Kaman Corp (KAMN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Kaman Corporation earnings conference call. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Eric Remington, Vice President, Investor Relations. Please proceed.

Thank you, and good morning, everyone. I'd like to welcome you to the Kaman Corporation third quarter 2011 conference call to discuss our earnings results and the confirmation of our outlook for 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'll 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 release.

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

Neal?

Thanks, Eric, and good morning, everyone.

We continued to demonstrate strength across the majority of our lines of business in the third quarter of 2011. Our Industrial Distribution segment performed well once again, with growth in sales and continued margin expansion over last year. Although sales were lower in our Aerospace segment compared to last year, we delivered solid results overall, with strength in our bearing product lines helping to largely offset the impact of an interruption of Joint Programmable Fuze deliveries.

I'd like to begin my review of the details of the quarter with our Aerospace segment, which reported a revenue decline of 14% versus the prior year's quarter. Most of our programs performed well during the quarter, led by higher sales of bearing product lines, unmanned K-MAX and contributions from Global Aerosystems. This was offset by the delayed shipments of JPF units during the quarter. In addition, keep in mind with comparisons to last year that the second half of 2010 included deliveries of more than 9,000 JPF fuzes in each quarter.

Our Aerospace operating margin in the third quarter was 15.9%, compared to 15.7% in the prior year, when adjusted for a contract settlement. The margin improvement was primarily attributable to higher sales of bearing product lines. The volume of shipments in the Joint Programmable Fuze program was disappointing for the quarter, as we delivered only 1,200 fuzes, compared to more than 9,000 fuzes in the third quarter last year. We experienced several acceptance testing failures resulting from issues with test equipment and testing procedures as well as an isolated component failure.

We worked methodically through these issues, which caused a prolonged halt in production, but resolutions were developed cooperatively with our customer, the Air Force, and we expect to return to acceptance testing in the next few days. The field reliability of the JPF continues to be well above Air Force requirements, and we will continue to deliver nothing but the highest quality products to our armed services.

Also, we have previously discussed the recompete for the follow-on JPF contract, and there are positive developments on that front. The contract was intended by the Air Force to be a competitive bid. However, we have been informed that ours was the only proposal submitted. Therefore, the source selection has been transitioned to a sole-source negotiation with Kaman. It will take the government some time to audit our proposal and conclude negotiations, so it will likely be midyear 2012 before a contract is awarded, and we expect that contract to consist of a base year award with three one-year options.

Our bearing product lines continued their top line recovery. Revenue trends are strong in this business, and, most importantly, order intake has been robust in affirming our outlook for both the near and longer term. As expected, the increase in commercial build rates is having a positive impact on order trends, and we continue to increase content on new platforms, with recent wins on the 787 and A350. Program wins for these product lines are broad-based and a result of a long-term relationship with those customers and our continued investment in the business.

Unmanned K-MAX was a great story, both during the quarter and in recent weeks. First, our partner, Lockheed Martin, delivered two aircraft to the Marine Corps under the contract awarded last December. Those aircraft underwent quick reaction assessment testing in August, which was completed successfully, with the K-MAX meeting or exceeding all requirements.

In October, the Marines announced that two K-MAX aircraft will ship to Afghanistan, becoming the service's first ever cargo unmanned aircraft system to deploy in an operational environment. The aircraft are undergoing final testing and are expected to be operational in country before the end of the year. We are pleased by these developments, but, more importantly, proud that our aircraft will be performing a lifesaving mission critical to our men and women in uniform.

Additionally, we were awarded a contract for unmanned K-MAX from Lockheed under their Army AATD program. This contract is an important step in developing additional mission capability and expands the customer base for the K-MAX platform.

Many of you saw the notice published by the Defense Security Cooperation Agency in September that indicated Ecuador has requested two SH-2 aircraft. I think it is important that we clarify a few points about this notice.

First, this prospect arose out of our marketing efforts for the Australian aircraft. However, those aircraft did not suit the mission in Ecuador, but the US Navy SH-2G configuration did. Therefore, the aircraft requested are excess Defense articles currently the property of the US Navy and not our Australian aircraft. If we are awarded this contract it will be a great success for our helicopter division, and, more importantly, I think it speaks to the continued attractiveness of the SH-2 platform.

Finally, we are very pleased to announce that we have entered into an agreement to acquire Vermont Composites, located in Bennington, Vermont. Vermont enhances our position in higher growth intelligence, surveillance and reconnaissance sectors of the Defense market and increases our platform exposure on the V-22, P-8, C-130 and various UAVs, in addition to bringing Blackhawk content. Vermont Composite's annual sales for 2011 are expected to be about $32 million. This acquisition supports our strategy of adding scale in aerospace, particularly in higher growth composite markets, through acquisitions, and we expect to close this transaction in November.

