance sheet remains strong, as evidence of this we closed on a $50 million term loan with our banks earlier this week. We are pleased that in a very difficult lending environment we were able to raise this additional capital to provide us with further liquidity and allow us to continue to execute our growth strategy as we navigate through this difficult period.

At the end of the quarter we had $72.9 million available on a revolver that we can draw upon. As of today we have added approximately $50 million to that number.

Finally I should mention that during the quarter, we completed the purchase of the portion of the Bloomfield campus leased form NavAir and as part of that agreement have assumed responsibility for the environmental remediation at that facility as may be required under the Connecticut Transfer Act.

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

Thanks, Bob. I'll just conclude by reiterating that we're very pleased with our performance in the third quarter, which demonstrates the continued successful execution of our operating strategy across all of our business segments. Clearly we are faced with a difficult macroeconomic environment, which calls for caution as we move forward.

We do however believe that we are well positioned to navigate these difficult times and continue to grow the business by investing for the long term. In aerospace apart from the macro concern of what the global economy will mean for air travel and a short term impact of the Boeing machinists strike on commercial aerospace business, we believe that we have strong diversified base. And that will provide key strength going forward.

Hopefully the strike will be resolved tomorrow and Boeing will resume production quickly. The impact on our business was minimal in the third quarter and while we may see some revenue shift from the fourth quarter into the first quarter of 2009, it should not be significant.

At KIT because of our participation in industries like pharmaceuticals, food and mining, we expect demand to remain fairly steady. And our focus will be to build on our competitive position. We will continue to build geographic network through both organic growth initiatives and strategic acquisition, while at the same time expanding our product offerings to ensure we are providing current and perspective customers with the products they need when they need them.

At the same time we will maintain our diligent focus on cost management to ensure that we are maximizing leverage from our sales base and providing our customers with the most efficient service offerings available.

Overall I'm very pleased with the progress we've made this year, as Bob pointed out, we are in an excellent position financially and have ample liquidity with which to fund our current business and invest in our future prospects through both internal activities as well as value enhancing acquisitions.

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

Thank you. Francine, may we have the first question?

(Operator Instructions) Our first question comes from the line of Matt Duncan with Stephens, Inc. Please proceed.

Good morning, guys and congrats on a nice quarter.

Thank you.

First question I've got, Neal, I just want to make sure we've got the numbers right on the impact from the Boeing. So in the 10-Q you guys had said that you thought it would be, Specialty Bearing sales would be down slightly from 4Q '07 ,I guess now you're saying they would actually be up slightly. So can you maybe help put some brackets around that for us? If we think about what the right dollar number to think about is there and then how that would impact you guys' profitability-wise?

We, Matt, you're right. We had anticipated, we certainly didn't anticipate that the Boeing strike would end as potentially quickly as it did. We had anticipated that we could have as much as $3 million worth of volume that would have moved out of the fourth quarter and into the first quarter and, frankly, some of that would have been likely lost simply because they can't ramp up their own production rate.

So that was really what we had intended when we looked at the queue and did it, however, in re-examining it today with the potential for the strike being ended tomorrow and back at work next week we think that again we'll be able to recover a significant portion of that and end up with our fourth quarter performance in '08 slightly above our '07 numbers.

Okay, so '07 was $29.8 million, third quarter of '08 was $36.8 million, so probably below 3Q but still above 4Q '07?

Yes.

Okay, fair enough. You gave us a little bit of commentary on KIT about some of the end markets you see that are still pretty good. Are seeing any end markets starting to deteriorate with the industrial economy looking like it's slowing down? And if so, how do you think that impacts the KIT business going forward?

We -- I've been listening to calls, I anticipated that question. And we have not as of this time seen the slowing yet. Do we think it's going to inevitable come, Matt? Yes, we do, however I would put in perspective from -- three ways, one we ramped up in the fourth quarter of last year as you will remember. We had a 10% growth in the fourth quarter '07 versus '06. A lot of that was due to new national accounts that were added and then beginning to convert their sales to KIT.

