Moog Inc (MOG.A) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Moog Fourth Quarter and Year-End 2007 Earnings Conference Call. (OPERATOR INSTRUCTIONS.) As a reminder, today's call is being recorded.

At this time, then, I'd like to turn the conference over to Ann Luhr of Moog, Incorporated. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of the conference call. These forward-looking statements are not guarantees of our future performance, and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of today's date, our most recent Form 10-Q filed on August 7th, 2007, and in certain of our other public filings with the SEC.

Today we're trying something new. We're providing some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations home page and webcast page at www.moog.com. Bob?

Good morning, everybody. Thank you for joining us. This morning we'll report on the fourth quarter '07, our '07 year-end results, and we'll update our guidance for fiscal '08.

We have a great story to tell. Fiscal '07 was another terrific year for our company. Sales of $1.558 billion were up 19% from a year ago. Net earnings, $101 million, up 24%. And earnings per share at $2.34, up 19% over last year's $1.97. These results were achieved in spite of very heavy R&D expenditures on the 787. R&D of $103 million was up almost $34 million from a year ago. That's the total for the Company. During the year, we spent $46 million in R&D on the 787, an outweigh which we believe will pay off handsomely in the years to come.

In addition to the increase in R&D expenditures, our selling and admin expense increased by $39 million, roughly in line with sales increase. Interest expense was up $8 million. These cost increased, though, were overwhelmed by an increase in gross profit of $103 million and, of that, nearly $20 million came to the bottom line.

So, now let me go to Q4. For the Company the fourth quarter came in a little stronger than we'd forecasted. Sales $413 million, up 21%. Net earnings, $26.8 million generated earnings per share of $0.62 on a per share basis, 22% increase over last year's fourth quarter.

Now, to the segments.

Aircraft Q4. Aircraft sales in the fourth quarter, $160 million, up 12% from a year ago. And the growth is all in the commercial side. That, as you may remember, has been the pattern this year. Commercial sales were up 28% to almost $73 million. Military sales in the quarter were actually down about 3% to just under $88 million.

On the military side, revenue was down in the F-35 development contact. Revenue in this year's fourth quarter were just over $17 million on that contract versus $19.6 million a year ago. Every quarter I remind you that we are the lead contractor on both the primary flight controls and the leading edge flap. And every quarter our revenues include not only the work done in our company, but billings that come through from our partners, Parker-Hannifin, Hamilton-Sundstrand and Curtis-Wright.

This quarter, although the total revenue was down by over $2 million from a year ago, the Moog content was actually up $3 million to a total of $12.4 million.

A larger portion of the sales change in the quarter, though, relates to unusually high sales to our Japanese licensee on the F-15 and the Seahawk in last year's fourth quarter. Last year in the fourth quarter we did almost $11 million on those programs and, in this quarter, the total was only $4.5 million.

On the positive side in the military, our revenues were actually up on major production programs. Sales were up on the F-18 and the V-22 by $1.3 million and $1.6 million, respectively. And last, but by no means least, we had a huge quarter in military aftermarket, $33.3 million, up $2.5 million from a year ago.

Commercial. Commercial aircraft, as I mentioned, sales were way up. The increase was 38% or $20 million to a total of $73 million. Almost $12 million of the increase was in OEM equipment to Boeing, including an increase of over $6 million on the Legacy 7 series and $5.4 million on the 787.

In business jets, sales increased by over 50% to $4.7 million. The sizeable increase in the Bombardier Challenger as production ramps up. But, most of the increase was contract work on programs wherein our participation hasn't yet been announced.

Commercial aircraft aftermarket was up by 17% to a total of $25.8 million.

Aircraft margins in the quarter of 10.9% were an improvement over what we've been running for this year. We continue to have very heavy R&D this quarter. But, we've finally, sort of turned the corner on the 787. R&D on the 787 for the quarter was $12 million, down slightly from a peak of $12.1 million last quarter. So, we could say that the 787 has started to trend down.

Margins in the quarter, though, were adversely affect by an addition to our cost estimate on the A400M of about $1 million. As you know, this is a pretty big job for us. We're doing Aileron and elevator thermal actuators and two different spoiler actuators. We've delivered hardware. We've delivered four chip sets but the hardware is still in the safety and flight testing and the testing has uncovered some problems which require some redesign; hence, the addition to the cost estimate.

Now, let me go to aircraft for the whole of '07. Aircraft sales up 11% to $587 million, increase all in the commercial side. Military aircraft total of 325 includes the impact of a $12 million decline in revenue on the F-35. On the F-35, we finished '07 at $65 million, down from $77 a year ago. And as I mentioned a minute ago, the revenues include not only our work, but that of our partner. So, it turns out in '07 within Moog, we generated slightly more revenue than in '06, but the decline in our partners' workload and in their billings to us is reflected in the lower sales to Lockheed.

There were numerous other puts and takes in the military aircraft product line. But, were it not for the F-35 military aircraft sales in '07, it would have been $6.7 million higher than in '06.

Commercial aircraft, though, for '07 is a much bigger story. Commercial aircraft sales for the year were up 33% to $261 million, a $64 million increase. And $37 million of that was in original equipment to Boeing. Our OEM sales on Legacy 7 series increased $17 million. We generated $20 million in revenue on the new 787. Total sales to Boeing commercial reached $83 million for the year, an 80% increase over '06.