Now I'd like to move on to an update of Industrial Distribution. Revenues for the segment grew 7.2%, to $239 million, in the quarter. This was mostly organic, and in fact organic sales per day for the quarter were a record. We did see a small contribution from our acquisition of Target Electronics in August, and we look forward to their contribution to our future growth.

With regard to mix, our MRO business increased modestly over the prior year, and our OEM business was up sharply, by 28%. In addition to our OEM-related end markets, we experienced strong growth from mining, chemical manufacturing and paper manufacturing end markets. The environment is competitive, and we continue to focus on sales growth that compensates us for the value we provide, as evidenced by our improving operating margin. In fact, this is our seventh consecutive quarter of year-over-year operating margin improvement, and we posted an operating margin of 5% for the quarter, matching our year-to-date performance.

As mentioned earlier, in September we acquired Target Electronic Supply, a motion control distributor in New England. Target is a great fit strategically between the automation strength of Minarik and our traditional power transmission offerings. This will allow us to serve the region with a wide variety of applications and multiple technologies. We expect it will add about $20 million in sales next year.

Overall, with the exception of JPF, we had a solid quarter. While the JPF result is disappointing, it represents a deferral of revenue and not lost sales. We are extremely pleased with the performance and underlying trends in our bearing product lines, our other Aerospace programs had a great quarter, and our K-MAX achieved a number of milestones. In Distribution, we continued to experience positive sales growth, and our margin performance continues to improve, and we anticipate a solid close to the year.

With that, I will turn it over to Bill Denninger to provide some additional color and walk you through our outlook for the balance of the year in more detail.

Bill?

Thanks, Neal, and good morning.

Consolidated third quarter sales were about flat with the prior year, at $356.5 million, driven by growth in our Industrial Distribution segment but offset by the delay in JPF shipments in Aerospace. Consolidated net earnings for the quarter were $12.4 million, or $0.47 per diluted share. On a segment basis for the quarter, Distribution sales were $239 million, up 7.2% year over year. Organic sales were up 6.7%, with acquisitions contributing the balance.

Distribution operating income was $11.9 million, up 39.7%, or $3.4 million, year over year. Distribution's operating margin improved by 120 basis points, to 5%, resulting from drop-through on higher sales, continued improved gross margin, contributions from acquisitions and benefits of our productivity initiatives.

Moving on to Aerospace, sales in the quarter were $117.4 million, down 13.9% compared to the prior year. Aerospace operating income was down 1.7%, to $18.7 million, versus a year-ago level of $19 million. These declines were primarily the result of the JPF issue that Neal discussed. Even with that issue, operating margin improved by 20 basis points, to 15.9%, primarily on the shift in mix toward higher margin bearing product lines. This comparison is against last year's adjusted operating margin, as the third quarter included a charge related to a contract pricing settlement. Our Aerospace performance was solid during the quarter with the exception of the JPF issues. It is important to note that we experienced a delay of JPF shipments, and not lost revenue. In fact, we should be back to acceptance testing in the next few days. The third quarter impact of the delayed JPF shipments versus our expectations was a reduction in sales of about $17 million and an EPS impact of about $0.10.

Moving on, corporate expenses were $10.2 million in the third quarter, an increase of 29% versus prior year. That increase was primarily the result of a one-time benefit of $1.5 million recorded in the third quarter of last year related to medical claims. We also experienced higher year-over-year acquisition expenses. We benefited from a lower tax rate during the quarter, primarily the result of a tax rate reduction enactment in the UK.

Capital expenditures were $6.9 million for the third quarter of 2011. We expect full-year CapEx of approximately $25 million to $30 million. We generated free cash flow of $2.5 million in the third quarter and used $3.9 million through nine months, including the $15 million March payment to Australia. We are reducing our outlook for full-year free cash flow to a range of $15 million to $20 million. Reasons for the reduction include a delay in JPF sales into Q4, with a related delay in collection of receivables into Q1 2012, a customer claim that now appears will not be paid until 2012 and an increase in 2011 nonrecurring engineering and inventories for new programs such as the A-10 and AH-1Z.

Moving on now to the full-year outlook, with three quarters behind us we've been able to tighten up our outlook, but it is essentially unchanged from last quarter. In Aerospace we now expect to post year-over-year sales growth of about 15%, which will result in sales of approximately $560 million. Operating profits should be between 15.3% and 15.5%. The Aerospace expectations do not include any contribution from Vermont Composites, which will add a few million in sales dollars but minimal earnings this year.

