Moog Inc (MOG.A) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Moog third-quarter 2008 earnings conference call.

At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session and instructions will be given at that time. (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. 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 this 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 May 5, 2008, and in certain of our other public filings with the SEC. We've provided 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 homepage and webcast page at www.Moog.com.

Bob?

Good morning. Thanks for joining us. This morning, we will review the results of our third quarter of '08, we will update guidance for the balance of '08, and we will provide our initial outlook for '09.

The third quarter of '08 was an excellent quarter. Sales were up 23% to $497 million; net earnings $31.1 million, up 22%; earnings per share at $0.72, also up 22%. Our guidance for this quarter had been $0.69, so the results exceeded our own expectations.

On a year-to-date basis, earnings-per-share of $2.02 are up 17% from a year ago.

Sales in our four largest segments are running way ahead of our original plan for '08. Very strong margin performance in our industrial segment and in the Components group had more than offset a margin shortfall in aircraft and medical devices.

As recently as fiscal '05, our aircraft group was not only our largest segment but also had the highest margins. As all of you know, we are now in a period when Boeing and Airbus are both developing new airplanes and a number of new business jets are in design. During a period like this, a company that does flight control actuation, is successful in winning business, is going to be making major investments in R&D as well as investing in new facilities and working capital. We are right in the middle of one of those periods and fortunately for us, while our Aircraft group profitability reflects these investments, our Industrial segment, our Components group are achieving the best performances in their history.

If you look at our consolidated P&L, compare it to the similar quarter of a year ago, our gross profits, although they were up $17 million, were lower as a percentage of sales. However, R&D, SG&A and interest were also a lower percentage, so our earnings both before and after taxes were the same percentage as a year ago on a sales base 23% higher. The result is a 22% increase in earnings per share.

Now, let me go to the segments. Aircraft -- total Aircraft sales up 17% to $175 million, increase all on the military side; military sales up $26 million or 32%. Over half the increase was on the F-35. Sales in the quarter were $30.3 million, up $14.4 million from a year ago.

In addition to increased workload in our company and in that of our partners Parker Hannifin, Hamilton Sundstrand and Curtiss Wright, this quarter also included a profit-rate adjustment for having achieved certain weight objectives.

Another of the big increases was the V-22 -- sales in the quarter, $11.1 million, up $4.8 million from a comparable quarter ago.

The military after-market also produced a big increase. Sales reached $33.1 million, a 32% increase over last year.

Commercial aircraft sales were down 1% from the same quarter a year ago. We experienced lower sales on the Boeing 7 series as well as on the 787. Total Boeing sales of just under $18 million were down almost $5 million from a year ago. On the other hand, sales in business jets, $16.5 million, were up $6 million from last year, the big increases on the Hawker 4000, the Challenger 300, and one other, unannounced platform.

Commercial aircraft after-market, which seems to be a focus of a lot of attention these days, came in at $23.2 million. That's up 4% from the most recent quarter but down 6% from the same quarter a year ago. Over the last five quarters, our commercial aircraft revenues, after-market revenues have fluctuated between $21 million and $26 million. There are a number of reasons for this volatility. The result, though, is that I am not sure that you can connect any two points and call it a trend.

For those who are concerned that this category of business will shrink because the airlines are taking aircraft out of service, we offer a couple of thoughts. First of all, commercial aircraft after-market revenues are 5% of our company's total sales. So, if there is a little shrinkage, it's not going to kill us.

In addition, many of the aircraft being removed from service are in MD-80s, DC-9s and 737s. These are airplanes that have a relatively small complement among hardware, and hardly any of our aftermarket sales depends on these airplanes.

Based on the current trend, however, we are now forecasting that commercial airplane aftermarket sales for this year will be $90 million, and that will be down 5% from a year ago. Perhaps there will be a similar decline next year, but we believe that our strong position on newer and bigger airplanes should continue to support substantial aftermarket revenues.

For the total of '08, we are increasing our aircraft forecast by $5 million to a new total of $662 million. The change is the net of an increase in F-35 revenue on the military side and the reduced level in the commercial aftermarket that we just talked about.

