Kaman Corp (KAMN) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2008 Kaman Corporation earnings conference call. (OPERATOR INSTRUCTIONS)

I would like to turn the presentation over to your host for today's conference, Mr. Eric Remington, Vice-President of Investor Relations. Please proceed.

Thank you. Good morning, everyone. I would like to welcome you to the company's 2008 fourth quarter conference call. This call is being web cast over the internet at www.kaman.com and an on-line archive of this broadcast will be available within two hours of this call and will be available until March 6 at this site.

Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer, and Bill Denninger, Senior 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 filings with Securities and Exchange Commission. In addition, the information contained in this conference call is accurate only on the date discussed. Investors should not assume the statements made in this conference call can remain operative at a later time. The company undertakes no obligation to update any information discussed on the call. Please turn to exhibit one and with that I will turn the call over to Neal Keating.

Thanks, Eric. Good morning. I would like to begin by saying during 2008 we continue to execute against our operating strategy and generated solid performance particularly in light of current economic conditions. We are meeting our plans for our three recent acquisitions and we made significant progress during the year correcting the issues at our Wichita facility. We consistently exceeded our joint programmable fused production targets and results in both our Helicopters and Specialty Bearings businesses remain strong. This solid performance helped to somewhat offset the dramatic slowdown that hit our industrial distribution segment in the last two months of the year. While it's impossible for anyone to escape the impact of this global economic downturn, we believe the diversity of our businesses and customer base should help us through this difficult period.

Starting with the high level review of the numbers on a consolidated basis for the quarter, net sales from continuing operations rose 16.2% to $316.4 million, driven by sales growth across all of our businesses. Net earnings from continuing operations were $6.8 million, or $0.26 per diluted share compared to $9 million or $0.35 per diluted share in the prior year period. For the year, sales from continuing operations grew 15.4% to almost $1.3 billion and net income from continuing operations was $35.1 million or $1.38 per diluted share.

With that, let's discuss some of the details on each of the businesses. There is clearly concern these days about the outlook for commercial Aerospace sector. I will talk in more detail about our mix in each business but keep in mind as we head into this period that about two-thirds of our Aerospace business is military related which is more stable than the commercial market. I will start with Aerostructures. At the top line the business turned in strong performance for the quarter in year with sales rising more than 44% over year ago levels driven by the contribution of Brookhouse and growth of the Blackhawk program.

Let me comment on Brookhouse. First, the acquisition has exceeded our internal plan. Second, Brookhouse provides new reach into airbus, VAE systems and other companies across Europe and third, the combination with command gives Brookhouse access to programs that would not have been available to them in the past due to their relatively small size and we are working on bidding on significant new opportunities that we will update you on during future calls.

While revenue was up for Aerostructures for the period, operating income decreased from year ago levels. Wichita again was the primary issue. However, at this point we believe the actions we've taken have addressed the operational issues at the facility and we are now looking to add to the revenue business base in Wichita to return the facility to profitability. Given the uncertainty surrounding the commercial Aerospace market, our Aerostructures business is well positioned with 80% of its revenues from military platforms. While ultimately we would like to have a more even balance of military and commercial business, in the short-term, this will serve us well.

Finally, the longer term nature of most of our contracts provides with us solid revenue visibility into this business for 2009 and beyond. Sales growth will moderate over recent levels but with our current programs and the ramp up of the A-10 program in 2010, we have a good base of business off of which to build going forward.

Overall, we are pleased with how this business is positioned in an uncertain environment. Moving on it to the precision product segment, the story is similar to recent quarters with a strong increase in JPS sales to the US military. However, the essentially break even nature of those sales reduced the operating margin in the quarter and full year periods. As compared to the fourth quarter of 2007 results, this quarter reflects an operating profit reduction of $1.2 million related to the 40mm product line which was sold in 2007, and the JPF facilitization contract that was completed in 2007. For the full year 2007, these nonrecurring items contributed $4.5 million in operating profit.

We are very pleased with the progress we've made on the JPF, and as we proceed into 2009, we continue to drive improvements and develop new ways to further enhance our performance and profitability on this program. Our redesign of the JPF fuse, which improves it's manufacturability and reliability, has passed its high speed, impact sled, and aircraft flight testing qualifications, and we expect to ramp up this new design into production early in the second quarter, pending final customer approval. We are also making very good progress in our renegotiation of the JPF contract for options 6, 7 and 8. We feel we are well positioned for the Air Force to award a sole source contract to us and we have responded to their request for proposal. Our expectation is that by the time we speak with you on our next conference call, or before, we will be able to confirm that we have been successful in obtaining a higher price on future sales of the JPF to the US government.