We're now a year into that so we expect that to slow. So as we look at slowing, we see it more so from the perspective of having converted those accounts to KIT and now we will be getting incremental business from them as opposed to them joining the KIT business base.

So inevitably that will slow versus the 10% that we saw. We do have now the added contributions from both ISC and beginning in the fourth quarter INRUMEC, which will help us. But then again we break it down to the individual markets that we're serving today and we have not seen a drop off in sales from them yet. But we're ready to react when it does occur.

Okay, so I guess then if we look at -- if you look at past utilization data, you look at PMI, they've both taken a pretty sharp nose dive here. Would it be reasonable to expect that you could end maybe having small sales declines at KIT? Or do you feel like your end market exposures are such that you should still be able to grow that business?

With the dynamics of that business it's -- that is really a real time question. Right now based on what we see, we expect that we should be able to grow that business.

Looking then at Precision Products, those sales were quite a bit stronger in the quarter than they were even in the immediately prior to it. It looks like you guys are having a good success there ramping up production of the joint programmable fuze. Do you feel like this sort of $33 million type revenue run rate is a new run rate that you can build off of or was there anything that made shipments in the quarter particularly strong?

I think what made this quarter particularly strong, Matt ,was exactly the first thing you touched on, is that we've had now two, actually three very good quarters of continued production increases in the JPF and therefore the revenues have followed that. I would expect that as we look at the fourth quarter that it would still be up.

We will get to a slower growth rate out in the future simply because we ramping up the production rate successfully, filling the orders and now we will be approaching the steady state requirement for the US government. Obviously the bad news there is that our ramp up rate will come down. The good news is that we will be able to more aggressively market JPF sales to foreign governments and be able to improve our margins in that manner.

Okay. So then you should be able to grow, quarterly sales should go up again in the fourth quarter from this level; from the $32.5 million, $33 million level.

We expect that they will.

A couple more things then and I'll jump back in queue. Just from a modeling perspective, if I look at the operating margins at KIT, clearly you're showing some improvement there. But just to make sure we understand the sequential move of margins. If I look back the last two years, you've seen your operating margin decline about 100 basis points in the fourth quarter from the third quarter, is there anything materially different about the KIT business now that you've made a couple of acquisitions and that business has grown? That should keep a similar drop from happening in 2008?

Matt, I do not expect that we've broken that model because that is based primarily on the seasonal decline is sales. So I can't tell you that we have broken that model, however, there's two aspects. One our volume is higher so we should expect that we would get some contribution from that because of the fixed cost based, and in addition we have two additional business days in the fourth quarter of KIT in 2008 versus 2007. So that should have n incremental positive impact on us as well.

That's very helpful. Then last thing here on foreign exchange, dollar have obviously strengthened quite a bit recently. How would you expect that to impact your various businesses that you have Brookhouse, I know part of Specialty Bearings is a German-based business; just a comment here on how foreign exchange may impact you guys going forward with the strengthening dollar.

Matt, in all of our businesses, one of the things that that will do will be to tend to reduce the numbers a little bit. With the strengthening of the dollar and we haven't disclosed the size of those businesses, but that could have an effect of $1 million, $2 million, something like that on our Aerospace businesses.

Thanks, guys. And congrats again on a nice quarter.

Thank you.

Our next question comes from the line of Arnie Ursaner with CJS Securities.

Good morning, I'll try to not give you 10 or 12 questions if I can. My first comment, if I can, is regarding Wichita. Wichita obviously continues to be problematic, you've quantified it in a general sense. You mentioned the $1.8 million was an inventory related charge, which I assume should be one time in the way we ought to think about it.

That's correct.

But I want to focus on the balance of your business and begin to think about margin and opportunity there. You mentioned you were removed from probation, the AS9100 certification in august, and these have been incredibly costly items that have impacted your margin there. So can you comment on that? But also you mentioned the final pricing on the TRP seems to be an issue. But I guess I'm concerned about is are we entering a period similar to the helicopter where you have a long term contract to produce a product at a loss indefinitely, and if so, Neal, how do you intend to attack that?

