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Executives

Russ Jones - SVP, Chief Investment Officer

Neal Keating - CEO

Bob Garneau - EVP & CFO

Analysts

Tim Hasara - Kennedy Capital

Margot Murtaugh - Snyder Capital

Steve Levenson - Stifel Nicolaus

Robert Kirkpatrick - Cardinal Capital

Matt Duncan - Stephens

Mario Gabelli - Gabelli & Company

Arnie Ursaner - CJS Securities

Kaman Corporation. (KAMN) Q4 2007 Earnings Call February 29, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Kaman Corporation Earnings Call. My name is Frieda and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call Mr. Russ Jones of Kaman Corporation. You may proceed.

Russ Jones

Well, thank you Frieda and good morning, everyone. This is Russ Jones of Kaman Corporation and I'd like to welcome you to the Company's 2007 fourth quarter conference call. The conference is also being webcast over the Internet at www.kaman.com and an online archive of this broadcast will be available within one hour of the conclusion of the call and will be available until March 7 at this site.

Conducting the call today are Neal Keating, President and Chief Executive Officer and Bob Garneau, our Executive Vice President and Chief Financial Officer.

Before we begin, let me take a moment to reference the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This conference call may contain certain forward-looking statements that are subject to significant risks and uncertainties including the future operating and financial performance of the Company.

Although the Company believes that the expectations are reflected in its forward-looking statements are reasonable, we can give no assurance that such expectations or any of these forward-looking statements will prove to be correct. Important risk factors that can cause actual results to differ materially from those reflected in the Company's forward-looking statements are included in our earnings release filed yesterday and in the Company's filings with the Securities and Exchange Commission.

In addition, the information contained in this conference call is accurate only on the date discussed. Investor should not assume that the statements made in this conference call remain operative at a later time. The Company undertakes no obligation to update any information discussed during the call.

Finally, our discussion today will include certain non-GAAP measures related to Company performance. Reconciliation of this information is provided in the exhibits to this conference call and is available through the Webcast section on our website.

And with that, please turn to Exhibit 1 and I'll turn the call over to Neal Keating. Neal?

Neal Keating

Thanks, Russ and good morning everyone. I am very pleased to be conducting my first earnings call as CEO of Kaman Corporation. Already, I have met quite a few of our Investors at the conferences, I have attended with Russ and Bob. And I look forward to getting to know many more of you in the months ahead. This morning I am going to review our results for fourth quarter and full year 2007. And Bob will go into some detail on the numbers.

I am also going to make some general comments about what I found here in my first month at Kaman and give a perspective on my priorities and where I see the company going. I will also talk little bit about how I think that current economic situation may affect the company and we will finish up with a Q&A session to address your questions. Starting with a high level review of the numbers on Exhibit 1.

The fourth quarter was once again a period of strong financial performance for Kaman. On a consolidated basis net sales from continuing operations rose nearly 9% to $272.3 million, while net income from continuing operations grew 33.3% to $9 million or $0.35 per diluted share. Bob will get into the details, but I should mention here that these numbers include and therefore after charges in both periods but the Australian helicopter program.

For the year, sales from continuing operations grew 9.5% to $1.1 billion, and net income from continuing operations rose 48.1% to $36.5 million. Once again, net of the Australian charges taken in both years.

If you would turn to Exhibit 2, we can look at these results on a segment-by-segment basis.

At Aerostructures, our fourth quarter sales were 20.7%. However our operating income while improved sequentially from the third quarter of 2007, was down 9.7% from the fourth quarter of 2006. For the 2007 full year, sales were up 30% and operating income was up 14.6% over the full year 2006. The reduction in fourth quarter operating income in 2007 was due to certain adverse adjustments resulting from the simultaneous ramp up of three major new programs at our Wichita facility which we commented on in our third quarter call and at that time we stated in expectation that these issues would continue into 2008. Performance of this segment overall however, continued to be driven by the success of our BLACK HAWK helicopter program for Sikorsky, good performance on the Boeing C-17 Military transport and Boeing commercial aircraft contracts.

I will say a little bit more about those in a minute, but first let me give a little more color on the issues at Wichita, where we've had very good success in winning important new business, specifically two contracts involving the new Boeing 787 and one involving a Sikorsky helicopter for the Canadian Maritime forces.

All three are good programs for Kaman, but we have encountered both customer design issues and other issues as we've ramped up to rate production. I have personally spent a great deal of time in Wichita, since I arrived at Kaman and have brought in teams from across the company including our helicopters and specialty bearings businesses in Connecticut as well as our Jacksonville operations to help support these efforts.

We have also invested in additional manpower as well as new machinery and equipment that will enable us to improve throughput and product quality while reducing our costs over the longer term.

While the financial impact in 2007 was a disappointment, we are making meaningful progress and I expect that we will resolve the remaining issues during the course of this year. Taking a minute to circle go back to the segment’s major ongoing programs. We delivered 86 cockpits under our Sikorsky Black Hawk program at Jacksonville in 2007 compared to 56 cockpits in 2006.

And we expect to meet Sikorsky’s projected need for 9 to 10 completed cockpits per month this coming year. In all to the end of 2007 we delivered 158 cockpits under the program since inception.

In December of 2007 as you have likely seen, we signed a memorandum of agreement with Sikorsky that brings the potential total value of the program to approximately $250 million, more than double the amount projected when we begin to ramp this program up in 2005.

So this is a very good program for us now with continued prospects for the future. Also in December of 2007 we signed a seven-year follow-on contract with Boeing to supply wing components on the Boeing 777 and 767 aircraft. That will extend work we have been doing for sometime at Jacksonville.

And while we do not have Boeing's permission to disclose the numbers on that it does provide the segment with some visibility for the years ahead. In the same way the extension of C-17 program beyond 180 aircraft has moved there program completion date from the middle of last year through the balance of 2008.

And the discussions in which, with in Washington for further extension of this program have continued. The new C-17 ship sets at in the present program extension are at somewhat lower price than we had through aircraft 180 and so program margins were affected after the first half of 2007.

Moving on to the Fuzing segment. Fourth quarter sales were up 51.8% and operating income was up 50.5% over the fourth quarter of 2006. For the full year 2007, sales were up 23.1% and operating income was up 36.1%.

Sales increases were driven primarily by our JPF Fuze and 40-millimeter product lines. The fourth quarter increase in operating income was driven primarily by our traditional fuzing products while for the full year the increase in operating income was driven by the JPF and 40 millimeter programs.

The JPF product continue to mature both in our factories and in the market. While we experience periodic production interruptions over the course of this year including in the fourth quarter of 2007, we made progress on production improvements and enhancements to the fuze.

We continue to invest in increasing our capacities support for both US government and foreign military sales. Deliveries are increasing and I am pleased to report that the JPF has demonstrated excellent field reliability.

As we've reported before, we expect that there will still be some quarter-to-quarter variability in our JPF program going forward.

Helicopter segment sales for the fourth quarter were down 37.6% and operating income was down 64.2% from the fourth quarter of 2006. However for the full year 2007, sales were up 3% and operating income was up substantially to more than $2.6 million from a slight profit for the full year in 2006.

The lower sales for the fourth quarter were a function of unusually high sales in the fourth quarter of 2006 including the sale of our last available K-MAX Helicopter, delivery of a large spare parts order to Australia and lower sub-contract sales in the fourth quarter of 2007 with the completion of a program for the US military and somewhat lower sales associated with the Black Hawk joining in insulation program for Sikorsky.

A principle factor in the increase in operating income for the year was the lower charges associated with the Australia program which I'll comment on more in just a minute. First, I want to let you know that the work for Sikorsky is going well and that we have a memorandum of understanding with Sikorsky that involves joining approximately 60 helicopters per year for them through 2010.

