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Kaman Corporation (NYSE:KAMN)

Q2 2008 Earnings Call Transcript

August 1, 2008 11:00 am ET

Executives

Eric Remington – VP of IR

Neal Keating – Chairman, President and COO

Bob Garneau – EVP and CFO

Analysts

Arnie Ursaner – CJS Securities

Jack Atkins – Stephens, Inc.

Steve Levenson – Stifel Nicolaus

Edward Marshall – Sidoti & Company

Robert Kirkpatrick – Cardinal Capital

Jonathan Moraco [ph] – Vanadium [ph]

Jerome Lande – Millbrook Capital

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2008 Kaman Corporation earnings conference call. My name is Erika 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 before the end of this conference.

(Operator instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Eric Remington, VP of Investor Relations. Please proceed, sir.

Eric Remington

Thank you, Erika, and good morning everyone. This is Eric Remington of Kaman Corporation and I would like to welcome you to the company's 2008 second quarter conference call. This call 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 August 8 at this site.

Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer; and Bob Garneau, 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 the expectations 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 filings with the Securities and Exchange Commission.

In addition, the information contained in this conference call is accurate only on the date discussed. Investors 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 on the call.

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

With that, please turn to Exhibit 1, and I will turn the call over to Neal Keating. Neal?

Neal Keating

Thanks, Eric, and good morning everybody. Before discussing the specifics of our quarterly results, I wanted to provide an overview of several of the significant milestones achieved in the second quarter that will improve our competitive position in the near-term and provide a foundation for continued future growth and profitability.

During the quarter, we completed the acquisition of Industrial Supply Corporation, our first acquisition in industrial distribution since 2003, which provides a stronger presence in Virginia and North Carolina, expands our product offering and brings a very experienced management team.

In addition, we opened our newest distribution center in Savannah to service our growing business in the Southeast. On June 12, we acquired UK-based Brookhouse Holdings, our first acquisition in aerospace since 2002. Brookhouse brings us expanded composites capability, proprietary technology, diversifies our customer and platform base, and again, a key factor in our decision to pursue Brookhouse was the proven capability of their management team.

And finally, we further strengthened our leadership team with the addition of Greg Steiner, who joined us as President of our Aerospace Group. Greg brings a wealth of experience in the aerospace industry and has run large global businesses for Rockwell Collins, Smiths, and most recently GE Aerospace. We are very pleased to have Greg onboard and look forward to his contribution.

These efforts, combined with our success earlier in the year in reaching a settlement with the Australian Ministry of Defense on the Super Seasprite program gives us confidence that we enter the second half of the year better positioned for the future.

As we look at the second quarter, a quick review of results shows that our overall growth trends accelerated during the quarter. Net sales rose 16% to $316 million, driven by sales growth across our businesses. While diluted earnings per share were $0.24 versus $0.36 a year ago, the current year period includes a noncash goodwill impairment charge of $7.8 million or $0.31 per diluted share related to issues at our Wichita facility, which we will discuss in more detail. And as you will note, our second quarter 2007 results included a $2.4 million charge related to the Australian helicopter program which did not recur in the current period.

With that, let’s get to the reporting segments. I’ll start with our most challenging business currently, Aerostructures. The business demonstrated strong top line growth with sales rising about 30% over year ago levels driven by our BLACK HAWK program and continued contribution from the C17 program.

Unfortunately, while we succeeded in returning this segment to profitability, generating $1.5 million of operating income excluding the impairment charge, this was still significantly below the $3.7 million of operating income in the year earlier period.

While we made progress in Wichita during the quarter, including filling key operations, quality and supply chain management decisions, and implementation of corrective measures to enhance operating and quality procedures, the progress was slower than either we or our customers wanted to see, and we continued to experience production inefficiencies.

Specifically, as reported earlier, the facility’s AS9100 certification was suspended late in the first quarter and significant additional costs have been incurred to support inspection prior to shipment as well as additional administrative costs required to prepare for recertification. Currently, our audit is scheduled for the third quarter and we would expect to regain our AS9100 certification during the fourth quarter of this year.

In addition, we experienced additional costs in shipment delays due to the probationary status imposed by a major customer in the first quarter. This probation dramatically reduced our shipments throughout the second quarter and these delays in attendant cost are reflected in our results. We did pass the customer’s verification audit in mid-July resolving the issue to their satisfaction and the customer has now allowed production to resume on all-continuing programs, a concrete indication that progress is being made.

However, the combination of these issues has affected our ability to deliver product to our customers during the second quarter and this, together with issues specific to each program, has resulted in the termination of our contracts with Spirit AeroSystems, Shenyang and two other smaller contracts.

Currently, these contracts were projected to generate total sales of about $14 million from the third quarter of 2008 through the end of 2010. The issues we encountered during the second quarter required us to assess the goodwill associated with the acquisition of the Wichita business in 2001, and based on our analysis, we thought it was necessary to record an impairment charge in the period.

As I said during the first quarter conference call, this performance is unacceptable. Again, we are making progress, and while risks remain, we believe we will begin to see the benefits in the second half of 2008. While the Wichita situation has impacted our Aerostructures segment performance, there were other very promising developments in other areas within the segment.

Overall, our Jacksonville facility continues to perform very well, delivering high quality product to its customers and I am pleased to report that we were able to leverage this solid program performance into a new contract win to act as a subcontractor to Boeing to produce wing components for the A-10 program.

Boeing will be delivering 242 ship sets plus spares to the US Air Force and we expect to ultimately ramp up to an average production rate of 47 ship sets per year. We are under contract and already have the first PL from Boeing. Work will commence this year but full rate production will not begin until 2011 and is expected to last through 2015.

This is a significant win for Kaman that could mean over $100 million in revenue for the business over the life of the contract and will ultimately more than replace C-17 sales. However, the C-17 is not gone yet as we are under contract for 17 ship sets that will provide work through 2009. Combined, these two programs represent a revenue opportunity for the Aerostructures segment of over $120 million.

Of course, the other major development in the quarter in the Aerostructures segment with our acquisition of UK-based Brookhouse Holdings. The integration of Brookhouse into the Aerostructures segment has been progressing well and we remain as excited by this opportunity now as we were when we first announced it. The Brookhouse command brings on board a highly-respected organization that more than triples our exposure to the fast growing composites market.

The acquisition on Brookhouse also helps diversify our Aerostructures unit across customers, platforms and markets. Prior to the acquisition, our business was very concentrated with two key customers, Boeing and Sikorsky. Clearly, while these are great customers to have with strong backlogs, we wanted to broaden our customer mix. Brookhouse added Airbus in France and in UK, Spirit AeroSystems in the UK, GKN and BAE Systems, to name just a few.