Aircraft margins -- margins in the Aircraft group this quarter were an unusually low 6.9%. This compares to 10.6% a year ago and 8.8% in the most recent quarter. In part, this performance reflects a level of R&D is substantially higher than we had anticipated. R&D in the quarter was $19.2 million, up $1.5 million from the same quarter a year ago. R&D in the 787 at $8.6 million was down from last year's $12 million but up from last quarter's $7.3 million.

Simply put, we are spending more on the 787 than we expected to. The effort to complete safety of flight, which is now done (inaudible) continue to conduct a qualification testing of all the hardware we've designed -- that effort is turning out to be more work than we anticipated. We entered this year thinking we would spend $18 million in R&D on the 787. Our current estimate is that $18 million will be more like $34 million or $35 million. Our R&D expenditures directly depressed our margins in the quarter.

In addition to that, we have, in the quarter, established a reserve of $1.8 million on our Boeing commercial book of business. This change is intended to deal with two problems. One has to do with the schedule slip on the 87.

Prior to Boeing's last reschedule, we were preparing to build, over the next 26 months, 221 chipsets of hardware. The latest Boeing schedule requires, over that period, delivery of only 61 chipsets.

We've been building facilities, acquiring equipment, and hiring staff to build the capacity to deliver three to four chipsets a month. Over the balance of this year and most of next, we will be building one or two chipsets a month. As a result, we will be absorbing excess overhead on a smaller production base.

In an addition to that, we've encountered availability problems with certain types of custom design components, most notably bearings. The suppliers are simply unable to support current production. The solution seems to be a choice between extraordinary expedite fees or the expense of requalification. We've estimated those impacts and established the appropriate reserve.

Also in the quarter, we've increased our estimate in completion for our A400M program by about $1.2 million to cover additional costs in electronic design and in software verification and validation. We do expect Aircraft margins to return next quarter to about 9%, a level we've seen in previous quarters, and that would bring margins for the year to 8.6%.

So, Aircraft for '09 -- we are looking for a modest sales growth in the aircraft business in '09. We are projecting a big increase in the military aftermarket, $123 million to $141 million. This forecast is, for the most part, based on identifiable programs, so we are feeling pretty confident about it.

V-22 OEM sales will be up a few million dollars because of increased production rate, but we are expecting lower revenues in the F-35. I think F-35 will be $96 million next year, down from $105 this year. So the net of those changes will bring military aircraft sales to about $407 million.

On the commercial side, we are expecting Boeing 7 series to be about the same as this year. 787 revenues should be up over $6 million to $25 million. Revenues at Airbus will be up $7 million to $27 million; business jets up $5 million.

The wildcard will be the commercial aftermarket. If we maintain the '08 level, it will come in at $90 million. If there were a 10% decline, it would come in at about $80 million. So considering that range of possibilities, we are now forecasting commercial aircraft revenues in a range between $283 million and $293 million, which takes the total for aircraft to a range of $690 million to $700 million -- the low-end a 4% sales increase, the high end a 6% increase.

We do expect a modest improvement in margins. We are planning on about 9% compared to this year's 8.6%. We now think that aircraft R&D next year will most likely be similar to this year's $69 million. We have that estimate baked into our forecast.

(inaudible) space and defense, back to Quarter 3 '08, space and defense had a very good quarter. Sales -- $63.5 million, up 33%. Most but not all of the $16 million increase was revenue from recent acquisitions, QuickSet and CSA.

Growth in the core business came about because of the development programs on the Constellation, work on Aries 1, the launch vehicle, and Orion, the exploration vehicle, totaled $7.2 million in the quarter compared to $600,000 a year ago. This is cost-plus development work and the programs that will replace the shuttle system.

The defense controls product line, the completion of deliveries at QuickSet, and the Driver Vision Enhancer system were up $4.6 million and replaced a similar amount of sales in last year's quarter on LAV 25. QuickSet also generated most of the $5.8 million increase in our Homeland Security product line.