In business jets, we had a 41% increase to $43.5 million. And a big portion of that change is increased revenue on the Bombardier Challenger and the rest is on contracts that we're not able to talk about yet.

The aftermarket on the commercial side, up 13%. Over the last four quarters we've seen a nice increase from under $22 million to almost $26 million. And the total for the year was 94.8.

For the year, aircraft margins came in at 10.4, down from 12.6% the year previous, and about where we projected in our last conference call.

Aircraft for '08. As I said 90 days ago, we're looking for another strong year for aircraft in '08. And we're increasing the '08 forecast that we presented at that time. We've updated our projections for the F-35, Boeing OEM and for the Blackhawk. We're now forecasting $651 million for the year, up 11% from '07. Increases will be both in military and commercial.

Compared to '07, we're forecasting a $10 million increase in F-35 to $75 million. As it turns out, the F-35 workload is accelerating as we move into development for the actuation on the Stovall airplane and the carrier version.

On the V-22, we expect a major increase from $25 million to $32 million, and a substantial increase in the military aftermarket from $109 million to $119 million, mostly having to do with retrofit programs on the C5A and the F-18. The military aircraft total for '08 is up $30 million to $355 million.

On the commercial side, we're looking for an overall increase of 13% to a total 296. Boeing OEM revenues, including the 787, should be up about $5 million to $87 million.

We're forecasting substantial increase in business jet revenue from $44 million to $64 million, mostly having to do with production on the Hawker and the Challenger. We're anticipating a 4% increase in the commercial aircraft aftermarket to a level of $99 million. So, the commercial at $296 million, $355 million in military sales, total aircraft sales for '08 are now projected at $651 million.

We do believe that we'll see a reduction in aircraft R&D expenditures in '08. As a result, we'll be looking for an improvement in aircraft margins from the 10.4% of '07 to 11.3% in '08.

Space and defense. Q4. Another great quarter. Sales up 29% to $46 million. The total does include 649K in revenue from our recent QuickSet acquisition. Setting that aside, the sales increase was still 27%.

Throughout this year, fiscal year '07, Defense Controls product line provided the largest part of the sales increase. In this quarter, Defense Controls were up 22% to $2.4 million, reflecting increased production on the Marines light armored vehicle, and development work on a Servo motor controller we're making for the Army's future combat systems.

Sales of propulsion controls and mechanisms for satellites and space vehicles were also up a couple of million. Our satellite customers on the commercial side are doing well these days. Demand is strong for HD-TV, the WI-FI internet, satellite radio, GPS and high-resolution mapping.

Increased work on the Minuteman refurbishment programs and the ground-based interceptor for missile defense provided a $2.6 million increase in strategic missiles and missile defense. Tactical missiles were up in the quarter, increased production of [all-fire intels].

Last but, by no means least, the Constellation program generated a total of $1.5 million in sales I the quarter. Constellation is the new name for the collection of programs which will replace the Space Shuttle. Includes the Ares I crew launch vehicle and the Orion crew exploration vehicle. Constellation will be a big program for us and this is just the beginning.

Margins in the quarter of 12.1% continued the excellence performance of this segment throughout the year. Were it not for the purchase Accounting adjustments resulting from the QuickSet acquisition, margins would have been 12.7%.

The Space and Defense for the total of '07. A banner year for Space and Defense. Sales, $185 million, up 25%. With the exception to Tactical Missiles, sales were up in every product category. Total increase was almost $37 million. About a third of that was the surge in deliveries on the Light Armored Vehicle. This program provided revenues of almost $18 million this year. The other big contributor in Events Control, as I mentioned a minute ago, was the future combat systems, an increase of almost $10 million.

Satellite and Space Vehicle business up 16% to a total of over $51 million. I mentioned a minute ago the strength in the Commercial Satellite business, and we believe that will continue. Some of us remember the lean years in the commercial satellite business. But, it does appear that we're now back to 25 or to 30 commercial [GEO] satellites a year.

Strategic Missile, Missile Defense product lines up slightly, the result of increases in the EKV ground-based interceptor. I mentioned we've seen the beginning of the Constellation program. It generated $2 million in revenue this year. We have experienced 26% growth in Naval applications to a total of $7 million. Margins in Space and Defense finished the year at 13.1%, up dramatically from the 9% of over a year ago.

Space and Defense for '08. The spectacular 25% increase in '07 was driven by the Defense Controls product line, and particularly the LAV program for the Marines and Future Combat Systems. LAV will -- Light Armored Vehicle -- will finish up in '08. Sales in '08 will be $5 million compared to $18 million in '07. Future Combat Systems will tune down to half the $10 million run rate of '07. We'll have growth of 20% in then rest of the Defense Controls product line, but the result will still be a sales decline in that product line from $62 million to $51 million.

In spite of that, in spite of the reduced sales in Defense Controls, we will experience moderate organic growth in the Space and Defense. It'll come about because of the big increase in workload on the Constellation program. We now expect this program to generate $22 million in sales in '08. This is a $9 million increase from the forecast we made for this program only 90 days ago and that's because a lot has happened in this program and our position continues to expand.

