Kaman Corp (KAMN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Kaman Corporation Third Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Eric Remington, Vice President of Investor Relations. Please proceed.

Thank you and good morning, everyone. I'd like to welcome you to the Kaman Corporation's 2010 third quarter conference call to discuss our earnings results and our outlook for 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 that 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 or its management, statements of 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.

Our discussion today will include references to certain non-GAAP financial matters. Reconciliations of these non-GAAP measures to our GAAP financial statements have been included in our earnings release. With that, I'll turn the call over to Neal Keating. Neal?

Thanks, Eric. And good morning. We delivered a strong third quarter in both of our businesses which combined with lower corporate expenses yielded higher sales and profitability than we originally anticipated. This strength along with several contract wins during the quarter is encouraging as we head into the final quarter of 2010 and into next year.

I will begin with our results at industrial distribution which once again delivered a solid quarter with sales up 37% following a 35% increase in the second quarter. Approximately 20 points of this growth was driven by the three acquisitions that we've made in 2010. As you can see from this strong contribution, the performance of Minarik and Allied has been excellent and we are now forecasting both to actually be slightly accretive in 2010. Our organic sales in industrial distribution also remain strong, up 17% on a sales per day basis in the third quarter which is consistent with our second quarter increase. Despite less robust industry indicators as we move through the quarter, our results remain consistent as the quarter progressed.

Virtually all end markets contributed to our growth during the quarter with the exception of construction and housing related business. We continue to add new product lines to drive share gains and to continue building our national account base. During the quarter we were awarded several new national accounts and while we have a few large national accounts which will be up for renewal next year, we are working diligently to recommit these customers for the future.

Strong sales results at distribution have allowed us to drive another quarter of substantial year over year improvement in our operating margin which was 3.8% or 170 basis points higher than the third quarter of 2009 and a ten basis point improvement over the second quarter. Our distribution segment is now under the leadership of Steve Smidler who assumed the Presidency on September 1 following Jack Cahill's retirement. The transition has gone very smoothly and we are looking forward to the future with Steve.

Overall, both our existing and acquired businesses contributed to solid improvement over 2009 for industrial distribution; however, the majority of the upside in the quarter was driven by better performance in our aerospace segment. Sales increased approximately 7% following significant year over year declines in both our first and second quarters. A large portion of our first half decline was attributable to the Joint Programmable Fuze program. As you know, we resumed production in early August and were able to ship more than 9,000 units in the third quarter. We also completed Option 5 during the quarter and began shipping Option 6 orders.

I would like to take this opportunity to recognize the efforts of our precision products team led by John Kornegay. They have faced many hurdles this year and to deliver more than 9,000 fuses in the quarter is a tremendous achievement. Other drivers of our third quarter aerospace results include increased deliveries for our Sikorsky BLACK HAWK cockpit program as we delivered 49 cockpits compared to 38 in the prior year as well as higher sales in our blade erosion coating program.

Sales of bearing product lines were down as we had anticipated although our operating margins improved compared to the prior year. We have continued to focus on improving the efficiency and profitability of our bearing product lines which has helped us preserve our margins during this period of softer sales.

Overall, even with lower volume from our bearing product line, our aerospace operating margins were flat compared to the prior year, excluding the TRP settlement which Bill will discuss later. This is truly a testament to the efforts of the aerospace team to expand and to diversify our aerospace product and customer base.

Now to provide some perspective on our view of our business as we close out 2010 and move into 2011. First, commercial aerospace markets appear to be continuing to improve with both Boeing and Airbus orders and production steadily increasing. We are looking forward to our content on the Boeing 787 starting to contribute to our sales in a more meaningful way during 2011. We also delivered our first [A10] chipset in September. This is a significant program for us and should begin to ramp up to full rate production during 2011.

As a reminder, our A10 program has grown to over $110 million in anticipated revenue; however, the business jet market is not improving and 2010 deliveries are expected to be below 2009's already depressed level. While we do not expect to rebound in this market now until 2012, the long-term market prospects are encouraging. This month, Honeywell published their forecast for the business jet market through 2020 and they project a market for 11,000 aircraft with a value of $225 billion. We at Kaman along with many other companies are looking forward to the recovery in this important market.