Most of the other major product lines in space and defense were remarkably stable. The satellite market produced $13.4 million in revenue, about the same as last year. If I add the revenues in launch vehicles, the missile business, the naval applications, the total in this year's quarter was $14.4 million compared to $14.3 million a year ago.

In May of this year, we announced the acquisition of CSA Engineering. This is a specialist in structures used on space vehicles, a specialist for shock isolation and vibration suppression. Applications include satellite payload isolation systems, tune mass dampers for vibration control, and a jitter-reduction control system for the Airborne Laser Optical Bench. This acquisition added $2.4 million in sales for the quarter.

Our most recent '08 forecast for space and defense was 246. This quarter, we are making some small adjustments in the product lines, but the major change is the addition of about $7 million in revenue for the CSA Engineering acquisition. So in '08, space and defense should come in at 253.

Margins in the quarter were a respectable 11.7%, down slightly from last year's 12.9%. In last year's quarter, we were still wrapping up some nicely profitable space shuttle business.

Our most recent projection of margins for the year was 11.2. Given the performance in this quarter and what we expect in the fourth quarter, we are now increasing that forecast to 11.9%.

'09, space and defense in '09 -- the gross challenge for this segment in '09 comes about because of the extraordinary orders that QuickSet received for the Driver Vision Enhancer in '08. You may remember this program. In the first three quarters of '08, we've delivered 7600 Driver Vision Enhancer systems, producing over $28 million in revenue. In '09, we expect there will be some DVE sales but nothing close to $28 million.

But we are expecting higher revenues on the Constellation program, increases in launch vehicles, tactical missiles, Homeland Security and the Naval applications, and we are forecasting $20 million in revenue for CSA, a $13 million increase from this year. So when we put the picture together, space and defense for '09 is forecast at 270, a 7% increase over '08.

We are anticipating that cost-plus development work, less risky but lower margin, will be a more dominant factor in '09 and so our margin projection for space and defense in '09 is 9.8%.

Industrial -- Q3 '08, a spectacular quarter, sales of $143 million, up 28%. There was a currency effect as a result of the euro and the yen. However, setting that aside, organic sales increase in the quarter was 17%. Given the markets in which we operate, we think that's an outstanding achievement.

Sales were up at almost every major market area. One exception is in specialized test equipment, where some projects have been rescheduled for later delivery.

The biggest quarter-to-quarter change is in the motion simulator business. Sales in the quarter were up over $10 million, an increase of $10 million, or 92%, to a new total of $21 million -- robust deliveries to CAE and flight safety, but we are also delivering to Rockwell Collins and a number of other customers.

The simulator market is an excellent example of sales growth coming from increased scope of supply. Many years ago, we sold only servo valves for use on customer-supplied hydraulic actuators. Sales per simulator measured in tens of thousands of dollars. We then moved up to selling hydraulic servo actuators, and we now supply a complete electric actuation system, including control electronics. Sales per simulator are measured in hundreds of thousands of dollars.

The PowerGen market -- sales were up almost $4 million to $13.8 million, much of the growth in Asia, where we are delivering controls for gas turbines, steam turbines and wind turbines. Customers -- Mitsubishi, Toshiba, Fuji. We are expecting that wind turbines will become an increasingly important market for our entire company.

In mid-June, we announced our investment in a German company named LTi REEnergy. This company specializes in the design and manufacture of servo controllers and complete drive systems for rotor blade controls on electric wind turbines. This company has already delivered controls for over 7500 wind turbine systems.

In June, we acquired 40% with the expectation that we will acquire the remaining 60% in 12 months' time. This two-step process will allow the current owners to relocate the product line into a stand-alone facility which won't need to share services with other of their companies. In the fourth quarter of '08, our investment in LTi should provide about $0.01 a share.

Metalforming -- metalforming market continues robust growth. Sales were up in the quarter 35% to $13.9 million.

In Asia, there's been a continuing increase in auto-producing capacity. Japan built more cars last year than in any year in recent history. In Europe, we are providing controls for metalforming machines that handle scrap material and powdered metal.