On the other hand, in the Launch Vehicle business, we zeroed out our previous forecast for commercial space transportation. We dropped $11 million out of the forecast we gave you 90 days ago, while we've added back $3 million for a new start on the Taurus II. Other than those changes, revenues from Satellite, Space Vehicles, Missiles, Missile Defense and Naval Applications are all about the same as our last forecast and at about the same as '07.

But, the other big story for the Space segment in '08 is the acquisition of QuickSet. When we announced that acquisition, we forecasted an '08 sales impact of $32 million. Recent order activities suggest that '08 will be closer to $36 million. QuickSet is primarily a play in Homeland Defense. Much of the business is related to border security and surveillance.

There is, however, an industrial component as well, a product line of matrix routing switches for the video market. So, for '08 we now believe that QuickSet will add $32 million in Space and Defense to the growth in our Homeland Security product line, and $4 million in Industrial sales, which will show up in our Industrial segment.

Margin performance in Space and Defense will be impacted by the addition of QuickSet. QuickSet will generate operating income, which will largely be offset by purchase accounting adjustments and interest.

Also, in the Constellation programs, which we'll be glad to have, will be cost-plus with the typical cost-plus margins. So, we're now projecting '08 margin performance for Space and Defense of about 11% compared to the 13.1% of '07.

Industrial. Industrial Q4. Fourth quarter is generally not a great quarter in our Industrial business because over half our revenues are generated in Europe and, as you know, a lot of Europe takes a month off in the summer. Nevertheless, fourth quarter '07, sales were $111 million, almost the same level as the third quarter, and up 18% from the fourth quarter a year ago. Of the $17 million in sales growth from last year's fourth quarter, $5 million was currency but, other than that, real sales growth was still over 12%.

In the quarter, the most dramatic growth was in the simulator business, motion simulators. An increase of 36% or $3.5 million. Gauge controls for steel mills were up $3 million to a total of $10.1 million. Plastics, our largest market, sales up 11% to $17 million. Most of this growth in Europe where our customers, particularly in injection molding, are doing extremely well at the moment.

Sales up $1.6 million in metal forming to a total of $9.5 million. In this category we have a wide range of applications, conventional sheet metal forming equipment, powdered metal presses and forging equipment, much of which is currently being delivered to China.

During the quarter Turbine Control business was up 11%, $12.6 million. Test equipment up 7% to just over $10 million. So, that's the quarter.

Industrial for all of '07. On a year to year comparison, sales of $436 million were up 14%, $55 million from the year previous. Of that increase, $20 million attributable to currency and the balance of $35 million organic growth represents a 9% increase.

For the year, Metal Forming, the fasting growing market, sales increase of over 32% to a total of $38 million. Steel mill equipment was also up 32% to just over $35 million. Motion Simulator business up 19% to $48 million. Plastics up 14% to over $70 million. Test equipment up 6% in the Turbine Control business about even at $43 million.

Fourth quarter margins, 12.4%, up nicely from a year ago when margins were 10.4%. For the year, Industrial margins of 13.2% were a record in our recent history and compare with 11.8% a year ago.

'08 -- Industrial '08. Our Industrial strategy, providing system solutions as well as components, has resulted in five straight years of consistent growth. And we're projecting a continuation of that trend for '08. Forecasting '08 sales at 493, plus or minus $10 million. The midpoint represents an increase of 13% or $57 million.

We're looking for a dramatic increase in the simulator business, a 39% increase, principally the result of recent orders from CAE. You'll recall that in mid-'06 we signed a five-year agreement with CAE to provide all the motion bases for their electric simulators. We're also looking for growth in plastics, in metal forming, in turbines, in test equipment, and in the aftermarket. We're hoping to maintain the 13.2% margin performance that we achieved in '07.

Now, over the last few months, we've experienced considerable strength in the foreign currencies against the dollar. 90 days ago we provided an Industrial forecast for '08 of $479 million. And we I think mentioned that that was based on a euro at $1.36. We've just updated that Industrial forecast to a midpoint of 493. And when we did that, we were using an average euro of $1.38.

You'll recall we forecast a sales range of plus or minus $10 million around our Industrial forecast. Those of you who are certain that the euro will maintain it's current level for the next 11 months could conclude that we'll finish '08 at the high end of our Industrial range. But, at this point, we don't want to base our mid-range forecast on the presumption that the euro will maintain its current level.

Components Group, Q4. Another great quarter. Sales, 72.8, up 18% from a year ago. Of the sales increase of $11 million, $4 million came in Space and Defense products. These are familiar programs in a variety of components on the Commander's Independent Viewing Platform for the Bradley Fighting Vehicle. We delivered slip rings for the Abrams. And in this quarter we finished up an order for fiber optic modems delivered to the Egyptian Army.

Aircraft equipment sales in the quarter up $2 million. Most of the increase in Commercial Avionics, principally delivered to Rockwell Collins. On the Military side, we delivered over $1 million worth of components for the Northrop-Grumman Guardian program. As you may know, this is an infrared countermeasure system to defend large aircraft against shoulder-launch missiles. Marine market, sales up another $2 million in the quarter, all the result of increased delivery of huge slip rings used on the vessels involved in deep water oil production.

Revenues in the Medical Product area up $1.8 million to 13.5, a result of increased deliveries of electric motor assemblies to Respironics for sleep apnea equipment. Industrial sales, 13.6 million, up 12%; increased demand for closed-circuit TV.