In Distribution we expect sales of approximately $950 million, a 14% increase over 2010. The operating margin should come in between 4.8% and 5%, slightly higher than our previous estimate. We continue to expect corporate expenses to be between $43 million and $44 million, excluding the $2.4 million nonrecurring benefit from the death of a former executive. Interest expense should be about $12 million, and due to some discrete items we now expect the full-year tax rate to be about 34%.

I would like to highlight that in August we announced a 14% increase in our dividend, which was paid last week. In addition, we made approximately $5 million of stock repurchases in the last few weeks under a longstanding authorization.

In summary, we have had a solid performance so far this year and expect a strong finish.

With that, I'll turn the call back over to Neal for some closing comments.

Thanks, Bill.

Overall, we are pleased with the performance across most of our businesses, and while disappointed in the shipment delays on the JPF program, our team is intensely focused on recovery, and we remain confident in our full-year outlook. In the longer term, we have a strategy in place to grow our revenues and improve our profitability.

At Industrial Distribution, we continue to execute our strategy to grow profitability and attain a 7% operating margin. Within Aerospace we continue to invest in developing new applications and new markets that will benefit us for years to come and our position to benefit from commercial build rates on existing programs as the OEMs significantly ramp up production across their platforms. Except for the temporary disruption in the JPF program, we are executing well in each of our businesses, and I'm confident that our strategy will continue to enable us to produce superior long-term 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)

Our first question comes from Arnie Ursaner, of CJS Securities.

Hi. Good afternoon.

Good afternoon, Arnie.

I guess my first question is regarding the math on the JPF fuze, because I had come up with quite different math. So, I agree with your revenue. If you lose 4,800 units at roughly 3,500 per unit, that's about $16.7 million, $17 million. So I think I agree on the revenue impact you had. But to get to a $0.10 earnings per share impact I just backed into the math you would need a 28% operating margin in that piece of the business. I know it's been viewed as above average, but something doesn't equate. I don't think it's a 28% operating margin business.

Arnie, we've said -- we haven't disclosed what the specific gross margin is, but it is what we like to say nicely profitable.

Yes, but I'm saying off an operating margin backing into it using a full tax rate you would need about a 27%, 28% operating margin to get to a $0.10 impact. Right, maybe we'll follow up offline, but that is the math.

And nobody here is saying your math is wrong.

Okay. As a follow-up to that, two more questions on the JPF, we know what your -- if I add back the $17 million we would've been at $133 million or so in revenue this quarter. Last year you did $136 million, but you had 9,000 JPF fuzes in that. If we were to completely X out the JPF fuzing business, what are the trends in your other Aerospace businesses? Are they up?

I'm sorry, Arnie. Were you saying overall Aerospace business or were you talking about our fuzing program specifically?

The overall Aerospace -- if I added back the $17 million you would've been at $133 million, which is still down a little from the $136.5 million, but the $136.5 million has 9,000 JPF fuzes.

Okay. Actually, we've had strength across, as we said, a number of our businesses. Even in our fuzing businesses, Arnie, we had much stronger shipments on some of our missile programs, including Harpoon and Maverick. We've had a significant step-up in our specialty bearings business that we referred to. Triple 7 and 767 are part of that, A330 is up. And obviously we've also got improvement coming in from the unmanned K-MAX program in the quarter.

Okay. And, Neal, just take 30 more seconds, because I think it's really critical. You had prior issues with the JPF where it was more manufacturing and product related. Just to make it exceptionally clear, this is a different issue. Could you just make sure everyone hears that very clearly?

Yes, thanks, Arnie. I think it provides me an opportunity to actually get a good answer out there, I hope. It is different than what we experienced last year. As many of you are aware we had a component issue last year, and we made several changes to the product to enhance the reliability, so I'd like to take a step back and kind of characterize the issue that we have today.

And, as we said in our prepared comments, we believe there's three areas that contributed to the problem during the quarter -- issues with test procedures, test equipment and an isolated component failure. And, as we moved through and introduced the reliability enhancements into the JPF beginning in late December of last year, we thoroughly tested those both internally and had those changes tested by an external lab and felt very good about them.

