Kaman Corp (KAMN) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Kaman Corporation earnings conference call. My name is Tom and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to Eric Remington, Vice President, Investor Relations. Please proceed.

Thank you, and good morning, everyone. I would like to welcome you to the Kaman Corporation 2009 second quarter conference call to discuss our earnings results and our outlook for the remainder of the year. 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 this morning, please be advised this call may contain certain forward-looking statements such as projections of revenue, earnings and other financial items, statements on the plans and objectives of the company and management, statements of the future economic performance and assumptions underlying these statements regarding the company and its business. The company's actual results could differ materially from any forward-looking statements made due to several important factors described in the company's latest filings with the Securities and Exchange Commission. With that, I'll turn the call over to Neal Keating. Neal?

Thanks, Eric, and good morning. Let me begin by saying that during the quarter, our strong positions on military programs in our aerospace segment, contributions from acquisitions made in 2008, accelerated cost reduction actions across our businesses and focus on improved execution paid dividends. We are pleased with our strong earnings performance and improved cash flow in what continues to be a very challenging operating environment. Our performance was the result of a number of items, including continued strong profit margins and bearing programs, increased Blackhawk deliveries, a catch-up on JPS and Tomahawk fuze shipments from the first quarter, as well as strong second quarter shipment levels, getting us back to our expectations for the first half of the year, continued operational improvement at Wichita, better than expected performance at KIT as a result of our cost reduction actions and positive impacts from our gross margin improvement initiatives, and a focused effort on overall working capital performance in cash flow. While we have a lot of work ahead of us, I believe these results demonstrate the progress we have made in improving our underlying operations and cost structure since the beginning of the downturn last year.

Before I discuss the details of the quarter, as you saw in our press release, beginning with the second quarter of 2009, we are now reporting in two segments, industrial distribution and aerospace. As you know, last year, Greg Steiner joined us in the role of President of of the Kaman Aerospace Group. Before that, each of the aerospace division's presidents reported directly to me. Our goal in realigning the aerospace operations is to increase collaboration among the units to better leverage our investments, to enhance our overall profitability, and to better position the business to achieve sustainable growth in the evolving aerospace market. For example, where appropriate, we now have multiple business units approaching potential customers as a cohesive team instead of as individual businesses, enhancing their ability to provide a more compelling seamless solution and improve our competitive position. As a result of these changes in our organizational structure and internal reporting, we reviewed our segments and we will now be presenting aerospace as a single segment. We think of the business as really being driven by programs, the JPF, Blackhawk, commercial bearings, 777 and so on. So for you to best understand how we're doing will provide the narrative at that level.

Our industrial distribution segment, which has been under the leadership of Jack Cahill for some time, was not impacted by these changes. With that explanation, I would like to move on to our quarterly results. I'll begin with industrial distribution, where results were ahead of our expectations as our cost reduction actions and gross margin improvement initiatives had a faster and more significant impact than originally anticipated. This progress was made, despite a continuation of soft market conditions across many of our industrial end markets. For example, in Q2, mining, the most challenging end market was down 26% sequentially and 44% from the prior year, nonmetallic mineral manufacturing and machinery manufacturing were down 42% and 33% respectively from the prior year. Food, beverage, and paper sectors were essentially flat. We are encouraged that KIT's organic sales decline seems to have stabilized, down 24% on a year on year basis. As we indicated on our last call, monthly sales trends were relatively stable during the first quarter.

Sales took a step down in April with the month about 10% lower than March. May and June levels were essentially flat with the April number. The sales -- the daily sales rates appear to indicate that we are bouncing along the bottom and anecdotally, we are beginning to see increased quoting for new projects, which we see as an encouraging sign. As we manage through this downturn, we are staying focused on balancing cost control with our commitment to preserve our value proposition and protect our position as a respected leader in the market. With that, I'll now turn to the aerospace segment, which reported solid top line growth and improved profitability driven by strong execution on the Blackhawk, JPF and other fusing programs, military bearings, improved performance at our Wichita facility, and a higher contribution from our UK composite operations, which performed very well during the quarter. This was somewhat offset by lower volumes of commercial, regional and business aircraft bearings. The regional and business jet market has been hit extremely hard with significant declines in new aircraft deliveries and this has impacted our bearing business.