Helicopters reported a solid quarter, with increases of both revenue and profitability over the fourth quarter of 2007. Their performance was driven by our subcontract work for Sikorsky and progress on the Egyptian upgrade program which more than offset the reduced service center sales resulting from the termination of the Australian program. In relation to the Australian program, we received title to the Australian aircraft earlier this month. We continue to pursue marketing opportunities for the aircraft and have secured 43 marketing licenses from the US government to support this effort. Overall, this is a long-term process that is proceeding as expected and we would anticipate that 2011 is stale reasonable time frame for the sale of the aircraft.

The helicopter business was a solid contributor to Kaman's performance in 2008 and we see opportunities to expand our subcontract business. However, 2009 will be a transitional year for this segment as it will face a revenue decline from the loss of the service center contract with Australia which contributed $9 million of profitable sales early in 2008.

Specialty Bearings posted another quarter of very strong results despite the head winds of the Boeing strike, product mix, a stronger dollar and a decrease operating leverage from slower year-over-year sales growth than previous quarters. Looking ahead, our Specialty Bearings business remains an industry leader and we expect to see continued strong performance from this business in 2009. However, unlike our Aerostructures business, about 80% of Specialty Bearings sales are related to the commercial Aerospace market exposing it to the challenges facing facing that sector. This combined with the challenge of a stronger dollar will lead to slower growth in the coming year, although profitability should remain sound with margins somewhere between 2007 and 2008 levels.

In our industrial distribution business the fourth quarter brought with it a sharp downturn in North American industrial production that had a negative impact on our sales. While we posted a single digit organic growth rate in October, in November and December we experienced a sudden and severe decline in demand that led to negative organic sales growth. This decline was felt across literally all of the industries that had previously been drivers of our growth, and the negative organic growth has continued into 2009. Overall, our organic sales growth in the fourth quarter was positive 1.4% in October, negative 8.5% in November, and negative 10.4% in December.

Despite the fourth quarter, I would like to point out we had organic sales growth for the full year of 4.8% which combined with our two acquisitions drove total sales growth of 11% and operating profit growth of 7.1% over 2007 levels. In reaction to this downturn we implemented our contingency plans at distribution and began aggressively reducing costs to sustain our profitability. These steps include a head count reduction of 10%, a salary freeze for all employees, branch consolidation, and of course reduction of all discretionary spending. Overall, these actions will result in savings this year of approximately $7.5 million. However, we will not be able to cut deep enough and fast enough to maintain our operating margin. We are anticipating a sales drop of 10% to 15% which could result in a margin decline of as much as 150 basis points in 2009.

While we reduce our cost of distribution, we will not do so at the expense of our long-term business prospects. As a leading player with national reach, we continue to have significant competitive advantages in a down market that will allow us to take market share from weaker regional and local competitors. Acquisitions that enhance our geographic footprint or product offering remain a key part of our strategy, and we will continue to pursue these opportunities. There also remain sectors of the economy, such as energy, utilities and the U.S. government, where we can successfully build a presence and we will work to achieve that in the coming year.

Despite the downturn in the market late in the year, KIT had a solid year overall with several accomplishments including our first acquisition since 2003, important national account wins and renewals, and impressive organic sales growth through the first ten months of the year. While the market for industrial distribution has turned suddenly, we were committed to our long-term strategy for this segment. Overall, there is no doubt that 2009 will be a challenging year on many levels. However, we expect our Aerospace businesses to continue their growth in both sales and profits in 2009. We exited 2008 in a solid financial position and will maintain a strong balance sheet and focus on cash flow generation and liquidity in 2009. Most importantly, we will continue to build long term shareholder value through these challenging times. Now with that I would like to introduce you to Bill Denninger and welcome him to his first conference call as Kaman's CFO.

Thank you, Neal. I will try not to repeat information you have read in our press release and 10K issued yesterday. However, there are several points I would like to highlight for emphasis and perhaps give you some insight into what to expect in 2009. As Neal mentioned, results in the aerostructure segment for the quarter continue to be affected by inefficiencies at our Wichita facility which had a negative impact on profitability of $2.2 million during the quarter and partially offset ongoing solid performance at the businesses operations in Jacksonville.

