Kaman Corp (KAMN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kaman Corporation second quarter 2011 earnings conference call. My name is Onika and I will be your operator for today. At this time all participants are in listen-only mode. We will have a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

At this time, I would now like to turn the call over to Mr. Eric Remington, Vice President, Investor Relations. Please proceed.

Thank you. And good morning. I'd like to welcome you to the Kaman Corporation second quarter 2011 conference call to discuss our earnings results and our outlook for the remainder of 2011. 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. Additionally, I will note that our discussion today will include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to our GAAP financial statements have been included in our earnings press release.

With that, I'll turn the call over to Neal Keating. Neal?

Thanks, Eric, and good morning, everyone. We are very pleased to report strong second quarter results that reflect continued sales growth and improved profitability. We achieved another quarter of record consolidated sales of $385 million. In year-over-year our earnings per diluted share increased by 117% to $0.50 per share.

I'd like to begin with an update of our Industrial Distribution business, where revenues rose by 13.5% to a record $239 million for the quarter. Our OEM markets continue to experience strong growth, with sales up 31% over last year and on a daily sales basis were 3% higher than Q1. Most of our MRO end markets were up versus last year, and we saw solid growth from our mining, food manufacturing, and primary metal manufacturing end markets. As I'm sure you all saw earlier this week, the ISM Manufacturing Index for July was released, indicating a decrease to 50.9 from 55.3 in June. This is a large and rapid change, and while we are being vigilant, we continue to see sales growth over prior year levels.

In addition, we achieved a 5.1% operating margin in the second quarter, marking our ninth consecutive quarter of operating profit improvement and return on sales. We attribute this increased profit performance to strong execution during the quarter. Our ongoing commitment to improved pricing discipline, the leveraging of our fixed costs over a larger sales base, achieving productivity benefits through our organizational realignment, and targeted investments in information technology. We also increased gross margin year-over-year and sequentially, despite a very competitive environment.

In addition, we've managed our cost structure very effectively and maintaining this discipline going forward will be a key factor in achieving our long-term operating margin target for Industrial Distribution. We have made solid progress toward our 7% target and are significantly above the 2% operating margin we recognized at the depth of the economic cycle in 2009. So, while we are pleased with our progress, we recognize that there is a lot of work ahead for us.

Our aerospace segment also delivered significant growth in both revenue and operating margins in the second quarter. Total segment sales were up 37.3%, and operating margin increased 360 basis points compared to the second quarter of 2010. Organic sales accounted for 30% of the increase, with the remaining sales growth resulting from our acquisition of Global Aerosystems.

There were a number of drivers to our organic growth. The JPF program continued to achieve performance improvement with strong volume and we continue to book additional orders, ending the quarter with a program backlog of over $137 million.

We are also seeing more interest from foreign markets. Year-to-date, we have shipped just under 12,000 JPF fuses versus approximately 3000 fuses in the first half of 2010. I am sure you will all recall that we had a supply component issue in the first half of last year that limited our ability to deliver product. As expected, we are returning to a more normalized volume of about 6000 fuses per quarter on average. As we indicated previously, JPF mix will result in increased profitability on the program through the balance of the year.

We also saw growth in the unmanned K-MAX program revenue, and higher sales of our bearing product lines. These were partially offset by slightly lower Black Hawk cockpit deliveries as we delivered 39 cockpits in the second quarter compared to 44 in the year ago period. These lower deliveries are due to timing related issues resulting from customer requirements, and year-to-date, we have delivered 84 cockpits versus 83 in the first half of last year.

We have maintained our backlog at a high-level, ending the quarter at $536 million, up over 16% over the same period in 2010. We continue to book JPF orders and the total since March of 2010 -- with the total since March 2010 at $177 million and order intake during the quarter was also strong in our bearing and erosion coating programs.

Most important are the positions that we are building on programs such as the 787, A350 and A380. With the significant commercial jet build rate increases, currently planned by Boeing and Airbus over the next several years, we will benefit from these positions for years to come. In addition, our business development pipelines are full, and we have promising opportunities across the segment.

I am especially pleased that through the acquisition of Global Aerosystems, we are accelerating our strategy to expand beyond build-to-print capabilities to full design and build projects. We know that this will take time, but the activity of Boeing on the 787 variants, 747-8, the tanker, and now the re-engined 737 will provide opportunities, and we are well-positioned to capture additional work on these programs.