In addition work on the Egyptian SH-2G program continues to progress well, both on the depot level maintenance contracts and also under an upgrade program that has increased the total program potential to approximately $80 million. Nearly three quarters of that work lies ahead for completion between now and 2010.

On the Australia program, in November 2007 the Commonwealth held elections and the Labor party which had been the opposition party was successful. Under the new government, new ministers of defense and procurement were appointed. I've just returned from a trip to Australia and while there I was advised by the new officials that they are reviewing our program along with several others and that the determination will be made about its completion.

A point I want to leave with you is that initially, we face significant technical risks with this program until the software is completed. Now we have overcome the majority of the technical hurdles and the inventing is done. We believe we have performed our obligations under the program and that the SH2 helicopter is the most efficient and cost effective method to achieve the Commonwealth operational needs.

We do not know, what the decision will be. The program maybe cancelled, or it may go forward. If the Commonwealth decides to cancel the program, we are hopeful that they will work with the company to negotiate a mutually expectable termination. In any event, the company will pursue all avenues available to it as needed to protect its legal rights.

With that let me move on to the Specialty Bearing segment which is the largest of our aerospace industry segments. Fourth quarter sales were up 12.8% and operating income was up 48.9% over the fourth quarter of 2006.

Full year sales for 2007 were up 16.7%, and operating income was up 44.6% over the full year 2006. These strong results, all records for the segment were driven by higher shipments of our airframe bearing products to customers across wide spectrum of commercial and military programs.

The segment continues to develop new customers and applications and with the recent facilities expansion, capacity is in place to meet demand and ensure that shorter lead times for the customer remain a competitive advantage.

As you know, our products have long been used in aircraft built in North and South America and across Europe. We are now beginning to see the results of our marketing efforts into new emergent regions including Russia, where we have numerous applications on the Russian Sukhoi 100-seat regional airline, and in China where we are participating on the ARJ-21 to small initial positions, but important new platforms as we build our business for the future.

That bring us to the industrial distribution segment where our fourth quarter sales and operating income accelerated nicely, and we are up 10.4% and 7.7% respectively over the fourth quarter of 2006.

For the full year 2007 sales were up 5.2% exceeding $700 million for the first time and operating income was down 6%, due both to expense that company has incurred to bring several large account wins online in 2007 and a one-time gain recorded in 2006.

Industrial Distribution's performance was particularly notable given the uncertain macro economic conditions affecting the period. 2007 was the fourth consecutive year of record sales for the Industrial Distribution segment driven, both by an emphasis on a less cyclical industries, such as, food and beverage and by success in national account competitions.

Our national accounts sales have been growing a double-digit pace and are driving market share increases. National account competitions will continue to be a key priority of this company going forward, and we will continue to invest the resources necessary to support the growth of this business.

We intend to augment our organic sales growth through acquisitions and believe that the current economic uncertainty will provide for improved prospects and valuation. Our strategy also includes internal investments, such as the construction of our new Southeast distribution center in Savannah Georgia, the second largest port on the East Coast.

This new 46,000 square foot facility which will include a co-located branch facility to serve the local market is scheduled to open in June, and will provide improved customer service and an expanded next-day delivery capability to our growing roster of customers in the Southeast.

The industrial distribution segment growth also includes the expansion of our catalog. In the past 12 months, we have added over a dozen new product lines and value-added services and are currently engaged in the largest product line expansion in our history.

This involves as a partial list, fluid power, electrical product offerings, system engineering resources, oil purification systems in industrial automation products. Clearly, we want to be able to expand the portfolio of products and services, we can deliver to our customers and become their supplier of choice.

Before I turn the call over to Bob, I would like to take a minute to offer some observation on what I found since my arrival here at Kaman.

I've spend a significant amount of time making the rounds, meeting our people, and touring our facilities. I am very pleased with what I have seen and the progress that company has been making.

I am impressed by the energy of the people I have met, their dedication to meeting customer needs and to building a stronger more efficient company for shareholders. And I am particularly impressed with the flexibility and willingness of our senior managers to adjust priorities, and then think of new ways in response to our continually changing environment.

A lot of the credit to this is due to Paul Kuhn and the team he has lead for nearly 9 years as Kaman's CEO. Paul is in the room with us today, and in fact today his last day before retirement. So, before we discuss our financial and operational results, I would like to take a minute to recognize Paul's contribution and thank him once again for his hard work and commitment to commend over these past years.

Paul led this company through a period dramatic transformation that included a fundamental realignment of our aerospace business, the acquisitions of company that have extended our capabilities in areas targeted for growth, the application of lean principals throughout, our recapitalization into a single class of common stock, and the realization of the desire to find the strategic buyer for the music segment.

Paul's leadership inspired outstanding performance throughout the company and lead the strong improvements in financial and operational results. And he has created a solid foundation for Kaman's future.

And so Paul, I am sure the whole team joins me in wishing you a very happy and healthy retirement. Would you like to make a comment?

Paul Kuhn

Thanks Neal and good morning everyone. Among many rewarding aspects of my job all these past years has been the opportunity to tell our story to you folks. I really appreciate the time that you spent with me, looking in at the company and the constructive dialogues that we have shared. This assignment has been both exciting and very personal rewarding for me and I have enjoyed my involvement in the numerous changes that have incurred throughout the company.

I have to tell you that I feel very, very good about both the team that remains here under Neal's leadership and the opportunities that are being presented to the company to support its growth strategies. Thank you again very personally, for all of your continuing interest and command. Thanks, Neal.

Neal Keating

Thanks Paul. I will be back to wrap up and give some thoughts regarding 2008, but first I will turn the call over to Bob, who will go into detail on our financial results.

Bob Garneau

Thanks, Neal. As most people now know, we sold our [former] music segment on December 31, 2007, and therefore the segment has been classified as discontinued operations in the reports we filed yesterday. This will prompt us to highlight continuing operations in our discussions today, but I will take a few minutes to go over the contributions and discontinued operations before we go on.

If you would turn to Exhibit 3, we have a table that shows both the amounts contributed by the discontinued operations and the gain realized from the sale of those operations at the end of the year. Net earnings from continuing operations and diluted net earnings per share from continuing operations are given in lines one and five. Lines two and six show that discontinued operations contributed $3.5 million in earnings, net of taxes in the fourth quarter of 2007, compared to $2.9 million in the fourth quarter a year ago and for the full year $7.9 million for 2007, compared to $7.1 million in 2006. This resulted in $0.14 per share in the fourth quarter of 2007, compared to $0.12 in the fourth quarter of last year. And for the full year periods $0.31 per share in 2007 compared to $0.29 per share in 2006. Incidentally, all of the per share figures I mentioned are for fully diluted earnings per share.

The sale of our Music segment [defend the] for cash payment of $119.5 million represents a price had exceeded publish street estimates and recognized the value we had work to create.

As shown on lines three and seven that price resulted in a gain net of tax is over $11.5 million or $0.46 per share. Some of you have asked what the sales were for the music segment and although they are not included in GAAP presentations, let me mention that sales for the segment were $58.57 million for the fourth quarter and $214.1 million for the full year 2007.

All together therefore for the fourth quarter of 2007 total net earnings including continuing operations, discontinued operations and again on the sale of discontinued operations was $24 million.

As shown on line four, compared to $9.6 million for the fourth quarter of 2006 and for the full year was $55.9 million for 2007 compared to $31.8 million for 2006. In terms of earnings per share on line eight, this translates to $0.95 per share in the fourth quarter of 2007, compared to $0.39 per share in the fourth quarter of 2006 and for the full year periods $2.23 for 2007 versus $1.30 for 2006.