From a platform perspective, it adds positions and new platforms such as the Airbus A320 and A330-340 family, as well as the JSF, Eurofighter, Hawk and A400M. While we are not at liberty to disclose the customer, Brookhouse also has meaningful content on a high-volume, new wide body commercial airliner program. We illustrate this on Exhibit 2. These tables show the platform exposure at our existing Aerostructures business and at Brookhouse.

So, in summary, the addition of Brookhouse nicely diversifies our customer base as well as our platform exposure. The net result is decreased revenue exposure to any one customer as well as additional risk diversification across the commercial and military market.

Through its aftermarket services business, Brookhouse also increases the Aerostructures segment exposure to the aerospace military aftermarket and we also look forward to leveraging Brookhouse's excellent tooling capabilities to support our production programs, reducing the segment's overall operating costs, and strengthening our relationships with our customers. Overall, this has been an excellent acquisition with strong growth prospects that further several of our goals in the Aerostructures segment.

Moving on, we have recently announced the renaming of our Fuzing segment as Precision Products. This is to better reflect the diversity of the segment’s capabilities which includes memory products, measuring systems and electro-optics research and development in addition to fuzes.

In Precision Products, sales for the quarter grew 13.7% to $27.2 million. Along with continued solid performance within our legacy products at Middletown, the quarter’s revenue growth reflected increased JPF shipments to the US military. However, as we have discussed, sales to the US government are at breakeven and this was one of the factors leading to lower profitability in this segment for the quarter.

As in the first quarter of this segment, there were limited higher margin sales to foreign militaries in the second quarter as almost all of our JPF volume went to fulfill US military requirements. We also had the facilitization contract in Middletown in the second quarter of 2007. In addition, you will recall, we sold the 40-mm product line at the end of 2007 and profit from that line is in the 2007 numbers.

The teams in Orlando and Middletown made continued progress on JPF's production and I am pleased to report that we met our stated production run rate of 2,000 units per month for the quarter. This is a significant milestone as it represents the run rate at which we believe we can fulfill our requirements under our contract to the US military, while having sufficient production capacity left over to take advantage of foreign sales opportunities on a more regular basis as they arise. Based on this performance, we hope to be in a position to fill existing foreign orders for the JPF in the second half of the year.

We have discussed our goal of increasing our profitability on the JPF and I would like to explain what we have done and what we are doing currently to achieve that improvement. While we have not yet been able to obtain all of the price increases on sales to the US Air Force under the original contract from 1997, we have obtained foreign military sales price increases.

We have also been able to earn some additional profit on the program as we have been awarded several ancillary JPF contracts that have been nicely profitable. An example of this was the facilitization contract in 2007 associated with our JPF production line in Middletown.

Another profit initiative that we have been working is direct commercial sales and we expect to make progress in the second half of the year. The process of obtaining a price increase on the base USG sales beginning with Option 6 of the original JPF contract is also proceeding well and we are optimistic that we will get improvement beginning with Option 6 sales which are now expected in late 2009 or early 2010.

We were very pleased with the performance of our helicopters business, where sales were slightly lower at $18.1 million compared to $19 million in the second quarter of last year. However, overall, we are seeing good progress with our Depot Level Maintenance Program for Egypt and the subcontract work for Sikorsky. The segment reported a substantial increase in profitability as there were no charges in the quarter related to the Australian Helicopter Program compared to a charge of $2.4 million a year ago.

At this point, we are still awaiting US government approval of the transfer of the Australian aircraft before moving forward. I would note, however, that during the quarter, we retained the resources necessary to market the aircraft and secured marketing license in a number of target countries, so that we are ready to proceed once we received governmental signoff. The settlement did have a slight impact on the segment sales in this period as service center work related to be Australian program, which we generated in the second quarter of last year, was reduced in 2008.

I'll close out the Aerospace business with a discussion of its strongest performing component, Specialty Bearings, which had another excellent quarter of growth, with sales increasing over 16% to $36.7 million and an operating margin increase of over 500 basis points from a year ago to 38%.

Not only does this represent excellent growth against the year ago period but also sequential growth in the record results reported by the segment in the first quarter of this year.

Demand remained strong across the product line and the segment was able to leverage the additional sales volume into substantial increase in profitability. We could not be more pleased with the performance of John Kornegay who runs this business and the entire Specialty Bearings team.

Jack Cahill’s Industrial Distribution team also had a great quarter that built on the progress made in the first quarter of this year. Total sales growth was 16.5% with 8.4% organic growth and the balance of 8.1% from our acquisition of IFC. We’re very pleased with this organic growth rate, particularly given the current challenging economic environment, and we are confident that we are taking share away from the smaller but well capitalized players in the market.

The growth was driven by a combination of continued strength in the less cyclical markets we serve including mining, energy and food, as well as growth within national account program secured over the course of the last year that have begun the gain traction. Overall, national account sales have grown almost 20% year-to-date, and while we are not at liberty to disclose the name, during the quarter we secured a new national account program with a leading human therapeutics company in the biotechnology industry.

Also, our national account agreement with Hormel was renewed and we have been awarded a contract by the GSA to supply US government customers, which is a significant new potential market for us.

The second quarter also marked the first period to include results from the acquisition of Industrial Supply Corp, and their performance was slightly above our expectations.

The integration of this business into KIT has proceeded well and we’ve begun to see the benefits of this acquisition. While KIT’s performance in the second quarter was very strong, we continue to be vigilant given the uncertain economic environment. I mentioned earlier the challenges faced by this unit. These include the lower margins of ISC in a short-term, higher energy prices, margin pressure from supplier price increases and the continued investments in new branches.

However, against this backdrop, we are executing on our growth strategy including our national accounts program, making the investments necessary to support it and delivering the results.

As mentioned earlier, during the quarter, we opened a new – another new Greenfield branch in the Savannah distribution center, bringing our total to 12 new facilities since the beginning of 2007. At the same time, we are also focused on tight expense management. On this subject, I should point out that while fuel costs are a concern, we are less impacted by this than you might think as the majority of our sales are not delivered by our own delivery vehicles, but rather by a third party logistics provider.

Despite this, the careful management of all of our costs is a priority in this market environment to ensure that we can continue to market the segments' profitable growth and position it for outperformance on the other side of the cycle.

Now, I let Bob Garneau walk you through the financials in more details. Bob?

Bob Garneau

Thanks, Neil. Neil already provided some of the financial information, but I’d like to add some segment detail and balance sheet and cash flow highlights.