Global is performing above expectations and was accretive to EPS in both the first and second quarters. On the other hand, as you would expect, the operating profit margin from an engineering services business is lower than our average aerospace margin, and therefore, the addition of Global has had a slightly dilutive effect on our overall aerospace operating margin. However, as we leverage this capability into design and build opportunities, we see upside potential in our margin performance.

The unmanned K-MAX program is progressing well, and is ahead of where we expected to be at this point in the year, with the quick reaction assessment testing for the Marine Corps currently scheduled for later this month. We remain committed to supporting our partner, Lockheed, and the warfighter, with the life-saving capability of the unmanned K-MAX and continue to be optimistic about the long-term potential for this program. The K-MAX fills a void in the force structure for an efficient, safe, logistics capability delivered from an unmanned platform and offers a combination of reliability, flexibility, and low operating costs.

In addition to the Marine Corps program, Lockheed was awarded a 5-year, $47 million contract from the Army last month for additional unmanned K-MAX development work. This contract award demonstrates the Army's continued interest in our aircraft, and is intended to develop alternative missions for the platform, which, if successful, will add capabilities and broaden support within the military.

As I said, we are very pleased with our overall quarterly performance. We continue to believe we are well-positioned in both segments to capture organic growth opportunities, and at the same time, we will continue to focus on strategic acquisitions to reinforce our growth. With that, I will 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. I'd like to start by reiterating Neal's comments about how pleased we are with the sales and profit performance of each of our segments and generally with our results in the quarter and first half of the year. I'd now like to provide you with some additional detail from the quarter and discuss our outlook for the balance of the year.

In aerospace, we are holding our outlook for sales at $550 million to $565 million despite some headwinds from further push outs on the A-10 program. Due to recent scheduling changes from our customer, A-10 sales in 2011 are now expected to be about $17 million lower than our original expectations. And this program will not reach full rate production until late next year. While disappointing, keep in mind this is a push out and not lost revenue.

We expect to be able to offset this revenue shortfall with higher requirements for Black Hawk cockpits and higher sales from Global and from our bearing product lines. We're also holding the full-year operating profit margin range for aerospace at 15.2% to 15.5% despite higher legal fees related to our defense of contractual matters explained in our 10-Q. This profit range indicates a slightly higher expected margin in the second half of the year, which was a primarily a result of higher sales and profits from our bearing products and from UK composites.

At Industrial Distribution, we are holding our full-year sales outlook of $930 million to $960 million. We have increased our full operating margin outlook to 4.7% to 4.9% from 4.6% to 4.8% based on our strong performance in the first half. Our full-year range is below the 5% we have earned through the first 6 months of the year, but keep in mind that historically the margin in the fourth quarter can be as much as 100 to 140 basis points below the first 3 quarters of the year. This is the result of fewer sales days in the fourth quarter, less productive sales days around the holidays, and the timing of certain expenses. Sales from our 2010 acquisitions are now being included in KIT's organic sales. This presents us with much tougher comparisons as we go forward. So we expect our rate of sales growth to moderate.

Moving on to corporate, expenses are tracking in line with our expectations and we continue to expect full-year expenses of $43 million to $44 million. Our debt to capitalization ratio at the end of the quarter was 26.4%, down from 29% at year-end. In June, we were able to reprice our revolving credit facility, capitalizing on an improved market to lower our borrowing costs. For the full-year we expect interest expense to be about $12.5 million.

Our diluted share count for the quarter was slightly higher than the in the first quarter at 26.7 million shares. During the 2nd quarter our share price was above the conversion price of our convertible debt, resulting in dilution of about 125,000 shares, less than $0.01 a share. Keep in mind this is GAAP dilution and we will have no economic dilution below a share price of $44.40. We continue to be well capitalized to execute our growth strategies in both businesses.

Capital expenditures were $5.3 million for the second quarter of 2011. We continue to expect full-year CapEx of approximately $30 million, as we fund technology and facility improvements. Our free cash flow generation in Q2 was solid at $14.8 million, for the year we expect free cash flow to be between $30 million and $35 million. The effective tax rate for the year should be about 35%.

In summary, we are encouraged by the second quarter which essentially extended the strong start to the year we experienced in the first quarter, and believe we are well-positioned to achieve our targets for the full year of 2011. With that, I'll turn the call back to Neal for some closing comments. Neal?