Before we move on, I should mention that historically the share account difference between our basic and diluted earnings per share has been mostly due to the number of shares issuable on conversion of our 6% convertible subordinated debenture into common stock.

We call those debentures for debt redemption in the fourth quarter of 2007, and prior to the December 20, 2007 redemption day, all but a very few took advantage of their right to convert their bonds into common stock rather than redeem their bonds.

As a result, there will only be a small difference between basic and fully diluted earnings per share calculations going forward and that will only be affected by a small number of outstanding stock options.

Now if you would turn to exhibit four, we have included a GAAP reconciliation to show the effect of the charges we have taken on the Australian Helicopter Program. The exhibits starts on line one with our earnings before income taxes, net earnings and earnings per share diluted as reported for continuing operations for the three month periods ended December 31st, 2007 and 2006.

Line four gives the same data for the 12 months periods ended December 31st, 2007 and 2006. Lines two and five, add back the Australian charges for each of these periods. There is quite a bit of material on this programs and our quarterly filings particularly in the MD&A sections and this is all been updated in the 10-K we filed yesterday afternoon.

This morning, there are couple of points I would like to make. First, is that the chargers are lower than they have been in pervious periods. If you would look at the line two on the Exhibit, you'll find that charges for the Australian program were $0.02 per share in the fourth quarter of 2007, compared to $0.05 per share in fourth quarter of 2006. And on line 5 of the exhibit where $0.15 per share for the full year in 2007 compared to $0.23 per share for 2006. As you may know the Australian program has been in a loss position for sometime and it is still hard for us to predict the final timeline for the program.

We believe we essentially completed our work under the original contract and with the exception of a certain amount of regression testing left to complete. We do not believe additional charges will be necessary in future periods. But if future delays or if you stretch out the timeline and cause us to incur costs above those we have provided for, we'll then have to book additions to loss reserve to provide for such costs.

Another point to make that it is not on this exhibit is that we had a $0.6 per share gain from the sale of our 40-millimeter asset business. And that you may wish to back out in your models. The 40-millimeter programs were part of the 2003 Dayron purchase. However they were not core to our bomb fuzing product line.

With that, please return, turn to exhibits 5&6 for discussion of our fourth quarter and full year results by segment. Exhibit 5 presents data for the fourth quarters while Exhibit 6 presents data for the full year. You may find it helpful to toggle between these exhibits during my comments.

Starting with Aerostructures. The segment continued to make progress on profitability improvements through operating efficiencies and further development of key customer relationships at our Jacksonville facility. If you will recall, 3 years ago following our move from an old client Moosup Connecticut to expanded facilities in Jacksonville.

We went through a period of re-qualification process and program ramp up issues that affected our profitability. That period is now behind us, and the plant is operating efficiently and profitably. I would remind you that our C-17 program extension at Jacksonville however is at a lower margin commencing with ship sets delivered after the first half of 2007.

We are now going through a process at the Wichita facility that has some parallels to the ramp up a few years back at Jacksonville. As we ramp up new programs and upgrade procedures at Wichita. For the quarter and also for the full year has entailed higher cost and various inefficiencies at that location have also affected our margins for the segment.

Turning to our Fuzing segment. The principal drivers of the sales increases for the Fuzing segment have already been mentioned including the JPF in 40-millimeter programs. I would like to add three points. First our operating margins were lower in the fourth quarter of this year due to production interruptions and differences in the business mix for the quarter. Second, I mentioned the sale of our 40-millimeter assets, the gain of $2.6 million is shown on line seven of exhibit five. That gain was not part of the operating performance improvement reported on line two. Sales of the 40-millimeter products were $12.2 million for the full year 2007. The third point I would like to make about Fuzing is that we continue to work toward resolution of our warranty and contract dispute concerning the FMU-143 program.

During the fourth quarter we initiated termination of the contract due to the material breaches of agreement on the part of the US Army Sustainment Command. At about the same time they advised us they intend to terminate the contract for [default]. The matter is now in the litigation process and we've included the discussion of the matter in the MD&A that was filed yesterday. We had also previously reported on the DCIS investigation involving certain warranty issues relating to this program. About a week ago we received a letter from the government closing the matter in favor of the company.

Moving along to the Helicopter Segment. Sales were lower in the fourth quarter of 2007 due in part to a spare parts order from Australia in the fourth quarter of 2006. We also sold our last available K-MAX Helicopter in the fourth quarter of 2006 in somewhat higher sub-contract orders from Sikorsky in the year ago period as previously mentioned.

When we realigned the former aerospace segment into four businesses in 2005, the helicopter segment had been designed, but I view that it could function as a services and support operation and hopefully achieve breakeven results. With the Egyptian helicopter upgrade program getting underway, an agreement with Sikorsky for Black Hawk [to do work] through 2010 and the reduction in charges to the Australian program that I discussed on the GAAP reconciliation. This segment is operating more efficiently and is showing greater potential.

Our specialty bearings business continued its record performance as Neal said and this supported excellent operating margin performance for the quarter in a year’s periods to level that we believe are sustainable for as long as the present aerospace cycle continues.

For the Industrial Distribution segment on line 6, the decrease in operating margins that we experienced for the year was partially attributable to additional startup cost for new branch openings and other implementation costs that we have incurred to support several new national account contracts were awarded in late 2006 and 2007.

Additionally, during 2007 we experienced an increase in overall operating expenses and higher personnel costs primarily driven by the increased Fed count necessary to support our growing business base.

For the fourth quarter specifically, you will see that our margins are somewhat lower than for the full year periods. This is due to a range of factors including seasonality in the case of sequential quarters as there are three few selling days in the fourth quarter, and generally lower business activity during the holiday season.

Operating margins for the fourth quarter periods were affected by that, and also by the expenses we incurred in ramp up of both new national account programs and an increase in our overall business levels. The increase in sales for the fourth quarter and full year periods was due to the ramp up of our new national account customers.

I mentioned again on the sale of 40-millimeter products assets on line seven when I reviewed fusing. And that moves us to corporate expense on lines five and six. There is a table on page four of our earning release that breaks out elements of the corporate expense that have tended to vary from period-to-period.

The two most significant variances in the full year periods were a $3.1 million decrease in pension expense due to an increase in the discount rate and good investment performance in 2007.

And a $2.9 million increase in our group insurance expense for 2007 due to a continuation of the higher claims that we experienced during the year.

Now, let me just run through some balance sheet items quickly on Exhibit 7. Cash and cash equivalents on line one totaled $73.9 million at the end of 2007, primarily reflecting the cash received from the sales of the music business after paying down our domestic revolving credit borrowings.

Notes payables and long-term debt declined to $12.9 million after the debt pay down and conversion of our debentures. That brought a debt-to-capitalization ratio to an essentially non-leverage 3.2% at the end of the year.

In January, Neal, Russ and I visited with Standard & Poor's for our annual debt rating review. And we have since been notified that our BBB minus stable rating has been reaffirmed.

We have a $200 million revolving credit agreement in place with a $50 million accordion available. It is our intention to use our borrowing capacity and other means of accessing capital for our strategic purposes as Neal said.

The extent of leverage, we would be comfortable with will be a function of the specific circumstances that would be comfortable at higher leverage ratios than you have seen in the past several years.

In all, we are pleased with our financial performance for 2007. And with that, I'll turn the call back to Neal. Neal?

Neal Keating

Thanks, Bob. Before I turn the call over for questions, I want to summarize and add a few additional thoughts. The significant transformation of our company over the past several years, combined with the strong progress reported during 2007 provides a powerful foundation for continued growth.