Let's start with your last question and to put it in context, we -- I hope that we've been pretty clear in articulating the two outstanding risk items in Wichita outside of the normal operating inefficiencies that we've had there, Arnie, and they were number one an inventory adjustment as we went through and evaluated material and work in process. And the second was a final negotiation for pricing with Sikorsky on the TRP.

We believe that we've, that charge that we've taken of $1.8 million in this quarter should enable us to put the inventory issue behind us. So we're now down to the Sikorsky TRP. To begin with, that is not an indefinite contract, that's a contract for 30 units and we have now as of last weekend shipped the third of those 30. So it's not indefinite. And what I think we represented is that through the life of that program there have been a significant number of changes that have impacted the cost.

We are going into a negotiation with Sikorsky to be able to recover those costs. We feel we have a sound basis for recovering those costs, but it will take a negotiation for us with the end customer to determine what the final outcome is.

But again, not indefinite, we are already 10% of the way through that program. So I just need to make sure we're clear on that.

Clearly not an Australian type situation. But to clarify, you just said 10%, you meant 10 units out of 30 or a third, is that correct?

No, we've shipped three units so far of the 30 that are required, so 10%.

Got it, thank you. Very quick question, foreign sales as a percent of JPF sales, what were they please?

We've got that.

They were very small in this quarter.

And still had a pretty sizable impact on margin?

No.

No. The improvement was predomintantly driven, Arnie, by the legacy missile fuzing business from Middletown. While we had strong shipments of JPF, 90% was to the US government and only 10% was outside of the US government.

So the real margin improvements yet to come as you're able to increase the percent to foreign governments?

Neal Keating; Yes, I think that they did a great job this quarter in the Legacy fuzing business, they did a very good job in the ramp up of the JPF, but we've got the margin improvement yet ahead of us both on mix of sales and renegotiation for Option six pricing.

Can you disclose the number of branches you opened in industrial distribution in Q3? How many you hope to open in Q4, and the impact of the branch openings on margin, if you could?

We can do that, Arnie. We can handle at least a few of those. We opened one branch in the third quarter of this year. I think that between branches, distribution centers and service centers, we've opened four this year and I think in the last five quarters that number has been 13. So we haven't characterized how that may have degraded our performance in the period, in prior periods. But what we have said is we do expect that they an investment the first year, that they break even the second and they turn profitable and get to KIT average margins in the third year. So that's really how I would model it.

Thank you very much.

Thank you.

Our next question comes from the line of Steve Levenson of Stifel Nicolaus. Please proceed.

Thanks, good morning, Neal, Bob and Eric.

Good morning.

Nice to see the continued progress you're making. In terms of the fuze contract, you said it won't really change much until 2010. Do you expect to see any revenue in 2009, I guess the award is pending?

Sure, I'm sorry if I wasn't clear on that. But we will continue shipping Option five fuzes through likely early 2010 based on current production schedules and demand. Sp we will not have a decline. We will continue to fulfill under the Option five contract. The Option six contract will be negotiated hopefully end of this year, early next year we'll come to a conclusion and we would expect to begin providing product on that option and therefore at better pricing in late first quarter 2010, perhaps early second quarter 2010. What we also have said and has been released by the US government is that we do in Option five have a higher percentage of foreign military sales. So we should have some marginal up tick in margin for that product in 2010, excuse me 2009.

Okay, thanks. And I take it there's no further development needed on the product?

Well, we've actually done a new development. It's in test right now; flight test and other things with the US government. So we're ready to make that transition and are going through all of the inventory balancing and other things as you would expect with that. We do anticipate that there will be some further quality improvements and productability improvements in the new design. But frankly while I don't want to overstate it, we've done so well with the production ramp up of the current design that we don't mind if the new design moves out a bit.

Great thanks. On the Bearings side of the business, are there other retrofit opportunities that you see coming up? I know Bearings don't directly affect fuel consumption, but has anything come up where people are asking you to come up with new designs for existing aircraft?