Thanks, Bill. We are pleased with our recent performance, and longer-term we believe that by executing our strategy we can grow both our revenues and improve our profitability over time. Within aerospace over the next several years, we are positioned to benefit from commercial build rates on existing models as the OEMs significantly ramp up production across their platforms. And we believe that we've continued to invest in developing new applications and new markets that will benefit us for years to come.

At Industrial Distribution, we have reorganized to better serve our customers and to improve productivity. We continue to build scale and improve margins to achieve our goals for sales and profitability. Today, we are executing well in each of our businesses, and I'm confident that our strategy will continue to enable us to produce superior results for our shareholders. I will now turn the call back over to Eric. Eric?

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

(Operator Instructions) Matt Duncan, Stephens Incorporated.

Good morning, guys, and congrats on another great quarter.

Thank you, Matt.

The first question I've got is on KIT. Neal, you talked about 3 end markets where you were seeing some strengths. Is there anything that's weak, or are those 3 really the only ones that stand out as being stronger than the rest right now? Can you kind of just give us a look at how your various customer end markets are doing right now?

Sure, Matt. We are really pleased with the uptick as we came out of the fourth quarter of 2010 and into the first quarter of 2011, in our OEM market specifically. And I think that the 31% growth rate kind of demonstrates that year-over-year, although that's slowed -- that growth rate slowed in the second half.

The other strong market for us is primary metals, steel. As we look at our top 10, that's the smallest of our top 10. But that was up strongly both from year-to-year and also in the quarter. And fabricated metals were up, as well.

The areas where we saw a little bit of a slowing in the growth rate was in consumer and packaged goods area that hits us a little bit because of our strong national accounts in those areas. Paper was down for us, and one of our -- the beverage market was also down, growth rate down a little bit. Stronger in the mining segment, as well.

So overall, looking at it from year-to-year, 8 of our 10 top markets were up year-to-year. So we're still pleased with that. But the growth rate has slowed a little bit.

Okay. Looking at pricing at KIT, what type of impact do you think that's having right now for you guys on revenues?

I would break it down into 2 parts, Matt. One is that pricing -- we've seen a slowing of price increases from our suppliers, and we feel that one of the reasons that we've been able to improve our margin from quarter to quarter was that the price increases that we were able to put in place have flowed through now. So we're getting some of the benefit there. The other half of that is one of the things that we've talked about now for 2 or 2.5 years, and that's really an emphasis to improve our own pricing discipline. So I think that we certainly benefited from those initiatives during the quarter as well.

Okay. And then last thing and I'll hop back in queue. I want to focus on the guidance for a second. It still feels like there's probably a little bit of conservatism in the guide. Last quarter you guys told us that your revenues at KIT were tracking near the high end of the range. It appears that that's still the case. Is that still what we should be thinking there?

Yes, it is.

It's still where we're at, Matt.

Okay, and then looking at the aerospace segment guidance, Bill, you mentioned that the impact of the A-10 shifting to the right is about $17 million versus your original expectations. How has that changed since the last quarterly conference call? Because I know last call you told us it had already shifted out.

It changed pretty substantially. Originally I think we were looking at 47 ship sets, a quarter ago we were down to 35. Now we're down to 10.

Okay. So the majority of that $17 million push out happened really since the last quarter.

Right.

Okay. All right, and is it fair to say that there still is a bit of conservatism built into the guidance here?

I don't know that I'd agree with that. I think that's a pretty honest view of where we think we're going to come out. And we're always looking for upside, but right now I think it's a pretty balanced view.

Yes, because you know Matt, as we look at, in particular the second half of the year at KIT, there's a number of things that I think are important for us to keep in mind. Number 1, it's clear that Steve and his team aren't going to sit on the sidelines riding an exercise bike in the second half of the year. We're going to be trying to improve from the numbers that we have out there. But we really have to keep in mind that we've got 5 fewer business days in the second half of the year. So just when you look at that, we've got to have revenues up 4% from year-to-year. So I think that we've got to keep in mind, we've got 5 fewer business days, so we're still showing 8% continued organic growth in the second half of the year. And given the last ISM, that's probably not too conservative.

