Moog Inc (MOG.A) 2009 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 earnings conference call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded. At this time, I would like to turn the conference over to Ann Luhr of Moog Inc. 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 November 5, 2009, our most recent Form 8-K filed on November 5, 2009 and in certain of our other public filings with the SEC. We provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have a 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. Thanks everybody for joining us again. This morning we will review the results of our fourth quarter, we will wrap up fiscal '09 and we will update our guidance for 2010, the year we have just begun.

In a quick summary, the fourth quarter came in within the range that we expected. We finished the year with sales of $1.849 billion, net earnings of $85 million, $1.98 a share. Q4 09 we look more particularly at the quarter, sales $504 million were actually up 3% from a year ago. However, the quarter includes $69 million of revenue from acquisitions made during the year '09.

Setting the revenues from these acquisitions aside, sales were actually down 11% from last year. Cost of sales, 72.7%, was way up from last year's 68.7%. There was an unusual (inaudible) in cost of sales.

We wrote off $4.4 million worth of inventory on certain business jet programs. Even stripping out that impact though, the cost of sales was still high, 71.8%, reflecting relatively adverse product mix in the quarter.

In the quarter, we booked a total of $5.1 million in restructuring expense. R&D $27.9 million was actually down $1 million. SG&A $72.6 million, down $2.7 million from last year despite the addition of $6.3 million of SG&A expenses from the acquired companies.

Interest 10.8 was up 12% from last year. Our tax rate a more normal 28.7% was quite a bit higher than last year's very low 19%. Earnings for the quarter came in at $15.2 million, 3% on sales and about half of the earnings in the fourth quarter (technical difficulty) year.

'09 the total year, as I mentioned, sales for the year '09 came in at $1.849 billion, up slightly from our most recent guidance. Earnings $85 million, $1.98 per share (technical difficulty) end of the range that we talked about 90 days ago.

Comparison of fiscal '09 with the year previous simply highlights the effect on our Company of the global recession. On the face of it, it would appear that sales were down only 3%, however, '09 sales included in the year $122 million of revenue from acquisitions made within the year.

Excluding revenue from those acquisitions, sales were down 9% or $176 million. Much of the sales reduction was in our industrial product line and the products affected are nicely profitable products. As a result, our cost of sales was close to 71%, 3 percentage points worse than '08.

During the year, our management team responded to the sales and the reduction in sales just as you would expect they would. We resized our organization to the new sales level. In the process, we incurred restructuring expense of over $15 million.

We reduced R&D by $10 million and SG&A by $14 million. Interest was up only 4% to $39 million. We did have the benefit of income on our investment in LTi. You will remember for the first eight months of the year, we were a 40% owner in that company and that investment brought in $6.7 million

Pretax earnings, $111 million were down 34%. Tax rate for the year, a low 23% and the net result $85 million or 4.6% on sales. In the midst of what some people call the worst recession since the 30s, I think that a profit of $85 million, 4.6% on sales is a respectable result.

I've often said that the Company's management, particularly middle management, has to do its best work in the worst of times. In some parts of our Company, we faced really difficult circumstances in '09 and I'm proud of the work that was done by the folks who had to deal with those situations. They did what needed to be done and made the best of a bad situation.

Now let me turn to the segments. Aircraft Q4 '09, Aircraft segment has a solid Q4, sales $177 million, flat with last year. We achieved this result in spite of the 21% decrease in commercial aircraft sales.

Military aircraft revenue, $108 million was up $5 million. The quarter, we had sales increases on F-18, the F-15 and the Indian Light Combat Aircraft. We also had a big increase, $3 million or 9%, in our military aftermarket, reflecting increased activity on refurbishment of hardware for the C-5 and a lot of action in the overhaul of equipment for the V-22 and the Blackhawk.

We have been anticipating that our F-35 revenues, Joint Strike Fighter revenues would come down this year as the development program nears completion. Sales in the quarter were $20 million and included $4 million on the production contract, the (technical difficulty) contract and we are still down 1.4 million from a year ago. Revenue on the development contract at $17 million was down $5 million from last year and almost all of the reduction was in work done in our Company as opposed to our partner companies.

On the commercial side, revenues to Boeing for the production 7 series at $17 million returned to the same level as last year, up substantially from the last couple of quarters. (technical difficulty) development program at $800,000 was way down from a year ago.