For the full year 2008, Aerostructures had an operating loss of $5.9 million, which includes the $2.5 million tooling charge in the first quarter and the $7.8 million non-cash goodwill impairment charge recorded in the second quarter as previously disclosed, as well as accumulative impact income from the operating issues at Wichita in excess of $10 million. We do not expect the Wichita operation to be profitable in 2009 as again we need to generate additional sales base to return to profitability. However, we anticipate the level of losses in 2009 to be much less than what we experienced in 2008 therefore providing a significant year-over-year profit increase.

In Helicopters we received title of the Australian aircraft this month and have taken them into inventory. As we previously discussed, our cost basis in the aircraft consists of $32 million receivable from the Australians we forgave and the value of the minimum payment of approximately $26 million. In connection with this title transfer, we did issue letters of credit to the common wealth in the amount of $39.5 Australian dollars to cover the guaranteed payments. Neal mentioned the challenges facing Helicopters this year but we expect the business to be nicely profitable and working to recognize value from the Australian aircraft.

With Precision Products, our efforts this year will be directed to increasing our mix of fire and JPF sales and working to achieve a price increase on U.S. government sales of the JPF in 2010 and beyond. In addition, we were extremely focused on asset utilization in the business and are working to reduce our overall investment thus increasing returns and generating cash.

At distribution, as you might expect, we were seeing a number of customer bankruptcies, KIT has done great job of managing credit and losses have been relatively limited thus far. However, we were clearly mindful this of and monitoring credit closely. I should mention that upon my arrival at Kaman I was actually quite impressed with the asset management performance within distribution and in these difficult times this will serve us well.

Before moving on, I wanted to take a moment to discuss two nonoperational issues that will have a substantial impact on our performance in 2009. If you turn to exhibit 2, the first item is pension expense. The decline seen in equity markets in 2008 resulted in significant reduction in our pension plan assets. This will cause pension expense to be materially higher in 2009 as compared to 2008. This schedule quantifies what we expect that increase to be. You can see that we are facing a more than doubling of our pension expense in 2009 which will result in $0.22 negative impact to earning per share. This will also cause a higher contribution to the plan in 2009 of $10.9 million, an increase not quite as dramatic as the increase in expense. And while the decline of pension assets did not have an impact on our P&L in 2008, it did have an impact on our balance sheet. The reduction in assets resulted in an underfunded status to cause us to make a comprehensive income adjustment to share holders equity of $121 million. As you can see from exhibit three, this had the effect of increasing our leverage ratios as of December 31, 2008. While this will somewhat decrease the flexibility of our balance sheet, we still have ample capacity to pursue acquisition opportunities as they arise.

The other issue is foreign exchange that the strengthening dollar will have varying impacts across our businesses. It will directly affect Aerostructures and Specialty Bearings within Aerostructures most of Brookhouse sales and expenses are denominated in Pound Sterling and within Specialty Bearings the German operations conduct most of their business in Euros. While we were naturally hedged by having sales the and expense in the same local currency upon translation we will experience lower sales and profit dollars. One benefit of the strengthening dollar is that it's significantly reduced our cash liability in U.S. dollar terms to the Australians in connection with the SH2 settlement.

You may recall when we announced the settlement we talked about the liability of the Australians being $37 million U.S. dollars based on the exchange rate at that time. Our agreement was actually commitment of $39.5 million Australian dollars. Since then Aussie dollar has declined significantly against the U.S. dollar, and through foreign currency exchange contracts we have essentially reduced that $37 million U.S. dollar payment to $26 million U.S.

Now before handing the call back to Neal, let me comment while leverage has increased over the course of 2008, it remains very low with a total debt of $94 million at year end, only $6.2 million of which comes due in calendar year 2009. Also we have a company wide focus on working capital management, cash flow optimization. Each of our businesses has targets establish and actions underway in both these areas. In all, we are pleased with our performance in the challenging 2008 and believe we are well positioned for 2009. With that, I will turn the call back over to Neal.