Steel mill -- sales of gauge controls continue the growth pattern. This quarter, sales were up 30% to $10.8 million. European customers -- Danieli in Italy, ThyssenKrupp in Germany, a company named NKMZ in the Ukraine. In Asia, we are selling to Mitsubishi and Hitachi.

Plastic-making machinery continues to be our largest market, sales up 15% to $21.7 million. This market, unit volumes are relatively stable in both Europe and Asia, so much of the sales increase in this quarter was currency.

Lastly, we are happy to report that we had an excellent increase in aftermarket sales in industrial, a 33% increase in the quarter. It took revenues to $13.5 million.

We are asked regularly these days if we've seen any slowdown in our industrial markets. One might expect that, given what's happening in the US auto industry, that ultimately we would feel that affect in controls for metalforming presses or plastic-making. Machinery, we are certainly on the watch for signs of weakness, but today we are able to report that incoming orders are strong.

Because of the strong order book, we are forecasting a fourth quarter of $135 million in spite of the fact that many of our European customers take much of August off. That forecast will result in an industrial total for '08 of $5.31 million, a 22% sales increase over '07.

Margins -- margins in our industrial business continue to set new records. Margins for the quarter -- 14.4%, up from 13.8% a year ago. That excellent margin performance is the result of a lot of things -- a favorable product mix, much-improved efficiency in our manufacturing operations, and the benefit of increased volume.

On a year-to-date basis, our industrial margins are 14.3%, and we are projecting a continuation in that level for the balance of '08.

Industrial for '09 -- we typically forecast industrial sales in a range around a midpoint. The range is intended to reflect uncertainty of the industrial market through a period that ends 14 months from now and also to reflect the possibility of currency fluctuation. For '09, we are currently forecasting sales in the range of $643 million to $663 million. Using the middle of the range, that's a 23% increase over our current forecast for '08. It does include $46 million of revenue that will be consolidated into our results when we complete the acquisition of LTi REEnergy. We expect that will happen in June of '09, and we will have about four months of LTi sales. Our forecast midpoint, not including LTi, is $607 million, an increase of $76 million or 14% organic over fiscal '08.

So let me provide a little color to that projection. We are anticipating a substantial increase, $16 million, in specialized test equipment. The biggest portion of that has to do with a number of projects in the auto industry, particularly in Asia. We have discussions underway with a number of customers whose names you would recognize.

We are looking for a $12 million increase in the power-gen market. Much of that will come in Asia, primarily with customers building steam turbines and wind turbines. In addition to that, we will then add the $46 million from the LTi acquisition.

In the simulator business, we are looking for a $9 million increase, reflecting continuing demand at CAE and new business with customers like Medtronics and [Hollis].

Metalforming -- a $10 million increase to $62 million, the result of increased sales of hydraulic manifolds built in Luxembourg and the application of very high-power electric motors, a technology we recently acquired in Japan. We are expecting $8 million worth of growth in controls for plastics, the result of hydraulic pump sales to new customers who've recently embraced that product.

Forecasting increases in sales of gauge controls for steel mills -- this market continues to be driven by requirements in China. Recently, the Chinese have begun rebuilding outdated steel mills to upgrade their capacity.

Last, by no means least, we are looking for an 18% increase in aftermarket to a level of $57 million.

Given the concern in many parts of the world about the onset of a global recession, it may seem a little unusual to be talking about a 23% increase in industrial sales. However, our forecast is based on trends in a number of different product and market specialties. We have customers experiencing strong demand at the moment, new customers coming onstream for current technology, and new products and new technology to be delivered to our existing customer base. Then we have the impact of the LTi acquisition. So we have quite a bit of confidence in our industrial forecast.

In margins, we have a budget put together which forecast margins of 14.2%, very close to the 14.3% that we expect to experience in '08.

All in all, our industrial picture for '09 is very bullish.

Components group -- Components group continues its stellar performance. Sales in the quarter $87 million, up 20%. Of the $14.5 million increase, $4.3 million came from recent acquisitions -- Thermal Control Products, Techtron, Prism. Even without the benefit of the acquisition, sales were up 14%.