Sales to Airbus came in at about the same as last year. Our commercial aftermarket at $22 million was down only 2% in the quarter. The big change in our (technical difficulty) market though is in business jets.

Revenues of $6 million in the quarter were a third (technical difficulty) last year. The majority of our sales in this category were in programs with Gulfstream. We had sales of less than $1 million to Bombardier on the Challenger 300 and no sales to Hawker Beechcraft.

In the last couple of quarters, we've described a new revenue category which we call Navigational Aids. This is a combination of the TACAN product line that we acquired from Raytheon in 1998 and the recent world acquisition of Fernau Avionics.

Sales in the quarter, $13 million. The year ago, we didn't own Fernau and our TACAN business was only $2 million. Compared to the most recent quarter when we did own Fernau, sales were still up $2 million or about 16%. Since we acquired that company, we have had some significant wins in systems in India and Korea and we won a follow-on contract with the US Navy.

Aircraft '09, the total year. Total aircraft sales for the year (technical difficulty) were within 1% of last year's level in spite of a 21% decline in the commercial business. (technical difficulty) sales for $17 million were up (technical difficulty)

The big increases were the F-18, V-22, Blackhawk and the Indian Light Combat Aircraft. Over half of the sales increase though was in the military aftermarket. It came in at $135 million, up 11%, $13 million up from a year ago.

There weren't many bright spots in the commercial aircraft product line. Sales to Boeing in the 7 series OEM business, down 31%, primarily the impact of the strike. Revenues on the 787 were down $7 million. Our business jet product line for the year was down $24 million. And in this category, sales were down in every program.

The one result in commercial that was better than expected was in the aftermarket. Sales of $82 million for the year were down only 8%. Early in the year, you may remember we were predicting a decline (technical difficulty) 15%. The new Navigational Aids product line finished the year at just under $33 million, about $1 million more than our forecast.

2010 aircraft. We are projected (technical difficulty) 2010 at 736, an 11% increase over '09 and the increase comes about of course because we are having $93 million of revenue from the GE acquisition and we have Fernau for the entire year which will add about $22 million in sales.

Were it not for the GE acquisition, our military aircraft sales would have been down about $34 million. Sales will be up on the V-22, the Blackhawk, the F-15 and the Indian LCA and in the military aftermarket. But on the other hand, revenue on the F-35 program, which was almost $100 million in '09, will be down to $57 million in 2010. It's a very large cost plus development program on the primary flight controls which includes the revenue of our partner companies is nearing completion.

The [Elrip] production program has begun to kick in. It will be $20 million in 2010. Within the production program, you will remember that our partner's sales don't go through us, they go direct to Lockheed. So it will be a few years before the production program generates $100 million a year in revenue just for Moog, but it will happen.

With the addition of over $44 million in military aircraft revenue from the GE acquisition, our military aircraft forecast for 2010 is 427, an increase of about $11 million or 3%. The commercial side of our aircraft business, a similar story.

Before we add in the sales from the GE acquisition, our 2010 forecast would've been about $8 million lower than '09 and the reduction primarily in business jets. In '09 we had revenue of just under $39 million (technical difficulty) down from $63 million in '08 and we are anticipating a further reduction in 2010 (technical difficulty) $28 million. So down from 63 to 28.

We are anticipating in 2010 a small reduction in sales (technical difficulty) programs. The G-250 development contract is nearing completion. Sales in the Challenger 300 will be down (technical difficulty) forecasting hardly any sales to Hawker Beechcraft.

Our forecast for Boeing commercial is up 43 million to $54 million. We expect production programs to be up and the 787 revenues to be down from $11 million to $9 million. But that is before we include the GE acquisition.

Airbus (technical difficulty) year will be about the same as '09 and we are forecasting the aftermarket in 2010 at about the same level as '09. When we add in $52 million in forecast (technical difficulty) GE acquisition, we get to a commercial aircraft total for 2010, $259 million, a 21% increase over 2009.

Let me talk for a minute about the GE acquisition. If you have been keeping track, our acquisition of the GE Wolverhampton facility is forecasted to provide $97 million in sales in 2010. But we need to tell you that we formerly had $4 million in our forecast of sales to GE (technical difficulty) are now eliminated as intercompany.