When we introduced the product into manufacturing late December, beginning of this year, we made some changes in conjunction with the Air Force recommendations to both some of our test processes and some of our test parameters, and what hit us was that during the first and second quarter we encountered a number of LAT failures, and we investigated them and we thought we had a root cause, however, with a component issue again. And we implemented some additional screening at a component level, and when we did that it didn't have a significant improvement in our LAT testing results. So, in conjunction, again, with our customer, we concluded that wasn't a root cause and we elected to stop performing our LAT testing and focus the efforts on trying to determine what it was.

At this point, after some extensive work, we believe that actually the changes that we made to our test procedures and the parameters on our test equipment may be what's causing the problem. The Air Force has agreed with that assessment, and we expect to return to testing in the next few days. We feel very confident in the people that we have working on this program, from Greg Steiner to Jerry Ricketts and the balance of the team, and we're confident that we'll work through the delay. And we'll have to manage a few give and -- gives and takes that I'm sure we'll inevitably come to in the fourth quarter, but we feel pretty good about still achieving our full-year outlook.

(Operator Instructions)

Our next question comes from Matt Duncan, of Stephens Inc.

Good afternoon, guys.

Hey, Matt.

So, just to go back to Arnie's question on the math, I want to make sure we're clear as to how you get to $0.10, Bill. I'm assuming that you're not adjusting SG&A expenses at all, that the 28% probably is more accurately reflective of a gross margin rather than maybe an operating margin.

That's correct.

Okay. I just wanted to make sure that was clear. On Vermont Composites, can you talk a little bit more about the strategic rationale behind adding additional Aerospace exposure? I know you guys have wanted to increase the commercial exposure you've got in your Aerospace business, and this is going to sort of take the mix that's commercial down even further. So talk a bit about why you're comfortable doing that and maybe about some of the programs Vermont Composites is on.

Sure thing, Matt. Obviously, we've said that we'd like to expand our exposure on more commercial platforms. At the same time, we've said that the composites area is an area of growth for us and we want to invest in expanding that part of our business, as well. What was really attractive to us with Vermont Composites is first of all we've had a relationship with them for probably a couple of years now. We know the team there very well. We know their capabilities very well.

It enabled us to gain some scale in our composites market. They've got some very, very strong engineering capabilities there for both in-autoclave and out-of-autoclave composites. They've got some very, very advanced capabilities with special material applications. And, as we looked at it, the programs that they were on are programs that we feel are going to be very solid in the ISR areas, programs like the P-8, the V-22, across a number of UAV platforms including Global Hawk, and also additional content on the Blackhawk. And as we sit here today you can be assured that we are going to aggressively leverage this capability across the balance of our organization to further penetrate the commercial market, as well, and diversify that revenue base over time.

Okay. That's helpful. And in terms of the impact of Vermont Composites on the numbers, Bill, I'm curious, in the guidance for the rest of 2011 does your interest expense and corporate expense guidance include costs that were associated with this transaction?

Yes, they do.

But the revenue guide does not. So, in theory, if we add in revenues for Vermont Composites, the earnings guide might be a little bit different than what it spits out if you put the numbers through the model that you provided for guidance, correct?

I guess that's right, yes.

Okay. And then last thing sort of to help us with the margin profile of that Vermont Composites business, is it very dissimilar from your Aerospace segment aggregate margin?

No, it's not.

Okay, thanks. I'll hop back in queue.

Matt, the other thing is that as you think about modeling for the balance of the year we expect to close in November, but we'll only have it for a very short period of time this year.

And our next question comes from Edward Marshall, of Sidoti & Company.

So are you -- hey, guys, good afternoon, sorry.

Hi, Ed.

So, you lost or you had 4,800 shipments that were pushed out, the fuzes, are you producing right now? I mean, can you get those 4,800 plus an additional run rate [above] that 6,000 that you've been running out the door in the fourth quarter? I mean, I'm assuming that's the plan, but do you have the capacity to do that, or are you producing right now?

Ed, we're producing product. We've produced product, and -- but we are not going through the LAT acceptance testing. As I said, we expect to start that up in the next few days. Similar to last year, we are able to move quite a bit of product through once we are able to have a number of successful LATs in a row at both of our facilities. I think all of us can sit here and say that if we add 4,800 to 6,000 that is a lot of units. We were at 9,000 last year. I think if we are in that range again this year we'd feel very good about it. But, again, as we've established our outlook for the business for the year, we do recognize that there will be some gives and takes, and at this point in time if there's any give on the JPF areas we think we have other areas that can take up that slack.

Okay, so assuming testing acceptance goes as planned.

That's right.

Okay.

And if we have a continuing issue, then we would likely have to update if we feel we would not hit that outlook.