Diluted earnings per share from continuing operations for the quarter were $0.24 compared to $0.36 in the second quarter of last year. If you turn to Exhibit 3, we have prepared a non-GAAP reconciliation to better compare these results.

Our earnings for the 2008 second quarter include a non-cash goodwill impairment charge of $7.8 million or $0.31 per share diluted related to the Wichita operation. This item is not deductible for income tax purposes.

Adding the charge back to earnings per share would result in an adjusted EPS number of $0.55 per share. Results for the 2007 second quarter include a charge of $2.4 million or $0.06 per share diluted related to the Australian Seasprite program as previously announced. You will see we have added this chargeback in the non-GAAP analysis to provide a better comparison.

We believe this analysis illustrates the strength of our businesses in the second quarter with the exception of Wichita and the JPF Fuze program, which lacked foreign sales in the quarter.

A decline in corporate expenses was also a contributor to our results and we will discuss that subject later. I should also note that we reported $0.01 in earnings per share for discontinued operations. This was a result of settling the closing balance sheet for the Music segment which was sold on December 31 of last year.

Now, if you’ll turn to Exhibit 4, let’s discuss our results on a segment basis.

In Aerostructures, Jacksonville continued to increase sales driven by continued solid performance on the BLACK HAWK program. Since the beginning of the year, we have shipped 59 cockpits to Sikorsky under the program compared to 38 cockpits in the first half of 2007.

Regarding the new A-10 program, we should begin to see revenue from this program in the first quarter of 2010. I should also point out that the Helicopter segment will serve with a significant subcontractor to Aerostructures on this program which will add base in Bloomfield.

Brookhouse was a part of the Aerostructures segment for about two weeks in the quarter and was profitable, contributing sales of $3.6 million. Overall, operating income for the Aerostructures segment before the goodwill impairment charge was $1.5 million compared to $3.7 million a year ago and reflects the impact of continuing issues at Wichita, which resulted in an additional $2.4 million and cost inefficiencies and adjustments during the quarter. These circumstances, together with the increased carrying value of the assets at Wichita, led to the write-off of the entire goodwill balance in the quarter.

Helicopter sales were down slightly primarily as a result of the reduced revenue from the Australian service center contract. The segment is performing well with no real surprises. If you add back the 2007 charge to the results, you’ll see that operating profit margins actually improved on lower sales aided in part by ongoing subcontract work from MDHI and Sikorsky. The Egyptian Depot Level Maintenance contract also provided steady state work.

As we previously indicated, Precision Products sales have increased as JPF production has ramped up. The decline in profitability quarter-over-quarter reflects the fact that in the current period, a majority of JPF sales were to the US government and these sales are essentially breakeven in nature. The total cumulative value of JPF orders by the US government through the end of June was $156 million.

Specialty Bearings had another outstanding quarter achieving record sales and operating profits. Operating margins rose over 500 basis points to 38% from 32.4% a year ago, as the incremental sales in the period flowed through the business' existing cost structure.

Despite the consistently strong growth we’ve seen from this segment, we believe there remained additional opportunities for capacity expansion within our current facilities to meet demand as needed.

In the Industrial Distribution segment, sales rose 16.5%, split almost evenly between strong organic growth and the addition of ISC. You’ll note that as a percentage of sales, the operating profit margin was consistent with the prior year at 4.8%.

We expect ISC’s margins to improve to the levels typically seen in our distribution business as they continue to operate as part of Kaman and leverage our cost structure. Branch openings also continued in the quarter in support of our national account strategy. As we discussed last quarter, our higher than average investment in new branches over the last 18 months has had a slightly negative impact on margins as it takes on average two to three years to have sales ramp up sufficiently, so as to support their cost structures and provide acceptable profit margins.

If you turn to Exhibit 5, I’d like to discuss corporate expenses. As you can see, corporate expenses were lower in the second quarter compared to the second quarter of last year declining from $10.2 million a year ago to $6.5 million. You will note there are several items that have contributed to the reduction expenses, including incentive compensation, a reduction in stock appreciation rights and the SERP expense. The incentive compensation and stock appreciation rights are down as a result of the lower overall earnings and the reduction in stock price. As we’ve previously discussed, the SERP expense is being driven in 2008 by two officer retirements.

Finally, higher claims experienced in 2007 in our group insurance program have come down somewhat in 2008. The corporate expense this quarter is below our traditional spend rate. $9 million to $10 million per quarter is a pretty good estimate of what to expect for the balance of 2008.

Now, if you'll turn to Exhibit 6, I'll discuss balance sheet and capital factors. As you will notice from this exhibit, our use of cash and our debt level has gone up substantially since year-end. This is primarily a result of the cash used in the first quarter and the two acquisitions we made in the second quarter which in total were in excess of $100 million.

The debt level is still below where it was a year ago and provide us adequate capacity to operate the business and fund a certain level of acquisition activity.

On the first quarter conference call, we discussed our use of cash in operations for that quarter. Operations were slightly cash flow positive in this quarter. CapEx is running a little behind our anticipated run rate for the year. However, we expect to catch up on this in the second half of the year.

In addition, we plan on acquiring the Bloomfield (inaudible) facility during the second half of the year. Also, be mindful that the acquisitions of Brookhouse and ISC will result in additional amortization of intangible expenses going forward. While we're still working to finalize our valuation of those properties, we believe the additional amortization expense will likely be between $2 million and $3 million per year.

Overall, we are in a strong financial position with flexibility to continue making strategic investments in our businesses. That covers my remarks and with that I turn the call back to Neil.

Neal Keating

Thanks Bob. As I said at the beginning of the call, while there are certain areas that need improvement, we executed on several significant strategic objectives in the first half of 2008 that will ultimately better position Kaman for the long term. These accomplishments include two excellent acquisitions, the addition of Greg Steiner to lead the Aerospace Group, and the Australia program settlement agreement.

Overall the Aerospace segments are performing well, with growth at Specialty Bearings in particular, that continues to drive the group's performance. In Aerostructures, we have undertaken a number of initiatives to address the issues in Wichita and fully expect to be able to turn this business around by the end of the year.

Jacksonville continues to perform well and the A-10 win and C-17 extension are excellent programs that should more than offset the business loss in Wichita, while the Brookhouse acquisition will provide the Aerostructures segment with new opportunities for growth.

Having hit our 2000 unit per month production target for the JPF during the quarter, we look forward to reporting additional progress on this program over the second half of the year as we continue to get closer to leveraging the significant long-term opportunity this contract represents.