To give you some context, our full year 2008 sales of regional and business aircraft bearings were $25 million and that business is down 42% for the quarter and off 22% for the half year. Sales of commercial bearings are down as well, although not quite as dramatically. These declines have been somewhat offset by growth in military bearing product lines. During the quarter, another driver of our performance was the Sikorsky Blackhawk helicopter cockpit program, where deliveries were up over year-ago levels. This continues to be a strong program for command and in the second quarter, we delivered 43 cockpits to Sikorsky, compared with 32 units in the same period last year. We expect deliveries to level off at more or less the Q2 rate for the second half and we anticipate delivering our 400th cockpit to Sikorsky during the third quarter. The JPF program team achieved several key objectives during the quarter. Most significantly, they were awarded a contract modification on JPF options six, seven and eight, which provides for higher pricing on the JPF US government production units, beginning with option six, which as you know, will significantly improve the profitability of the JPF program. Also, during the quarter, we met our internal schedule and completed option four shipments and began deliveries under option five.

We are also very pleased to report that the Middletown facility passed its first JPF enhanced design lot acceptance test in June, so the JPF is now in production at both facilities. Overall, JPF US government and FMS sales increased 61% over the second quarter of last year, in part due to the timing of deliveries. During the first half of 2009, we delivered more than 14,000 JPF fuses compared to fewer than 10,000 in the comparable period last year. Before I wrap up discussing our programs, I wanted to talk to you about our unmanned K-MAX program. As you may have seen there has been a lot of press recently about this program this. Is an unmanned version of our K-MAX helicopter we are developing in conjunction with Lockheed Martin for the Marine Corps. This week we were awarded a contract to demonstrate the capabilities of this aircraft to the marines later this year. This is a positive development and we are certainly enjoying all of the attention this program is getting. While we are confident in the aircraft and its fit for the mission, at this point it is in its very early stages, and as with all programs of this type, will take some time to progress. This is an exciting, but longer term opportunity.

Now for one more item and I'll turn the call over to Bill. I would like to take a moment to update you on the progress at our Wichita facility. During the quarter, we continued to show improvement on key performance indicators, including a smaller operating loss, reduced past due deliveries, and lower scrap rates. In addition, the facility successfully completed its NADCAP recertification audit, a key milestone in bringing business back into the facility, and we also completed successfully a Boeing process audit that reflected the substantial progress made since last year. At this point, we have rebuilt the infrastructure of the business and continued to work hard to optimize its financial performance. However, as we have said, additional volume is required to move the business into the black. We have begun to bid on new work, but given the dramatic slowdown since last year, we expect that this will take longer than anticipated when we established our plan in 2008. So we are now anticipating that our target for achieving breakeven will move into 2010. With that, I will turn it over to Bill Denninger to walk you through the financials in more detail. Bill?

Thanks, Neal, and good morning, everyone. As you've seen, for the second quarter net earnings were $9.4 million, or $0.37 per diluted share, 54% increase over the year-ago level of $0.24 per share. Earnings per share on the second quarter of 2008 included a goodwill impairment charge of $7.8 million, or $0.31 per share related to the Wichita facility. On a sequential basis, diluted earnings per share in the second quarter were 76% higher than the first quarter of 2009. Sales were $293 million in the period, $23 million, or 7.3% lower than the year-ago period. The sales decline was driven by a 23.3% decline at KIT, offset by a 21.5% increase at aerospace. Our year-over-year sales comparison was impacted by the stronger dollar. The overall impact of currency translation on second quarter sales was a decrease of $2.9 million or about 1%. At KIT, operating income of $3.1 million was below the $9.7 million reported last year, but increased from $2.8 million in the first quarter, as we have been focusing on scaling our cost to the current demand environment.

As a result, the business generated a 40-basis point improvement in operating margin relative to the first quarter of the year and we are on track to generate annualized cost savings in the $12 million range. The bulk of our cost savings have come from payroll, including furloughs, pay reductions, and unfortunately head count reductions. At this time, furloughs are not planned for Q3, so that aspect of cost reductions may not recur. We are not planning for any meaningful improvement in economic activity in the second half and expect distribution sales to show modest sequential improvement in the last two quarters and to be down for the full year at the high end of the 10% to 15% range we discussed previously. And at this point, we are projecting full year operating margin for distribution to be 200 to 250 basis points below last year's 4.6%.