Across our Aerospace business, we have a strong mix of military and commercial customers, a growing backlog in our specialty bearings business, strong demand for our joint program for fuse and visibility into upcoming requirements that reflects good potential for several of our major military and commercial Aerostructures programs.

While the uncertain economic environment is a significant concern, I believe these factors will help to mute the impact on our Aerospace businesses in the near-term. This is also a business where we will increasingly focus on balancing our organic growth with acquisitions that enable us to expand our capabilities and increase our footprint on key platforms.

A slowing economy will certainly impact our industrial distribution business as our customers include industries such as housing that have already been significantly effective.

Mitigating this impact, I think will be the continued success of our national accounts program, which is focused on less cynical industries such as food and beverage.

We continuing strength of our business in the mining sector should also help us weather a downturn. Long-term, we will look to build scale to improve profitability. With the strong balance sheet, we can supplement good organic growth with additional acquisitions that expand our geographic footprint, improve market access and enable us to better serve our customers both large and small.

No matter what economic climate we face, we will continue to execute on our long-term growth strategies. As we do this, we will look to the talent and dedication of all of our employees.

Although we are accompanying with powerful technology platforms in state-of-the-art facilities, our ultimate success requires positive enduring relationships between our people and our customers.

These relationships are built on creditability and strong performance which we must demonstrate day-in and day-out. Building on the momentum we've achieved, we'll require a flawless execution on our existing programs and winning new business based on superior performance.

That concludes our formal comments. And with that I'll turn the call back to Russ. Russ?

Russ Jones

Well, thanks Neal. That wraps up our prepared remarks. And now, we will open up the line for questions. Operator, may we have the first question please?

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Arnie Ursaner of CJS Securities. You may proceed.

Arnie Ursaner - CJS Securities

Gentlemen, good morning.

Neal Keating

Good morning Arnie,

Bob Garneau

Hi Arnie.

Arnie Ursaner - CJS Securities

Bob, I think you gave us the sales number for the 40-millimeter in Q4 of $12.2 million was there an operating contribution embedded in the number there from that -- from the 40 millimeter sales as well?

Bob Garneau

There was an operating contribution. We gave sales, we just thought that might be helpful number to have and that was part of the contribution [defusing].

Arnie Ursaner - CJS Securities

Do you have the operating profit contribution from the 40 millimeter?

Bob Garneau

I don't have that with me now.

Arnie Ursaner - CJS Securities

Okay. The other questions I have relate to margins in -- I guess both relate to industrial distribution. You had the strongest rate of growth, I've had looking for model over four years, year-over-year. And you've always talked about volume being a very key component for margin improvement. Given the incredibly strong revenue growth, what expenses are you incurring for holding back margin and how likely are they to continue?

Neal Keating

Arnie, this is Neal. I think that there is a couple of things, we'd ask you to keep in mind in their analysis, one is that you are exactly right, exceeding 10% all organic growth was a significant achievement for us. However, as we've commented through the year most of that is driven by new national accounts and through the course of the year we've talked about starting up some four to five branches to support those accounts and in addition to that, we had four additional for a total of nine branches that we opened during the year and we also commented as well today about the efforts going into a new southeast region distribution centers. So, those are the incremental expenses that we've had on a year-to-year basis that have impacted the margins in that business. As we continue to grow that we will of course have better conversion of those incremental sales to profit.

The other thing that I'd asked you to look at as well Arnie, is that the fourth quarter is typically based on seasonality, lower margin for us and as you did a comparison, I'm sure against last year in the fourth quarter the operating margins were in the 4.1% range last year, so we are within now one 10 basis points to that.

Arnie Ursaner - CJS Securities

What do you think your margin will be in '08? Again, I'm trying to get a feel for how long this expense be the impact to margin will continue as we look at the balance of '08?

Neal Keating

We would expect, yet we --Arnie; we don't really comment on margins going forward. Although, we certainly would expect them to improve in the first half of the year as these facilities begin to get more volumes through them. And we actually saw that, I think when you look at the fourth quarter were the profit conversion was up almost 8% as versus the 10% sales growth.

Arnie Ursaner - CJS Securities

Follow up, another question I had is regarding the Black Hawk helicopter program. Obviously, you are continuing to make exceptional progress and I found that a little inconsistent with the comment, that there was a pretty much of a slowdown or lower sub-contract sales. Can you help us understand kind of how those two equate?

Neal Keating

Yes Arnie, the comment that we made on the slow down in the helicopter joining was specific to the helicopter business not the Jacksonville Aerostructures business.

Arnie Ursaner - CJS Securities

So, what is causing the lower segment subcontract sales?

Neal Keating

Actually, as was talked about at the end of in the fall through the fourth quarter of last year was that, Sikorsky was having difficulty procuring cabins, so that slow down some of the joining process for us.

Arnie Ursaner - CJS Securities

Okay. I will jump back in queue. Thank you.

Operator

And your next question comes from the line of Mario Gabelli of Gabelli & Company. You may proceed.

Mario Gabelli - Gabelli & Company

Hi, I would be missed since I was on -- Paul believe your first call, delighted to be on your last call. So, I want to thank you for kind of the struggled you had in terms of converting the A and B and few other things that they you may able accomplish and the breaking out your segment earnings particularly the bearings period time of a lot of companies don't do that, could have probably all hitting those margins. So, thank you on behalf of our clients who are fairly large shareholders in your company. Neal, can you kind of talk about your vision, you kind of gave motherhood and apple pie as your comments and I maybe not ready to do this, but what's your philosophy towards use of leverage, you are currently have about $60 million net cash?

Neal Keating

Mario, I think that we clearly feel very strongly, we have about a great ability to able to leverage our balance sheet, be able to accelerate the growth in our business.

Mario Gabelli - Gabelli & Company

No, we all understand it, but the question is do you want to do that. What's your personal philosophy and then I will get in to when the Board was looking to hire you kind of what they looking at your execution skill sets or acquisition skill sets and what kind of look at what you are going to plan on doing at first year or two, your stewardship of my client's assets.

Neal Keating

I think that when they looked at hiring me, Mario, it was combination to two things. Number one, the track record that I have for growing businesses because scale is incredibly important for both our industrial distribution business as well as our aerospace business so, I think you will find that I am not afraid to leverage a balance sheet where the math works for acquisitions that add capability and shareholder value. The second thing is that I think as importantly the execution skills that I bring because as you look at it we have some businesses today that are operating well. We have some that frankly we know that we can improve and being able to generate the needed improvement in those is going to help to generate an overall improvement in total returns.

So I'm not at all risk averse in terms of investments to growing a business, but I think that I do bring the experience where you have to make sure that you have a good strategic framework in which those acquisitions fit. And also that you've done adequate due diligence on the property itself and also how you're going to integrate it to deliver the value that you expect.

Mario Gabelli - Gabelli & Company

And what's your philosophy with regards to use of cash flow to look at your own company, I mean if you look at Kamatics and I can probably sell that to anyone at a fairly decent wealth I believe in today's world and look at the economic value of your enterprise. Why have you, you didn't have one discussion or comment on whether you would recommend to the board or to the shareholders that you might consider a, some kind of a stock repurchase, what's your philosophy to it that is the stock too high, how do you view that element?

Neal Keating

At this point, well, it maybe on the table for a future meeting. We haven't discussed that simply, I believe because of the number of shares outstanding today.

Mario Gabelli - Gabelli & Company

Do you mean there is too many or too few?

Neal Keating

I think too few.