We continue to aggressively pursue opportunities for the SH-2G aircraft with several interested countries and will be sure to update you on any material developments. We were also awarded several contracts during the quarter which I'd like to touch on.

First, we're encouraged that our Wichita facility recently received an $11 million follow-on order for Boeing for inlet screens on the CH-47 program and also won a number of smaller follow-on programs for various customers, further evidence of the progress we are making with that operation.

Second, as already announced, the Air Force increased the value of Option 7 under our Joint Programmable Fuze program by $36 million, bringing the total value of the Option to $81.5 million. We expect Option 7 shipments to begin in early 2011.

Finally, two weeks ago Lockheed Martin submitted a proposal to NAVAIR in response to their RFT for an unmanned aerial system demonstration in Afghanistan, the Kaman K-MAX with the platform proposed by Lockheed. If awarded a contract this would result in modest revenue for us in 2011 and utilize existing inventory on our balance sheet. More importantly, it would represent the next step in developing a long-term opportunity for this program.

In industrial distribution, we have been very encouraged by the results we've achieved in the first nine months of this year but recognize we have a lot of work ahead of us to achieve our goal of 7% operating margin. While the key indicators for our industry including industrial production and capacity utilization have moderated somewhat, they continue to indicate that we are in an expansionary mode in the industrial sector. As I have already mentioned, revenue and profitability from our 2010 acquisitions are trending even better than we had expected and they should be even more accretive next year. While our comparisons will not be as easy as we move into 2011, for the majority of this year we're still operating at sales levels below where we were in 2008. We believe this suggests more room for growth in 2011 with additional upside if market conditions continue to improve.

With that I'll turn it over to Bill Denninger to walk you through the quarterly financials and our outlook in more detail. Bill?

Thanks, Neal. And good morning. Third quarter sales were a record $359.5 million, up 24% compared to the third quarter of 2009 driven by growth in both our aerospace and industrial distribution segments. Net earnings for the quarter were $15.8 million or $0.61 per diluted share; on an adjusted basis excluding a $6.6 million benefit from look back interests and a $2 million contract settlement loss in aerospace. Our net earnings for the quarter were $12.8 million or $0.49 per diluted share up from $9.6 million or $0.37 per diluted share in the prior year.

I will discuss these one-time items later but please also reference the non-GAAP reconciliation table contained in our earnings release.

On a segment basis for the quarter, distribution sales were $223.1 million, up 37% year over year or 39.1% on a sales per day basis as we operated one fewer sales day this quarter compared to the prior year. Our organic business excluding acquisitions was up 17.1% on a sales per day basis, consistent with our results in the second quarter. Our gross profit margin improved compared to prior year and segment operating income was $8.5 million, up 150% year over year. As a result our operating margin improved by 170 basis points year over year to 3.8%.

The drop through rate on our distribution business was about 8.5% compared to the third quarter of 2009. On just our organic business, the drop through rate was about 12%. Minarik was slightly accretive during the quarter and both Allied and Minarik are expected to be accretive for the year.

Moving on to aerospace, sales in the quarter were $136.4 million, up 7.2% compared to the prior year. Our GAAP operating income for the quarter of $19 million included a charge of $2 million or $0.05 per diluted share on an after-tax basis related to our contract resolution with Sikorsky regarding the composite tail rotor pylon or KRP program for the MH-92 helicopter. Excluding this one-time charge, aerospace operating income was $21 million or 15.7% of sales, equal the prior year.

Operating income on an adjusted basis from our two segments increased 27% to $29.5 million. In addition to the growth in our segment results that I just mentioned, consolidated operating income was boosted by lower than expected corporate expenses. This decrease at corporate was related to lower medical claims in the absence of acquisition related third-party expenses. Our medical claims have been challenging to predict in 2010 as we implemented a new self-funded medical insurance program on January 1 and actually claims to date have been running below our projections.

Additionally during the quarter we received a one-time $6.6 million pre-tax or $0.17 per diluted share after-tax look back interest payment related to the Australian helicopter program. Our effective tax rate for the quarter was 31.6%, lower than expectations due to a few discreet items related to our 2009 tax return. As a result, for the full year we expect our effective rate to be about 33% and for the fourth quarter our more normalized 34%.