The other thing is that we have always seen, as Bill mentioned, a sequential decline from the third to the fourth quarter in operating profit because of fewer business days and less [defective] business days around the holidays. We also have some higher costs that we know we will have in the second half of the year. Obviously, higher payroll costs since our merit increases for KIT were effective through the second quarter. We've also opened 6 smaller new greenfield locations during the second quarter. We'll have those costs through the second half of the year. So we've got some headwinds with fewer selling days and higher costs, but we feel that we're still going to be at the top end of that 15% year-over-year revenue growth number, and we did increase the operating margin guidance as well. Although it was slight, we did take it up to 4.7% to 4.9%.

Okay, thanks, guys.

Arnie Ursaner, CJS Securities.

Hi, good morning. My first comment, I think I would urge you to ask your analysts to ask 1 question and 1 follow-up.

My question for you is, Boeing is re-engining their plane, and you have a very excellent development team that could or should be part of that process. Can you update us on that, if that occurred?

Arnie, I sure can. I was actually up with the Global Aerosystems folks last week on Monday evening and Tuesday. And it's obviously early in the process right now. But we are seeing increased demands from Boeing on 747-8, even though it just got past the FAA testing this week. We're seeing increased requirements for the 787 variants, and now we're beginning discussions on both 737 re-engine, as well as the tanker. So we don't have any orders in place yet, but I think reflective in the higher than anticipated revenues that we've experienced at Global, that we're getting a share of that new work.

Okay. And my second question relates to the 2 identified catalysts that are out there, either sale of the SH-2 helicopters or the use of proceeds from the convert transaction that you did. Can you update us on either or both of those?

Sure. On the catalysts, I'd say SH-2 certainly, we continue to be -- it's an ongoing story, I understand. But we continue to be engaged actively with a number of foreign governments to place those aircraft, and we continue to feel encouraged that we will be able to accomplish that. Timing is the question mark.

I would add into the list of catalysts that you mentioned, the unmanned program, and in fact, 2 aircraft departed here yesterday for Yuma for the quick reaction assessments. So we were extremely pleased to see those go into the air yesterday, leaving here.

And quite frankly, on the acquisition environment, we are very active, quite frankly I'm a little frustrated, we've had some very high valuations, ones that didn't pass our expectations for adding value. We continue to be involved in those conversations. We expect to be able to close on acquisitions yet this year as we did last year when we accomplished 4, but we also are going to be very vigilant in maintaining our fiscal discipline around the acquisitions that we do.

Thank you very much.

Jeff Hammond, KeyBanc Capital Markets.

Hi. Good morning. Just on the K-MAX, anything to read into the pull forward of the revenue there? Are they asking for that faster, or were you just ahead of schedule, or what's behind that?

They've actually asked for it faster. If you remember, even going back to last year, we thought that it was going to be the first quarter of 2010 that we'd actually get the order, and they moved it up into December of last year. So, they've kept a very aggressive schedule on this. Quite honestly, faster than we'd anticipated.

Okay, great. And then, the comment on the ISM, and maybe you can comment on your July daily sales runs, was that your business is showing more resiliency than that number would indicate?

Yes. We just got our final July sales numbers last night, Jeff. And they're consistent with where we ran in the second quarter. And I don't think it would surprise you that typically the first month of the 3 months in a quarter is a little bit weaker than the other 2.

Okay. And then Kamatics, it seems like that business has been exceeding expectations. What are you seeing in the order book there, and what does that suggest for kind of momentum in this second half and into '12?

We did better in -- we did better across both of our businesses than we had anticipated in the first half. That certainly included Kamatics from both an order and a shipment perspective. What we're seeing is, in the first half we had some unique customer requirements that brought some demand forward. But the order rate has been very strong for commercial aircraft new build. We've had an uptick in our after-market demand, and we've actually had some increases in the helicopter and military aircraft bearings as well.

Overall, our shipments for the second quarter year-over-year were up about 20%. So when you look at that and our incoming order rate, we feel very good about a solid second half of the year, and continued strength into next year to support both some increased after market and the increased new aircraft build at both Boeing and Airbus.

Okay, perfect. Thanks.

Edward Marshall, Sidoti and Company.

Good morning. One of your competitors, peers, I guess I will call them, in the bearing side, aerospace bearing side, talked about their concerns surrounding capacity, saying that they were expecting to be tight on capacity as production rates ramp up. Do you share that concern? And if so, what are you doing to -- ?

Ed, we've commented a few times, we'd love to have that concern. We don't right now, and I think there's a couple drivers for that. Number 1 is, you've been through that facility. You know that we kind of hold it up as by far our best example of lean, and they continue to execute that.