Thanks, Bill. Before we open up for questions, I want to summarize and add a few additional thoughts. As I said at the beginning of the call we were facing a challenging economy and tumultuous capital markets. The diversity in our business lines and end markets is proving to be an especially important competitive advantage for us in today's conditions. In Aerospace we believe we have a solid foundation for the future. While some of our businesses may face challenges, we expect substantial improvement in Wichita and opportunities for incremental growth through new program wins as the combined Aerostructures, Brookhouse business goes to market. In addition, while conditions in the commercial Aerospace market will affect the growth rate and Specialty Bearings, we do expect continued growth and solid profitability from this segment. The downturn in industrial distribution was sudden but not unexpected and now that it is here, we were not assuming a recovery in 2009 and will manage this business to adapt to current market conditions. Importantly, we enter 2009 from a position of financial strength and will take advantage of this to pursue strategic acquisitions on both sides of our business as they present themselves. The current volatility in the markets requires everyone to keep an eye towards the here and now and respond in realtime to fluctuations in the business with aggressive cost control. All the while we will remain as focused now as ever and nurturing customer relationships in investing to achieve operational excellence and executing on growth initiatives that are in line with the long-term success of our business. That concludes our formal comments. And with that, I will turn the call back to Eric.

Thanks, Neal. Operator, may we have the first question, please?

Your first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed.

Good morning. Two things I like to see if you can quantify or give us a little better feel for. One is the negative impact you had in Wichita, how much that impacted your results? And two, perhaps try to quantify given the various pieces of your business, the impact of Boeing's strike on your results?

Ernie, hi, it's Bill Denninger. Wichita, as you know, we had the $7.8 million goodwill writeoff and also $2.6 million in tooling writeoff. If addition to that, for the full year there were operating inefficiencies that cost us roughly $10 million.

What was the number in Q4 of the inefficiencies?

The operating loss for Wichita in the fourth quarter was $2.2 million.

And you know, when do you expect that to get break even or more normal profitability?

Our plan this year as we said is for loss for the full year and we were targeting to try to reach break even toward the end of the year. We do need to get additional sales, sales base, if you will into the Wichita operation for that to happen.

Okay.

Ernie, on the second part of your question where did we see impacts of the Boeing strike, we saw it in two areas. If you look at the degradation in margin in our Specialty Bearings business, there were really multiple different drivers of that as we've said. One of them was lower Boeing sales which for us was very good margin sales. We replaced that with obviously therefore it led to a higher mix of military business for us in the Specialty Bearings business which while still nicely profitable is lower profitability. And then also because of lower shipments to Boeing out of our U.S. facilities, the overall sales mix shifted toward our German subsidiary and the combination thereof, A) it is a lower margin business to begin with, and B) the foreign currency exchange hurt the margins in that. But that's where we saw one of the elements of Boeing impact. And the second as well was within the aero structure's group. Obviously in our Jacksonville facility we do work for Boeing on both the 777 and the 767, there was pushout from the fourth quarter there as well.

I think I will stop right there.

Thank you, Arnie.

The next question comes from the line of Matt Duncan with Stephens, Inc. Please proceed.

Good morning, guys.

Good morning.

First questions I have are on KIT. Neal, the appreciate the insight you gave us on the month to month sales trend there. What does that look like if you extend that out to January and February. Have the declines accelerated?

We haven't seen an accelerating of the decline, Matt. We haven't seen any improvement from the levels we experienced in December.

So down 10% or 11%?

That's correct.

What were the sales from the IFC and INRUMEC in the fourth quarter? Trying to get to the organic growth rate for that business for the whole quarter?

They were about roughly between $15 and $16 million, Matt, for the fourth quarter.

So I'm coming up with roughly kind of a down 1.5% to 2% for the full quarter. Is that about right?

That's for the full quarter, but if you look at sales per day which is what we tend to monitor, it was actually down about 6.1% for the quarter.

Okay. So you had an extra day in the quarter then?

I don't remember the days.

Actually, we had a couple extra days. We actually had three extra days. One extra day in November and two extra days in December.

Okay.

It was probably not the best year for us to have three extra days in the fourth quarter of 2008. That's how it worked out. But your insight is correct. If you look at the causal from the fourth quarter of 2007, Matt, to the fourth quarter of 2008, there is roughly a 90 basis point degradation and there is four real contributors to that. The first is that we had obviously the two acquisitions that, while profitable, brought our overall return down by the 20 basis points that you just hit on. The second was that we as we talked about, we had a number of new Greenfield branches and other service centers that we opened, and year to year from fourth quarter of 2007 to fourth quarter 2008, that was another about 30 to 35 basis point degradation in the margin. When you look at the decline in revenues in our base business where we are down roughly $4 million from the fourth quarter of 2007 to the fourth quarter of 2008, Jack and his team did a very good job, they were prepared with contingency plans since the beginning of the year. They put them in place. But still despite that we had about a 35 basis point degradation from that lower sales that they were not able to offset through their cost reduction opportunities. And then the fourth factor would be that we had approximately something less than $200,000 of severance expense. So if you tick through it, the main causes were, one, the acquisitions acquisitions and degradation from that, the new Greenfield branches, and the combination of lower sales and margin conversion in severance costs.