Aircraft products -- $29.8 million, up 20%. The increase was all in original equipment, not in the aftermarket. The major part of the increase was the Guardian program at Northrop Grumman, a system designed to protect military and commercial aircraft from shoulder-fired missiles.

Sales on the program -- $2.7 million in the quarter were up $2 million from a year ago. We had a big increase on Raytheon's multispectral targeting system, sales up $1 million to $1.8 million, started deliveries on the Lockheed Longbow radar system, sales of $800,000.

Space and defense part of the Components business was up $3 million to $15.5 million, the increase all in the defense segment. Sales increased on future combat systems, Abrams, Bradley fighting vehicle, and the Stryker mobile gun system.

The marine market -- sales of $11.9 million were up 28% -- increases in equipment used on undersea robots by a broad range of customers. We keep looking for a top in this market but we don't seem to be there yet. The most recent quarter incoming orders were well ahead of sales.

The medical market -- sales were up 7% to $14.7 million. Respironics revenue was actually down. Quantities were up, but the average selling price to Respironics has followed the cost reductions introduced through extensive automation. On the other hand, sales of slip rings for use in CAT scan machines was up nicely with Philips, Hitachi and other customers.

Sales of industrial products and components were up 22% to $15.3 million. This is where we see the benefit of the recent acquisitions, but we are also seeing continued growth in slip rings for closed-circuit TV. Customers -- [Telco], Bosch, GE, and we are also seeing substantial growth in international sales.

Every quarter, we increase our sales forecast for the Components group for the year based on the strength of the quarter we are just reporting. Last quarter, we were projecting the year at $330 million. Strength in our aircraft business suggests the year is more like likely to come out at about $338 million.

Margins -- margins in the quarter, a handsome (technical difficulty) .4% percent up from 14.9% a year ago. On a year-to-date basis, Components has run margins of 17.8%. Allowing for a slight moderation in the fourth quarter as a function of product mix, we are projecting the year will finish at 17.7%.

The Components group '09 -- if you've followed our company, you know that every year we've owned the companies that make up the components group, the results exceeded our initial sales forecast. We are now predicting that '08 will be 19% above '07. If we take out the effect of the recent acquisitions, sales growth for the year '08 will be 15%.

For '09, we are starting with a growth projection of 11%. It includes a $14 million increase in aircraft, primarily in the Guardian system. That system and some other products will offset the fact that some of our commercial avionics products are at the end of their life.

We are predicting continued growth in the defense market and in the marine market. Every year, we suggest that the marine market may have topped out. This year, it is up over 40% from year ago to a level of $43 million.

In '09, we are now projecting a 16% increase to $50 million. We are also forecasting continued growth in our industrial products, once again the result of recent acquisitions.

So in total, we are forecasting $374 million in sales. We are reluctant to forecast the continuation of the current very high level of margins. We have a budget put together that suggests a slight moderation to margins of 16.5% for components for '09.

Medical devices Q3 '08 -- Quarter 3, the medical devices segment got back on track. Sales $27.6 million were up from less than $23 million in the second quarter and up 27% compared to a year ago. That's now a legitimate comparison. Last year's third quarter was the first period in which we owned all of the businesses that today take up (technical difficulty) devices segment.

Operating profit in this quarter was $3 million. It was over three times what we made a year ago.

Pumps sales at $8.6 million were up slightly from a year ago. The ZEVEX enteral feeding pump is providing the growth, and it was 63% of pumps sales in the quarter.

Sales of admin sets are the major growth driver. Sales in the quarter of $9.2 million were up 42% from a year ago. This is the pattern that we expect in this business. As time goes by, we deliver more pumps every quarter, the installed base increases, and there's increased consumption of admin sets.

Growth in this quarter, though, was unusually high. You may recall, last quarter, we had some deliveries and held up waiting [B-Braun] approval of a new set supplier, and those sales slipped into this quarter.