Also, through the course of last year, we invested in rehabbing a facility on campus that we were able to add some additional floor space for our specialty bearings line, and actually to replicate some of our [KRA] and mixing capability as well, just from a risk reduction perspective. So that added some additional floor space for us. But the combination of that with the lean activities, investments in new equipment that's higher speed, and actually some investments that we're making right now with an outside consultant in training and productivity initiatives, we feel very good about the ability to respond and continue to keep lead times as a competitive advantage for that part of our business.

Okay. And it looks like the operating leverage that you're seeing in the back half of the year for aerospace, in order to meet your guidance, you're going to see a ramp in the operating business. Is that coming from bearings? Is it coming from a combination of bearings plus fusing? I don't know if you commented on that.

There's a couple of factors there. One is, it's a favorable JPF mix in the second half versus the first. That will help us. And we've got some good improvement coming through at UK Composites, both in the tooling and fabrication side. So those are a couple of the key drivers.

And then finally, you mentioned something about acquisitions. But my focus would be more kind of on the leverage that you're getting from the existing -- the old acquisitions. Have you pretty much tapped out kind of the leverage that you can see from those businesses, and how they boosted the margins initially on the industrial side? Or is there still more to go?

The Allied and Minarik acquisitions last year, we track them quarterly, as you know. They are turning out to be about doubly accretive as to what we committed to the Board when we got their authorization to make the acquisitions. Allied is pretty well done. They've exceeded both sales and cost synergies. Minarik is going to take a little longer. We need to convert them to our system; that will happen next year. So more to go on Minarik, but sales for both Allied and Minarik have been extremely strong; we bought them at the right time.

Right. Good luck on finding additional ones.

Thanks.

Pete Skibitski, SunTrust.

Morning, guys. Nice quarter.

Thank you, Pete.

I just want to make sure I understand, on the revenue guidance implying kind of a flattish second half, you're saying that's basically the fewer days as well as kind of a tough K-MAX comp. Are those 2 major reasons?

On the KIT side, Pete, it is really fewer days. So we've got to be up there. And then on the aerospace side, it's a couple of things. Where we really did much stronger in the first half of the year than we'd anticipated, because of pull forward of unmanned K-MAX, we actually had the pull forward of some of our -- some programs in specialty bearings. And we also had some pretty high shipments of non-JPF, both bomb and missile fuses, where customer requirements shifted into the first half from the second half. So as we look at the second half, when you combine that with the decrease in A-10 that Bill referenced earlier, we really have to deliver on both higher Black Hawk sales primarily, and also as Bill just said, UK Composites, and also some additional growth in Global Aerosystems.

Okay, got it. And then on the aerospace margin guidance, you expect it to expand in the second half. That's basically JPF mix and UK Composites driving that?

JPF mix is probably the most significant factor.

Okay. And then I'm wondering, are you guys seeing the benefit yet of the commercial aerospace upswing in a meaningful way, or is that still yet to come? Because I know you kind of called out biz-jets and regionals, I think, in the release. And so I'm just wondering if you could give us some more color there, and maybe even quantify how much biz-jets was up in the quarter.

I'll tell you, we're beginning to see the uptick in the commercial aerospace. So the Boeing and Airbus, from an orders perspective, where orders are up significantly and we're beginning to have very nice fill for our orders planned for 2012. We really haven't seen an uptick in the small to medium business jet area. We continue to see ongoing strength in the high end of the business jet market.

Okay, got it.

So we're very pleased to see the orders coming in for the commercial aerospace market.

Okay. And are you guys thinking you can get margin expansion at Kamatics over the next couple of years, as OE ramps up? Typically, you might get some lower margins on the OE business versus the after market. I'm just wondering if that's going to be headwind to Kamatics margins, or maybe there's not a huge differential for you guys and so the higher volumes can really flow through nicely for you.

Pete, you're right at the comment that you made at the tail end. With the pricing structure that we have with our specialty bearing product lines, there is really very little difference in the selling price to an OEM versus to the after market. It's very much unlike the avionics and other parts of the aerospace industry. So we don't see -- we like equally an order that comes in from a Boeing or an Airbus, or for after market. So we would clearly like to see some margin improvement with the additional volume, but again, that business operates extremely efficiently today. So it would be a marginal increase. What we really look for is higher volume, quite frankly, and it being able to improve our overall segment margins simply through volume mix.