Okay. And then if we -- and now that we're starting to look kind of at 2012, and I know you're most likely not prepared to give '12 outlook, but if I can kind of talk maybe directionally or at least about maybe the Aerospace business as a whole, obviously, commercial business starts to pick up a little bit, and that's going to help your high-margin bearings business. Could we kind of discuss maybe the incremental margin that you may find on the additional sales dollar into 2012? Any kind of directional sense you can give to us.

Ed, are you talking about bearings or Aerospace overall?

Aerospace overall, but assuming that bearings is going to be a bigger contributor than it was this year and assuming that's a much higher margin.

Well, you know where we're saying we're going to come out this year. I think you're also aware that for 2014 we've said high teens.

Yes.

So next year will be a step in that direction.

Okay. Fair enough. Thanks, guys.

Our next question comes from Jeff Hammond, of KeyBanc Capital.

Hey, good afternoon, guys.

Good afternoon, Jeff.

Can you -- just stepping over to Distribution, can you talk about daily sales rate trends through the quarter? And then just maybe what's your view on the disparity between OEM strength and some of the moderation in MRO?

Yes, I'll start with the first half of that, Jeff. We actually saw a slowing in -- slower July business, and it strengthened during the quarter. Actually our September numbers were up about 6.4% from July. So if you think back to ISM in June at 55.3 and then kind of taking that big step down that we all remember into July, we saw a little bit of a decline come through. But, again, it strengthened during the quarter. So we felt good, in particular -- again, any time we can say that we have a record daily sales rate we'd feel good about it.

We had a big step up in our OEM business from the fourth quarter of 2010 to the first quarter of 2011, and, frankly, we've had marginal improvement, a couple percent, sequentially in the first to second and second to third. So, it kind of took that step up and then it stayed at that level. And, again, it seems to be fairly broad-based, and more than likely the addition of the Minarik business to our portfolio has really helped us not only penetrate that OEM market but bring some of our legacy power transmission, motion control products into those customers, as well.

Okay. And then back to 2012, I know you're not prepared to give formal guidance, but can you talk about specifically on the military side of the business in Aerospace what you think some of the big picture puts and takes are into '12, whether it is just broadly or program specific?

A few things that we're looking at on the military side, number one, we would expect Blackhawk to be probably fairly flat, maybe down just fractionally. We see some additional strength coming through from A-10. As you know, we'd anticipated, I believe, 47 ship sets this year and it was delayed. So we would see that certainly picking up next year that would help us some. We also will begin shipments for the Bell AH-1Z program, so that should help us some.

The -- I can't say that JSF -- we'll build more next year than this year, but that's not enough to move the needle for us, frankly, and I don't know that we have any key platforms that are going to be rolling off. So, to Bill's point earlier, we've given where we expect to be in 2014 on both a sales and margin perspective, so we would hope to be able to have stable defense, up a little bit perhaps on the programs I identified, and growing commercial business. I think a wild card in there, and quite frankly it is a wild card for us, is whether or not there's any acceleration of unmanned K-MAX requirements.

Our next question comes from Pete Skibitski, of SunTrust.

Good afternoon, Neal and Bill.

Hi, Pete.

Hi, Pete.

Hey, could you, maybe, Neal, could you parse bearings for us a little bit in terms of is the majority of the growth you're seeing in commercial, and is that OE or aftermarket driven, and maybe some comments on the regional and (inaudible) factors, as well?

Sure, I can. The -- it's interesting. We're seeing -- certainly across our bearing product lines a lot of the increase that we see there is because of the commercial ramp-up, Boeing and Airbus, and we can track it directly to that. There is slightly higher -- we believe slightly higher aftermarket. It is a little bit more difficult for us because we sell to the aftermarket both directly through Boeing and through distribution. Again, our margins in aftermarket versus forward fit are not substantively different, so it doesn't impact our performance as it would somebody like a Goodrich or a Rockwell Collins. In the military side we're also seeing some nice business increases in the military helicopter area. So those things have been pluses for us, and, as I said earlier, we're also seeing nice uptick in the A330 line, as well.

Got it, got. And then, just a follow-up, can you guys share with us what you're hearing in terms of budget availability for further K-MAX sales, be it from the Marine Corps or the Army?

As we've said, between the Marine Corps and the Army they've talked of aircraft demand between 30 and 300. We certainly think that the order that was awarded to Lockheed, to the Lockheed/Kaman team earlier to introduce additional mission capability to the K-MAX certainly demonstrates continued confidence in the platform and a desire to provide additional capabilities for a wider variety of missions. Quite frankly, it's going to be up and operating in Afghanistan this year, and I think that based on the results of that we are certainly hopeful that they will determine that they'd like to accelerate the efforts. But we would likely not believe that there would be significant production or go back into production on the aircraft until 2014.