Margins in the Components group for the quarter, 14.7%, up from 13.5 last year's fourth quarter.

Components, '07 for the year. A spectacular year for the Components group. Sales up 19%, $283 million; Marine sales were up 32%, Space and Defense up 26%, aircraft, 23%, Medical up 12%, and Industrial up 9%. The trends that affected the fourth quarter are the same that affected the year.

Military aircraft. In the year we saw increased activity on the Blackhawk, the F-18 [Fleer] System, the Euro-Fighter, the CH-47, the beginning of deliveries on the Guardian Infrared Countermeasure.

Commercial aircraft revenues up largely because of increased penetration in the Avionics market. Space and Defense revenues influenced by applications on the Bradley and the Abrams. And the fiber optic modems to the Egyptians.

Marine continues to reflect increased interest in exploration and production of high-priced oil. Medical applications driven by increased unit sales to Respironics. And our Industrial sales continue to reflect the expanded use of closed-circuit TV.

Margins for the Components Group came in at 15.7% for '07, up from 15.5% last year. Components Group continues as our highest margin segment.

So, how about '08? Our history of sales forecasting for the Components Group would suggest that we have a conservative bent. We began fiscal '07 projecting a 9% increase in this segment, and we just reported that it turned out to be 19%. So, for fiscal '08, we're starting with a somewhat more aggressive forecast. We're projecting sales of 321, a 13% increase. And we're projecting increases in all the major markets except Marine.

In total, we're looking for a sales increase of about $38 million. A large part of that will come in increased aircraft deliveries, the Guardian System, and Raytheon's multi-spectral targeting system for the Predator.

In the Defense market we're looking for an $11 million increase, mostly associated with future combat systems, the Bradley and the Striker Mobile Gun System.

In the Marine market, we're forecasting only a continuation of the recent levels. We don't feel comfortable extrapolating dramatic growth.

In the Medical market we're projecting an 18% increase to $62 million, half the increase in deliveries to Respironics and the balance in slip rings for CAT scan (inaudible).

The Industrial -- in the Components Industrial business we're looking for a 24% increase or $12 million. We're anticipating organic growth in slip rings sold in the Wind Energy market, in companies that make turbines, companies like Enercon and Gamesa.

Much of the sales increase will be made up of products from recent acquisitions. Thermal Control Products, a manufacturer of blower assemblies. And the more recent acquisition, Tektron. In September we paid $5.6 million for Tektron, a privately-held producer of slip rings used primarily in the closed-circuit TV market. In '08 we expect Tektron to generate sales of over $4 million.

We're projecting margins for '08 of 15.7%, continuation of the level that we achieved in '07.

Lastly, Medical Devices. Q4. The Zevex product line currently makes up more than half of our volume in medical devices. And we acquired that product line only seven months ago, so we have no meaningful year-to-year comparison for this segment. If we compare to the most recent quarter, though, sales were much improved. Sales in this quarter of $23.4 million were up from $21.7 million a quarter ago.

But, in our most recent forecast we were looking for 11% operating profit in this quarter. And in spite of lower sales than we had forecasted, we actually achieved 12% operating profit through careful control of overheard expenses. As I mentioned, sales were up compared to the preceding quarter but, fourth quarter sales fall short of our most recent forecast and the shortfall reflects the fact that Curlin pump sales came in short of expectation.

You may recall the Curlin product line goes to market primarily through the [B. Braun] National Sales Organization. As recently as 90 days ago, they provided a sales forecast for pump revenues of close to $4 million, and the actual result was under $2.5 million.

I mentioned last quarter that there are a number of theories that try to explain the lower volume -- unit volume of Curlin pump sales. So, over the last 90 days we've done some field research on our own and come to these conclusions.

First, the ongoing consumption of electric ambulatory infusion pumps is fairly stable and is not declining. On the other hand, it does seem that a number of customers for pumps over the last year or two had accelerated their purchase, probably in response to the Baxter recall which made them replace their Baxter pumps. And as long as they were at it, they bought a few extra.

In addition to that phenomenon, we also feel that we're somewhat out of alignment with our distribution network. Our Company is interested in increasing unit volume to generate more gross margin. It seems that B. Braun has limited their focus to emphasis on high margin accounts. Needless to say, we're in active discussions to resolve this misalignment.

Other than the sales volume in Curlin pumps, though, everything else in Medical Devices is going fine. Sales of Curlin sets are up over a million units from a year ago. Disposable pump sales are down some in the summer quarter, not unexpectedly as reflects fewer elective surgeries during the summer season.

On the more positive side, the Zevex product line is going gangbusters. In the quarter, Zevex had the benefit of a very large pump order from Abbott Laboratories and generated $6.9 million in pump sales compared to $4.2 million in the previous quarter. Sales of Zevex admin sets were up nicely and sales of sensors for infusion pumps and hand pieces for ophthalmic surgery were robust.

All of this activity resulted in sales for the quarter of $23.4 million, as I mentioned, up from $21.7 million in the previous quarter. And generated operating profit of $2.8 million or 12%. And this, after purchase accounting adjustments in the quarter of $1.8 million.