Moving on to the aerospace segment, sales in the quarter increased 21.5% to $137.3 million from $113 million in the second quarter of 2008. Of the increase, [13.6%] was organic and our UK composites business contributed $9 million of incremental sales. Also contributing were higher military sales, primarily on the Blackhawk cockpit program with Sikorsky, the JPF and military bearings. These improvements were partially offset by lower commercial, regional and business aircraft bearing sales. Aerospace operating profit in the second quarter was 15.7% of sales. This compared to 13.1% in the first quarter and 14.5% for the first half. The improved profit in the quarter was primarily the result of improved profit performance from the JPF program and higher sequential profit rates from bearing programs. I would now like to provide with you some color on bearing profit margins.

In anticipation of forthcoming lower bearing sales, we reduced our bearing cost base early in Q2. We took this action as soon as we saw that the fourth quarter backlog was not filling in as we had expected earlier. So during the second quarter, we enjoyed the benefit of this lower cost base, but with a still healthy top line. That combination drove our profit margin percentage higher in the second quarter. With the slower cost base, these product lines are structured to sustain their historically high profit margin performance going forward, but with a lower dollar contribution due to the lower sales volume. Overall, these lower second half bearings sales were expected to result in full year aerospace revenues 5% to 7% higher than 2008. Q3 aerospace revenues were expected to be about 10% below second quarter levels with improvement in the fourth quarter. For the year, we expect an aerospace profit in the midteens, so overall, we expect aerospace to have a stronger second half of the year, but with the third quarter weaker than the fourth.

For Kaman in total, we expect to be slightly less profitable in dollar terms in the second half than the first half for four main reasons. First, sales are expected to be lower at KIT than we previously anticipated. Next, sales from commercial bearings product lines will be lower and will not be completely offset by the increase in military product line sales. Third, a slower return to breakeven in Wichita, and finally, anticipated due diligence costs related to acquisitions in the pipeline. As Neal said, we incurred lower operating losses in Wichita in the period as compared to the prior year and the previous quarter. I believe it's useful to put Wichita in context. The facility generates annual revenue of less than $20 million, which is less than 4% of the aerospace segment's total sales. So when we talk about needing additional revenue in Wichita to break even, we mean just a few million dollars in new business.

Moving on, our consolidated results were impacted by pension expense. It was $2.3 million higher than last year in the quarter and $4.4 million higher for the six months. Pension expense is spread among the two segments in corporate. For the quarter, our free cash flow was $23.5 million, which includes a 2009 pension contribution of $10.9 million made in April. For the first half of 2009, our free cash flow was $17.4 million compared to a use of cash in the amount of $45.7 million during the first six months of 2008. This excellent cash flow performance with conversion rates of 250% for the quarter and 118% for the half was driven by working capital improvements and provides us with comfort in relation to our full year free cash flow expectation of between $35 million and $40 million. Liquidity remains a top priority in the current environment, so I'll take a moment to address our balance sheet.

I want to highlight that our leverage remains very low with a total debt to cap ratio of 23.5% at the end of the quarter and only $4.1 million of debt comes due in the remainder of calendar year 2009. So we are exiting the first half of the year on a solid financial position. In all, we delivered a strong second quarter on earnings and cash flow. In this challenging business environment, there is opportunity and we continue to be very focused by making sure that Kaman has liquidity and financial flexibility to not only operate effectively under the current conditions, but also to take advantage of opportunities to strategically invest in the business. With that, I'll turn the call back over to Neal.

Thanks, Bill. Before we take questions, I want to highlight a few points and add some concluding thoughts. We are seeing early signs of stabilization in the industrial markets, but the timing of a recovery is still uncertain. We believe that we have made the right changes to our organization to successfully manage the business through this downturn. Based on these actions and the diversified nature of our business, we turned in a solid second quarter. Looking ahead, we plan to remain prudent with regard to cost management, while also investing to position the business for growth over the longer term. Our initiatives to scale the cost structure at KIT to the current demand environment have been effective and our Aerospace Group is off to a strong start under its new organizational structure. This has not been without sacrifice. KIT and [Kamatic's] all took week-long furloughs during the quarter. In addition, all corporate officers have had their 2009 salaries frozen at 2008 levels and have taken voluntary week-long furloughs as well.