Mario Gabelli - Gabelli & Company

It's an interesting comment. I think we have to have a discussion offline on that subject. Your backlog in the Kamatics business is terrific. Your margins were fabulous, congratulations, and I got a lot on this, but let me let other people ask to fill in their models.

Neal Keating

Okay. Great. Thank you.

Operator

And your next question is comes from the line of Matt Duncan of Stephens. You may proceed.

Matt Duncan - Stephens

That's Stephens. Good morning everybody.

Neal Keating

Good morning Matt.

Matt Duncan - Stephens

A few questions to your, one thing that we are still tying to kind of get of arms around these margins and so a couple of questions about that. First, if I look at your gross margins and back out Australia charges and kind of normalized fuzing and Aerostructures. It looks to us like your gross margins would have been sort of 28.5% to 29% this quarter. I am trying to get a sense of number one, is that relatively accurate and number two where should we be thinking about the gross margins of your business going forward?

Bob Garneau

When you say Matt, that you are normalizing I mean we think there are couple of things, I mean we think that they are low on several of the businesses and you have normalized fuzing in helicopters you said?

Neal Keating

Fuzing in Aerostructures. So I am looking at Aerostructures once we get these new programs around. Fuzing if you had not had a production issue with the joint programmable fuze this quarter. Basically saying if Aerostructure goes back to a mid-teens operating margins.

Matt Duncan - Stephens

Yeah.

Neal Keating

And fuzing is kind of back to sort of 12%, 13% type operating margins.

Bob Garneau

Yeah. And so then the total aerospace, you are looking at that, or are you are looking at operating margin before we get into corporate expenses.

Matt Duncan - Stephens

Well Bob, I am really trying to think more about what gross margins would have been because productivity issue in fuzing obviously is going to impact your cost of sales. In Aerostructures you got ramped up costs for new programs. So, I am just trying to think about going forward, how we need to be modeling margins, because they have been kind of trending down and I would think that they should start trending the other way pretty quick here.

Neal Keating

It's gets, it’s a business-by-business thing and our specialty bearings of course are higher. We will make improvements in the helicopter over time as we eliminate the losses and move into some of the programs and in terms of Aerostructures would get, would improve more to what you see in the [2006] things. So I think when you look at a blended rate and I guess that's what you are after.

Matt Duncan - Stephens

Yeah.

Neal Keating

You see in Aerospace it's going to be in the, probably in the high teens like it's been over a longer period of time and industrial distribution as we grow we eventually will move those up. But again size and scale are important.

Matt Duncan - Stephens

All right. So, Neal, those are operating margins you are talking, okay, fair enough. And moving on then. Looking at the industrial distribution operating margin again for just a minute here, in 2006, from the third to fourth quarter that margin was down 110 basis points and the same held true this year. I am just trying to get a feel for other than seasonality and obviously being familiar with the distribution business, I understand that the fourth quarter can be seasonally challenging on sales.

Your sales were down $4 million sequentially, it's not a huge decline, but a 110 basis point decline in operating margin, is there anything structural about your distribution business? Are you accruing for bonuses that maybe you aren’t accruing high enough and so there is a kind of a catch up that's showing up in the margin in the fourth quarter. Is there anything structural about specifically the fourth quarter that would bring it so much below the rest of year when sales were only down about $4 million sequentially, and we're actually basically flat with the first and second quarter.

Neal Keating

There is nothing structurally that would bring it down I mean I think it is a seasonal issues that effected and to the extent that we are opening branches and we are putting people in, I think there was some fourth quarter hit particularly this year or impact I should say particularly this year.

But I don’t think there is anything structural that would do that.

Matt Duncan - Stephens

So then we should in all likelihood see your operating margin for distribution jump back up you in the first quarter.

Neal Keating

And traditionally it would

Matt Duncan - Stephens

Okay. I just wanted to make sure that was still the case. On Aerostructures when do we feel like these new programs will be ramped up to get operating margins for that segment kind a back to the 2006 type level?

Neal Keating

There are a couple of issues there, but certainly that we think it's for the most part issues that will extent through the first half and that's part of 2008. I mean that's pretty much I think what we believe where we are working with.

Matt Duncan - Stephens

Okay and then last question here I'll jump back in queue, Neal you've hit on this some you been commenting about five months now. I am curious if you can talk about some of the opportunities for improvements, some specific opportunities for improvement that you identified whether it would be revenue growth opportunities or margin improvement opportunities that you identified in your time so far?

Neal Keating

Well I think, I think Matt first of all the key opportunity for us is to accelerate our organic growth rates through acquisitions and we've been spending tremendous amount of time and particular in the last couple months focused in that, both in our industrial distribution and aerospace businesses.

I think that you certainly have the balance sheet strengthen and leverage to enable us to do that. We have businesses again as I've said that are driven in large part by scale, so I think that that is incredibly important for us and it going forward.

The second is in terms of operational improvements, we've hit on a number of them here this morning. Number one is our Aerostructures business in Wichita. That is incredibly important to us because of the programs that we've got in there.

Depending on the day or the week Boeing's backlog for 787 approaches 800 aircraft to 850 aircraft, we need to make sure that we have been able to meet the customer expectations with our high-quality product and be able to get our cost down for doing that, And it's going to have a disproportionate impact on the profitability of that location.

So that combined with Fuzing and consistent production of the JPF Fuze, those are the two areas right now that we're focused on from a margin improvement perspective. And I think the third area would be, we have a great position and franchise in our Specialty Bearings business. We've had good organic growth rates, but what opportunities do we have to accelerate the growth for that business and still sustain those margins.

And I think that when we talked little bit about the new platforms in both the Sukhoi and the ARJ21 aircraft are indications of that, but accelerating the growth of that business because simply because of the margin conversion there is important to us as well.

Matt Duncan - Stephens

Right, maybe just one more thing on acquisitions which that you seem to be talking about that quite a bit, I am curious when we might should to see an acquisition and sort of what's your philosophy on what the right multiples to be paying for these businesses are. And then I'll let that be my last question. Thanks guys.

Neal Keating

Well, Matt I guess I would just say stay tuned on the timing for them. And I don't mean to be coy there, but I think we all recognize the confidentiality there in two very different multiples and approaches there.

The industrial distribution business typically you would pay between $0.28 and $0.33 to $0.34 for each dollar of revenue. again varying somewhat based on the product mix and the profitability of that business, and frankly on the aerospace side, those multiples continue to be high today and they are all over the map depending on the specific technology the you are acquiring.

So I think that to put a range around that is a little bit difficult right now because of the range of businesses that we are in and what that would imply for a range of multiples for our specialty bearings business, for example versus an Aerostructures business.

Matt Duncan - Stephens

Okay. Thanks for the comments.

Operator

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

Robert Kirkpatrick - Cardinal Capital

Good morning, and let me add my appreciation to Paul. It's been many years that we had questions going back and forth.

Paul Kuhn

Hi --

Robert Kirkpatrick - Cardinal Capital

A couple of questions. One, Neal would you care to comment on the tone of the discussions with Australia and maybe if there could be a discussion of the cash that is at risk. Should that not be able to be satisfactorily resolved?

Neal Keating

Okay, Sure, Rob. As I said I was just down there two weeks ago, the ternary discussions frankly were constructive. They were interested to learn what the status of the program was today, how far we thought we were from completion of the product and the capability for the Commonwealth. They were very interested in the current issues that we faced in achieving completion and they were obviously struggling with a number of very difficult defense procurement decisions that sit on the table today for the new administration. I think in the press, they have discussed some ten troubled programs down there bearing across frigates to the new F-18 e-procurement they have gone through et cetera. So, I think that they have a number of very difficult decisions ahead of them, the discussions that we had were again I would say very constructive and we look forward to working with them hopefully now in the near term to be able to get direction as to whether they feel that they still need the capability that we can deliver with our [C spread] helicopter or whether they are going to cancel the program.