Okay. Got it. Thank you very much.

Thank you, Pete.

Your next question comes from Scott Graham, of Jefferies.

Good morning. Good afternoon.

Good morning. Or good afternoon, Scott. Same mistake.

I was just wondering what is maybe on the acceptance testing, so you had acceptance test interruptions you're saying here, which essentially it sounds to me like, and forgive me as a newcomer here, sounds to me like you kind of knew that there were going to be failures. Is that -- am I characterizing this right, or is it something -- I understand it was within the testing, and that the testing was perhaps off so that you --- so as you'd even put it into a test. Am I getting this right here?

Well, let me take a step back, and one of the characteristics of this business, Scott, is that there is a what's called a lot acceptance procedure that we have to go through where we have to select a certain number of units out of each production lot and test those. So, for the US government this is a requirement for this type of product. So it is not unique to Kaman. This is the type of testing that's required for certification and for delivery to the end customer, in this case the US Air Force. So the test procedures that we go through, the lot acceptance testing, is standard.

When we introduced the reliability improvements into the product in late 2010, early 2011, we in conjunction with the Air Force did make some changes to both the test procedures as well as some of the test parameters, and we may have -- we believe now that we may have been in error in making those changes.

Right. And I do understand the acceptance testing process. What I'm saying here is that the wording on your press release seems to imply that you didn't even put them into acceptance testing, knowing that they were going to fail.

No, if that's how the release reads, Scott, that would be an error.

Because it says "expected to return to acceptance testing in early November after encountering acceptance testing interruptions" as opposed to acceptance testing failures. So then you had failures and that was really what triggered the reassessment of the procedure.

That's correct. We did have failures. Then we reassessed. We elected not to continue with LAT testing. We worked through changes, and now we've gotten authorization to return to testing, and we expect to do that in the next few days.

I've got that now, okay.

Okay.

That wasn't clear to me off the press release. Okay, so then the other question is now you had some pretty good math wizards here, and their wisdom I'll let sit there. It seems to me that on that same wisdom, though, that the ability to make up all this lost in the fourth quarter is kind of next to impossible, so it would kind of spread that over into the first quarter, I assume, as well, and if so can you give me an idea of what sort of the incremental overtime and premium freight costs would be that would attach to that?

Scott, we've said that we're holding our full-year outlook for Aerospace, and we do believe we can ship up to 11,000 JPFs. I mean, as Neal said, we've continued production, but we stop before we go to LAT, lot acceptance testing -- lot acceptance testing. So we, sitting here today, believe that we have a good shot at reaching that objective and holding our full-year outlook.

Right. But I also thought that Neal said that you'd be happy at 9,000.

I said that there's risk. I think that, as you've said, Scott, there's an awful lot to make up there. We demonstrated the ability to have significant ramp-up in production in the second half of last year when we did over 9,000 fuzes in each of those quarters. We may be between -- as I said earlier, we may be at 9,000, we may be a little bit below that, a little bit above that. But we have considered in sustaining our outlook in Aerospace for the full year the relative gives and takes, relative costs of additional overtime as well as other programs that we have right now in our ability to manage both of those programs to be able to perform well in the fourth quarter.

Understood. All right, two other questions, and they're easy ones. Was there any Fx in the Industrial Distribution business?

Very, very minimal. I mean, about 85% of that business is US based.

Yes, no, got it. And then on the Aerospace business, the Global Aerosystems revenues, did you give that at any point?

No, we disclosed the first quarter, which was about $8 million. I mean, it's running at a run rate of about $30 million, Scott. It was $20 million last year.

So, wow, interesting. Oh, that was actually going to be my last question. What was the run rate? What do you attribute that to, the jump?

Well, it's really been additional work that we've done, primarily on Boeing 787 and also on the 747-8 and some of the additional requirements we received from Boeing on that.

And our next question comes from Robert Kirkpatrick, of Cardinal Capital.

Good morning, I mean afternoon, and thank you for putting in the extra call.

Yes.

A couple of questions --

Are you still on generator power?

No, that changed last night, but thank you for asking.

Okay.

But that actually was my first question, which is could you -- I understand that the region around Bloomfield has been pretty hard hit and there's been power out for a week or so -- are there snowstorm disruption costs that we should expect in Q4?