Got it. Thanks, guys.

Steve Levenson, Stifel Nicolas.

Thanks. Good morning, everybody.

Good morning, Steve.

You mentioned opportunities on the re-engine 737, but didn't say anything about A320. Anything cooking there?

Actually, we're not doing a lot from an engineering side, primarily because of Global's focus on Boeing, and the Japanese heavies in support of Boeing. I'm not sure that we have much with the -- we probably have bearings with the engine guys, with the Geared Turbofan and the LEAP-X engines. But on the structures itself for the A320, I don't think that we have anything that is going to change there because there are some differences, but not the big structural changes that we will see on the 737. Because 737, it's going to be interesting. They've got to change, I think that they're going to have to change the landing gear; they're going to have to change the wing box; they're going to have to change the wing. It's a big deal.

Got it. Thanks. You already have reasonable content though on A320 today, right?

Actually, our structures content is relatively low on that.

No, I meant in the bearings.

It's still relatively low -- .

It's still relatively low.

Okay.

And that goes a lot with the size of the aircraft, Steve.

Got it. Thanks. In relation to K-MAX, force protection doesn't seem to be getting hit in the budget, but do you see any issues that might actually help you? Which, I know you're getting some pull forward, but I don't know what happens going into next year.

I think that we can. And everybody can read Defense Department budgets and initiatives in different ways. But the K-MAX is a very cost effective platform. And as they try to combine cost effectiveness with getting people out of harms way, and still having a demand to resupply, I think that that bodes well for acceptance of the K-MAX. So we feel we're pretty well positioned with that.

Got it. Thanks. Last one. At the airshow, you announced an arrangement on a new material, I guess, it's an aluminum composite.

Yes.

Are you quoting on any parts? Are people looking at that, and can [KAron] be applied to it?

Absolutely. It was one of the areas that the development team and materials people identified, as well as the marketing people, as a way to be able to get into a broader range of applications. And so we announced that so that we could promote it, get orders, and make some money.

And I'm guessing there's not going to be any contribution this year, but do you think there could be anything as early as 2012?

I'll tell you what, I'll comment on that in the next call, or if something important comes up in between. But I don't want to get ahead of ourselves there.

Got it. Thanks very much.

Thank you, Steve.

Robert Kirkpatrick, Cardinal Capital.

Good morning. Neal, could you expand upon your remarks a little bit earlier about the defense budget, and particularly how do you manage the Company, given the way that the budget seems to be coming out, especially with respect to kind of a sword of Damocles hanging over the budget if they can't find a way to agree?

Yes. It's interesting, Rob, because I've been in Washington a lot recently, et cetera. And it's a complex question. So I'd like to kind of -- as I think about it, we really need to look at it from a couple of perspectives. For us, higher Defense Department spending is always better. But I think realistically, we've understood, and the industry has understood for a while that there's going to be an impact.

So we really look at it from 2 perspectives. The first is to understand the magnitude of the reductions, and the second is, as you've outlined, what do they really mean to Kaman? Because that's who we get paid to worry about. We're concerned that the procurement in R&D accounts will come down. That's about $179 billion of the $530 billion that was appropriated for defense this year. So, if we get to $1 billion, which is our goal, with a 50/50 commercial and defense split, Rob, that's less than 0.3%.

So we're not going to come into any meetings here at Kaman and say that a decrease in the Defense Department budgets is a reason that we don't meet those goals. We are a small company and we've got great opportunities there, and we're not going to use that as a barrier to reaching those goals.

So we look at Kaman specifically, and what do we see? Number 1, we are investing to grow our commercial business. We've talked about that as a key part of our strategy; the Global Aerosystems acquisition was part of that. The Brookhouse acquisition was part of that. And the investments in new facility in Mexico was a part of that. And our most profitable business, our bearing business, is 80% commercial, and as we just talked about, that's growing.

Two, we've been consistent in saying that we like the platforms that we're on. The Black Hawk, and increasingly the Chinook, are very important platforms for us, and we believe that vertical lift will continue to be funded. And that's what we see, and that's what we hear. Some of the refit or recap programs that we're on, the A-10 and the AH-1Z, again, those are going to go forward, those are going to get funded because it's a service life extension for aircraft that they don't have replacements for. C-17, firm through 2013, and Joint Strike Fighter, again, even if they go down to 2,300 aircraft there, that's going to provide some significant growth opportunities for us going forward.