This shared sacrifice shows the commitment of our employees and is greatly appreciated by all of us. While we are cautious about the commercial aerospace market, the segment's exposure to military programs with good revenue visibility should continue to provide balance to the business mix. Also, as we've said in the past, a key part of our investment strategy continues to be our opportunistic, yet disciplined approach to evaluating potential acquisitions, and to that end, our acquisition pipeline is relatively full on both the distribution and aerospace sides of the business. We have been engaged on a number of properties, but there continues to be a lack of realism in terms of how sellers are valuing assets, given the environment we expect to be operating in over the near term. I want to reiterate that we are being very disciplined with regard to valuation and prudent in our assessment of available synergies, but we will continue to pursue opportunities that enable us to strengthen our competitive position and expand our customer offerings. We feel that we have the right organization in place at this point to navigate the current cycle and continue to execute on our longer-term strategic plan. That concludes our formal comments. And with that, I'll turn the call back to Eric.

Operator, may we have the first question, please?

(Operator Instructions) And your first question comes from Arnie Ursaner with CJS Securities, please proceed.

Hi, good morning. Neal, in your prepared remarks, I think you gave us a number for fusing, you gave us I think it was a 61% number for growth. I'm trying to make sure, is that for Q2, is that for the first half?

Arnie, that was for Q2, and as we also commented, at the first quarter call, we did have some significant delays of shipments out of the first quarter that we were able to recover in the second quarter, both on Tomahawk fuses, as well as JPF. So really it would be a -- I think more appropriate with the half on half comparison where we talked about slightly under 10,000 fuses in the first half of 2008 versus just over 14,000 in 2009.

But to follow it up, I know you no longer provide the segment data, you did $20.7 million in fusing and indicated that you hadn't shipped [11,000]. If you did 60%, you did over $43 million this quarter. You haven't been anywhere near that type of number in precision, even if you add in the $11 million or so for one-times. Are we -- is that now a sustainable type of run rate, or are there other one-times within that?

I think that the number that you had backed into for our second quarter was what, Arnie?

Well, if you did 60% growth in fusing precision products year-over-year, you would be at $43 million of revenue. That's just mathematical.

No, that was JPF. The JPF product line, Arnie, was up 61%, not the entire business.

Okay. Thank you. I appreciate the clarification.

Oh, no, that was a good question.

My second question relates, you generated $19 million of cash from inventory reductions. Can you give us a better feel for the split between that $19 million reduction? And then as a follow-up, as it relates to industrial distribution, we've seen a lot of companies in the business attempt to reduce inventories fairly hard. But you're balancing the broader issue of getting the volume rebates you need to get profitability. So first, give me a better understanding of where the cash was generated in terms of the inventory reduction, and how you're approaching carrying inventory versus volume rebates.

Arnie, hi. The breakdown of the $19 million is basically about $5 million from the aerospace group. Their days on hand actually came down a little bit during the quarter, which is did. And KIT reduced inventory by $12 million, their days actually moved up a bit because they couldn't bring inventories down as quickly as sales came down. But they made good progress. And I'll let Neal respond to the question on rebates.

Yes, Arnie, I would divide that into three quick parts. Number one, we never have an inventory discussion without talking about customer fill rates first, because we always talk about how important an incremental dollar of sales is to a business like that. And if you don't have an A item, especially in this environment, you're going to have a customer that's going to go down the street, and we absolutely cannot have that happen. Secondly, we do certainly look at the trade-off between rebate income and our inventory levels. And to be quite honest, we just do the math. And we will sit down, we have sat down already, and we have a regularly scheduled meeting where we sit down and look at the math based on the advantages of orders and rebates this year versus the inventory carrying costs and what our expected sales are through the first half of next year. And that's really how we make those decisions.