And then, Neal, if I look at your guidance for sales in KIT to be down 10% to 15% down, I assume that's organic down 10% to 15%? Not the whole business because you are still getting some positive impact from the acquisitions.

Matt that would be true. We also just commented on what we are seeing year to date so I think we were in that ballpark. What we are concerned about quite frankly is if we have a second leg down in the second half of the year and that's why we are saying 10% to 12% sales decline.

The acquisitions should contribute about 3% year-over-year.

Right. If you don't see another leg down in the second half of the year, you might actually be able to perform better than the guidance but clearly we will have to get to the middle of the year before we have a better idea on that.

I think that's absolutely right, Matt.

Okay. And then as you look at acquisition opportunities for KIT, are you seeing potential targets be more willing to talk about lower multiples given what's happening in their businesses and do you feel like you will be able to make acquisitions in that business during calendar 2009?

Matt, we feel we will be able to make acquisitions in that business in 2009. To be quite frank, as you would expect, we've looked at the couple and to this in time while they are beginning to understand what the impact will of this recession will be on their performance, the owners are still looking at past performance and trying to modify that by a very small percentage going forward. And we think that the multiples need to come down from where those people are right now. So we quite frankly we have walked away from a couple because of that very reason. We expect that it should actually be a very good year for us to make good acquisitions in the industrial distribution business at very good multiples in geographic territories that we currently don't have a presence.

That's what I was getting at. I guess as the year wears on it would probably be reasonable to assume that the businesses you are targeting will start to realize that they aren't down 1% or 2%, they are down 10% to 12% and gets a little bit easier to negotiate those deals at that point. So maybe second half of the year is when you will get more active there then.

I think that's right because the other thing is that we are talking typically about small to mid-sized privately held companies that are going to struggle mightily with the credit conditions in today's environment. They will likely not be able to work as aggressively with suppliers as we will on the cost side. And also just replenishing their inventory will be difficult. I think that given the financial strength we have, being one of the larger players, that we have some innate advantages that will help us and I think you are exactly right in timing. We were more apt to see that in the second half of the year.

Okay, and then moving over a couple questions on Aerospace and I will jump back in queue. I guess that at Aerostructures, this Wichita issue seems to be taking longer to get profitable than you guys had thought. When do you think you might actually have other programs to put in that facility that will help get it profitable? I guess is your current guidance that you could have it breaking even by the end of the year, is that based on no addition programs or will that require additional programs?

That will require some additional work. We turned our business development sales and marketing guys on within the last six weeks to go out and be able to bring work into that facility. We were there, Bill and I, were there just last month again, and they now have a fairly solid basis and disciplined quality system they are operating to. A very good management team on site now. But for us to have the infrastructure we feed run that plant, we need some more base to bring it profitable and that's really what we were focused on right now.

Okay. Neal, if Wichita was break even, what would the entire aero structure's business operating margin look like?

It would be about 18%.

Does that include the amortization of intangibles from Brookhouse being put into the profitability for that segment?

Yes, it does.

And then last question and I will get back in queue. Precision Products, when do you expect to see sales to foreign government be meaningful enough that you can return that segment to sort of a doubled -- 10% plus operating margin that it has had in the past? When should we be thinking about -- or comfortable with?

I would break it into two parts. The first is that we will begin I believe in the second quarter of this year delivering option five and option five has a not exactly but about a 50/50 or 45/55 split between foreign military and U.S. military sales. So that will give us a nice increase in profitability, simply based on that mix.

And Neal, to stop you real quick, what is the mix under option four?

I don't know that off hand, Matt, but it is over the course of option three and four it's a relatively low percentage. I would say 10%.

Okay. So it's a meaningful increase.

Is it. I would target for 2009 mid-single to 10% operating margins. We would like to have that business in that range, so higher single digits, and then 2010 again second quarter, likely of 2010 when we begin shipping option 6, that should be another meaningful leg up in improved profitability simply because again we were in the process of renegotiating that contract right now. The sole source justification on authorization has been signed, we have responded to that request for proposal and as we said earlier we are certainly looking forward to being able to report a contract.