And I will let Bob comment on the specifics related to any cash impacts we would have.

Bob Garneau

Hi Rob, a couple of things and I think we've talked before, I mean we still have a receivable from them, due from them on the completion and delivery of the helicopters and that's $40 million offset by a couple of $8 million and $10 million items which nets it down a bit. And then there is a letter of credit that we've got in the neighborhood of $16 to $20 million that, if things were I mean those are vulnerabilities, but we don't think they are issues that we are overly concerned about. We think that and certainly are hopeful that if we have to work through something that we would work through those issues as well. So we don't see too much of a cash type of an impact from something like this if the program went either way. If it goes forward, then we will collect those over the normal time that we finish the additional work.

Robert Kirkpatrick - Cardinal Capital

Okay. And Neal would you care to comment also on the process that you expect for the Fuzing contract that has been either discontinued or suspended in terms of the process that you go through the timing. And then, again, if Bob could address the dollars at risk?

Neal Keating

On the 143 program Rob, currently we are not delivering those fuses. We have not delivered those fuses for a number of years. So they were talking about actually rejecting lots of fuses that were delivered over a timeframe from five to even two or three years ago. So, it's not a product that we currently have in production.

Bob Garneau

Yeah and we do have some inventory Rob, and we would expect to deliver that at a point that we work through these issues. And we do have a small warranty accrual to fix the fuses and you recall we had a couple of disclosures where they wanted instead of having us fixed and to send them back and we sent them back and then they charged us to fix them. But that's all what the lawsuit is about and that will be resolved as we go through the lawsuit aspect of it. We don't believe that we've got a financial exposure on that that will, because we believe we are correct on our position.

Robert Kirkpatrick - Cardinal Capital

Okay. And thirdly, there has been a sequential decline in sales I believe in Kamatics every quarter in the last fiscal year. Is there is seasonal reason for that or is that just that you caught up with the production backlog as you open the new facility at the beginning of the year.

Bob Garneau

I think Rob on that, is that is there is, I mean there is, decreases are pretty small where the fourth quarter comes down little bit and sometimes that is just because there is a few holidays and less work days there. But there is nothing traditionally seasonable about that, and any reason for sales coming down.

Neal Keating

And then part of that Rob is also timing of requirements where as we have said our lead times are fairly short. Our customer while they push for delivery in the fourth quarter they also experience fewer working days in the fourth quarter. So I think that has something to do with it as well. I think what you would expect for our Kamatics business would be really a plan that would be fairly stable in each of the four quarters of the year. You are right, we came down a little bit sequentially during the course of the year. But frankly I think that the difference from the first and fourth quarter was about 4% or 5% and some of that may have had to do with making up for some short shipments in December the prior year even. And we do have a record backlog, so it's not a case that the business is coming down.

Robert Kirkpatrick - Cardinal Capital

Yes, I know that your backlog for aerospace in total was well over 1.2 and look like it was very solid across the number of categories. Finally, Neal could you comment maybe more generally on the M&A environment, not necessarily speaking to one side or the other, but just in terms of there has been some concerns about liquidity in the market and has that resulted in any greater opportunities for Kaman to look at potential acquisitions or and perhaps fewer competitors as you go out and begin to have any discussions that you would have.

Neal Keating

I think that it has impacted Rob in exactly the manner that you said, in fact there is some interesting comments from a number of Aerospace that happen to be leaders in the last week or so, saying that there is less impact right now from a number of the private equity firms that had been very active over the course of the past three to five years which makes it a little bit better environment for the strategic investor and that that carries across to our industrial distribution area as well. So we see that. I think that the uncertainty right now or the apparent slowdown has also opened up some people’s eyes in the industrial distribution side where they are more likely to look at selling companies in a lot of privately held companies or closely held companies in those business today. And the evaluations I think will be better. So I think it's a positive.

Robert Kirkpatrick - Cardinal Capital

Okay. And then one for Russ. First of all Russ congratulations, I understand you will be retiring at the end of March. Has there been any discussion about a replacement as for the prime investor relations contact.

Russ Jones

Well thank you very much Rob for that. Maybe I'll actually turn that to Bob to say what we've done in that area. Thank you.

Bob Garneau

Yeah. We've actually got a person identified, we haven't realized anything yet on it, but we do have a person and he is actually, will be out with us in the next few days as we go out and meet folks.

Neal Keating

And he is internal candidate, Rob. So we listened.

Bob Garneau

We listened.

Robert Kirkpatrick - Cardinal Capital

Great, well thank you. I am sure it will be very helpful and Russ thank you for being as helpful as you've been over many years with Kaman. We appreciate it.

Russ Jones

Well it's been a pleasure Rob and this fellow is already been on the road with us and he has a lot of skills. He is a CPA, he has got all the kind of credentials that you be looking for.

Robert Kirkpatrick - Cardinal Capital

Great. Thank you.

Operator

And your next question comes from the line of Steve Levenson of Stifel Nicolaus. You may proceed.

Steve Levenson - Stifel Nicolaus

Thank you. Good morning.

Neal Keating

Hi. Steve.

Bob Garneau

Good morning.

Steve Levenson - Stifel Nicolaus

Or I should say good afternoon?

Neal Keating

Yes.

Steve Levenson - Stifel Nicolaus

And let me first say thanks to the Paul and Russ and nice talking to you guys. And for Neal, I know most of the questions have been asked, can you give us some additional details on the backlog and where that lies and then I was just going to just follow up with an M&A question.

Neal Keating

Well, I think in the, from a backlog perspective the -- we spoke about our specialty bearings business being at a record high and that makes up about 20% of that backlog and as you would expect for their business, it's fairly broad across industries and customers.

Our Aerostructures’ business is predominantly around Sikorsky, Boeing C-17 and Boeing commercial aircraft as well both the 767 and 777. I am sure you saw the announcement and as we commented today that contract extension. And in the Fuzing business predominantly around our JPF Fuze and then in our Helicopters business we have parts of the -- of course the Australia program still in there. We have the Egyptian depot level maintenance and upgrade program, not the whole thing in there. And also some of the joining work and installation works that's planned in '08 for the Black Hawk that we do here in Bloomfield.

Steve Levenson - Stifel Nicolaus

Thanks. Based on what they told you about 767, do you want to try to handicap who is going to win the tanker contract?

Neal Keating

I will tell you. This is one where you can be wrong and you can be wrong quick if they actually go ahead with the announcement at the end of the day today. I think it would be difficult in today's environment for that contract to be awarded to the Airbus side.

Steve Levenson - Stifel Nicolaus

I hope that will work out for you, then.

Neal Keating

No, we hope so. I think there is two things, one we do 767 works in Jacksonville, that would go on the tanker. We do there [ruddervator] for the refueling boom in Wichita which we would be very happy with.

The flip side is that if by chance it does go the other way you can be sure that they will be looking very quickly to establish dollar denominated local sources of supply for the components on that that they can move to fabrication or construction assembly here in the states. So we would certainly be very active with that as well.

Steve Levenson - Stifel Nicolaus

Okay. Thank you. On the M&A side, given you draw there, would you ever buy on aerospace side of the business or industrial distribution and can you give us some idea where you really see the low-hanging fruit, not necessarily meeting the best margin, but the best benefit for command. Right now.

Neal Keating

Yeah. I think an important thing to keep in mind is that they really are not mutually exclusive. We feel that acquisitions will provide significant opportunities for us and both of our businesses, and frankly can help us improve our margins significantly.