Final question, if I may, corporate expense dropped fairly sharply relative to the guidance you've had of $9 million to $10 million a quarter. You did indicate you had some furloughs and other things. Are you changing your view of what the -- what we should expect for corporate expense on a run rate basis?

Arnie, we still think $9 million to $10 million is reasonable. We're sort of running on the low end of that range. We'll continue to do that because we have taken a number of cost reduction or deferral actions at corporate. On the other hand, we do expect that in the second half of this year, we will be spending some money on due diligence, which as you know goes right to the P&L. So that's a bit of an offset.

Okay. We'll see you all August 18th at our conference. Thank you.

Great. Thank you, Arnie.

Your next question comes from Matt Duncan with Stephens, Inc. Please proceed.

Good morning, guys.

Good morning, Matt.

The first thing I've got, is there any way you can quantify for us the impact of those furloughs this is quarter on the SG&A line? How much did you save as a result of those furloughs?

We saved total company about $1.5 million, and that was a one-time savings.

Okay. Are those furloughs continuing, Bill, into the third quarter here?

Right now, it's not part of our planning, but depending on how things go, it's possible. It's not in the current plan.

Okay, and then, Neal, you mentioned acquisitions. I know you guys are talking about some due diligence costs in the second half. Sounds like you must be getting fairly close to doing something, if those due diligence costs are going up. Can you give us any idea which side of the business you're getting closer to a deal on and sort of what type of things are you looking at?

Actually, Matt, this is one of those things where they either happen or they don't. But we are -- as we said, we're actively working on both sides, both the industrial distribution and aerospace side. We are close on opportunities in -- on both sides actually right now, but again, we cannot be sure that we will be the successful bidder. And it really -- the acquisitions are really pointed at the strategies for each of those businesses that we've laid out, Matt. Number one, on the industrial distribution side, for us to fill out our geographic footprint in the US, buy companies with strong management teams, good positions in the marketplace, and a nice complimentary product mix for us. And on the aerospace side, we would be focused primarily in the composites area.

Okay, thanks. That's helpful. And then when you look at the distributor business maybe having bottomed in the second quarter, can you give us some additional color on that? What are you seeing that kind of gives you confidence? I know you mentioned the monthly run rate seemed to have kind of bottomed out. April, May, June, all about the same. What did it look like in July? And sort of talk about why you think maybe distributions bottomed here.

Okay. July, about roughly the same. I think there's two reasons that we think it's bottom. One is that we've been at very close to the same run rate now for about four months. So with very little variation around a $2.4 million or $2.39 million a day rate, obviously daily rates up and down, but on average, that's where they are going to be. We also commented in the first quarter call that we felt that there was an impact of destocking that would hit or would bottom in the second quarter and we believe that that has had an impact and we're through most of if not all of that impact in the aerospace -- excuse me, in the industrial distribution business. Followed by the Jack Cahill had his entire sales team in, sales management team in a week before last, and again, anecdotally, the quoting activity particularly for some project business is increasing and that typically is a precursor of some improvement.

Okay. Then just a couple more things here. First, on JPF, when do you expect to start shipping option six and how much does profitability improve there when you do?

We expect based on current delivery schedules to begin shipment of option six in the second quarter of 2010, and as we have said before, we will move what has been a break-even US government business prior to option five to nicely profitable.

Okay.

That's what we've said in the past, and we look forward to getting to that nicely profitable point.

Okay, and then last two things here. Bill, for you, first on tax rate, what tax rate should we use for the rest of 2009 and then also kind of looking out to 2010? And then last, any update on trying to renew your revolver? Thanks.

Okay. Tax rate, we're still looking at 35%. It was a little lower on the first half due to lower KIT state taxes due to lower KIT earnings. Right now, I would use the same sort of guidance for 2010.

Okay.

And you're asking about the revolver. We are having a bank meeting next week where we kick off the process. We expect that we will at the minimum be able to renew at the current size. We may be able to upsize, but time will tell. We've had a very positive reaction from many new banks that we've been talking with, so we're quite encouraged.

And did have you any sense yet on what the change in your interest rate may be associated with that?

The current market is LIBOR plus 350. The current revolver is LIBOR plus 88.

Okay, thanks.