KIT has delivered great performance in challenging economic times and while we will monitor the economic landscape and make the necessary adjustments to the business, we continue to believe that a focus on less cyclical markets and an effective national accounts strategy are the keys to continued growth going forward.

Industrial Distribution has the size, capabilities and financial strength to take market share in this environment and this is was once again proved out in the second quarter.

Kaman is operating from a position of financial strength that allows us to invest not only directly in our businesses but also to pursue strategic acquisitions that complement and enhance our current businesses. We see additional opportunities for value enhancing acquisitions in the marketplace and will continue to evaluate opportunities in both sides of our business as they arise.

Overall, the first six months of 2008 were a period of significant progress for Kaman and we believe we are on the right course for the future.

That concludes our formal remarks. And with that, I'll turn the call back to Eric.

Eric Remington

Thank you, Neil. That wraps up our prepared remarks. Now, we will open up the line for questions. Operator, may we have the first question please?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from the line of Arnie Ursaner from CJS Securities, please proceed.

Arnie Ursaner – CJS Securities

Take a stab at it; it is Arnie Ursaner of CJS Securities. But, good morning.

Eric Remington

We knew that Arnie.

Arnie Ursaner – CJS Securities

Many questions obviously arise from your release and extensive conversation, so I guess I will start with first and foremost on Wichita, obviously the language that’s in your Q about things like withdrawing from suspended and all these other terms and the termination of two contracts, I guess the broad question I have is, is there a plan you believe you have underway that can restore this facility to profitability? Do you have enough opportunities or volume to cover your fixed cost in any reasonable timeframe?

Neal Keating

Good question, Arnie. Where we stand right now, Arnie, I think there is a couple of key things that we need to focus on. Number one, you are right about some of the language relating to suspended and withdrawn, etc. But here is, I think number one, the Wichita facility is very important to us and that is why we are putting the effort in to make sure that we can get that business up to the same level of performance that we have in our Jacksonville facility today. I am confident that we will be able to achieve that although it will take the balance of the year for us to work through the current issues that we have.

I think the most important things to focus on are that number one, we did have a probationary status imposed by a major customer. We were able to successfully work through that issue and as we said in our comments, we were given the authorization to go forward on all of their current programs in mid-July of this year. I think that that is a critical concrete indication of the progress that we have made.

We have gone through our NADCAP certifications for multiple processes within the facility and received NADCAP certification for those processes. We are scheduled for our AS 90-100 recertification audit in August of this year and we have everybody focused on securing our recertification. We believe that it will take a couple of months after the audit to get that, so it would probably occur in the fourth quarter of this year.

In addition, if we look at the business through the facility, there is a couple of things for us to keep in mind, number one, the business is about 55% to 60% military, Arnie, and we have continued to serve our customers primarily Boeing ideas through this period. So we have not had an issue with that part of business.

In addition, if we look at the fourth quarter, the programs that have been cancelled or terminated, Shenyang, the Spirit flight deck floor and the two other smaller programs, made up approximately 10% of the value out of that facility. So, I believe that we have the volume in the facility to return it to profitability. We will have to do some resizing there, but we will do that and I believe that that facility is important to us in the long-term because of the capability and cost structure that it delivers to the business.

Arnie Ursaner – CJS Securities

The $2.4 million of cost inefficiencies you incurred this quarter, are you expecting levels similar to that for the balance of the year by quarter?

Bob Garneau

We expect that that it will come down. It will probably be unprofitable out there for the next two quarters but at a lower level, on the premise that we do not have any other issues flare up.

Arnie Ursaner – CJS Securities

If I can ask one of you, if you would not mind focusing on Exhibit 5, perhaps you could try to help all of us. So you mentioned in your prepared remarks that you expect to have corporate expenses moved back to the $9 million to $10 million per quarter level for the balance of 2008. You had some pretty well defined language about the SERP impact in Q3, but I guess what I am asking you to try to do if you wouldn’t mind is take the base level before breakout items of $5.8 million you incurred and perhaps walk us back to how you get to the $9 million or $10 million. What are the key elements we should look for in that, if you do not mind?

Neal Keating

You have to give me just a second, Arnie.

Arnie Ursaner – CJS Securities

How is your back?

Bob Garneau

Actually, it is a lot better. Thanks. I have been a little bit busy, no boating lately to hurt my back.

Arnie Ursaner – CJS Securities

If it helps you, the language you had in SERP in your Q is $5 million in the quarter but the balance expected in August. I am trying to again equate the $5 million with the $0.9 million you showed in the balance in August. That is where I am struggling to understand how they equate.

Bob Garneau

I think that I do not have all that detail in front of me and you do know, the third quarter, you explained with the SERP payment, it's going to restore. I mean, the before breakout items are going to tend to trend a little bit higher, be a little higher. But again, our estimate is that they will come back to a level and I don't have all that detail in front of me.

Arnie Ursaner – CJS Securities

Not a problem. We could follow up later. I look forward to seeing you guys at our conference and thanks again. Good quarter.

Bob Garneau

Thank you.

Operator

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

Jack Atkins – Stephens, Inc.

Hey guys this is Jack Atkins for Matt. Congratulations on the nice quarter.

Neal Keating

Thank you, Jack.

Jack Atkins – Stephens, Inc.

Just a couple of quick questions here. First of all, turning to the charge and its impact on EPS. If we back out the charge, and assuming a normal tax rate and then assuming a normal level of incentive comp because you got a benefit from that in the quarter.

Neal Keating

Yes.

Jack Atkins – Stephens, Inc.

We were coming up at around $0.52, does that sound accurate to you guys or not?

Neal Keating

Did you begin on the corporate rate?

Jack Atkins – Stephens, Inc.

Right, I think you said that the charge was kind of $0.31, right?

Neal Keating

$0.31 and if you look on that non-GAAP analysis, you can see that it just drops right though without any tax benefit.

Jack Atkins – Stephens, Inc.

Right. But also backing out the benefit you received from the lower level of incentive comp because of the charge, do you think it's fair to back that out as well and if so, kind of what --

Neal Keating

And that would get tax affected at normal 35%, 36% rate.

Jack Atkins – Stephens, Inc.

Okay. So you would be $0.55 better than [ph] backing out any further benefit from incentives?

Neal Keating

So, you're right. If you took the 7.8 out, then you lose some of the benefit of the incentive comp. It would probably revert back to – you'd probably add back a good piece of that that we took out in the quarter.

Jack Atkins – Stephens, Inc.

Okay. Thanks a lot for that, and then looking at the two loss contracts at the Wichita facility, just a question as far as the remaining base of business there. What is the remaining base of business in dollar amount, if you can disclose that? And then how do you utilize the extra capacity there, going forward that was created by the extra – by these two contract losses?