I can't say that they have. I think more so what we continue to encounter are on a number of the new aircraft programs as they go through their testing and they find out that some of the bearings that they specified don't meet the requirements in actual fact that the Specialty Bearings group continues to be brought in and increase their content on those new platforms. But I cannot tell you right now or point to any retrofit applications, any additional retrofit applications or new since we talked about them before.

And on bearings, are you still quoting with similar lead times as you have in the past?

Yes, we are.

And will that require any expansion; further expansion for that new bay that you built?

We don't believe that it will right now for the next, and I don't know if it's 18 or 24 months and I've said before I think that everybody in this room and probably a number of people out there will be very happy when we have to expand that business again. But if you were here, for example we had a group from United Technologies and their companies such as Pratt and Whitney and Sikorsky here earlier this week and they presented a Specialty Bearing business with the UTC Gold recognition, is extraordinary. I believe there's only 19 companies in the world that have gotten that award and as they toured the facility, what they were interested in was the number of machines that were actually being moved around. And how we continued to relay out the value streams in that facility to improve not our operating performance in terms of lead time, in handling time, but also clearly for all of us how that helps improve our margin performance in that business as well.

So they've got an ongoing program of improving efficiency. We've added capital in there with new higher speed, more sophisticated machines, robotic loading and unloading. So we can continue to invest in that business within the existing footprint that we have and increase our output as well.

Great, thanks. In terms of your new bank arrangement, are there any restrictions on acquisitions there and in relation to acquisitions, what are you seeing in your pipeline both on the Aerospace side and KIT? And are other people in there? Are you seeing prices coming down or any greater willingness to sell?

Steve, actually, on the new bank arrangement, the terms model what's in our other agreements. So there aren't any restrictions that you mentioned. It's pretty much we could use as we could use our existing ones. In terms of what's available out there in this market hopefully more things will come out in the market and prices will be lower and therefore more opportunistic. But course, you do need to worry about financing because as of yet, the credit markets are providing for great liquidity. And so we're happy that we did what we did and then it'll be on an opportunity as presented going forward.

Great, thanks. And last on the hedge, you cancelled that. Are there any other instruments like that or was this a one time?

That was a one time.

Okay. Thank you very much. Last question, I'm sorry, one other think. With Brookhouse and the work you're doing in composites, are looking at all about expanding into wind power? Seems to be a lot of demand for blades and some of the people who make them are having problems with them using the older technology.

I can't tell you right now that we are looking at that. In fact Kaman many years ago did some composite wind blades, we may actually still have one around here somewhere. But at this point in time, we have not. We certainly are looking at ways in which we can move into adjacent markets, whether it's in our Bearings business to support wind power and other alternative energy investments right now. But I don't believe that at this point in time we'd be in a position to look at a wholesale shift of some of our composites work for wind applications.

Thanks again. Have a good weekend.

Thanks, Steve.

Our next question comes from the line of Edward Marshall from Sidoti & Company. Please proceed.

Good morning, everyone.

Good morning, Edward.

The first question ins on the aerostructures, actually both of my questions are on the aerostructures. Backlog was up year-over-year, nicely, but more importantly sequentially up 11%. I didn't catch if you said what was driving that?

I can tell you that we don't have A-10 in there yet. We have a little bit of A-10 in there so it's predominantly additional ship sets on C-17 and Brookhouse. Of course we added that. As we've added Brookhouse, we've added their backlog.

But that was from last quarter as well. There was about $250 million in backlog last quarter. I think that jumped from year-over year was due to Brookhouse? Or was I incorrect on that?

I think it's predominantly we had the Sikorsky multi-year. It's probably mulit-year Sikorsky order and the A-10.

When does the A-10 start to hit the backlog?

No, A-10, we've got a very small backlog on that right now. But since we begin producing in 2010, I would expect -- it will be dependent on how Boeing issues orders out, frankly, and how we put it in. But we've talked about it being the potential for $100 million program. And it is something that they're going ahead with.

The big change in the third quarter was the C-17.

Okay. And did we quantify the effect that Boeing had in the quarter to either the aerostructure segment and the 777 and 67 or as well as with the Bearings segment?