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

Thanks, good morning, everybody.

Good morning, Steve.

Congratulations on the unmanned K-MAX award. Do you know how many guys you're going to be up against?

Actually, we do not know at this point, Steve. It hasn't been made public. We did -- we do expect that at least one other would get the award. I would not be surprised if it would be two others, but we don't have that -- we have not been advised of that formally yet.

Okay, thank you. I guess this one might be for Bill. Away from the furloughs, can you give us an idea how much the cost savings is going to continue on? And particularly in KIT, is that something that's going to have to ramp back up there the savings go away, or are they sustainable?

No, like we said, at the KIT, about $1.3 million of about $8 million in savings in the first half was one time. But our $12 million for the year continues as being a reasonable objective.

Great, thank you. Last, do you have an update on the SH-2Gs?

Steve, we continue our marketing efforts. We've had customers from a couple different countries in to fly the aircraft. We continue to meet with them. We have had some initial sales of the spare parts that have come back as part of that deal, but we don't have anything to announce on contract awards.

Okay. Thank you very much.

Your next question comes from Edward Marshall with Sidoti & Company. Please proceed.

Good morning, everyone, and thanks for taking my call. You discussed the trends on the industrial segment. But kind of longer term thought process of now that you're running a much leaner cost structure in that segment, where do you think that the margins of that business can ultimately go, even looking out past 2010?

Ed, we've said that our goal for that business is 7%. Obviously we've taken a step back from last year because of the downturn in the business, but we're going to structure that business and aggressively grow it so that from both a buy side economics and get the advantages of scale that we need to close the gap between the 4.6% we were at and 7%, get smaller, leaner cost structure that we have today across the organization so that we have a lower fixed cost to amortize. We know that some of those costs will go up. We will have to add some people back in. We will also have variable expense associated with that, but our long-term target for that business still is 7%.

And going back to the [burrow] you mentioned some of the development of contracts and some of the long processes that you have to go through just yet, but kind of thinking of the timing if a contract was awarded, would we see any benefit to your 2010 numbers at all?

It would -- I don't mean to be evasive, Ed, but it would depend on the type of contract it is.

Right.

If there is a contract that is for the aircraft, about what it is today, then we could see an impact in 2010. However, the likelihood is there may be some modification required to the aircraft, so that would move the benefit out more likely into 2011, which is frankly our first payment to them, to the Australians, is due in 2011. What we attempted to do through the contract negotiation was align the contract payments up with when we thought we were going to have revenues for that.

I see. And there was commentary, I don't know if there was in the Q or in your press release about the dilutive effects of Brookhouse in the quarter. How far below your traditional margins is the Brookhouse business? I'm not looking for a raw number.

Within aerospace, it's in high single digits. As you know, aerospace overall is in mid-double digits.

Okay. And --

I'm sorry. I'm going to go back. I was just coached very politely that you asked a question on K-MAX and I answered an SH-2 question. I apologize. The K-MAX demonstration order is relatively small. It's under $1 million. We would expect that we would perform that demonstration late this year. It may depend in part on when the Marine Corps can support it at one of their training facilities. We expect it may be China Lake. They have said that they would like to deploy after a successful test. We would have three aircraft. I don't know if we would have a benefit in 2010 if we were to get to that stage or whether it would occur in 2011. It would depend on the level of modification required after the trials.

So I guess to clarify, especially assuming the partnership with Lockheed Martin here, is it fair to assume that this is a very long process and it's going to take some time before you actually see any benefits from it?

Yes, Ed, that is exactly correct.

Okay, and then finally, my thoughts on the shelf registration that you had earlier in the quarter. Is it possible that we could see shares issued to fund the pension?

It's something we've considered, decided not to do. We put cash in, but certainly it is an option that we have. And going forward, that may be something we do.

But at this point, it has been -- it's -- you haven't done it, or you're not planning on doing it at this point?

No, we do not. I mean there are I think 8% of the pension plan assets are Kaman shares, must have been put in some time ago.

Okay. Thank you very much.

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

Hi, good morning, guys.

Good morning, Jeff.

Just wanted a lot of great color and granularity here on the call, so I appreciate that. Bill, just back to your commentary second half versus first half, did I hear that clearly, you think second half operating income is below first half?