Neal Keating

Jack, initially, as we said that we don't disclose the size of that business, it's not that big a facility. I'll just leave it at that. Again, I would come back to what we said earlier and that is that the contracts that we have lost made up about 10% of the revenue out of that facility in the fourth quarter of last year. We're using fourth quarter because it was about the average for shipments for the year. So, there's not, at this point, all that much additional capacity that we would need to fill up. In addition, it's an area where we believe that we have the opportunity to grow and get incremental business into the facility once we've restored our certifications. So, I'm not overly concerned about our ability to fill up back – to replace that 10%. Obviously as we would go out to 2011, 2012, and '13, with the ramp up at that point of the 787, it would have been more meaningful to us.

Jack Atkins – Stephens, Inc.

Okay, great. Just couple of other items here. Your sales at your precision product segment, they were up nicely in the quarter. I'm just curious about how we should think about sales for the JPF – to the U.S. government going forward, should those sales kind of plateau and level off, or should they peak and go back down?

Neal Keating

We expect still some increase and the reason is that they've been very successful at increasing the production rates and while we've hit our – actually in the second quarter we hit our target for the year, we still expect that we'll be filling U.S.G backlog with that. Although our hopes and our work with the U.S. government is to be able to divert some of that to direct commercial and foreign military sales, but we would expect to see that continue to ramp up for a little bit and the preponderance of that would still continue to go to the U.S. government.

Jack Atkins – Stephens, Inc.

Okay, great. One last thing, if we look at the strong organic growth in your Industrial Distribution segment, it was really nice in the quarter. What end markets were the strongest and the weakest do you think?

Neal Keating

Jack, (inaudible) will appreciate you asking the questions, so they get a little press during the conference call. Actually, Jack, the markets that continue to be strongest for us are mining. Mining is doing extremely well year-over-year. Energy, as you would expect, for us is doing very well. And then, driven really by the strength of our success with national accounts that tend to be in the less cyclical food, beverage, tobacco markets, that has really helped us tremendously. The areas that we continue to be down on or down in are housing and frankly, as we’ve said before, housing now is a very small part of our business. So it has a somewhat muted impact and we are a supplier to a smaller degree to the automotive industry, predominantly to the people that are the Tier 1 or Tier 2 suppliers and we’re down there but again it’s a very small – a relatively small part of our business. So frankly, the businesses that were up in the first quarter for us continue to be up and in a little bit have continued growth in our national accounts.

Jack Atkins – Stephens, Inc.

Okay. And just finally, based on the discussions that you’ve had with your customers, what do you expect to see growth wise for that segment going forward? And I'll jump back in queue. Thanks.

Neal Keating

We’re going to have tougher comps for the Industrial Distribution business in the third and fourth quarter. I’m working off the top of my head a little bit. But I think in the third quarter of last year, our growth was between 6% and 7%. I know in the fourth quarter it was just a little bit above 10%. So we’re headed into two comparative quarters where the comps will be more difficult. Obviously, with the acquisition of ISC, we’ll have about 8% growth there through acquisition, as was demonstrated in the second quarter. Certainly, I think in the last call, people asked us if we felt we’d be in the 5% to 6% organic growth range and we’d certainly like to target that.

Jack Atkins – Stephens, Inc.

Okay. Great. Thanks a lot.

Operator

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

Steve Levenson – Stifel Nicolaus

Thanks. Good morning Neal, Robin, and Eric.

Neal Keating

Good morning.

Bob Garneau

Hi, Steve.

Steve Levenson – Stifel Nicolaus

It looks like Brookhouse is something that’s proved to be really important. Can you tell us, is the autoclave capacity totally spoken for or did they have room to book more business?

Neal Keating

Do you have nay orders to give us?

Steve Levenson – Stifel Nicolaus

Yes, but I don’t build any planes, so it’s not going to help a lot.

Neal Keating

A lot of people are getting in the business. They have capacity that’s available for additional business. They have some programs that will be ramping up. They have got a very – some really good business development people there. So we’re hoping for some good things out of that business, but right now they are not capital or capacity constrained.

Steve Levenson – Stifel Nicolaus

Okay. Thanks. Can you tell us about the significance of their capabilities out of autoclave processing?

Neal Keating

I can tell you a couple of things and we certainly hoped to be able to tell you more as in a not-too-distant future, but what they have developed is a Resin Film Infusion technology. Other people have done it as well. However, they have been able to demonstrate it to major commercial OEMs, gained very good acceptance with it. It enables them to do more complex shapes in close molds with an oven-curing process rather than an autoclave. So it’s lower cost and again, it enables you to make some more complex shapes than you can otherwise do. So it was a technology that really interested us in our acquisition analysis. It was something that I was familiar with from a prior life and clearly, is one where a number of OEMs are really looking to that technology to enable them to get lower weight on new aircraft and that was one of the key reasons we bought them.

Steve Levenson – Stifel Nicolaus

That sounds great. Now, you mentioned lower weight on new aircraft. Some of the manufacturers, Airbus particularly, has talked about trying to remove weight from existing designs that they wouldn’t have to recertify, do you see retrofit opportunities for non-primary structures on existing models?

Neil Keating

Yes, we do and you named Airbus, obviously, we would like to do that on their high-volume on A320 family. We'd like to be successful in working with them to achieve those goals.

Steve Levenson – Stifel Nicolaus

Okay. Thanks. On the Specialty Bearings side, is some of the sales growth coming from A380 buyers that are taking the dry wing option, or is it just across the board?

Neil Keating

I can’t answer that question specifically. I know that our A380 business is up from year-to-year. Our expectation is that has driven by them beginning to ramp up, although slower than they would like, but to ramp up their production and some of the people using up the inventory that they had had from prior year shipments, but I can't comment about the dry wing option.

Steve Levenson – Stifel Nicolaus

Could you see, on the A350, I don’t know if you're talking to them, or if you can say anything about if it's going to be an option there or standard item, or not at all.

Neil Keating

We are currently working with Airbus across our Aerostructures and Specialty Bearings business. I cannot comment that we've gotten any contracts or orders for them for any options on that aircraft yet.

Steve Levenson – Stifel Nicolaus

Okay. Thanks and last question, where are the Australian Seasprites and what’s going on with them? Have you had any interest?