Capital expenditures were $6.4 million for the third quarter and $14.5 million for the nine months. We continue to expect our CapEx to be in the $20 million to $25 million range for the full year. This was higher than historical levels due primarily to a number of IT investments we're making both at distribution and at corporate which Neal will discuss in a minute. We generated approximately $7 million in free cash flow during the quarter and $13 million year to date. For the year we continue to expect our free cash flow to be in the range of $20 million to $25 million. Our leverage remains low with a quarter end debt to cap ratio of 23.1%. We continue to expect our debt to cap ratio at the end of the year to be in the mid 20%. We have no significant near-term debt maturities and a solid balance sheet which was recently strengthened by a new credit facility which replaced our old revolver. There are a number of benefits to this new facility including an increased term of four years, a higher facility size of $275 million, a $75 million accordion feature and a lower interest rate spread.

I'd like to take a moment now to discuss our liability to the Australian government as a result of the termination of a helicopter contract in early 2008. The termination agreement requires us to pay Australia a minimum AUD26.7 million by March 2011. At the time the agreement was signed that equated to approximately $25 million. The amount we will be paying next March is now substantially less for a number of reasons.

First, some of the liability has already been paid by virtue of our having shared with Australia proceeds realized from sales of spares since the date of the agreement. Second and more significantly when the value of the Australian dollar was at a weak point in 2008 we hedged a majority of the liability due under the agreement which substantially reduced that liability in US dollar terms. As a result the payment due in March now translates to approximately $16 million. This outflow of cash has in part already been funded by our receipt of almost $12 million in cash as a result of the termination of the program. This includes proceeds from the sales of spares and the look back interest recently received from the IRS. Therefore, the additional funding required to enable us to make this payment in March has been greatly reduced and it is not a significant concern.

I would now like to provide some additional detail and outlook for the remainder of the year. In distribution we've been encouraged to see sales trends continue to be strong due to a combination of variable market conditions, our efforts to win new accounts, and the contribution from acquisitions. Given the solid third quarter performance and our expectations for these trends to continue, we are raising the outlook that we provided in August. We now expect organic sales for the year to be toward the higher end of our range of up 10% to 13% and overall revenues to be in the range of $810 million to $830 million. We expect full year operating margin to be in the range 3.3% to 3.5%. Keep in mind that the fourth quarter typically has a lower profit rate due to fewer sales days and slow downs around the holidays.

In aerospace we have worked hard on our JPF program to resume production, minimize further disruptions and meet our revenue targets. While there is always risk, I am pleased to tell you that we're on track to meet our full year projections. As Neal previously mentioned, our bearings business continues to be soft. Order rates are improving sequentially but many customers are now requesting deliveries in 2011 rather than 2010. As a result we expect fourth quarter bearing sales to be slightly above the level of Q3, however, not by as much as originally expected and below prior year levels. Taking all of this together we are maintaining our outlook for aerospace sales as we expect the better than anticipated third quarter results to be offset by lower than previously expected bearing shipments.

We continue to expect aerospace sales of $480 million to $490 million for the full year and an adjusted operating margin of 14% to 14.5%. On a consolidated basis we still anticipate that our fourth quarter performance will be slightly stronger than our adjusted third quarter results. While we benefited from a few items in the third quarter we do expect our corporate expenses during the fourth quarter to be in the range of $8.5 million to $9.5 million including due diligence costs related to potential acquisitions. Interest expense for the full year is expected to be approximately $9.8 million due primarily to the impact of higher borrowing costs and higher borrowings to fund this year's acquisitions; however, including the one-time $6.6 million look back interest payment which was recorded as interest income in the third quarter, our full year net interest expense is expected to be approximately $3.2 million.

In summary, we are encouraged by the underlying trends in both of our businesses and combined with our internal initiatives to drive growth we believe that we are well positioned for the fourth quarter and 2011. With that I'll turn the call back over to Neal. Neal?

Thanks, Bill. Before we take questions I wanted to take a moment to update you on several of our investments for the future. We've already discussed our acquisition investments and we continue to pursue additional targets with active pipelines in both businesses. Our business system improvements in distribution are progressing and we are already benefiting from some of these projects.