So the net addition to our Company is $93 million. Of the $97 million in revenue for the Wolverhampton facility, we forecasted $73 million in OEM business and $24 million in the aftermarket, 80% of the aftermarket is commercial. Military OEM revenue from this outfit will come in the -- form the in-board flap around actuators and the gearbox assembly on the European fighter aircraft, the rudder actuator on the V-22.

Incidentally the rudder is the is the only flight control actuator on the V-22 that our Company wasn't providing. So now we have them all.

Wolverhampton also has a very interesting job on the Joint Strike Fighter. (technical difficulty) actuation mechanism to Rolls-Royce for a system that swivels the main engine on the [stovel] version of the aircraft, a very complex system that incidentally uses 3500 PSI aircraft fuel as hydraulic fluid.

In total, the forecast for our military aircraft sales totals $44 million for Wolverhampton. On the commercial side, this operation supplies components for the high-lift system on A-380 and the A-330 as well as a power drive unit that mates with the Moog high-lift system on the 777.

In addition, the Company has a primary contract (technical difficulty) for the whole high-lift system on 87. We at Moog were a teammate on this job, providing 40% of the system to GE. (technical difficulty) the sales of the Aircraft segment that now get eliminated because of their intercompany. Our forecast for total commercial sales from this operation is $52 million.

If you study our balance sheet, you may notice that we have added about $30 million in contract loss reserves in the new balance sheet and they've all to do with this acquisition. As you may know, there is an opportunity when making an acquisition like this to set up loss reserves on the opening balance sheet (technical difficulty)

The loss reserves (technical difficulty) the cost level that had been being achieved in the Company and the presumption is that those cost levels on those programs (technical difficulty) continue in the same fashion over the orders on the books. If it turns out that that is too conservative a projection, then the benefit, the reduced costs simply reduce the contract loss reserve balance on the balance sheet and do not affect the P&L.

If on the (technical difficulty) the improvements in the cost picture come as a result of action taken by the Company post-acquisition, then there is the possibility that those cost reductions would influence the P&L. In total, we believe that by combining the capabilities of our flight control actuation facilities and particularly our high-lift expertise in Torrance, together with the newly acquired talent in Wolverhampton, we've built an even stronger supplier for aircraft flight control.

Lastly, in Navigational Aids, the new product line, we expect it to grow from $33 million in '09 to just over $50 million in 2010. So when we take them all together, our aircraft forecast for 2010, $736 million, an 11% increase over 2009.

Margins. Aircraft margins in the quarter before restructuring were 8%. This achieved after taking a $4.4 million inventory write-down as I mentioned on certain business (technical difficulty)

The Aircraft group also encouraged $2.8 million restructuring expense in the quarter which took the actual margins for the quarter down to 6.4. These same two charges impacted the (technical difficulty) Aircraft margins after restructuring for the year came in at 7.9.

For 2010 we are anticipating taking some additional restructuring expenses. There are activities already planned and we are currently forecasting aircraft margins for 2010 at 8.3%. I would point out though that if you exclude restructuring, 2010 Aircraft margins before R&D expense would be close to 17%. So when our R&D comes back down to a more normal level of 4 or 5% of sales, Aircraft margins should be back to the double-digit performance that we experienced some years ago.

Space and Defense. Q4 '09, the second-best quarter in (technical difficulty) sales $70 million, up 12%. Of the $8 million increase (technical difficulty) revenue from a recent acquisition, Videoalarm. Sales in the quarter [are what I've been called] the legacy business in which I include satellite controls, launch vehicles, strategic and tactical missiles and missile defense. Sales in the legacy business were up 25% to $36 million; the strength primarily in satellite controls which were up 20%, the result of increased activity in commercial satellite.

Growing sales on the turrets launch vehicle drove a 27% increase in launch vehicle revenue, so over $4 million. The tactical missile business was up 70% to $10 million in the quarter, reflecting increased deliveries on Hellfire and TOW. The strategic missile and missile defense product lines taken altogether were about even.

Our Defense Controls product line has been greatly influenced quarter to quarter by sales of the Driver Vision Enhancer. As you may recall, our QuickSet operation sold thousands of these systems in '08 for use on the MRAP vehicle. In the last quarter of '08, sales on that product alone were almost $5 million. In this quarter, they were less than $100,000.

Our Defense Controls business other than Driver Vision (technical difficulty) was consistent, just under $12 million. NASA. The NASA programs in the quarter at $6 million were down 11% from last year. The ebbs and flows in these programs have all to do with the timing of contract awards for the Constellation program.