Okay, guys. Thanks.

Thank you, Matt.

And your next question comes from the line of Steve Levenson with Stifel Nicolaus. Please proceed.

Good morning.

Good morning, Steve.

You mentioned the possible, or you expect to have the sale of the Australian Seasprites close by 2011. There was some commentary in a recent article that suggested you might be able to do it in the current year. Can you reconcile the dates, please?

Sure. I think there is a couple of things there. One would be the timing between where we would actually have a contract and when we would actually make a delivery. So when we think about 2011, that's when we have our first payment due to the Australians and what we have been working to do and what we thought was an appropriate alignment was delivery of aircraft or equipment in that time frame. But we may have work required to modify the aircraft to meet the specific missions of a new customer that would take sometime. We have licenses for 42 or 43 countries today. We have a number of programs in what is commonly called the sales funnel. We have responded to multiple RFIs. We responded to two RFPs. We have had a customer from a Naval attache from an Asian country come over and actually spend time and fly the aircraft here over a series of days and so we are working very aggressively to be able to enter into a contract, but there also will be a time lag between a contract award and shipment.

Got it. Thank you. In the 10K it mentions a $2.4 million environmental charge or an accrual related to Brookhouse. Could you tell us when that went through the P&L or how it went through the P&L?

It was set up as part of our purchase accounting that would have been done in the fourth quarter.

So that did impact your net income during the quarter you just reported?

No, it did not. It was capitalized --

Capitalized. Got it.

Yes.

Last is the dividend with things going the way they are and with your expectations do you plan on continuing to pay the dividend?

We are expecting a very good cash flow year this year 2009 and certainly the dividend is solid as we sit here today.

Great. Thanks very much.

And your next question comes from the line of Edward Marshall with Sidoti & Co.

How you doing, guys? How many bidders are there on the JPF other than yourself for options six through eight?

There are no other bidders.

It's sole source.

That was a very -- that was a very long and difficult road for that team to get to. I think it's indicative of the level of performance that they provided to the U.S. government on the program and also a recognition on the part of the government that the contract was not profitable for the industrial base.

So it's safe to say you will win the contract - it's just a matter of what price, and whether you are willing to receive it at as specific price?

I think that's a fair characterization, although we still worry about it every day until it's signed.

The timing of the expense savings, that up $7 1/2 million of industrial distribution, is that streamlined or do we expect that to take place in the second half of the year rather than the first half of the year?

No, the actions that are taking are primarily related to the salary freeze and head count reductions are virtually done so there will be a benefit even in the first quarter.

And the 150 base point reduction that you spoke of, is that off the 4.6% average for the year in that segment?

Yes, it would have been 2008 result which was 4.6%.

Okay. And then finally, I know it's a bit of the way off but the credit facility, what are your plans there as far as reupping that.

Could you repeat that?

The credit facility, it's out there, I think it's August of 2010 that comes due.

It's tough out there and we are in the process of meeting with all our revolver banks and those that came into the term loan. Right now if we were to go out and renew the revolver we would have to contract it. I don't have a final plan at this point but we will be taking action toward the end of the year and whatever way that makes sense. We were still looking at options.

Thank you very much.

Your next question comes from the line of Brian Betts with Gabelli & Co. Please proceed.

Good morning.

Hey, Brian.

The question I want to dig deeper into the pension. I was wondering how it will run through the segments. And looking at the cash contribution in 2010 and beyond given where asset returns and discount rates are, and then I guess lastly the impact of the legislation that was passed on the 2009 cash contribution calculation. Thanks.

The amount that we allocate to segments is basically triggered by the amount of the cash contribution we put into the plan and that's for government accounting purposes. So that $10 million that is shown for segments in 2009 is allocated for government contracting purposes. The $5.9 million for corporate is not for the corporate employees, that's the amount we have retained at the corporate accounts if you will. The $10.9 million, the reason the legislation was passed in December allowed us to look back to year end 2007 funding levels, funding status, that would have been about $18 million had that legislation not passed. And in prior years we have done a certain amount of prefunding which brought it down to the $10.9 level, so going forward if there is no additional legislation and if the assets don't recover somewhat, we will be looking at crash contributions in the neighborhood of $25 million.

And then in terms of the funded status of the plan, what level will you to bring that up to avoid penalties?