Neil Keating

We are still working with both the US and Australian governments to finalize the paperwork for the title transfers so that we can take possession of the aircraft, but we have already engaged with a number of countries in discussions. We’ve applied for and have been granted marketing licenses for a number of countries. So, we’re not waiting for the transfer of the aircraft. We’re out and actively marketing them. We’re at Farnborough and follow-up meetings after that. So we’re active. We don’t have possession of the aircraft yet. But, in the end, again as we talked about in the last quarter, we think it’s meaningful that the first guaranteed payments to the Australian Commonwealth are three years from now.

Steve Levenson – Stifel Nicolaus

I got it. Thanks very much.

Neil Keating

Thank you.

Operator

The next question comes from the line of Edward Marshall with Sidoti & Company. Please proceed.

Edward Marshall – Sidoti & Company

Good morning everyone.

Neil Keating

Good morning Ed.

Edward Marshall – Sidoti & Company

My first question is, it may have been addressed in the last conference call, but can you quantify the extra costs associated with this suspension and the certification with the Wichita branch?

Bob Garneau

What we said was in the second quarter that we had $2.4 million in inefficiencies and adjustments that were – and a lot of that inefficiency came from the fact that shipments were very hard to get out the door and they needed additional inspection and quality sign-off. It’s hard to be specific beyond that.

Edward Marshall – Sidoti & Company

So the $2.4 million includes the third party certification and so forth?

Bob Garneau

Yes. All of that it’s in there.

Edward Marshall with Sidoti& Company

And are we – the audit that’s coming up I guess is in the third quarter here. Are we to anticipate any costs hitting the line here with the audit?

Neil Keating

Well I think that yes. We have costs involved in preparation for the audit and we will have some costs for the audit as well, and if any minor deficiencies or for that matter any major deficiencies are identified during the audit, we will have ongoing costs to correct those.

Edward Marshall – Sidoti & Company

Okay. I'm assuming we consider those one-time in nature but is there any way we can quantify what that might be?

Bob Garneau

I mean it’s hard to – we again, I will say that we certainly anticipate that the losses that we would experience out there would be less which would be quantifying those into it in the third quarter versus the second quarter. But it’s tough to go beyond that.

Edward Marshall – Sidoti & Company

Okay. We can wait for the next quarter. Jack, this one’s for you, I guess as you walk trough the, as you work through the acquisition and integration of ISC at Industrial Distribution, can we talk about the possibility of margin potential expansion in the industrial segment? I mean, is that possible?

Neil Keating

Jack isn't with us. He's --

Edward Marshall – Sidoti & Company

No, I meant it was kind of – you said that he would be excited that we are getting there [ph]?

Neil Keating

Thank you. Well, I tell you – I’ll give you a – as you would expect, we analyzed our second quarter results and we are very pleased with the acquisition of ISC. As we said, it's actually delivering slightly above our expectations. If we were to remove the ISC sales, cost of sales, et cetera, we would have been approximately 20 basis points higher in our base business. So, we would have approximately a 5% return on our base business.

Edward Marshall – Sidoti & Company

Okay. Can we assume that you can get to some of where the competitors are, though, on your operating line, maybe a 10% of what Grainger kind of gets?

Neal Keating

I think a better comparison actually would be AIT.

Edward Marshall – Sidoti & Company

Okay.

Neal Keating

Which is I believe around 7% to 7.2%. That is certainly our target. We've got a ways to go to get there and we have to get there through additional growth both from organic growth as well as acquisitive growth to get the scale we need to take better advantage on the sell side and also some of the inherent efficiencies that you get of putting that incremental sales through a fixed cost base. And quite honestly as well, we've been very successful with our national accounts but we've had to make investments as we have said to support those. We need to get further up the maturity curve of our national account program so that we're actually on the plus side of the economics there rather than in the investment side. So it's going to take us a while but there is nothing systemic in our business that would prevent us from making progress toward that 7% that AIT has.

Edward Marshall – Sidoti & Company

And on the Aerostructures side, the Sikorsky business, that is 32 ships this year. My original assumption was that ultimately you'll get to 36. Am I first riding [ph] that assumption, 12 a month, I think it was said 36 per quarter?

Neal Keating

I think that that's a little bit high. I think we said 9 to 11 per quarter.

Edward Marshall – Sidoti & Company

Okay. That's said, with the new contract win I guess with Sikorsky or the increased amount of ships that's over the period of time, is there any anticipation that we could accelerate that and actually see additional ship sales per month, above that 9 to 11?

Neal Keating

I don't think we'd been prepared to comment on that right now. That is our target for – and we've stated that's our target for the year, so I'm not prepared to go beyond that right now.

Edward Marshall – Sidoti & Company

Okay. Fair enough. And in the Special Bearings, is there a backlog number that you are prepared to give or is that just a yearly number?

Neil Keating

Actually, based on the questions in the call last quarter, we actually integrated it into the 10-Q this year.

Edward Marshall – Sidoti & Company

I'll look it up. That's fine.

Neal Keating

Okay. That's fine.

Edward Marshall – Sidoti & Company

Fair enough. Thanks guys.

Neal Keating

Sure. Thank you.

Bob Garneau

Thank you.

Operator

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

Robert Kirkpatrick – Cardinal Capital

Good morning and kudos to you for your disclosure in the 10-Q. I think it's very comprehensive and the outside investors appreciate that. Neil, could you provide us with perhaps an update as to where things stand on the search for a new CFO? I understand Bob is going to be retiring in the next year or so.

Neil Keating

Did you have to bring that up?

Bob Garneau

You didn't want me to answer that, Rob?

Robert Kirkpatrick – Cardinal Capital

Well, you want Bob to answer it, I don't care. How about Jack?

Neil Keating

Okay. Well, Rob, we've actually initiated the search. We've selected the executive recruiting firm that we're going to use and we've begun that process. Bob’s current retirement target is March of next year. Our goal is clearly to have someone onboard with sufficient overlap prior to Bob’s scheduled departure. He has also said that he is flexible in that if we want a little bit more overlap, and the good news is that he is going to be close by.

Robert Kirkpatrick – Cardinal Capital

Great, thank you so much. A couple of questions regarding the A10 contract in Jacksonville. If the A10 contract ramps as it is currently scheduled and the C17 business does not go away, how full will that facility be in terms of utilization in the out-years?

Neil Keating

Actually, Rob, it's a good question and one that we've been looking at right now. If we keep the C17, that facility would be very full. We have identified another building that is actually walking distance from the existing one, that if it is apparent that there would be a ramp up of the A10 concurrent with the C17 continuing that we could add, we've worked with the landlord. As a matter of fact, the existing landlord for one of our buildings in Jacksonville now is also one Rob, where as you know, that's an assembly business, so there's not a lot of fixed capital equipment that we put in there; it's jigs and fixtures and other things like that. So, there's not a big capital investment in doing that, it's really lease costs.