Our vibration controls business at CSA, the acquisition of CSA, just under $4 million; about the same as last year. Homeland security (technical difficulty) doubled last year because of the added revenue of Videoalarm.

Naval applications in the quarter, $4 million (technical difficulty) last year's revenues; the sales growth coming as a result of the timing of orders on Virginia class submarines. We did in this recent quarter $3 million on the Virginia class submarine program alone.

Space and Defense '09 for the year, sales of $275 million, up 8%. The Videoalarm acquisition provided about half of that sales growth as well. It was a very good year for satellite controls, sales $61 million, up 12%.

Sales on turrets added to the work on Atlas and (inaudible) and produced a big increase in launch vehicles; sales for the year, $14 million. Strategic missiles and missile defense just over $20 million, up a couple of million from last year and the tactical missile business driven by Hellfire and TOW grew 18% to $31 million.

I mentioned a minute ago that the Driver Vision Enhancer program has a big influence on the Defense Controls numbers. In '08 we did $33 million on that product compared to $16 million in '09.

Other than the Defense Controls -- other than that, the Defense Controls business was up about $7 million, total of $56 million, growth coming in Europe particularly FLW-100 and 200. These are remote weapon systems for (inaudible)

Our NASA work, $18 million for the year was actually down; once again, all a matter of contract awards. In '08 we did more work on the (technical difficulty) this year we were expecting a number of new awards on the Orion crew vehicle and those awards have been delayed.

Our vibration controls business, up nicely to just under $17 million, up $10 million since this year we owned the CSA company for a whole year. Homeland security, $23 million. Last but not least, naval applications at $11 million were actually up 60% from last year.

2010. In Space and Defense, we're forecasting our legacy product line at $137 million, up $11 million; increase driven by tactical missiles. We are projecting $44 million in that category versus $31 million in 2009.

We are anticipating satellite controls product line will moderate to $54 million. Missiles and missile defense in total will be down $15 million. We are finishing the refurbishment of Minutemen which was a nice job in '09. The launch vehicle business driven by the turrets program on the other hand will be up over $23 million.

Defense Controls once again influenced by Driver Vision Enhancer, we're currently forecasting $10 million (technical difficulty) 2010, down from 16 in '09. We believe that we're very well positioned on the family of systems and the M-ATV but the timing (technical difficulty) is still not clear.

The rest of our Defense Controls product line is remarkably stable (technical difficulty) $55 million. We are still forecasting increased workload on the Constellation program. We are projecting $35 million in 2010 on NASA programs, up from $18 million in '09.

This forecast presumes that the Constellation program continues to move ahead as planned and that Aries-1 in particular is not derailed by a report of the Augustine Commission. As you know (technical difficulty) launch of Aries-1 which may make it hard for the critics to predict that that launch vehicle just won't work.

We are looking for an increase in vibration controls to a total of $21 million. We expect a big increase in homeland security to $37 million. This is based on the premise that the security (technical difficulty) market will come back to life somewhat in 2010.

In naval applications, we are looking for a 26% increase to a total of $14 million. If I step back from this forecast and wonder about its chance of success, I would say that the threats and opportunities are somewhat balanced.

The (technical difficulty) programs could certainly be delayed based on the new administration's (technical difficulty) or lack of willingness to fund NASA at the level required to keep the program going. On the other hand, it's possible that we are too (technical difficulty) in our forecast for both satellite controls and Driver Vision Enhancers.

Margins. Space and Defense is the one segment in our Company that was largely unaffected by the global recession. Some years ago, this segment had its own recession, you may remember, when the commercial satellite business went to parade rest at the same time that the demand for tactical missiles had waned.

But this year is the year to be in the space and defense business. In addition to a solid increase in sales in both the quarter and the year, margins have been just great. Margins in the quarter of 13.6% were close to an all-time high and brought margins for the year to 14.6% which is practically stratospheric for this part of our business.

Looking forward, we are anticipating a larger percentage of cost plus development work. As you know, cost plus is relatively risk free but generally single-digit margins and therefore we're projecting 2010 operating margins at 11.3%.

Industrial (technical difficulty) 90 days ago, we were protecting our Industrial segment (technical difficulty) at $133 million. The results came in $5 million better. We'd forecasted $48 million for our new acquisitions in wind energy and they produced 49.