Medical Devices for the year. Final results for '07 were sales of $67.8 million. Operating profit, $6.9 million or 10.2%. Once again, after $6.2 million of purchase accounting adjustments.

This might be considered a reasonable result for entry into a new market. But, we admit that it's not what we had originally projected. Our initial projection for '07 was $8 million in operating profit and $40 million in sales of Curlin and motility products.

When we acquired Zevex, our expectation changed to $65 million in sales and 9.8 in operating profit. The shortfall of operating profit for the year is related directly to the shortfall in sales of Curlin pumps. So, that's the one problem we have. And of course, we have folks that are hard at work to turn that around.

So, what about '08? In our last conference call 90 days ago, we presented a plan for this segment that forecasted sales of $109 million. And in that forecast, a little less than $20 million was projected sales of Curlin pumps.

Given the difficulty we're having currently in forecasting and generating Curlin pump sales, we think it's prudent to bring the Curlin part of the '08 forecast down to a level closer to the $14.3 million that we achieved in '07.

Having adjusted the pump forecast in that fashion, we're now forecasting $49 million in total pump sales, including the Zevex (inaudible) pumps and McKinley disposable pump. Sales of admin sets in total projected at $32 million. Sales of sensors and hand pieces at $18 million. And $11 million in accessories and equipment. The total then would be $102 million, up 50% from last year -- from '07 that is.

But, the year-to-year comparison doesn't mean much since we bought Zevex halfway through. The more meaningful comparison may be a 9% increase over the run rate of the most recent quarter, the fourth quarter. Given a more conservative sales forecast and the plan to adjust some expense levels, we're now forecasting operating profit for this segment at 14.5%.

So, now let me update our guidance for '08. Let me summarize what I've said.

We're now projecting Aircraft sales at 651, operating profit 11.3. Space and defense, modest organic growth and the addition of QuickSet moves sales to 228, operating profit of 11%. Industrial continues a steady growth pattern. Sales range centered around 493, operating profit at 13.2. Another 13% growth step for the Components Group to a new level of $321 million, operating profit of 15.7%, the same as we have achieved in '07. We moderated our forecast for Medical Devices to $102 million, operating profit 14.5%.

The total then will be a sales forecast of $1.795 billion, plus or minus $10 million. The middle of the range would be a 15% sales increase over '07. We're projecting earnings in the range of $1.15 to $1.19, and the midpoint would generate $2.69 a share, a nice round 15% increase over the $2.34 that we've just achieved in '07.

On a quarterly basis, we're updating that forecast to this pattern. $0.62 in the first quarter, $0.66 in the second, and then $0.68 and $0.73.

And now, I'll turn you over to Bob Banta.

Okay. Thank you, Bob. And good morning, everyone.

A little more good news regarding cash flow and other balance sheet items. First of all, on the last 90 days, our total debt, net of cash balances and after adjusting for the $47 million we used to fund the two acquisitions, it decreased by $2 million. Receivables increased by $33 million, mostly in our aircraft segment, and air -- inventories rose by $18 million. However, it's important to note that about a third of the increase in receivables and inventories comes from either the acquisitions made late in the year or foreign currency movements.

On the other hand, our quarterly earnings of $27 million, along with an increase in accounts payable and customer advances of $9 million, and also a drop in capital expenditures of $7 million -- that's in the last quarter -- provided enough cash so that we could actually reduce debt. Hopefully, this is the beginning of the improvement that we're looking for in fiscal '08.

Now, cash flow from operations was $18 million in the fourth quarter compared to a use of cash in the third quarter, third quarter of '07, of $18 million. So, that's a swing of $36 million.

Depreciation and amortization was $14 million in the quarter and the non-cash charge for stock option expense was $600,000 in the quarter.

Loss reserves at the end of the year amounted to $12.4 million, down from $14.3 million at the end of June, 90 days ago. Amortization of $3.6 million on a variety of programs offset about $1.7 million of additions, also on a fairly long list of variety of programs.

Our tax rate of 26.3% in the quarter compares to 27.3% in the fourth quarter of last year. Generally, we've had lower rates in our final quarters of any given fiscal year. Our tax calculations at that time are generally trued up as we close out a year.

Our pension situation in the U.S. is another favorable or almost remarkable story. You'll recall we put $22 million into the U.S. plan in our third quarter. We contributed nothing in this fourth quarter. The total for the year was $28 million. We used a 6.25% rate to discount our pension obligations. This year, we also adopted FAS-158. This new convention requires us to use the PBO, or projected benefit obligation, on our balance sheet at this year-end.

Now, for the U.S. plan, which is the largest of all our plans, the PBO is about $22 million greater than the old practice of using the ABO.

And now for the good news. The fair value of our U.S. qualified defined benefit plan assets was $375 million on our measurement date. Our U.S. plan for the first time -- we could say in a long time, but it may be for almost ever -- is overfunded by $26 million, even when compared to this new standard of using the PBO. Our contributions and a very strong solid performance by a diversified investment portfolio provided these great results.

Looking to '08, we believe we'll see very like pension contributions. Cash flow form operations should amount to $121 million, and we're estimating capital expenditures of $70 million. Depreciation and amortization will run about $63 million. Interest expense is now estimated to be $36.4 million, up $3 million from our earlier guidance of about 90 days ago. And it reflects the impact of our recent acquisitions.