In aerospace we continue to make significant investments in our specialty bearing product lines. We have continued our efforts to develop new applications for our products through engineering resources and research and development. We also continue to invest in new technology and equipment to improve our productivity to ensure that we stay competitive. We efficiency in mind, we are consolidating facilities and investing here on our Bloomfield campus to enhance our capabilities, minimize business disruption, and lower costs while effectively utilizing our existing real estate. These projects include the construction of a backup data center, consolidating helicopter operations, potentially locating industrial distribution on to our campus, and creating redundancy in key specialty bearing processes. And next week we will hold a grand opening for a new aero structures facility in Mexico to be able to offer a low cost supply solution to our commercial customers.

We no doubt face short-term challenges but these investments demonstrate our commitment to long-term growth and our confidence in the future here at Kaman. With that I'll turn it back to Eric.

Operator, may we have the first question, please?

(Operator Instructions) Your first question comes from the line of Arnie Ursaner from CJS Securities. Please proceed.

Hi. Good morning. I want to try to focus a little bit on the JPF Fuze segment. You shipped 9,000 units in the quarter and that was in roughly a two month period and yet your annual production is 24,000? Unless that's changed materially? So, I'm assuming you're either shipping from inventory--is that the right way to think about it? And how should we think about unit shipments for Q4?

The third quarter did include shipments from inventory that have been built up while we were not doing less. Production capacity is around 6,000 Fuzes per quarter and right now we're targeting I believe about 9,000 Fuzes for the fourth quarter.

Okay. So, we had thought you would have more revenue closer to $70 million for the year. Unless the price has changed materially you'd be hard pressed to get to that type of level.

No. If we don't have any further production disruptions we should be close to that number at the end of the year.

I'm assuming the profitability is higher now that we're in Option 6. And is also Option 7 higher than 6 in terms of profitability?

7 and 6 are comparable and we are shipping Option 6 in the fourth quarter.

My final question, I know you've got some legalese in your Q but in there you speak about inventory on both K-MAX and the SH-2 being sold after October 2011 yet in your prepared remarks it sounded like you might have some inventory shipments of K-MAX much earlier in '11 and possibly even some progress on SH-2 much sooner than the end of '11. Can you try to reconcile those two comments?

Yes. The K-MAX relates to the bid that we've just made with Lockheed Martin which would take $5 million to $6 million of inventory off our books if we were successful with that deployment. Not the production contract but the deployment contract where we hope for an award in the first quarter. SH-2s are going to depend on how our negotiations with the various foreign countries proceed.

But again, assuming these are continuing on the path they're going, you expect it to take ten or 11 months into next year before the sales finalize?

You're referring to the SH-2, Arnie?

Yes.

I don't think we know at this point. It's possible. We would hope certainly to ship a number of helicopters prior to that but it certainly could slip toward the end of the year.

Arnie, it would depend. When we enter into the final contract, what kind of configuration the end customer wants for the aircraft. If it is in the current configuration we could certainly ship them more quickly. But if for example they wanted the aircraft to be modified for a combat search and rescue mission that would be a more extended delivery timeframe. So, that's really the key thing to consider in that I believe.

One final question real quick for Bill. You had $1.5 million less you disclosed for medical claims in Q3 and you mentioned you had changed towards more of a self insurance. Should we view the $1.5 million as a one-time?

Right now, yes. It was a reserve adjustment to bring us in line with the claims year to date. We just don't know what the fourth quarter is going to bring since this is a new program and we're watching it very closely but there is some variability there.

Okay. Thank you very much.

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

Hi, guys. Congrats on a nice quarter here.

Thanks, Matt.

The first question I've got is with regard to KIT. Can you talk a little bit about how the sales progressed month to month through the quarter and then into October?

Sure, Matt. They were very strong and consistent on a month-by-month basis with almost -- with very little variability in the daily sales rate and that continued into October.

Guidance. I know, Bill, you indicated that we should be looking at the high end of your organic growth range. Historically if I go back to the last growth cycle in the industrial economy, your fourth quarter was typically down about 2% to 5% sequentially and at 13% organic growth you actually would be at the high end of that decline at 5%. Maybe the opportunity for some upside there in the fourth quarter, if things are maybe in the midpoint of that normal seasonal decline range?

We are projecting sales at KIT to be less than the third quarter. I do think there may be some upside if the daily sales rate holds through December which historically has not happened because of the seasonality in the holiday period.