You know, Rob, we're assessing that right now. We've examined that. Greg Steiner, Rob Patterson and Jerry Ricketts and Sal Bordonaro, the people responsible for affected facilities here, are confident that we'll be able to deal with those additional costs and still make our outlook for the year. We have -- up until this afternoon we've had power at our Middletown facility, so we've been able to operate out of there. We have a disruption there this afternoon.

We have power returning to this campus today in various phases, but, quite honestly, our KIT people have been able to distribute to other locations and work effectively. We've had the main part of our headquarters building where we have backup power for our data center has been operational, so we've had people here, and also our new backup data center came in to be very handy in a way we hadn't anticipated. We're actually -- since Monday -- Tuesday the corporate staff has been working out of the backup data center. So, we've had some disruptions, but I think, quite honestly, I'm very proud of the way everybody's reacted to them.

Great. Thank you. And, Bill, you mentioned I think in your remarks a lower UK tax rate. Is that a one-time item, or is that an ongoing lower tax rate because of something that went on in the UK?

The amount we recorded in the third quarter was a discrete item. There were actually two rate reductions, [1%] each, one effective April this year, one effective April next year.

Okay. And then I also noticed something I haven't seen from Kaman in an awful long time, and that was the buyback activity. Could maybe Neal speak to why the Company decided to do that?

Sure, Rob. I think there were a couple of reasons. Number one, as you're probably aware, in recent years we've had a number of executives join the Company. Our plan prior to Steve Smidler was such that we gave them restricted stock awards. We felt this was a way to offset the dilution from those stock awards to those named executive officers. The second was that the economics, we felt, made good sense.

And the third was that we thought our stock price at the time was undervalued.

And we do have a follow-up question from Matt Duncan, of Stephens Inc.

I want to circle back to kind of what Jeff was getting at earlier on sales trends at KIT. I don't know if you -- I think I recall that you had given out July and August daily sales growth rates at a conference earlier in the quarter and was curious if you'd be willing to do that for September and then maybe what you've seen so far this quarter.

Well, September would be -- was obviously in that quarter. If you give me one second, I've got it right here. I'm sorry, Matt. It's taking me a minute more than I had anticipated. Just a second. In -- our daily rates for July/August/September were 3694 in July, 3735 in August and 3929 in September, and we did get our October numbers, and it was between 4% and 5% above last year.

Okay. Can you give us the growth rate percentages on those daily sales numbers, as well? I think July was in the 6% range, August was in the 8% range.

Yes, oh, I can give it to you by quarter.

Organic daily sales growth rate for the quarter was 6.7%.

Yes, well, we went 6.9%, 8.1% and 5.4%.

Okay. So the decel in growth then from August to September and again in October, is there anything in particular you would attribute that to? Is there an end market that's slowing, or do you think that's just noise?

I would say probably at this point we'd have to say it's just noise, and I think we would all say that in the last three months there's been a heck of a lot of noise in the industrial economy.

Picking up on any change in customer tone, or do you still feel like it's reasonable to assume that you'll have (technical difficulty) economy sort of in your sales helping push things along in '12?

We believe that we will have some growth and that will help us increase our sales next year. We can -- you can look at our sales, and obviously we've, I think, done pretty well this year. I think it kind of speaks to, again, the areas that we've been investing in more high technology, motion control and automation, taking advantage of some of the opportunities to further penetrate the OEM market and get some better balance in our business there. But we feel okay about next year. We'll talk about it, obviously, in our fourth quarter call. But we're completing our plans right now, and we expect next year will be another step towards those 2014 goals.

Okay. And then last thing for me is on acquisition pipeline. You just closed Vermont Composites. The distributor acquisitions you've made recently have been pretty small. I'm just curious if there's anything bigger in that funnel on the Distribution side and sort of what your focus is on Aerospace.

Sure. Since September 1 we've either concluded or announced three acquisitions. You're right. On the Distribution side, Matt, they are smaller. I think that they talk specifically to our strategy, and they are, number one, geographic expansion. The small acquisition we did in Texas is a bolt-on. It gives us more geographic footprints, more scale with our existing suppliers, fits very well with our legacy power transmission, motion control business and gives us some more strength in Texas.

The acquisition of Target Electronics actually we're very excited about and is focused on that higher end, higher value product that will help us penetrate the OEM market but also gives us better margins. We have looked at larger acquisitions, and we would certainly like to make some of those work, but I think we've also demonstrated good discipline in what we have been going after.

On the Aerospace side, we're really pleased with the Vermont announcement, and it is in the high technology composites area, and we intend to leverage that, as we said earlier, across our businesses. We would clearly love to make an acquisition in the bearings business and expand the product lines and capabilities we have there, and we are -- we're very active across both businesses, and I'm glad that since the last call we've been able to demonstrate some results from that activity, as well.