Pre-tax earnings are expected to be $172 million. And lastly, non-cash charges for stock option expense in '08 should be just a little bit under $4 million.

So with that, we'd like to go to Q&A.

Kent?

Great. Thank you. (OPERATOR INSTRUCTIONS.) Cai von Rumohr with Cowen & Company.

Yes. Let me just say thank you for providing us with hard copy of all those numbers so that my hand doesn't get terminal cramping. That's terrific. Appreciate--.

Does it help? Were you able to follow?

Yes, that's terrific. We can listen to what you're saying as opposed to trying to write stuff down.

Hey, what was acquisitions for the year and in the fourth quarter with the QuickSet? And was this last little one, was that in the fourth quarter? What was that number?

Yes. We acquired a little company in Naples, Florida. The name is Tektron. It was a privately-held outfit that competes with our components group in slip rings for the CC-TV market. We paid $5.6 million and we expect that we'll generate in '08 something in the neighborhood of $4 million in sales. Nice little operation. About 70 people. And some sort of neat technical approach, a nice little bolt-on acquisition that settles down a little bit more the competition in the CC-TV business.

I guess my question -- for the year fiscal '07, were acquisitions about $137 million? What you spent for acquisitions?

Yes, that's right. The total is about $137 million. It's rounded to 138, but yes.

Got it. Okay. And could you give us a breakdown of -- you told us -- you gave us a good breakdown kind of by product type for medical. But, could you just tell us how big was Zevex for the full year 2007? And how much of your number for '08 is expected to be Zevex?

I don't have a number in mind for '07. But, I think it was a little over half. And I think in '08 it'll be about -- it'll be over $60 million of the 102. But, I didn't -- but, we aren't -- as I think I've mentioned before -- the distinction is now getting down to kind of a brand name distinction.

And organizationally, the organization is now pretty much integrated. There's one engineering department, one sales management operation, and production of some of what are branded as Curlin products are now built in what was the Zevex factory. More of that will continue. So, the distinction that we're talking about will have more to do with what brand names -- what sales are associated with what brand names as opposed to reflecting an organizational entity.

Okay. Okay. And so, what -- in your number here you've kind of detailed your assumption about Curlin pumps. The admin sets look like they're doing good things. A little bit hard to parse out how much of that is Curlin.

Yes.

I don't know -- how much do you expect of Curlin to be a year-over-year admin sets.

I don't have that breakdown.

Okay.

We literally, Cai, are not going to bother going forward to try to sort out sales of admin sets on one brand name versus another brand name. They're all being handled in the same production operation.

Got it. And then, what's your assumption for R&D going forward for the year and kind of for Medical, and maybe some color on 787 and all of that.

Let's see. We just mentioned R&D for '07 came in at just under $103 million. I think 90 days ago we were forecasting R&D for '08 would be down slightly to about $100 million. Our new forecast revises that estimate so that '08 now looks very much like '07, about $103 million.

We're looking for a substantial decline -- the 787 -- I just mentioned R&D expense for the year of '07 was $46 million. And we're expecting a decline to a much lower number. We're a little bit up in the air on that at the moment.

When Boeing announced the six-month delay in delivery, theoretically that shouldn't have any influence on our R&D expense because the same work has to be done, whether they deliver airplanes in May or September, October. On the other hand, one could worry that the more time they have to evaluate the results of qualification testing, the more -- I don't want to -- I'm trying to avoid the word picky. The more careful they may become. And so, there could be some increase there.

On the other hand, we -- what we have at the moment in terms of R&D expense in our forecast for A350 and some other programs is just a guess because there still hasn't been a selection on the A350. We don't know whether we have the job we expected, a bigger job or no job at all. So, at the moment, $103 million is just a projection. 787, to quantify it a little bit, we're expecting it'll be less than $20 million in '08, somewhere in that range.

What was the reason for the $3 million increase?

Most of it has to do with the addition of QuickSet.

Got it. Okay.

So, we acquire a company that we expect will do -- we now expect it was going to do -- when we bought it we thought all our due diligence projected sales for '08 of $32 million. The business is going great, so we now think it's going to be $36 million. And there'll be -- it's an outfit that has historically spent rather heavily on R&D. So, that's the principal addition.

Okay. And the last one, you've assumed that Marine is flat and that -- it was up pretty nicely.

Yes.

In the fourth quarter. Is that--?

I've said this before. I just -- we just don't know how high that will go. What's going on, this is sales out of a company that we acquired from [Kadon]. These are slip rings, both electric and fiber optic, used on remote ROVs, they're called. These are undersea robots. And these huge slip rings used on so-called FPSOs, floating production and servicing vessels for deep water oil exploration.

And over the last couple of years, since we acquired that company, I mean, the sales of that equipment has practically tripled. Somewhere along the line, we have to get to the point where the customers are equipped with what they need to do what they're going to do.

I don't think it's sensible to, as I said, to simply extrapolate that growth curve in parabolic fashion. So, I don't think we know what's likely to happen in '08, but we've seen so much growth in the last couple of years that we've projected just a continuation of the '07 level.

Terrific. Thank you very much.

Karl Oehlschlaeger with Banc of America.

Hey. Good morning, guys.

Hi, Karl.