Very small.

Small in both?

Small in both, yes.

And I just want to see if I'm looking this right, looking at the business that's going to be hitting in 2010, you still going to have the firm base of the Sikorsky and the C-17. But you have addition A-10 business coming on and the joint programmable fuze. I guess Option six at that point and hopefully we get a higher price. Am I right in assuming that 2010 looks like a pretty good year for you guys? And not to put guidance or anything in your mind, but just as a kind of a hypothetical question to you.

I like business for now, and I think I'll like it a lot in 2010. And I don't mean to be trite. I think that those are the things that the people in each of the businesses have been working really hard and the -- whether it's the Precision Products group and all of the work that they've invested, not only in Middletown with the work for the missile fuzing, but and awful lot of hard work to get to where they are in Orlando today on JPF. And the work with the US government to be able to get higher pricing for Option six is going to make a huge difference for that business and they worked really hard for it. When you go to the aerostructures business and whether it is Jacksonville or here. Obviously our Bloomfield helicopters business is actually one of our big suppliers on to Jacksonville on the A-10. They've worked very hard to position and win the A-10 program.

They've performed well as a sub supplier in the entire chain on C-17 to position Boeing to continue to get orders. So there are a number of things that are coming together pretty nicely now. We expect that that should continue based on those things and feel pretty good about it.

Thank you so much for the commentary, have a good day guys.

Thank you, Ed.

(Operator Instructions) Our next question comes from the line of Robert Kirkpatrick from Cardinal Capital. Please proceed.

Again, let me add my congratulations as well. You mentioned I think that there were 35 or 38 marketing approvals that you had received from the US government to talk to different countries about the SH2, were any that you applied for that were rejected?

Not that I'm aware of.

And maybe a longer term question for you Neal, the company has burned through a fair amount of cash this year on an operating basis. If you look at the cash flow statement for the nine months and I realize that there are some things surrounding this year that make it perhaps a little bit more unique, but as you look forward over the next several years, is there a more normal pattern that you would expect or would you expect Kaman to continue end up burning through cash on an operating basis?

Rob, this is Bob, just as we get into the more profitable businesses, the cash flow comes with it and I think that going forward as we do things for the business to improve it and as we increase sales and profits, I think you will see that there will be good cash flow generated.

That certainly would be our expectation as well. Thank you very much.

Thanks, Rob.

Our next question comes from the line of Jerome Lande from Millbrook Capital. Please proceed.

Good morning, and great quarter, guys.

Thank you, Jerome.

First of all, digging in on KIT just for a second here. What about understanding that you've got sort of a basket of countercyclical or off cycle industries, what about mining, which I know has been a hug win for you especially as we see commodity prices coming down. Do you have any more color on that specific segment?

Jerome, it's one of the ones that we -- you listened to the announcement now a number of months ago that Terex made, what's happened with CAT and others and you see inevitably that capital programs would be reduced. Do I think that we're going to remain immune to that? I don't think that we will. At the same time our business into those markets consists really of two components and it is supporting new capital programs and supporting the operation of the facility itself.

I don't think that we've heard about people shutting down mining operations and closing them down. They may run them at a lower rate, but to shut down and restart is an expensive proposition for them. So we will continue to be able to provide product. If it turns, it burns and we work to help them maintain the operating efficiency. So do I thin kit will come down based on commodity prices? Yes, but I can't tell you today as we sit here that we have seen that yet.

Got it. You started to get into the area of my second question, which is my understanding has always been the KIT, if you were to look at the end uses for what KIT sales mostly MRO. But do you have any analysis that says how much of KIT sales are maintenance repair versus how much is original equipment or capacity expansion at you customers?

We do break it down actually between MRO and OEM, and I'm working from memory and it's about, I believe it's about 80/20. Wait a second I have a smart person giving me a chart. How about 70, how about 75% MRO and 25% OEM?