Robert Kirkpatrick – Cardinal Capital

Okay.

Neil Keating

We're prepared and frankly I don't think it would surprise anybody that we would love to see the C17 continue.

Robert Kirkpatrick – Cardinal Capital

#

Okay. And then on the schematics [ph] business, can you take that and roughly break that business down in three ways, one between commercial and military, two between OEMs and aftermarket, and three between fixed and rotary wing?

Neil Keating

How about if we try two of the three questions?

Robert Kirkpatrick – Cardinal Capital

I'll take two of three.

Neil Keating

Okay. If we were to look at '07, Rob, it's roughly 75/25 commercial versus military, so 75% commercial and 25% military. The second question was how much of that was --?

Robert Kirkpatrick – Cardinal Capital

If you broke it down between OEM and aftermarket, or if you broke it down between fixed and rotary wing.

Neil Keating

We can do the aftermarket. Aftermarket, if you bear with me one second, we are actually prepared for that question and I believe it is 60% forward fit, 40% aftermarket.

Robert Kirkpatrick – Cardinal Capital

Okay. And then on --

Neil Keating

And they probably do have a split rotary wing versus fixed wing, but that's a little bit more difficult because some of the business goes through distribution route.

Robert Kirkpatrick – Cardinal Capital

Okay. And then on the KIT side, realize that you can't tell us too much about your new national account with a major pharmaceutical company, can you perhaps try to ballpark quantify it? Would this be one of your top two, three accounts? And also, could you comment on the potential magnitude of the GSA contracts that you won during the quarter as well?

Neil Keating

It's a significant kind of the – I've never used the word therapeutics before, but that well-known biotechnology firm, it's going to be a significant account for us. It will be meaningful and we're very happy to win that. We will probably as we progress and ramp that up, Rob, it will be something that we will able to give a clearer indication, and I don't mean to duck that question, but it's a new account. We have an expectation for it, but we obviously have a ramp-up period to get there. But it is going to be a meaningful account for us. We're very happy to get it.

Second question, on the GSA contract, Rob, that essentially gives us the ability – we are in the GSA catalogue and enables us now to participate in that purchasing channel from the US government. But it is not a contract for a fixed amount. That market we believe is about $600 million, but we are very new with that. So it's a very important opportunity for us going forward but that's going to take a few years to really start to mature.

Robert Kirkpatrick – Cardinal Capital

And the $600 million is just the part of the overall government need that would deal with your products, correct?

Neil Keating

That's correct. They've got what they call a hardware superstore category and we estimated that at about $600 million. So that is the sub-segment that we will participate in.

Robert Kirkpatrick – Cardinal Capital

Okay. And I note that the new therapeutics company has locations in Puerto Rico. Is that an area of potential expansion for KIT or do you have presence there?

Neil Keating

That is a potential for future expansion. We do not currently have a presence there.

Robert Kirkpatrick – Cardinal Capital

Okay. And then finally one for Bob. Bob, can you quantify how much excess working capital has been used in the first half of this year that perhaps is a little extraordinary and might flow back in the back half of this year and then 2009?

Bob Garneau

Let me see if I've got a piece of paper that I can --

Neil Keating

Rob, I really appreciate you directing that question to Bob.

Bob Garneau

I think traditionally what happens is during the first quarter, and to some extent the second quarter, we tend to see increases in our accounts receivable, and usually at the end of the year, they're down. So, I think that certainly there is some ability there to recapture some of that as the year goes on and particularly in the fourth quarter. And I think we've got some more in inventories and we've got capacity there to recover money. And those – if you look at the three areas where we had significant usages, particularly the first quarter, but now cumulatively through the second, our receivables and inventories and then down below you see there's some in income taxes payable and of course that was some money that we paid for the Music transaction in the first quarter. So, I think what I would look to would be the receivables and the inventory. And in terms of amounts, I'm not sure I have a specific amount, but I would think that we would get recovery on those as the year goes on. Now, these numbers are going to get twisted around a little bit, once the Australian settlement happens because that will affect the working capital numbers too as the year goes on, and we take in the inventory and so the inventory numbers will change and be substituted with receivables and vice versa.

Robert Kirkpatrick – Cardinal Capital

And the cash effect of that SH-2 taking in, you're going to take in inventory but you'll have some liability side to offset it?

Bob Garneau

Yes, the cash – the asset side of that is going to be pretty much an exchange of accounts. The liability that will make a difference is when we have to make the income tax payment, which I think we indicated was in the neighborhood of $13 million to recapture the profit, the loss contract that we had. So that will be the cash impact and then of course as we sell them that will all get more than offset.

Robert Kirkpatrick – Cardinal Capital

And so you'll make the $13 million payment when you pick the take for the aircraft?

Bob Garneau

Yes.

Robert Kirkpatrick – Cardinal Capital

Great. Thank you so much. Congratulations again.

Neil Keating

Thank you, Rob.

Operator

Our next question comes from the line of Jonathan Moraco [ph] with Vanadium [ph]. Please proceed.

Jonathan Moraco – Vanadium

Hi guys. Good afternoon. Can you discuss whether there's anything unusual going on regarding bearing inventory in terms of de-stocking? I mean, I know it seemed odd from the sales growth and backlog within the segment, but I've heard that some distributors aren't de-stocking?

Neil Keating

We haven't seen that Jonathan and I haven’t had that reflected through our team in specialty bearings. So, it might be a different segment of the market where they're doing that.

Jonathan Moraco – Vanadium

Got it. Alright, thanks a lot guys.

Neil Keating

Thank you Jonathan.

Bob Garneau

Thank you Jonathan.

Operator

Our next question comes from the line of Jerome Lande of Millbrook Capital, please proceed.

Jerome Lande – Millbrook Capital

Good morning.

Neil Keating

Good morning Jerome.

Jerome Lande – Millbrook Capital

The (inaudible) from new account buildup and the integration cost, I think you quantified earlier in terms of what the margin would have been. Could you tell me what the actual dollar number that you would attribute to that in the quarter?

Neil Keating

Actually, Jerome, what we talked about was the difference between the base business which would include our national accounts business and the impact of the acquisition of ISC where that was a lower margin business group that we are acquiring and also we go through an inventory adjustment in the first period that we owed them. We said that that was 20 basis points impact from 4.8 % to roughly 5% but that was not related to the specifics on our new branch openings.

Jerome Lande – Millbrook Capital

Can I have that number, the new branch openings and the integration costs? Not necessarily the – I understand what you're saying. Not the differential in margin based on the two businesses, rather whatever unusual items might have been flowing through.