Could you talk a little bit more about Constellation and -- that's increasing quite a bit, around $20 million in '08. How should we think about that business going forward beyond that?

Well, the quick answer to that question is that we're kind of expecting that the Constellation collection of programs, Ares, Orion, ultimately it will be followed by Ares V, the big booster, will probably result in revenues for us of around $20 million a year consistently over the next few years. It could get to be a little bigger than that.

But, the reason we've gotten to that level is that, in September, the Boeing team was selected to build the upper stage. And we have -- our company has participated on the Boeing team for the upper stage. And on that team, we have the responsibility not only for TVC, but for much of the system work that will deal with fluid control on the vehicle. So, there'll be a lot of work to be done.

As you may know, NASA intends to be the designer and contractors will be the producers. But, there's -- there will be a lot of design and development work done under subcontract to NASA, because NASA really doesn't design. They take design responsibility, but they really subcontract out the work. This is cost-plus work. The requirements are continue to develop and elaborate.

So, I think the sensible way to think about it is, as I said, it's not going to be $20 million going to $50 million. It'll probably be consistently $20 million a year over the next few years.

And when you talked about the potential further opportunities, is it maybe another couple million on top of that?

Yes. There -- when I say $20 million it could be $25 million. But, I don't want to suggest to you that it's going to skyrocket.

Okay.

It's nice work if you can get it.

Right. On the -- just in the quarter the tax rate was -- I think just over 26%. Can you talk about -- I think you had said on the last conference call that you thought it would be about 30%. And just talk about that a little bit more, what sort of adjustments you had.

Well, I think the 30%, Karl, is for the whole year.

Okay.

Is what we were talking about. We knew that it was going to come down somewhat in the fourth quarter. But, it came down a little bit more than we might have had in our average. But, it was pretty close. So, it's mostly the mix of earnings and things.

Okay. And just finally, maybe more of a big picture question, but when you're looking -- you talked a little bit about it with the R&D, how that could maybe swing a little bit. But, as you think about next year's revenues that you laid out in pretty much -- in a lot of detail, what are sort of the biggest sort of swing factors that are there? Where's the most potential for downside or other upside risk?

I think the -- in our company, the uncertainty is principally in the Industrial business. The reason being that, in that business, much of the product we delivers is ordered for 8 or 12-week delivery. So, when we're projecting what's going to happen 11 months from now, it is literally a forecast.

I'm not -- I'm feeling reasonably confident about the Industrial forecast for this reason. The business in the U.S. is heavily influenced by the simulator deliveries to CAE. And that business is solid. I'm not looking for a downturn in Asia. The China market continues to be strong, and Japan doing better in the last couple of years than they have. And I'm impressed with the strength of our Industrial business in Europe. Europe seems to be doing well these days. Now, who knows. Six to nine months from now things could change.

But, the other point I'd make with respect to our Industrial business is we are not -- we don't simply follow the movements of the overall global industrial economy. Our Industrial business depends on what happens in some particular specialty markets; ejection molding, blow molding, metal forming for -- mostly for the auto industry, flight training simulators as I mentioned, power generating equipment, steel mill equipment -- which is all related to China -- test equipment for a variety of applications. Many -- I guess I would say most of our customers, regardless of where they're located, are exporters serving a global market. So, I'm feeling relatively quite confident about the Industrial forecast.

The Component forecast, made up of a lot of small orders. Also, one could worry that the DOD shuts down funding to the depots and that impacts the aftermarket repair and overhaul business. How likely is that to happen within the year '08? I don't think it's very likely. So, we're pretty optimistic about the situation we're in for '08. I don't see a lot of downside.

By the same token, I don't think that -- I wouldn't suggest that there's likely to be big time upside surprises. But, I think at this stage of the game, to be able to with reasonable confidence forecast a 15% sales growth and a 15% growth in earnings per share is not too bad.

Yes, that's great. Thank you.

Eric Hugel with Stephens.

Good morning, guys, and thanks for the presentation. Can you update us on, one, I guess in Medical. I guess last quarter you mentioned that you were beginning to focus on the efforts of expanding the distribution in Europe. Can you talk about that? And maybe give us a little more detail about the disconnect between you guys and B. Braun here.

Well, I'm not going to get too much into the kind of the family issues between us and B. Braun. But, it is a fact and we've acknowledged it last quarter and this quarter that sales of the Curlin pump, which sales for the most part go through that organization, have been disappointing. Not only for us, but for them. I mean, they're not -- the $4 million for the fourth quarter in Curlin pump sales, that forecast was their forecast, not ours. And if you forecast $4 million and come in at $2.5 million you got some 'splaning to do, but--.

So, on the other hand, I think we're quite conservative in what we forecasted for Curlin for '08 because we are developing European distribution for the Curlin pumps. And we're looking for a couple million dollars in sales -- international sales for the Curlin pump.

So, if in the U.S. Curlin pump sales in '08 were the same as they are in -- or the same as they were in '07, adding the international sales, they'd actually be up a couple million bucks. So, we are developing that distribution and it is coming alive.

And as you may know, you may remember in the Zevex product line that the biggest customer for Zevex pumps is an outfit named Numico in Amsterdam, recently acquired by Danone. So the European distribution of the Zevex product is big.

Is there an opportunity there to leverage that, or is it just a different distribution sort of channel?