Okay. That's helpful. And then if I go over to the aerospace side for a minute it sounds like specialty bearings are probably up a little bit in the fourth quarter, it's safe to say maybe not as much as you had previously thought. Did some of this shift? I guess you indicated some customers were looking for deliveries in 2011 now rather than 4Q. Should we just look at that as a shift of revenue from one bucket to another?

I think that's fair.

I would agree with Bill, Matt. I think that's fair. You know our incoming order rate was actually stronger sequentially in the third quarter than the second quarter and as you know the second quarter was a big tick up for us versus the first quarter in the year. In fact, we're actually at our highest incoming order rate in the specialty bearing product area since the fourth quarter of 2008. So, we feel good about that. We had strong orders in commercial aircrafts. So we're beginning to see some of that come back. In fact we also saw a nice tick up in demand for regional aircraft. So, we feel good about those order rates but again as Bill outlined a lot of the customers are asking for deliveries out in the beginning of 2011.

Okay. And then to help us make sure we're thinking through the quarterly underlying aerospace revenue, if I were to normalize the JPF quarterly shipments around that 6,000 unit which is your production, what would the revenues look like in that world? Can you help us think through how we would adjust the revenues from this quarter downward for a normalized run rate of JPF?

I think the easiest thing to do, the simplest thing, is to take the full year outlook we've given and divide it by four. That's your base business run rate as we move into the fourth quarter and next year.

Okay. Thanks.

We do expect some growth in various programs next year but that's the base level.

Okay. And then the last thing I've got is looking at your segment margins your guidance is implying that you're going to have about 130 to 150 basis point increase year over year at KIT. Obviously it's even really better than that underlying because you had some furloughs last year and some temporary cost would've come back this year. How should we think about operating leverage in that business as you work towards your 7% goal on an annual basis going forward after this year? I know 130 to 150 basis points is going to be difficult to repeat but is there any reason you can't do maybe 50 to 100? Just talk about what we should look for for the progression in the margin of that business?

Matt, we are still going through our annual budgeting process, firming up the numbers. At this point we are not giving specific guidance for 2011 and we'll certainly be prepared to do that or give an outlook I should say with our February call.

Okay. Alright. Thanks, Bill.

Your next question comes from the line of Edward Marshall from Sidoti and Company. Please proceed.

Good morning. Thanks for taking my call. The aerospace, if I could, looking at the guidance that you posed there for the full year and then kind of working backwards as to what that would mean for the fourth quarter, it looks like the drop through rate for the margin on the incremental sales dollar suggests that you're looking for at least the midpoint of the range because I guess their range is $3.5 million to $13.5 million in sales and incremental sales and $3.5 million is $7.5 million in incremental profit. So, it looks like you're not going to get 100% drop through on the incremental sales dollar. Are you guiding--should we expect closer to the midpoint of that range? I don't know if I made myself clear.

Ed, I'm afraid you didn't. I just didn't follow your logic.

We could follow-up later if you don't mind.

Why don't you give me a call after this call?

Okay. The JPF Option 6 and 7, can you kind of walk me through the timeline as to when you expect to have them completed, when you expect to start 7?

We actually are expecting right now, Ed, that we will complete 6 either late this year or early next year and Option 7 would take us through 2011.

Okay. As far as acquisitions are concerned, what's the--do we expect more acquisitions on the industrial side of the business? If so, will they be of the same magnitude that we've seen in the past?

You know, Ed, we've had--as we commented a little bit earlier, we've got quite honestly very active pipelines on both side of the business. The acquisitions that we've done in the industrial distribution segment so far this year have varied quite a bit in size from around $20 million up to about $40 million. We would certainly like to be able to close an additional acquisition or two in that range. We have ones in the pipeline as I said that we believe could enable us to do that. But again, when you're dealing here again with private buyers, we need to go with their timeframe. I think it was indicative this year where we did three acquisitions in the second quarter and we didn't complete any in the third. We certainly are optimistic and we have some that we're working on that would be in that range.

Minarik came with some pretty decent margins. Obviously it would be great to see something in that range. Are they in fluid power as well?