Sales of sensors and hand pieces are becoming an important part of our picture. Sales in the quarter of $5.9 million were up $2.5 million or 75%, 74% from a year ago. Growth drivers are ultrasonic hand pieces used in cataract surgery. Both AMO and Bausch & Lomb have embraced this product and they're the primary consumers of handpieces in cataract surgery.

After the sobering experience we had in Quarter 2, we had revised downward our expectations in this segment for Q3 and Q4. We would have been happy with quarters that were $24 million in sales and $2 million and operating profit, and Q3 came in much better than that. Based on what we now know about Quarter 4, we are hoping that the result will be almost as good as Quarter 3. If that occurs, then the totals for '08 will be sales of $103 million, $9.5 million in operating profit or 9.2% of sales, a marked improvement compared to the 8.2% we were projecting only 90 days ago.

So what about '09? We are expecting that fiscal '09 will be a year of continued development in this segment. We are anticipating the introduction of some important new products and the development of some new customer relationships. We are forecasting 15% sales growth to $118 million. Most of the growth will be in the (technical difficulty) admin sets made possible by the increase in our installed base of both IV and enteral feeding pumps.

The introduction of a new IV pump product will generate a 21% increase in IV pumps sales. However, our unit volume in enteral pumps was unusually high in '08. Two reasons -- our European customer Numico was replacing their installed base with our pump, and that replacement program is pretty much complete. Also in '08, we had kind of a one-shot, 5000-pump order from Abbott, and that won't repeat. So in '09, we expect a reduction in volume in enteral pumps, and the result will be that pump sales of $38 million will be about the same as '08.

We are forecasting growth of about 10% in sensors and handpieces. We are anticipating margin improvement in medical devices. We are now projecting operating profit of $13.5 million, up $9.5 million from this year. Margins will come in at 11.4%.

So, let me summarize our guidance for '08 and '09. In our last conference call, we were projecting '08 at $1.846 billion in sales, operating margins 12 point (technical difficulty) percent, net earnings $117.3 million, $2.71 a share. Since then, we announced our investment in LTi, and we suggested that it add about $400,000 in investment income, increase our earnings per share to $2.72

Today, we are increasing our sales forecast in all segments so that we are now projecting sales of $1.887 billion. We've moderated our operating margins to 12.3%, but the result is an increase in net earnings to $119.1 million, $2.75 a share, an 18% increase in earnings per share.

For fiscal '09, we are projecting a sales range from $2.095 billion to $2.125 billion. So we've cracked the $2 million mark. We are projecting aircraft sales between $690 million and $700 million, depending on what happens in the commercial aircraft aftermarket. We've projected industrial sales will range between $643 million and $663 million, depending on how sales materialize and what happens in exchange rates. Space defense projected at $270 million, components projected, $374 million, medical devices $118 million.

In terms of margins, we are projecting some improvement in aircraft and medical devices and some moderation of the currently very high margins in Space and Defense, Industrial and Components.

Putting the whole picture together, we are projecting operating margins ranging from 12.1% to 12.3$ depending on sales volumes, net earnings in the range of $134.3 million to $139.5 million, and EPS in the range of $3.08 to $3.20.

The low end of the range would be a 12% increase in earnings per share. If we are on that trajectory, the quarters will likely turn out to be $0.72, $0.76, $0.79, and $0.81. If the commercial airplane aftermarket holds up, industrial sales and the euro stay strong, and we come in at $3.20 a share, that would be a 16% increase over '08. One could say that the most likely outcome would be something in the middle. Given current economic conditions, we will regard any outcome anywhere in this range as a positive result and a nice addition to our long-running record of double-digit growth in earnings per share.

Now, I will turn you over to John Scannell. John will talk about cash flow, the balance sheet, and our recent financial transactions. Here's John.

Thanks, Bob. Good morning. I would like to begin with a discussion of our cash flow in the quarter and reiterate our guidance for the year. I will then address our recent financing transaction. I will talk about our tax rate and share some additional items of interest from the balance sheet. I will end with an overview of what we anticipate for fiscal '09.