Well, I don't -- Numico is a company that is in the business of making the food that goes through the enterable feeding pump. So, Numico would not be a distributor of infusion pumps for other applications. But, more likely, I think there are more opportunities for cross-selling of the Zevex pumps in the U.S. through B. Braun and other distribution.

Okay. Can you update us on the timing of potential A350? When you're going to know something?

We're going to know something whenever they decide. They tell us -- literally, this has been going week by week. And we're now at the stage where the procurement people that our folks are dealing with are annoyed because the decision hasn't been made and apologizing. So, I guess--.

Imminent?

Yes, imminent. Probably in the next month. But, they've got a lot of time. And when we're getting down to the last pricing rounds, it's always -- the decision is always this Friday. Give us a new price on Wednesday. We're going to decide on Friday. I think this week we provided our third, absolutely last, best and final, this is really the last one. I think this is the third round of those.

Okay. And two questions with regards to 787. I guess, one, can you update us on your discussions with Boeing, sort of around getting paid for additional functionality that you've added to the product? And two, could you address with regards to sort of you guys getting paid?

I guess your contract, since you're a revenue-sharing partner, is you get paid when -- on first delivery. Now that first delivery's sort of getting pushed out. Are there discussions that you're having with Boeing to sort of get paid before first delivery, now in December, or is that possible? Or are you not expecting to get paid now until, I guess, fiscal '09 for you guys?

We listened very carefully on the Boeing conference call to Scott Carson's answer to the question, what are you going to do about paying suppliers on delivery of the first airplanes? Are you going to make them wait the six months? And if you listened, you may understand his answer more clearly than I do. I think he opened the door to say, for suppliers who delivered on time, we may consider paying them on time.

We haven't opened that -- the discussion of that subject because we're still working the other question you asked, and that is how are we doing on negotiations of scope changes. And I would say -- all I'll say about that is, persuading Boeing that they owe you money for changes of scope is never easy to do. And we have -- we're continuing to work that.

And no doors have been closed. They're -- we're continuing in discussions and we have the fortunate circumstance that, in our case, the discussions of that issue are conducted in the context of a relationship where we are not one of their problems. Our hardware for -- our hardware is, for all intents and purposes, ready to fly. And so, we're not in the dog house. We're regarded as a good guy supplier at the moment.

With regards to your cash flow expectations for next year, I mean, are you assuming that you get paid for 787 as you were supposed to, or how--?

Why in the hell would we want to go on record with respect to our expectations of the answer to that question? Of course we're expecting to get paid because we heard Scott Carson say that if you were on time you were going to get paid.

Fair enough. And finally, what's your tax rate assumption for '08?

Just about 32%.

Great. Thanks a lot, guys.

Ron Epstein with Merrill Lynch.

Hi, Ron.

Hi. This is actually Stephanie Wang filling in for Ron.

Can you do an imitation of Ron's voice?

I try to, but it's a little hard for me. Mine's a little bit higher.

I just have two quick questions. The first one was, I guess in FY '08 in Commercial you guys are forecasting 4% for the aftermarket growth.

Yes.

But, you guys achieved 13% in FY '08. So, wanted to know why there was sort of this decline, or if maybe you are being potentially conservative in your forecast?

I think, if you've followed us over the years, I think it's true that -- particularly in the Commercial aftermarket, we always project a small increase and most of the time it comes in higher.

Okay.

It's just a very -- it's just guessing because there is quite a big of quarter to quarter volatility. It's not a direct passenger seat miles to aftermarket revenue equation. There are all sorts of contributing effects. And we just don't know what the aftermarket is going to do. So, our practice has been, in recognition of what's the general trend in airplane service, we project a small increase and hope that it comes in bigger than that.

Now, would -- what are the differences in terms of why it doesn't track passenger miles or traffic?

Because -- well, probably in the global scheme, over the longest haul, it does. But, in the near term, our customers are the airlines who send stuff to us for repair and overhaul. And sometimes they're aggressive at that and sometimes they're not.

A lot of our aftermarket, though, is literally selling piece parts to other companies that do repair and overhaul. And so, it depends -- our revenue depends on their inventory levels, their ordering practice, their inclination to buy from us. For the most part, they're obligated to buy from us, but it's not to say that they can't try to get stuff made in the gray market. So, there are lots of -- it's mostly just a matter that there are lots of intermediate customers, if you will.

Okay. Okay. I guess in your forecast for Medical in the margins, how much of that would be related to synergies or potential synergies from your different acquisitions?

How much of the margin--.

Improvement. Yes.

The question -- if the question is -- let me try to answer it this way.

Okay.

The projection of margins assumes very little synergies for changes that haven't been made. If you looked at the organizations as they were at the time we bought Zevex, they were quite a big different from what they are now. But, we're not projecting margins based on cost reductions for changes that we haven't made yet.

The reality is that the margins in the Medical segment will be influenced by how much additional cost we take on. I mean, you've got organizations that are growing and there is -- there are requirements for additional staff, both in development and in sales. And so, it's kind of at what rate do we increase what you could call the program costs. Programmable costs perhaps is the better phrase. So, we don't have a lot of work -- a lot of rearrangement to make the margins. It's kind of a matter of how much additional we spend.

Okay. Thank you very much.

Thank you.

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