At year end 2008 we were at 66%. There are certain elements that kick in at 80 or below but it won't affect us. If you drop below 60 you have to freeze plan accruals and benefits and we aren't there yet. Hopefully we won't get there.

Hopefully not. Thanks.

Brian, this is one where given Kaman's financial history and approach, certainly predating myself and Bill as well, is that even when the plan was overfunded, they made their contributions so that's helping us now obviously.

Can I just clarify one point I made earlier so there is no confusion. If Wichita were at break even, the Aerospace group in 2008 would have had an ROS of 17.5%. Aerostructures itself would have been at 10%.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed.

Good morning, guys. This is actually Josh filling in for Jeff.

Good morning, Josh.

Just one quickly about clarification item in distribution, the 150 basis point of margin degradation there, that is including the $7.5 million of cost savings?

Yes, it is. Let me further clarify the points on that. We are going to see some substantial severance in the first quarter which will tend to negate any savings we get on the first quarter, those two are very closely offset, so the real savings should kick not Q2.

Because excluding that, I guess we were looking at a 30% detrimental margin. Moving over to Aerospace, Specialty Bearings, still sounds like you are calling for some modest growth there, you expect margins to come in from 2008 levels, is that simply mix issue or I guess why couldn't we see some operating leverage out of that?

I think there is a few factors in that, Josh. The first is that typically as your growth rate is as high as theirs has been, your cost to support that trails. So that has caught up some, number one. Number two, the second thing is that we will have a higher percentage of sales coming from our German subsidiary which, while profitable, is lower, and also we do expect just some mix shifts based on the rollout rates we see for 2009 that will have a slight moderating impact on imagines as well.

I guess the bigger picture question on Aerospace with respect to the Boeing strike, would you classify that as timing issue where you will expect to make up some of that production or would you say that production is more or less lost as Boeing adjusts to what might be lower demand here?

I would classify it as that it's lost. They are clearly not going to increase their rates as they had predicted in the past. I think they are using their strike as a way at a macro level to have done an adjustment of their rollout rates downward. You know, I think that where we see continuing risk and I don't think we are alone here, is perhaps late in the third quarter and the fourth quarter of 2009 where both Boeing and Airbus may have issues with customer credit for delivery of aircraft.

That's helpful. Thanks, guys.

Thank you, Josh.

And your next question comes from the line of Robert Kirkpatrick with Cardinal Capital. Please proceed.

Thank you and good morning.

Good morning, Robert.

Question, you have a two year lease I think with Fender on the former Kaman music building. Does that return to you at the end of that? If so, what will that facility used for?

Very good, Rob. It does return to us. Actually, there are two things right now if you were to come visit us that you would see. One is we have actually taken the warehouse and that's where we have the Australian aircraft and equipment stored right now. So that is being used. We expect that it will be mid-this year that we will take possession of the office facility and our expectations at this point is that our portions of our helicopter business will go in there.

Okay, great there has been some discussion at Wichita of renegotiating the tail rotor pylon program and I was wondering if you could give an update on that?

Actually, we have begun that process. In fact, we begun that process this week. We expect it will not be necessarily a short process.

Sometime in 2009?

Absolutely. I would expect that it will likely be in the second quarter.

Okay. And then finally the world has changed a lot in the last six months. Could you talk a little bit about how, if at all, your strategy has changed for Kaman?

That's a good question. We had our board meeting earlier this week and we talked about that and had discussion with management afterwards. I think fundamentally our strategy has not changed, Rob. If you look at our industrial distribution business to begin with, very difficult times. I mean, that's reflected in our numbers and our comparative group numbers. However, our strategy has been to focus on A) national accounts and actually that has helped us mitigate some of the downturn. We look at comparisons as you do, and our degradation and sales rate has been lower because our focus on national accounts, so that key part of our strategy will remain. The other is that we have felt that we need to increase our scale and do that by expanding our geographic footprint. I don't think that part of our strategy has changed either. We do believe that there will be good acquisitions available for us. So overall that hasn't changed. The rate at which we would grow new Greenfield branches has dramatically changed, but overall the strategy hasn't changed. We are clearly more focused on cash generation from that business, keenly focused on the working capital metrics, and looking for acquisitions at a right value for what we see the market to be over the course of the next 12 to 18 months.