Slightly below, yes.

Okay. Because just as I look at the moving pieces, seems like even on a flattish kind of sales environment, distribution would see some nice improvement, just on the cost saves side and just given that first quarter was such a challenge. So are we -- is it fair to say that distribution is maybe up second half versus first and then the offset is aero is not quite as strong?

That's fair. There is a slight improvement in distribution in half two versus half one and the bearing product line impact on aerospace in Q3 primarily is a significant negative in the second half.

Okay, and then just in general, can you guys just give a little more granularity on what you're seeing on -- and how you're thinking about commercial OE, commercial aftermarket, business trends, how is visibility shaping up in the specialty bearings business into the fourth quarter? How do you think about commercial aero momentum into 2010?

Jeff, as we look at it going down, we've had the most significant impact from the downturn in the business and regional jets. I mean when their production rates are down some 40% to 45%, it ripples back through the supply chain pretty quickly and when our lead times are industry-leading, it hits us that much more quickly. However, we do believe that we've seen that. What we're pleased with is that we haven't seen Boeing or Airbus reduce their narrow body rates. We don't have a tremendous amount of content on those aircraft, but they build a lot of them every month. So that's been good news for us.

The delay of the 787 is not particularly good news for us from either a bearings perspective or some of our composites businesses. But we have nice content on 767. If 767s are used in the interim for those customers not getting delivery of 787, that's okay. The 777 declined next year from seven to five is going to impact us, but those are the big swingers for us right now that we see. So actually going forward, the fact that narrow body lines are staying constant, wide bodies are -- 777s are coming down, but we've got good content on the Airbus side as well now, we feel okay about it. It's going to be down. We know that, but we think the mix of platforms that we're on, combined with our strong military businesses really provides some offsets.

Okay. Just a follow-up. Regional business jets, can you just give a sense of how much of your aerospace was regional business jets. Are you assuming that that weakness continues into 4Q and into 2010, or is there some kind of inventory adjustment that took place that was -- that may be temporary?

Sure. First of all, our bearings business is really the only business in our aerospace segment that has exposure to the business and regional aircraft. In fact, it's one of our -- we have almost no content from a structure perspective. So it -- you could isolate it to our bearings business. The -- we believe there has been some destocking. We believe that as we've said, that we will have a dip down in the third quarter, some recovery back up in the fourth, and what we would like to do is defer any commentary on 2010 till the next call really, Jeff. I don't think anybody is saying that we're going to have a bounce back recovery in business and aircraft. That's really probably out past 2010. It's one of the reasons that we took the actions that we did during the quarter with a reduction in force in our specialty bearings business. It would have been different if we had seen that business bouncing back in 2010 for business jets.

Okay, great. Just shifting gears back to the cost savings program, Bill, can you just run through what your restructuring spend has been year to date and save, and what the second half looks like on those two fronts? And what was kind of one-time furlough versus permanent?

Right, in the first half, we had savings for the total company of roughly $11 million, of which $1.5 million was viewed as one-time and that was primarily furloughs.

And was any of that $11 million within distribution?

No, that's total company. Distribution was about $8.8 million.

Okay.

And the rest was at [schematics] and full year second half, we said KIT, our objective was $12 million. We expect to hit that and the KIT number was roughly double what we did in the first half there.

Okay. Thanks, guys.

The bearings number, sorry.

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

Good morning.

Good morning, Rob.

Bill, I noticed that your other expense was about $1.3 million for the six months. And then I notice in the Q that you -- I think you ran a $4.5 million loss on the foreign exchange hedge that you have through that, is that correct?

Yes, the net, which was about $1 million, runs through that particular line item. In other words, we have a hedge and we have the underlying and then the net of the two was roughly $1 million in the first half.

Okay, great. And then shifting to Blackhawk for a moment, Neal. How many Blackhawk cockpits are currently under contract and then what sort of options exist beyond that?

I think it's 580-ish are on order with us, Rob. As we said, we expect we'll deliver the number 400 in the third quarter. Our expectation is that as that program continues, given our strong performance with Sikorsky it would extend, but that's how far our contracts go out right now.