Comparing sales by product line in fourth-quarter '09 with the previous year is simply a painful reminder of how good things were before there was a recession. Setting aside for the moment the wind energy revenues from our new acquisition, sales in the quarter in our Industrial segment would have been $88 million, down 35% from a year ago.

Sales in the quarter of plastic controls were down 44%, metal forming down 56%, steel [mold] equipment down 45%, motion simulators down 28%, test equipment down 35%. It will probably be a one time before these product lines generate revenue comparable to fiscal '08. But there's certainly a lot of room for improvement over the levels of the last quarter and we certainly have the capacity to handle that improvement.

Perhaps a more heartening exercise is the comparison of Q4 Industrial with the previous quarter. Once again, setting aside wind energy, sales of $88 million were actually up 5% from Quarter 3. And the big increases were in plastics, machinery and motion (technical difficulty).

Industrial for the whole year, the Industrial segment total for '09 of 455 includes $74 million of revenue from new acquisitions. When we look at the product lines that we had last year, sales of $380 million were down 29% for the year. It was a very challenging year.

Plastic sales down 51%, metal forming down 48%, motion simulators down 28%, steel mill equipment down 28% and so it goes. The good news is that we have completed acquisitions in '09 which will paint a completely different picture in 2010.

So what about 2010? Our industrial forecast for 2010 could be looked at in two parts. We're forecasting in the wind energy business $220 million. And incidentally, this is latebreaking news.

Up until now, we had been planning on $235 million. We have very recently experienced some delays in some projects in Europe. We think the issue is financing and delays in financing have caused some projects to miss the construction season and therefore pushed revenues out a quarter or two.

We forecasted the rest of our major product lines at a level that's roughly a continuation of what has been achieved in the last six months and the result is a forecast for these (technical difficulty) of $353 million. I added to the $220 million, gets you to a total of $573 million, an increase of 26% over what we achieved in '09.

Margins. Industrial operating profit in the quarter before restructuring was (technical difficulty) or 7% and that is what we anticipate. We took a restructuring charge in the quarter of $2 million, took margins down to 5.5% for the quarter.

For the year, Industrial segment had operating profit before restructuring of $40.5 million. That included $6.7 million of investment income from the LTi investment. We booked $9.7 million in restructuring charges in Industrial and that took operating margins for the year down to 6.8%.

For 2010, we're forecasting an improvement in operating profit to $45 million or 7.9% of sales before an anticipated restructuring charge of $2.5 million that will take margins for the year to 7.4%.

Components Group. Components Group had a quarter that would be considered respectable by most objective standards. Sales about the same as last year, down only 1%. Operating profit in double digits, 12.3%. However this was not the quarter we had expected and reasons for that will become clear in a couple of minutes.

As I mentioned, sales in the quarter were down just a little from last year. They were up substantially in Aircraft and in Space and Defense business but down in Marine, Medical and Industrial.

More particularly, sales in aircraft products up $4 million to $33 million. The biggest part of the increase was in the aftermarket which increased by $1.5 million to $7 million. We also saw an increase in Raytheon's multi-spectral targeting system. Sales were $2 million in the quarter. Sold a lot of de-icing components for the V-22 and the Blackhawk for a total of $4 million, double last year's level.

Sales in the Guardian program at Northrop which we've talked a lot about in previous quarters at $4 million were actually down from a year ago and down from the $7 million level in the most recent quarter. During the quarter, as part of a cost reduction initiative, we had introduced a change in plating material for the commutators in that system.

Subsequent testing revealed the process problem with the new material. Production and the program went on hold for about half a quarter. We think the problem's been solved and the missed shipments will be picked up in 2010.

The other negative in the quarter was in sales of avionics for commercial aircraft. We sold a variety of instrumentation components to Rockwell Collins, to Honeywell, to Goodrich (technical difficulty). Sales of this product were down 22% to $6 million.

Space and Defense part of the Components business was pretty strong in the quarter. The big programs are the Commander's Viewing System for Bradley and Abrams (technical difficulty) Stryker.

The big growth in the quarter was an increase on the (technical difficulty) of $1 million to over $4 million. Also in the quarter, we delivered almost $3 million worth of fiber optics to the Egyptian Army and we have begun production on the CROWS Remote Weapon System sold to Kongsberg.

Sales in Marine products at $9 million were down 37% in the quarter, the reduction predominantly in components used on remote operating vehicles which is a term used to describe undersea robots. This is equipment used in offshore oil drilling.