Q3 cash flow -- free cash flow in the quarter was positive $16 million. Net debt increased by $31 million, primarily driven by the purchase of CSA in California for $15 million and our investment of $28 million in LTi REEnergy in Germany. In addition, we had costs associated with our bond issue.

Cash flow from operations was $38 million, continuing the pattern of improvements we have seen over the last couple of quarters. Working capital growth continued to moderate, helped by several customer advance payments received in the quarter.

Capital expenditures were $22 million in Q3, but depreciation and amortization were $16 million. Interest payments totaled $5 million, while our cash tax payments were $14 million.

We are maintaining our forecast for free cash flow for the year at positive $5 million. We believe our cash flow from operations will be slightly stronger than previously anticipated at $100 million, balanced by higher capital expenditures of $95 million. I would remind you that we continue to assume that we will be successful in collecting $20 million from Boeing for our work on the 787 as part of that forecast.

Financing -- in June, we sold $200 million of high-yield bonds at 7.25% interest rate. This follows the $150 million expansion of our revolving credit facility in the second quarter. Given the current turmoil in the credit market, we decided to avail ourselves of bonds when the opportunities presented themselves. We now feel very comfortable that we have sufficient funds available to continue our internal growth and our acquisition strategy over the coming years.

Taxes -- our tax rate in the quarter was 29.6%. The rate was helped by the conclusion of our analysis for the 2007 R&D tax credit. For the year, we are projecting a tax rate of 31.3%.

Some other items -- our non-cash stock compensation expense in the quarter was $1.4 million. Contract reserves increased by $2 million over the prior quarter, driven by the additional cost estimates in our aircraft book of business. At the end of March, our net debt to total capitalization stood at 38.5%.

Forecast for fiscal '09 -- for fiscal '09, we are projecting an improvement in free cash flow to $55 million, a 40% conversion ratio. Stronger earnings, combined with better working capital utilization, will drive this improvement. Capital expenditures will continue at the same level as fiscal '08, although as a percent of sales they will decrease by approximately 50 basis points. Depreciation and amortization will be $72 million.

We are anticipating a tax rate of 28.3% in '09. This rate reflects the benefits of implementing some international tax-planning strategies, continued R&D tax credits, as well as benefits from some foreign tax loss carry-forwards.

Interest expense for fiscal '09 is budgeted at $42 million, up from $38 million in fiscal '08 due to the increased interest costs associated with our recent high-yield offering.

Now, let me pass you back to Bob to lead the Q&A discussion.

Ken, questions?

Great, thank you. (Operator Instructions). Cai von Rumohr, Cowen.

Yes, a very impressive quarter and good presentation, guys. Bob, could you walk us through the 787? What did you say, $34.5 million this year? So clearly you are spending more -- maybe some of the reasons why and where you see that spending going next year.

Well, the reasons why, Cai, I think simply are a matter of our ability in the past to estimate the amount of effort that was going to be required to get all of this hardware. As I think you'll recall, there are 11 different designs onboard electronics. There's a hydraulic stabilizer trim actuator with extensive control electronics. We have a big task on the 787, and the effort to get all of this stuff through safety of flight, which as I mentioned is now complete, so we are ready to fly, and then plow it through qualification testing, I think we simply underestimated the magnitude of that task when we put our original forecast together.

So you have to face the facts. We spent $8.6 million in Q3, and we think Q4 is going to be somewhat similar. So we are now facing the reality that 787 R&D in '08 is not going to be $18 million. It's going to be more like $34 million, maybe $35 million.

For next year, we are thinking probably $15 million to $16 million. We should finish qualification towards the end of this year. The HSTA eight be a running endurance for a long time, but we think that R&D will tune down. We are now projecting R&D for aircraft for '09 at about the same level as '08.

Your next question will be, "What's the A350 going to be?" At the moment, we've got it somewhere in the mid 20s. So there is other R&D expenditure planned for '09, but we think the 787 will be trending down. It will depend in part on how successful we are in taking this hardware through qualification tests without problems and what work there is to do on the derivative aircraft and who is going to pay for it.