They're really not in fluid power, Ed. They're primarily in the high end, very sophisticated motion control and automation area. You're exactly right. They bring very good margins. A great mix for us to be able to continue to diversify our business between OEM and MRO business and quite honestly get us into the higher value added product lines that we'd like to go into. We'd certainly like to continue to grow in fluid power as well but this was another product area that enabled us to improve our margins and provide more of the products that our customers are looking for.

I guess moving on, the aero structures business, you said there was a facility opening in Mexico? Are there any tax benefits that we should be thinking about as we progress into 2011 as you open up that operation and revenues start flowing from that facility?

I don't think so, Ed. I mean it's normal US tax situation. It's a maquiladora.

Okay. Thank you, guys, very much.

Thanks, Ed.

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

Good morning, guys.

Good morning, Jeff.

So, you didn't really change anything on the aero guidance but $10 million for a year, pretty small range. $10 million for a quarter? In the range, pretty big. What are the big swing factors in your mind for the fourth quarter around that?

The biggest swing factor for us, Jeff, would be JPF deliveries. We stated before that we accommodated in our outlook a work stoppage. We have not incurred one so far. So, again, so far, so good. But key drivers of that range are primarily JPF in case we get to the point where we have another work stoppage and also there may be some variability around our specialty bearing sales driven by customer requests to deliveries at the very tail end of the year.

And that would just be a timing issue?

Yes. It would be a timing issue. Depending on their backlogs and whether or not they decide to go on an extended shut down over the Christmas holidays.

Okay. And just on JPF, any kind of growing pains that you're experiencing, added costs as you ramp back up?

Actually the team was able to control the costs extremely well through the most recent work stoppage. We're very pleased with that. Quite honestly, they managed it great. We got great upside as you saw from the volume that came through and they continued to perform well.

Okay. And then on these investments that you mentioned is that largely an indication that CapEx remains high into '11 or do you have some expense items that maybe move around the earnings numbers in the near-term?

Actually the CapEx for 2011 is going to be a bit higher than we're projecting for this year. The KIT industrial distribution and IT projects are over a two year period and there's additional spend, as Neal said, for some of the work we're doing here on the Bloomfield campus. So, we're probably looking in the neighborhood of $30 million to $35 million for next year's CapEx.

Okay. And then just a final question. You mentioned some moving pieces in national accounts into next year, some rolling off. Can you maybe quantify what's rolling off versus what's coming on? Maybe impacts that compares outside of just normal demand?

Jeff, I think that what we're just trying to outline is that national accounts are certainly a very dynamic area. We've had a great level of success with that and every year we're going to have some that roll off. Some of our larger national ones are up for competition next year. We're working very hard to make sure that we're able to recommit those customers as we said earlier. We think that in fact some of the moves that we've made with the Minarik acquisition position us very well with the advanced products and technologies that those sophisticated national accounts are looking to have as part of that package but I really wouldn't go into which accounts are up or where we stand with them.

Okay. But that's just normal course of business, some is coming in, some is going out. There's not a big two point swing in the revenue growth where if you lose one or two--

No. I think it's normal course of business, Jeff. It's just that we found ourselves--we talk about the successes we have. We think that it was also incumbent upon us to outline exactly as you just said, a normal course of business. We have competitions every year some of which we're successful in and the potential that we may lose some as well.

Okay. Thanks, guys.

Thanks, Jeff.

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

Thanks. Good morning, everybody.

Good morning, Steve.

You talked about business jets being slow. Are you skewed to any one particular manufacturer or one size class of business jet?

No. Steve, we're really not. The primary exposure in business aircraft for us comes through our specialty bearings product lines. They're on essentially all of the business aircraft platforms today. Clearly the midsize and lower end of the market is the end of the market that is suffering or segment of the market that's suffering today. Gulf Stream still continues to do well. So, our business with Gulf Stream continues. But also with Hawker Beechcraft, Cessna, and the mid and low end of the Bombardier range, they are struggling with volume therefore it reflects back to our bearings business.

Thanks. And you did talk about making some investments on the bearings side. Does that relate? I mean, it's a pretty efficient plant. Can you get more efficient? Or does it relate more to new products?