(Operator Instructions)

Our next question is a follow-up from Jeff Hammond, of KeyBanc Capital.

Hi, guys.

Hi, Jeff.

Just did you say -- you were talking about in the '12 view puts and takes on the military. What's kind of the expectation for JPF into '12? Is that a stable business? Is that growing?

Jeff, we would expect it to be stable.

Okay. And then I think in the Q you mentioned business jets as a source of growth, and I know that's been a challenged market. What are you seeing there specifically?

Yes, thanks, Jeff, actually someone, I think Pete asked me about that earlier and I neglected to answer it. I think we're seeing what others are. We're seeing nice activity at the high end, with the larger aircraft coming out of both Gulfstream and Bombardier. However, we're seeing continued weakness in -- I mean, stable but weak levels compared to certainly back in 2008 in the mid and lower end of the business jet market. We will not be expecting any upturn in 2012 in that business but certainly would expect that we'll have to see an upturn in that hopefully in 2013 or 2014.

And our next question is a follow-up from Pete Skibitski, of SunTrust.

Yes, I've got a couple of follow-ups. On Vermont Composites, is that just going to go on the revolver and you'll pay that down over time?

Yes.

Got you. And then can you give us a sense of any potential headwind you might face next year from pension, given the poor market returns and the yield environment weakening?

Yes, it's something we're tracking very closely. We really won't know until the end of the year. Right now it looks like we'll see something like a $3 million to $4 million in pension expense next year.

Got you. Got you. I'll sneak one last one, and so I won't get back on. On the Ecuador thing, just to be clear, understanding that they're not new-production helicopters, I'm assuming from the release that maybe you guys would have an integration role or a maintenance upgrade type of a role since you weren't mentioned in the release. Is that fair?

Well, that is fair. Actually, it will be -- we'll play a major role. I think that the information that went out said that that was going to be about a $60 million program. If it goes to contract we would expect that our portion of that would be about $40 million.

And our next question is a follow-up from Arnie Ursaner, of CJS Securities.

Hi. What is the growth rate or what was the growth rate on Vermont?

Arnie, sorry, the sales growth rate, or --

Yes, please.

Well, I don't have that number in front of me. Eric can get back to you on that. I don't think any of us brought that in here.

Yes, growth rate, no. I mean, we've -- over what period?

Over the last year or two.

Don't remember.

Yeah, don't have that in front of us, Arnie. We can certainly come back and get that to you, though.

Okay. And you've built this facility down in Mexico targeting the commercial aviation market. How is that running, and are you seeing actual business shipping to there?

Yes, we shipped our first orders during the second quarter to a customer that was a sub-supplier to Hawker Beechcraft, and we've been able to earn a number of the necessary certifications for the plant and actually have quite an active fitting activity out of there right now.

And our next question is a follow-up from Robert Kirkpatrick, of Cardinal Capital.

Could you talk a little bit about the capability of the Company to absorb additional M&A at this point or whether you're pretty much full up on each side of the business with the acquisitions that you've announced in the last month or two?

You know, Rob, I'll divide it into two parts. Number one, on the Distribution side we continue to be very active. The acquisition that we did in Texas was quite small, integrated very quickly. We've got some great folks down in Texas. So that, we're kind of done and through that. Target will become a part of our Minarik business. We've got very strong management there, so we are -- we're very confident that that will get integrated quickly and we can move people on to the next one. So I think we can go through it pretty quickly there.

The steps that Greg Steiner has taken to strengthen his organization to be able to effectively integrate new acquisitions has been significant over the last 18 months or so, Rob, and, quite frankly, the Global Aerosystems integration went very smoothly and very quickly. We certainly would intend the same to have -- same to happen with Vermont Composites. So we don't see that we are bandwidth limited right now at all.

Okay. And then finally a last one, with the extra expenses from the problems in fuzing and the low JPF shipments, was your fuzing business profitable in the quarter?

We look at it by product lines, Rob, and the JPF product line would not have been. But then if you moved over to our missile fuzing line such as Harpoon, Maverick, those were nicely profitable, so, but the JPF product line would not have been profitable with production of -- with deliveries of 1,200 units.

This concludes our question-and-answer session. I would like to turn the conference back over to Eric Remington for any closing remarks.

Okay. Well, thanks for bearing with us and joining us for today's conference call, many of you twice. We look forward to speaking with you again when we report our fourth quarter results in February.

The conference is now concluded. Thank you for attending today's presentation. You may disconnect.