So I don't mean to say I'm agnostic to either side, but I'm agnostic to either side. What we are really going to look hard at and focus on is the math of the deal, and how it really fits for us and how effectively we are going to able to integrate them.

So I think that when you look at the industrial distribution side, the key things that we look at is number one, we would like to fill out our geographic footprint. We've said many times that we are in 70 of the top 100 market share in the United States, and we think that that provides us a key opportunity for expanded growth.

The second thing is that as has been commented about the ability for us to drive incremental revenue through that fixed cost base is what's going to drive the margin improvement.

We've also commented about having to open new branches to serve our national accounts. If we already had locations there, we would be on the other side of that economic equation, where instead of investing to open a new plant, we'd have incremental revenue going through an existing facility and that's pretty important to us.

And the third would be those acquisitions that enable us to expand into higher margin area such as fluid power that we have a fairly small presence in today all of those things of course combined with a strong management team are the things that we look at.

On aerospace side, I think that again it's an area where we've got great opportunities if we could grow our Specialty Bearings business that would clearly be attractive to us because of the track record we have there and the capability of the team in our Specialty Bearings business to drive improved operational performance.

And then you simply look at the dynamics of the industry today and recognize the drive toward composite structures and we frankly have a fairly small presence today in the composite area, and that would be one that we think would be very appropriate to invest to grow.

Steve Levenson - Stifel Nicolaus

Thanks for the very complete answer. One last thing that I forgot to ask I am sorry, what are the lead times on the Connecticut experienced right now?

Neal Keating

I guess, it would vary, and would vary by whatever, but I think they try to get them out in weeks rather than months.

Steve Levenson - Stifel Nicolaus

And they are pulling pretty study?

Neal Keating

And they are holding pretty steady. Yes they do -- very good at that.

Steve Levenson - Stifel Nicolaus

Thank you very much.

Neal Keating

Okay, thank you.

Operator

And you next question comes from the line of Margot Murtaugh of Snyder Capital. You may proceed.

Margot Murtaugh - Snyder Capital

Thank you very much, I was just wondering if we headed for recession this or next, what happens to your industrial distribution's revenues and margins, and in 2008 how much incrementally is coming from the national accounts do you think, so you can talk a little bit about the outlook for industrial distribution in the top economy?

Neal Keating

Margot, it's interesting because this something that of course you would expect us to spend a lot of time on it we do. We got together with the leadership of that business back in late October early November, asked them for a very detailed contingency plan that would enable us to deal effectively with the downturn in the business when and if it occurred and we reviewed that right after the first of the year.

At the same time, as you saw in our numbers today, we exceeded 10% all organic growth rate in the fourth quarter of '07, so we have not yet seen that slowdown. If it is happening Margot, I think that the smaller local distributors are the people that are bearing the brunt of that because they either don't have the ability to support national accounts as those national accounts really drive towards consolidated purchasing, or their ability to drive attractive pricing from suppliers disappears, because they not demonstrating the growth.

So right now, we have not seen that slowdown come through in our numbers yet. So I can't --

Margot Murtaugh - Snyder Capital

Okay.

Neal Keating

I can tell you we're ready for it when and if it comes, but we haven't seen it and we watch those numbers daily.

Margot Murtaugh - Snyder Capital

Okay. Well, in 2008 there is a lot of incremental revenue coming from the new accounts, or did you get most of that in 2007, any thoughts there?

Neal Keating

Well, we've commented that we've had in excess of double-digit growth in our national accounts. We see that continuing and as we commented through the year, Margot, we've ramped up a number of new branches to support those accounts, but I think that we see those continuing to grow at those rates in through 2008. The other thing is that, we happened to have a fair amount of strength in mining in the commodities area predominately in copper and gold and that has obviously gone very, very well for us over the course of the last year and we don't see that those commodity slowing down any times soon. And the other thing that we touched on a couple of times is that, our national accounts have really enable us to increase our presence in the food and beverage industry, which is as we all know typically less cyclical than others.

Margot Murtaugh - Snyder Capital

Well, can you quantify what percentage of your business is to natural resource company?

Bob Garneau

We don't break it down to that level, but I will give you a little bit of insight I think and that is that if we were to combine our food and beverage and mining business together, that approximates 20% of our total business in the industrial distribution.

Margot Murtaugh - Snyder Capital

Okay. And your margins have been below your competitors. In the past, you implied that there is potential to get those margins up. I don't know how many percentage points, but is there still a goal in that regard from margin and industrial distribution.

Bob Garneau

I don't think that we publicly stated a goal but we certainly see that there is a significant room for improvement. We think that if you look at our two major competitors either AIT or Motion, they are between a 150 I believe and 250 basis points better margins than we have, and I think we should be able to cut into that.

Margot Murtaugh - Snyder Capital

Okay. And then one small question, G&A for this year and capital expense for 2008, if you have an answer?

Neal Keating

Hold on one sec.

Bob Garneau

The answer is yes, but it's going to take us one moment.

Margot Murtaugh - Snyder Capital

Alright. Well, I have been waiting for that. What percentage of your industrial distributions is related to housing and housing related businesses?

Bob Garneau

We have reported that, that’s about, that has historically been about 10% of our business, Margo. But that's off is about 40% to 45%.

Margot Murtaugh - Snyder Capital

Okay.

Bob Garneau

So luckily for us as opposed to some others, we were not very strong or dependent on the housing market or the automotive market.

Margot Murtaugh - Snyder Capital

Okay. That's good. And just if you have anything on those numbers and that would be…

Neal Keating

And Margo, you asked what capital expenditures were for '07?

Margot Murtaugh - Snyder Capital

No, what the projected for '08 and also G&A for '08.

Bob Garneau

I would say that those again in terms of the capital expenditure. Again, these aren’t typical numbers we give out. But if you look at our historical trends, it would tend to follow that. With the one exception that we have mentioned that we are negotiating with the government on the government property acquiring that and the way that would work is that would become capital expenditure, which would increase the number for 2008. Although not necessarily expenditure, because it involved kind of a long-term commitment to dealing with some environmental issues so, that would be spent over a longer period of time. In terms of the G&A, there is nothing there that should other than the normal growth of the business that would affect G&A going forward. So, the percentage would follow the trend.

Margot Murtaugh - Snyder Capital

I mean G&A for the new company?

Bob Garneau

Depreciation, okay, sorry. Again, that would tend to follow our historical trends.

Margot Murtaugh - Snyder Capital

Okay. Even without Music, I mean it's been about $10 million I believe?

Bob Garneau

Yes, and that's continuing operations, it would be about the same. Music has historically not had much depreciation.

Margot Murtaugh - Snyder Capital

Okay, great. Okay thanks very much. I appreciate it.

Bob Garneau

Thank you.

Operator

And your next question comes from the line of Tim Hasara of Kennedy Capital. You may proceed.

Tim Hasara - Kennedy Capital

Yes. I just like to follow up on the question with respect to buyback, and I was curious how you are defining that you have too many shares outstanding or not enough shares outstanding excuse me?

Bob Garneau

Well, I think we started by saying a little bit that we hadn’t spent time with Neal, talking about that and that's not been the conversation that we necessarily had. So in terms of stock buyback, we -- the sense that we've gotten that there are adequate shares out there and that in the market as work for shares and we haven't necessarily had too many shares and so, we necessarily haven't look at cash as shrinking the sides of company but more toward growing it going forward and that's been our plan with the cash that we are looking at is easy to grow before we use it to buyback shares.