On our Aerospace side, I don't think we have changed either and the reason I say that, Rob, is that we have said consistently that the two areas we would allocate capital and resources would be in the growth of our Aerostructures business and our Specialty Bearings business. When you look at our Aerostructures business today, we would like to increase our presence on incomposites for any aircraft and that's our strategy and we continue to believe that's important. We've also talked about the need to diversify to have more commercial business, Boeing and airbus business, and more business and regional aircraft business. Interestingly, you know, today we are not very strong in those areas and it's probably not a bad time not to be strong in it with as big a military component as we have that will help us for the next 12 to 24 months. Again, we think we will be able to acquire capability or companies that would help us increase our mix in business and regional aircraft in time for when that will inevitably return and to continue to increase our footprint on the new aircraft such as the 787 and the new A350. So again in Aerostructures I don't think the strategy has changed either, and in Specialty Bearings, while we know that our margins are going to go down, they will be somewhere between the 2007 and 2008 margin levels, that is still an excellent business for us. And our strategy is to increase our foot print on aircraft both existing platforms when they come in for maintenance and new aircraft platforms we will continue to do that and we are working very hard to identify adjacent markets where we can take that we think extraordinary technology and provide value to new customer set. So the timing in which we do things might change a little bit but I don't think the fundamental strategy has changed.

It sounds like there are tactical shifts not strategic shift.

That's a good way of capturing it.

Great. Thank you so much.

Thanks, Rob.

(OPERATOR INSTRUCTIONS) And your next question is a follow-up question coming from the line of Matt Duncan with Stephens, Inc. Please proceed.

Thanks. Just looking at the military Aerospace business now that we have a new administration in Washington have you had a chance to look at how this new administration might impact your military base over the next four years?

You know, Matt, I can't tell you that we have over four years. We looked at the next two. And the reason for that is that they will go through their quadrennial planning on the Obama administration. I don't think it will impact anything in a meaningful way for new aircraft procurement at least likely until 2012, maybe late 2011, but we have looked at it and we look at the platform we're on, C-17, as we've said before, there is continuously concern over whether that platform will tail off. They've continued to get new orders for that, I think UAE placed an order for three or four earlier this week, so we have solid orders through 2010 on that, and with UAE with the new African command, with some of the things coming out of the Obama administration that favors a large transport like that, we believe we were solid there through 2010. The Blackhawk is clearly an aircraft in demand from the U.S. Army today even as they transition out of Iraq and put more troops into Afghanistan, we expect the demand for the Blackhawk will continue and I think that's reflected in all of the comments coming out of the senior management at United Technologies today as well. Joints -- they talk a lot about new programs and the ones that are under pressure. The Joint strike fighter we are on, we're trying to grow our content on that because it's now a consortium of some 8 to 11 member countries that have invested in that aircraft so we are very confident it won't be canceled, that it will have a life of between 2000 and 3000 aircraft. Of the other key programs that are talked about today that may be in danger that the F-22 Raptor, we have very minimal if any content on the Raptor, so while I know it's very important to a number of companies in Aerospace for the jobs perspective and everything else, that's program that where it was cancelled, it would not impact Kaman. And the second in other areas that they talk about budget cuts such as the future combat soldier, obviously that type of program is something that we don't participate in. So as we look at it for the next couple of years we feel very good about the sustainability of the military aircraft programs that we are on.

That's helpful. And, Neal, don't want to back you into a corner here, but total company sale and you have given us some guidance on certain segments. Look at total company sales in 2009, is your expectation that Kaman can grow in 2009 on the whole?

You know, I will tell you what, Matt. Here we come into the call today and we give you more data than we have ever given you in our lives and you come back after us for more. Think I that the 10% to 15% down in industrial distribution, we can't offset that with growth in Aerospace, no. I think that we would be down marginally on the top line. We'll see how we roll out if we don't get down that far in industrial distribution we might be able to keep even.

That's what I was getting at - the decline or growth, whichever it is, is probably going to be low single digits on either side.

Yes, yes.

And that's what I was driving at. And then if you look at your borrowing capacity, Bill, what is your current borrowing capacity under your various credit facilities?

Hold on one second. At the end of the year which is relatively where we are at, our borrowing capacity was around $130 million against revolver.

Okay. That's all I had. Thanks.

With no further questions in the queue, I would like to turn the call back over to Mr. Eric Remington. Please proceed, sir.

Thank you for joining us for today's conference call. We look forward to speaking with you again when we report first quarter results in a couple months. Thank you.