I'll take it. And moving on to helicopters for a second, understand that Sikorsky continues to ramp and it's a good program for you and Egypt's holding up and then I guess whoever you sell these next raft of sea spreads to there'll be service contracts probably coming in with that, which will be good. Are there any other new business opportunities out there that you're bidding? Should we expect to see you expanding service breadth in helicopters? My recollection that -- certainly you've got a lot of space and you also I think still have a pretty big pull of labor you can pull from there in Connecticut. So what's the outlook for product breadth if you will?

I would look at it from two perspectives. Number one, we're really focused on performing on the Sikorsky program and actually if you were to come here this week, you'd see that our Building 30 is pretty much full of both Sikorsky helicopters as well the blade erosion coating that we're doing. So I think that they might contend that we don't have a lot of space right. But we also are -- if we look forward, reselling the Australian helicopters are very important to us for the very reasons that you said and what Rob touched on earlier; great cash generation opportunity, profit, adds to our service base. MDHI helicopter continues to be a good customer for us as well in this period.

We're also looking at together with DRS and now with Finmechanica, a reset for the Kiowa now that the ARH has been cancelled. And that would provide us some upside opportunity as well.

And finally we have talked in the past about a very opportunistic and I would emphasis very opportunistic program that we're working on in conjunction with Lockheed Martin right now called the [Burrow Program], which essentially takes our K-max heavy lift helicopter and reconfigures it for unman resupply using the Lockheed Martin mission management system.

That is a longer term program, but it is an opportunistic one that we're looking at that could provide dividends, especially when you're looking at the environment for UAVs today, a 6,000 pound lift capability, which is very different than anything that is out there today, and a strong partner like Lockheed Martin.

And the Burrow program would be retrofitting K-max helicopters that are already out there in the field or helicopters you have grounded somewhere, or that Lockheed has? Where would the actual choppers themselves come from?

They would be new aircraft.

New aircraft that Kaman would build?

Yes. We have between Lockheed Martin and ourselves today we have acquired three K-max helicopters and that's what we're using for our initial testing demonstration et cetera. But if in the future one of the services were to establish a requirement that the Burrow would meet, we would be looking at producing new aircraft.

Lastly, moving on to the term loan that you got finished just a couple days ago? What is the rate on that?

It's a market rate. It keys off the LIBOR and it'd probably be around 5% to 5.5% all out. Something like that.

Why was that done now? It's impressive enough to get it done and that sounds like a pretty decent rate, but you're replacing existing revolver borrowings, which had a little ways to go. What sort of a financing structure rationale?

We wanted to number one replenish part of what we'd use deal with the Brookhouse acquisition and we just thought in this market is was good to have the available cash resources and credit.

And that's nice, it gives you more patterns for acquisitions. Out in the M&A environment people you speak to I'm sure you've got your contrail of potential acquisitions you talk to from time to time. Are you getting any sense of different pricing out there and or more seller desperation from properties that you might be looking at?

Jerome, what I think Mike provided the best indication for the industrial distributions areas to begin with is that there's an analysis that MDM, Modern Distribution Management does that is an analysis of acquisitions and what the valuations have been.

In the third quarter of this year, the average valuation came down by 100% basis points, so I think that that's indicative of the -- doing the financial models. So I think that pricing will be -- valuations will be lower in the industrial distribution market and that's the data point that tells us that.

In aerospace, it's still difficult. The valuations are still high and there is probably a heightened level of uncertainty probably not for 2009 or 2010 perhaps, but past that. I don't think that we would comment that we've seen desperation, we've got a few that we wouldn't mind having be desperate, but I can't say that we've gotten people to that level yet.

That MDM figure you quoted, that was 100 basis points, in other words on multiple point lower of 1% change?

No, one multiple point lower. I don't remember exactly, it's on their website. I get the hard copy, Jerome, but I think it went from 7.5 times to 6.5 times. But I would double check that.

Thanks a lot.

Thank you, Jerome.

Ladies and gentlemen, I'm showing we have no further questions in the queue. I would now like to turn the call over to Mr. Eric Remington for closing remarks

Thanks for joining us for today's conference call. We look forward to speaking to you again when we report fourth quarter and year end results next year.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a good day.