Actually, Steve, good question. It goes to three areas primarily. One is certainly investments in people and research and development for new applications. Clearly A-350 continuing application growth on Joint Strike Fighter, very important to us. The second is as we've commented a little bit earlier, we've actually improved our margins with flat sales. So, it points to some of the additional investments that we've made in machine tools and improved processes in our bearings business to be able to continue to drive that efficiency improvement and third and very importantly to us, we're actually replicating some of the key process in a different building here on campus, separated from the main specialty bearings business just to prepare for any kind of potential issue that we might have in our process areas so that we would have redundant process areas in the most key processes. So those are the three areas of investment for us.

Sounds good. Thanks. Last, on K-MAX. You know, I guess there's still a question as to what happens in Afghanistan and how big or how limited the opportunity is but have you and Lockheed been having discussions about other applications? There's discussion it seems every day or some article printed about more applications for unmanned systems.

We look at additional applications every day. For example, as you know, prior to this Marine Corp contract we're working very closely with the US Army. So, those efforts continue as well.

Great. Thanks very much.

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

Good morning. Let me add my congratulations as well.

Thanks, Rob.

Can we spend a little bit of time talking about the decision to open a plant in Mexico on the aerospace side. What's the investment necessary? What will it likely do? What does it take to be able to make that particular plant a very strong contender?

Rob, the primary driver for us to open a facility in Mexico was the large number of aerospace companies that have moved into Mexico for various reasons. We're going to be in Chihuahua. We will be closely located to Cessna, Hawker Beechcraft, and Bell, three customers that are certainly targets for us to grow our market share in the business aircraft and helicopter areas. We have a total investment over time in the area of between $3 million and $4 million. We felt it was important for us to be there with those customers and offer our capabilities there. Clearly, it is also one where for us to grow in the commercial markets we need to have increasingly cost effective solutions. Mexico allows us to meet some of those target points where we can deliver at a cost that our customers are looking for and still make the kinds of returns that our owners are looking for.

Are there other locations around the globe that you would be considering or where Kaman is not present where your customers are that you need to consider?

Yes.

Shifting to KIT for a moment, can you talk about how MRO sales were versus OEM sales?

Sure. It was kind of interesting to us because our--if we talk about the base business, Rob, for a moment, taking Minarik and Allied, the two main acquisitions out, our OEM sales were actually up 45% year over year and MRO was up by 15%. And year to date we're up about just over 28% for OEM and just over 11% for MRO. Which is kind of interesting because as you remember, early in the year we were getting very good growth from OEMs but rather slow growth from our MRO segment. Now MRO is accelerating and interestingly our OEM business accelerated in the third quarter as well.

What do you think was behind the driving of the base business OEM acceleration?

I think that we certainly saw capacity utilization come up even though it's still about 5% to 8% below where it was in 2008 and we saw continued investment in some new equipment from the OEM side as well. What we're interested in finding out, Rob, is how much of that might have been export driven and we just simply don't have that data yet.

How about the acquisitions? Would they be substantially different if you were to look at them on an apples-to-apples basis?

On an apples-to-apples basis, I think that actually Allied is primarily MRO, Rob, and that's growing faster I would say than our base business and that may be driven by the uptick in oil and gas from year-to-year. Obviously 2009 being very depressed so we've got a very good comp there and we think we acquired that Company at a very good time. Minarik is a little bit different because they're about 75% OEM and so a little bit-clearly, very different than our legacy KIT businesses. But we've been extremely pleased with the level of growth and performance in both of those acquisitions.

Okay. And then finally, any comments on Wichita? Does this -- the awards that they have won, resolution of the tail rotor pylon program, does that give you sufficient coverage to be able to operate that plant at break even yet?

We've targeted exiting this year break even. We expect to be very close to that, Rob, if not profitable.

Great. Thank you.

It will certainly be profitable next year, Rob.

Great. Thank you, gentlemen.

Thanks, Rob.

(Operator Instructions) Your next question comes from the line of [Rob Crystal] from Goldman Sachs. Please proceed.

Hi, Bill. Could you put a little parameter around what you're spending in M&A fees or I guess gives us for a clean quarter what the corporate expense would be for Q4? Thanks.

Yes. In our outlook we tend to run a number of $750,000 to $800,000 would represent a quarter where we're active in due diligence with third parties. That's the kind of spend rate we would be considering.

Thanks a lot.

There are no more questions in the queue. I would like to turn the call over to Mr. Eric Remington for closing remarks.

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

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