Tim Hasara - Kennedy Capital

We'll, certainly that's not how you answered the question and the answers say, none of shares outstanding. I guess when you do a buyback you're looking for the return on investment on that buyback and you are looking to buy the stock at a discount to as net asset value and you sort imply that you would why understood issue stock here for an acquisition based upon there promise and who has given you the sense that some of -- there is enough shares outstanding or not enough shares outstanding or not enough shares outstanding?

Neal Keating

No that -- I am sorry if it came across that way Tim, but I think that if we take a step back right now what we really have to do is and of course are doing is looking at the best way to accelerate the value of the company. And in conjunction with the Board, discussions would take place across all of the appropriate ranges of options available to us to do that.

Tim Hasara - Kennedy Capital

Okay. And then just so to clarify, so with respect to a buy back you answered the question and you thought there was not enough shares outstanding and I am just curious why you said that, I mean you're defining that? Maybe you would answer that question?

Neal Keating

Just from liquidity perspective the number of -- when you look at our..

Tim Hasara - Kennedy Capital

With respect to what, large cap or small cap? I mean your -- I mean as a small cap manager your average training volume is roughly in line or maybe even greater than your marketing cap with respect to everything out there. I am curious how you are defining, are you comparing it to the GE or what are you doing?

Neal Keating

I don't think I would be comparing it to GE.

Tim Hasara - Kennedy Capital

Then what are comparing it to or how do you make that statement?

Neal Keating

Tim, it was a statement that I -- if we…

Bob Garneau

Historically when we talked to guys like yourself, the biggest problem we've had is that people want to buy this stock and can't find it. I think that's what kind of motivated.

Tim Hasara - Kennedy Capital

I just can't buy that, how can you buy that argument?

Neal Keating

It's true, that's the comment that have come back.

Tim Hasara - Kennedy Capital

Yeah. So if the comment came back and said so your stock at, use your stock at $15 a share then you'll take that up as well I mean.

Russ Jones

It is not so much, that was a statement that Neal made, but asked by Mario A or B that was just a fast answer. I think the underlying answer is that; that is a very important issue that requires a lot of careful thought and that is not of the table to have those kinds of thought processes. We don't want to get into an argumentative kind of a discourse here.

Tim Hasara - Kennedy Capital

Definitely not. But if you want to answer a question, if the CEO answers a question, you've to at least support the question and that's really all I'm trying to get out of this, where that came from and support that, so I understand what were trying to get at. Thank you.

Russ Jones

You are welcome.

Neal Keating

Thank you, Tim.

Operator

And your next follow up question comes from the line of Arnie Ursaner of CJS Securities. You may proceed.

Arnie Ursaner - CJS Securities

First one for Bob Garneau, you mentioned that the CapEx will kind of keep an eye on the star transact, kept an eye on the stock for about 3 or 4 years and I wouldn’t really know how to answer that, so perhaps you could expand a little on what CapEx is like between the upcoming year?

Bob Garneau

In terms of the, we spent about $12 million in the year 2006 and about $14 million this year. And so I would expect that we would and we've spent a little bit more because of some the early years, we had spent a little bit less. So I think in that $12 million to $14 million range is about where we would be comfortable generally going forward.

We try to not; get too far, had a deprecation so that the two are somewhat kept somewhere in the same range. The one thing that could make it change a bit going into 2008 would be the government property that we are discussing and are in the process of borrowing.

Arnie Ursaner - CJS Securities

Okay, again I am going to try to ask a relatively direct answer, hopefully to get an answer, are you losing money on Wichita now?

Neal Keating

No.

Bob Garneau

No.

Arnie Ursaner - CJS Securities

Okay.

Neal Keating

No and we have talked about the third quarter where the third quarter was, we had to encounter some issues. We work through most of the issues in the third quarter. We work through more issues in the fourth quarter although less in the third quarter. And we see that they are -- they will come down and but there will be some impact in the first and the second quarter of 2008.

Arnie Ursaner - CJS Securities

Okay, your segment has had roughly 15% margin last year given the negative hit from Wichita, when does Wichita improve to the point where you return to 15% tight margin in that business?

Neal Keating

I think, in the third quarter is most likely where we get back to where third and fourth quarters.

Arnie Ursaner - CJS Securities

Okay. And going back to the acquisition targets or opportunities given the math that you gave us, Neal, would imply that you could very, very comfortably buy $200 million to $400 million distribution revenues to the extent you layered on $300 million to $400 million of distribution revenues and exceeded $1 billion going back to I think Margo's question, you have two public competitors and you have consistently said volume is the key, there should be a very sizable incremental margin on acquisition revenues. If you got to $1 billion of revenue what do you believe your margin would be in distribution?

Neal Keating

Arnie, I think, I would like to look at the math on that prior to making a comment because it would also depend on, if you make that in two larger acquisitions or multiple smaller acquisition. So there is a number of elements that would go into that. I think that you actually did some work on that recently that probably isn't too far off.

Bob Garneau

Actually though when I did it was pretty conservative, but wanted to perhaps give you an opportunity in a very public form to respond to it.

Arnie Ursaner - CJS Securities

Well, I think that your work was pretty good. Okay. And I also want to extent my thanks both to Paul and Russ, and Russ I remember our meeting when getting through the door was a pretty big challenge to keep an eye on you, but we've gone a long way and I really thank both of you for your help in helping us create a winning stock. Thank you.

Neal Keating

It's been a pleasure Arnie.

Operator

And you last question is a follow-up from the line of Matt Duncan of Stephens. You may proceed.

Matt Duncan - Stephens

Hey, guys. Just a couple of quick housekeeping items that deal with all of our models. Bob, the tax rate has kind of jumped around a little bit in '07?

Bob Garneau

Yeah.

Matt Duncan - Stephens

What should we be thinking of about for the tax rate in '08?

Bob Garneau

We think it's going to stay at a somewhat traditionally rate of between 36 and 37. And the trouble with the new accounts tax rules are that when something happens in a quarter you have to recognize it in the quarter and that tends to give you some volatility in that range during the number, but generally it will be in that rate.

Matt Duncan - Stephens

Okay, because I think previously you were talking about something closer to 38%, 39% --

Bob Garneau

Yeah, and they have come down and particularly with a higher earnings the tax rate has trended down a little bit.

Matt Duncan - Stephens

Okay. Fair enough. And then, another question kind of gong back to specialty bearings, another personnel that was noticing that sequentially we've had decreases in that business this year, and I guess the think I want to hit on here is, typically from your fourth quarter to your first quarter of the next year, those revenues have a pretty substantial jump. Should we expect that trend to hold through?

Bob Garneau

I think that this is the large jump that you saw last year, and that was probably more due to the additional capacity that have been added during the preceding period, and it depends somewhat on the timing of getting things out.

Sometimes at year ends we run into either issues on our side or whether customer who doesn't want to get something and something that does impact the fourth quarter first quarter relation.

Matt Duncan - Stephens

Okay. I also know some from '05 to '06, it was up about 3 million sequentially fourth quarter to first quarter and then last year it was more like five. So, I am just trying to make sure that that is a trend that I should have in my model.

Neal Keating

One of the thing we do there, Matt is whereas we use to have summer shutdown in July, we don't do that anymore, but around the holiday season you are going to loose sometime, and we do have some things that tend to because of overall less economic activity out there. I have some things that slide into the first quarter.

Matt Duncan - Stephens

Okay. I appreciate you guys. Thanks.

Paul Kuhn

Yeah, good bye.

Neal Keating

Thanks Matt.

Bob Garneau

Well, yeah. I was expecting the operator to come on, but thanks for joining us today everybody and we look forward to speaking with you again, bye, bye.

Operator

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

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Source: Kaman Corporation Q4 2007 Earnings Call Transcript
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