And the other thing is that we know there's going to be more emphasis on unmanned systems. As I just talked about with Steve, we like our Lockheed Martin Kaman partnership on the unmanned K-MAX. And finally, for us, we know that the primes and the super tier 1s are going to be driven more and more to outsource some of their capabilities as volumes inevitably do turn down. And we believe as part of our key strategy that we are really well positioned because they're going to need a capable, low-cost partner, and we're there.

Great. Thank you. With respect to the Joint Strike Fighter, if for some reason they were to build substantially less than the number you cited, it might mean that we move faster to an unmanned type of aircraft. Beyond the rotary work that you're doing with Lockheed Martin in K-MAX, what is Kaman's position with respect to drone aircraft?

Outside of the K-MAX today, Rob, we have minimal participation. It is one of the areas, as we look at potential acquisitions, certainly we've talked about wanting to make them on the commercial side, but we are certainly looking at companies that serve the defense industry as well. As we look at those companies, we look very closely at the platform mix that they are on. And clearly, ISR and the unmanned part of that is very attractive to us.

Great. Thank you, and congratulations.

Thanks, Rob.

(Operator Instructions) Matt Duncan, Stephens Incorporated.

Hi, guys. I want to go back to Neal talking about acquisitions for a moment. You mentioned that you're frustrated with what you're seeing in terms of multiples. I guess we've heard, especially on the distribution side, private equity has been pretty active, so the larger properties are being sold, maybe 9, 10 times EBITDA. Can you talk a little bit about what sort of what multiples you guys are seeing in the market, and what you're comfortable paying?

We're seeing multiples at that level. If it was an outstanding business that we could integrate very effectively and identify key synergies, we would not shy away from paying that. But right now, the companies that we've looked at and got into the stage of due diligence, and we have not had a sound enough basis for paying a multiple like that. We would really prefer to -- on the distribution side, as we've said before, pay between $0.33 and $0.50 for each $1 of sales. And that's kind of our historic range.

Although, for the right one, we would go a little bit higher than that, and probably 8 to, at the top end, 10 times on the aerospace side. But we're not -- the good thing is everybody here, Matt, has been around long enough to realize that overpaying for an acquisition is just, it's really hard to get out from under that.

So Neal, does the focus have to shift, maybe, to smaller acquisitions with the multiples being so high on the bigger properties?

I think that -- we've always said that $40 million to $80 million on the aerospace side is a good sweet spot for us. And I think that that continues to be true. So when you look at some of the big deals today, whether it's the Primus deal or some others, those are quite a bit larger than ones that we would be in the market for typically.

I guess the last thing on this is, do you feel like you will be able to close something by the end of the year, and is anything nearing the finish line?

Yes and yes.

Okay. Thank you.

Pete Skibitski, SunTrust.

A couple of follow-ups, guys. Book-to-bill is a bit weak this quarter, I think about 0.82. Can you give us some color as to why that was, and maybe what kind of book-to-bill you're expecting in the second half of year?

Book-to-bill bounces around quite a bit quarter to quarter. We're actually at about 100 or 1.0 through the first half of the year. We expect that to pick up in the second half. We were at about 112 last year, so we had a solid orders year last year. But we're very comfortable with the backlog, and feel good about the second half and as we move into 2012.

Got you, okay. And the customer requirements issue that you called out in the release, in the Black Hawk, I think maybe related to the timing issue. Does that present any risks to your aerospace guidance?

No.

No.

No.

Okay. And last one, now that you're ramping up again, on Joint Programmable Fuze for the full year, can you give us a sense of how the re-compete is going? How it's going to impact your comp on that program next year? Maybe the ability of the segment to offset any potential headwinds there.

We feel pretty good about the backlog that we've got for JPF right now. We'll go through the re-compete. We feel that we're pretty well positioned on that. I think we understand where we need to have it priced, and we feel comfortable with that. And we're also working real hard for foreign sales, both through the US or for foreign military sales and also direct commercial sales. So we don't see that as a headwind right now.

Okay, great. Thank you.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Eric Remington for closing remarks.

Well, thank you for joining us for today's conference call. We look forward to speaking with you again when we report our third quarter results in November.

Ladies and gentlemen, this concludes the presentation. And you may now disconnect. Thank you, and have a great day.