So you get a new contract each time or they just agree to extend it and give you another order so to speak?

That's right. Last year we concluded a contract negotiation that I believe actually took us through 2012, and we know that other suppliers are working on contracts to extend past that point now, so we would expect that we would as well soon.

Great, and then I notice the Q also mentions that you have begun discussions with seven foreign governments regarding the sale of the SH-2 helicopters. Will those likely be sold in smaller lots or do they -- do you think that you will likely be able to sell all the aircraft to one government?

When we look at -- I think it is unlikely that we would sell all of the aircraft to one government. When we look at the mix of responses that we've had to inquiries at this point, they varied from about nine at the high end for one country down to two. So that's the kind of distribution that we've been looking at, Rob.

Okay. And then on Kamatics, you mentioned that you had seen some growth in military bearings to offset some of the weakness in bearings regional business jets. Where are you seeing the growth in military bearings? And then secondly with respect to Kamatics how are you efforts coming to find new non-aerospace markets for Kamatics bearings?

I'll start with the second question first, Rob. As we commented, during late fourth quarter, first quarter we added additional engineers into the application engineering area at Kamatics to be able to extend out into other areas. But we cannot say that we have, we have had success yet there, many times because of the custom application engineering requirements it takes a while. So we do not have any meaningful extension into a new area with that technology yet. And on the military side, I would expect that it's in two areas predominantly, helicopters, which given the usage in Iraq and Afghanistan, too, is probably not surprising. And also a slight tick-up in the engine area as well.

So it's after-market on the helicopters, is what you're saying?

Yes.

And then finally, using round numbers, could you kind of help us size potential acquisition spends that you could see Kaman making on both sides of the business, give me the ranges of companies that you're looking at?

Well, I can tell you what our sweet spot is. We may have some variation around that sweet spot. For the aerospace side, it's likely on, up to $45 million or $50 million, maybe a little bit above that million. And then in the industrial distribution side, it would vary, but I would say the companies we're looking at, low of maybe $10 million, more like the Inrumec acquisition from last year up to, up to perhaps $30 million.

Okay, great. And congratulations to KIT. I guess they got their first contract under the GSA [omnibus] contract. So that's good.

Yes, we did.

Thanks very much.

We're very pleased to see that concrete step forward with the GSA contract.

Thanks again.

Great. Thanks, Rob.

And your last question comes from Margo Murtaugh with Snyder Capital, please go ahead.

Thank you very much. Just a couple of questions. So your total capacity for acquisitions this year would be what? And what can your balance sheets handle, do you think, and what kind of cushion do you want to have?

Margo, on the outside right now, we could draw down on the revolver about $120 million. We would not good that high, but for the right deals, would consider using Kaman stock and would leverage up a bit and then eventually rebalance the balance sheet with a [follow-on] equity offering or whatever was appropriate.

Okay. Also, do you have any thoughts on the outlook in 2010 for bearings? You talked a little bit about the overall commercial aerospace outlook, so I appreciate that.

Margo, I think that the business aircraft portion of that is going to continue to be weak. I think that we will also see a slight tick down, as has already been announced on the 777 rates. But at this point in time, other than those two areas, we have not been advised that they either, Boeing or Airbus are going to roll back any of their other roll-out rates for 2010. And frankly, we've got fairly short lead times compared to some of the other equipment. So I think if they are not going to upset the supply chain pretty dramatically, they would have to be announcing those reductions fairly quickly. But we haven't heard them.

Okay. And is JPF profitability still pretty low, pretty low in the second half, or is there any mix change there?

It's operating under option five, Margo, whereas we were under option four going into the second quarter, and we made the switch during the quarter, and there is a bit of a pickup there with option five.

Okay. All right. Well, thanks. And thanks for the great detail on the call. Appreciate it.

Okay, thanks. Are you out in California, or are you on the east coast, Margo?

No, I'm in California.

Oh, gosh. So it's an early morning.

Yes, we're used to it.

Yes. Thanks for joining us.

Thank you.

This concludes the question and answer portion of today's conference. I would now like to turn the call over to management for closing remarks.

Thank you for joining us for today's conference call. We look forward to speaking to you again when we report third quarter results.

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