Neil Keating

Actually, the way that we have historically talked about that and I think what we're prepared to talk about right now is that we’ve opened some 12 locations over the – since 2007. It typically takes two to three years for those to turn profitable, so we would expect that all of those 12 are currently still at below our 4.8% to 5% return and we’ve also said that typically it costs us $200,000 to $300,000 to open a new branch but that’s the level of disclosure that we’ve gone to right now for competitive purposes.

Jerome Lande – Millbrook Capital

Okay. Switching gears to the JPF for the second, so it looks like, I guess the Air Force went out with a request for credentials or something like that, and I don’t know if they got anything back, they may not, and maybe that’s not a surprise given that it’s not a very profitable contractor, profitable at all at the moment, but I’m just wondering on a longer term basis in terms of how you are going to allocate capital here, you’re up to the run rate of what you think more or less the military is going to be demanding? There may actually be more, you have to get foreign sales to get profitable on it, and the whole thing is probably going to re-compete in 2010. Long term, is this a business that this company is going to be in, and can you not re-compete on the US but still sell to foreign governments? I mean, what are sort of long term options you have to make this more of a productive allocation of capital?

Neil Keating

Good question. I think there are a couple of things to keep in mind. Number one, that the US government has paid for facilitizing our facilities in both Orlando and Middletown, Connecticut. So, those have been elements of the program where the US government actually pays for the facilitization as opposed to us having to invest our capital. However, from a working capital prospective, you are right. What we tried to take people through both in the comments in the Q, which may be a little difficult to follow is that, what we have been able to do – I mean, clearly, Jerome, we need to get this more profitable. The key for us in doing that is twofold. One, to be able to sell a higher percentage of product to foreign militaries, both through FMS and DCS sales because those are nicely profitable for us today. But because we have not been able to meet the demand for the US government, which of course has first call on the product, we have not been able to divert and improve the sales mix to include DCS and FMS sales. Short term, that’s what we have to do, and we‘ve taken the first big step in getting to the 6000 unit per quarter production rate that we had actually targeted for the fourth quarter, so that’s important to us.

The second is that, we are going to recompete the existing contract on Option 6. What we talked about was that shipments on that contract would begin in late 2009 early 2010 dependent solely upon when we are able to finish the requirements for production on Option 5. So, the recompete for that contract would be prior to 2010 and will give clear visibility as to the profitability going forward on that contract.

Jerome Lande – Millbrook Capital

So, have you had discussions then with the Air Force about what the pricing expectation should be on that recompete, and what is their reaction then?

Neil Keating

We have had those discussions. We have very good reliability of the product in the field that they are extremely pleased with. The quality is higher, it provides a number of advantages to them which are critical such as captive carry, which allows them to leave it on the wing longer. So, they’re very pleased with aspects of the program. They granted us a price increase for foreign military sales which actually goes through the FMS branch of the US government. So, there is recognition there as well. But, as with anybody, customers want to make sure they get the best value for money, so it will be a negotiation with us. But we feel since we’re the total provider for that product today, since when they made the determination to add a second source, they elected to have Kaman be the second source, making the product in Middletown – in our Middletown facility rather than going to a competitor was an important step as well and frankly our barrier to entry for anybody else trying to recompete or to compete against the us on the Option 6.

Jerome Lande – Millbrook Capital

Okay, thanks. And switching gears again, there’s been no shortage of airtime or ink spilled about oil price impact on new builds and the aftermarket and so on, comparing it to 9/11 or what have you. Obviously, everybody’s got their view, I’m just wondering do you want to add your view as to what the company’s plans are, what you’ve mulled in at different oil prices as far as the feedback you are getting from OEMs and so on, and generally, what your views are, where we are today in commodity markets?

Neal Keating

Sure. As you’ve said, everybody’s given their view of that and I think people – we all have our own opinions. I would really – and I worry about our business and so I break it down into two elements. Number one, if we look aftermarket to begin with for those aircraft that are going to be parked, for example, people talk a lot about the 737 Classic, the MD-80, the only part of our aerospace group that has any significant commercial aftermarket exposure is our Specialty Bearings business. And as we said that’s about 40% of their business. However, they did not have much content on those aircraft types, so it’s not impacting us very much. In fact, we've gone out in preparation for this call and assessed it and we believe that we will not have an impact in the parked aircraft or lower capacity for our Specialty Bearings business for the balance of this year. And as we look at next year, we expect that the impact would be less than $5 million. It could be $2 million, it could be $5 million. So frankly, we see a fairly muted impact in the only business where we have an aftermarket component with the exception of our Brookhouse acquisition and that’s really UK military. So, we don’t expect it to impact them.

Jerome Lande – Millbrook Capital

Okay. Thanks a lot and congratulations on a good quarter.

Neal Keating

Great. Thank you, Jerome.

Operator

(Operator instructions) Our next question comes from the line of Matt Duncan with Stephens, Inc. Please proceed.

Jack Atkins -- Stephens, Inc.

Hi this is Jack again. Just a couple of quick follow-up items. First of all, what do you anticipate the impact will be on 2008 to 2009 earnings from Brookhouse?

Bob Garneau

We can’t disclose that Jack. I think what we said is they’ll be marginal.

Jack Atkins -- Stephens, Inc.

Okay.

Bob Garneau

I mean in '08 and starts to be accretive in 2009.

Neal Keating

I’m sorry, from an equation perspective, I understand, I thought individual profitability.

Jack Atkins -- Stephens, Inc.

Okay, great. And finally, what should quarterly interest expense be going forward since you used that to fund the Brookhouse acquisition?

Bob Garneau

I think if you look at what’s in there for the quarter, you can sort of see that and then based on the disclosures we’ve made for the acquisition, you can get a pretty good sense of what the expense would run. But we would expect that it would run. Again looking at the debt levels and looking at the current rates, you can pretty much get a sense of what the interest would be.

Jack Atkins -- Stephens, Inc.

Can you remind us again what the interest rate is on your debt?

Bob Garneau

It’s 5% roughly.

Jack Atkins -- Stephens, Inc.

Okay.

Bob Garneau

LIBOR plus 2%, something like that.

Jack Atkins -- Stephens, Inc.

Okay, great. Thanks a lot guys.

Operator

There are no further questions. I would now like to turn the call back over to management for closing remarks.

Eric Remington

Okay. Thanks for joining us for today’s conference call. We look forward to speaking you again when we report third quarter results. Goodbye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. Everyone have a great day.

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Source: Kaman Corporation Q2 2008 Earnings Call Transcript
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