Great. Roughly, the total R&D for this year and next year for the total company?

Total for the Company, this year we are now up to $112 million. I think the last time we talked, we were at like $109 million.

Right.

And we have -- the forecast we've just provided for next year is about $120 million. (multiple speakers) last time we were at $103 million, excuse me -- the last time we were at $103 million. I stand corrected.

Yes, okay. So next year is going to be $120 million.

That's what we have baked in the plan that we just described.

Okay. If it's $120 million, it looks like you are up some $27 million, exclusive of the 787. Is there any other major item other than the A350 driving that?

There are a couple of other jobs in aircraft, but the big change is really in our industrial business. As I'm sure you appreciate, our industrial business, which carried a lot of water for us this quarter, is a big business. I mean, we are now talking about in '09 a $670 million business. It is in that business. The products we provide are custom-design, high-performance actuation systems and there is an R&D component.

Okay. Then how much of this, as we look at all of this, is going to be LTi? You mentioned $46 million. Does your agreement with them have that it absolutely will close in June, and could that move one way or the other and --?

No, our agreement, it is a firm agreement. We have an agreement that we will acquire the balance of the company, the remaining 60%, one year from the date of the first buy. How much we pay for that 60% is dependent on the performance of the company over the next year.

The real objective, though, was to provide the opportunity for the current owners to segregate out the business that they will no longer own. They are literally going to move it into a new building 500 yards up the road in [UNA] Germany, so that we will be buying a standalone -- when we own 100%, we will own a standalone operation.

At the moment, this product line, in terms of facilities, sit in the middle of a number of this family's businesses. They have a number of businesses. So that's what's going on.

We do have, incidentally, a cap on what the price will be. Given the potential for this business, we think it's a very reasonable price.

Okay, terrific. I will let someone else go. Great quarter. Thanks.

(Operator Instructions). Ron Epstein, Merrill Lynch.

This is Elizabeth; I work with Ron. He's sorry he couldn't make it (multiple speakers). We just had some questions regarding your thoughts on the C-Series.

Our thoughts on the C-Series?

Yes.

We are not expecting to participate in the C-Series. Therefore, I don't think it's appropriate for us to comment.

Then also any thoughts on the impact from high oil and the slowing economy?

Well, you know, everyone is entitled to their own opinion. I believe that the world, and particularly the United States, needs to adjust. Those of us who were at Farnborough last week, are mindful of the fact that gasoline is $9.50 a gallon in the UK and has been for some time. My personal view is that somehow we've rotten Americans persuaded that $3-gallon gasoline is a birthright and we need to get over that concept.

Ultimately, I think the question is so what's it going to do to the airlines? I mean, it's going to make it tougher for them to stick with their current pricing, so the pricing will go up. There will be slightly less traffic. But we are not greatly concerned about that.

I just described a forecast range of (technical difficulty) aftermarket next year maybe $90 million or maybe $80 million, 10% or 11% less.

It's interesting to note that, in the year after 9/11, our commercial airplane aftermarket declined by only 12%. I will be surprised if the high oil prices have that much affect on the commercial aircraft aftermarket, but it remains to be seen.

(Operator Instructions). Eric Hugel, Stephens.

It's actually [Barbara Duncan] calling for Eric. How are you guys?

A quick question in regards to LTi -- so, I understand that it's in your guidance. However, the margins in that sector are pretty much staying constant. How are you dealing with the purchase accounting, since you are purchasing this in two stages or steps?

Well, the first eight months, the accounting will actually be equity accounting. And so, our portion of the earnings of the company will come in, but we will bring it in as operating income. Then in June, when we complete the acquisition, then the earnings become consolidated. Interestingly enough, at that time, the purchase accounting impact gets felt, and that pretty much eliminates or offsets the earnings in the fourth quarter. So there will be a benefit from our LTi relationship for the first three quarters, and we've just folded it into operating income so it's reflected in the margins.

Okay, thank you. That makes sense.

Thank you. (Operator Instructions). That does conclude our question-and-answer session.

Well, thank you all for coming. We will see you next time.

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