We've seen a decline in our incoming oil rate as oil prices have been coming down and we have been expecting the reduction in shipments and it has occurred. We think the current level is not likely to improve unless there's a run-up in oil prices.

Sales of medical components, $13 million in the quarter, down 13%, decline mostly to do with sales in motors to Respironics. Sales in the quarter at Respironics (technical difficulty) 14% from a year ago, reflecting a reduction (technical difficulty) sales price and in quantity.

The reduced quantity seemed to be related to a model change that is gaining share at a pace slower than anticipated. Sales of slip rings used in closed-circuit TV systems are down from a year ago but they seem to be recovering, looking at the last quarter.

The wind turbine built by (technical difficulty) China represents the growth market for us in the Industrial business and industrial automation products sales seem to be holding steady over the last two quarters. So for the year, Components Group sales for the year of 346, up 1% (technical difficulty) year ago.

For the year, the sales mix shift was very much like the last (technical difficulty) sales up in Aircraft and Space and Defense and down in Marine, Medical and Industrial. For the year, Aircraft products were $120 million, up 16%. The increase in the Guardian system and the multi-spectral targeting system. The growth in those programs (technical difficulty) $4 million decline in components used in commercial avionics.

Space and Defense components up 21% in the year to $80 million. Bradley and Abrams continue to be big platforms (technical difficulty) business is pretty (technical difficulty) quarter and we have this nice new program on the CROWS Remote Weapon System.

Marine products began the year at a sales level which was about the same as '08 but over the year, we've seen the decline that we anticipated. Sales in Marine products (technical difficulty) we think to activity in offshore oil drilling. (technical difficulty) prices come down, so does our incoming order rate. Sales for the year were $42 million, down only 8%. But as I mentioned a minute ago, sales in the fourth quarter were actually down 37%.

Sales in the medical market, just over $50 million, down 12% from a year ago. CAT scan business is about the same level as last year but a I mentioned, we're selling to Respironics lower-cost motors at about the same volume as the year before.

Industrial product sales in the Components Group, $45 million, down 27% reflecting weakness in (technical difficulty) TV, the market which we think is recovering, and then industrial automation. I mentioned a minute ago, we think we found the bottom in industrial automation.

How about 2010? In 2010 we are looking for organic growth in the Components Group of $19 million, about 6 (technical difficulty). We are anticipating the Guardian program will resume at close to $7 million a quarter and have $7 million in sales for (technical difficulty).

Forecasting a $3 million increase in the Sniper Advanced Targeting Pods (technical difficulty) and we have a very strong backlog in slip rings used in de-icing of the Blackhawk helicopters and a strong backlog, providing some growth in avionics (technical difficulty) helicopter.

We are forecasting Space and Defense sales in components at $77 million, slightly lower than what we achieved in 2009. Our forecast for Marine products (technical difficulty) million is down from 42 (technical difficulty) this forecast represents the current level of activity on remote operating vehicles. We've also forecasted about half (technical difficulty) the large slip rings used in FPSOs, floating production storage and offloading vessels.

$50 million forecast for medical products, simply a continuation of the current level. Similarly, our industrial forecast continues the current levels in closed-circuit TV and automation. We are (technical difficulty) substantial growth in the wind energy business though because of the slip ring order from Synovel. So that would take our Industrial forecast up $10 million to $55 million

Margins. Components Group margins in the quarter were an uncharacteristic 12.3%, down from 17.9% a year ago and 16.3% in the most recent quarter. The major influence was a rather dramatic change in product mix.

Compared to a year ago, sales of Marine and (technical difficulty) products which are nicely profitable, were down. Sales volume was made up by less than profitable military electric motors and fiber optic modems.

Performance in the fourth quarter brought margins for the year to 16.1% from the remarkable 17.8% of '08. 2009 actually compared favorably to a more normal 15.7% margin that we experienced in '07. Since we are forecasting a continued reduction in Marine sales and only a modest recovery in Industrial products, we are projecting margins at 15.3%, once again more in line with what we achieved in '07.

Medical Device (technical difficulty) Q4 '09. The segment did achieve the sales recovery in Q4 that we predicted. Sales came in at $31 million, a little better than our most recent forecast. And although we experienced some operating loss in the quarter of $763,000, that is a considerably smaller loss than we forecast and a lot better than the third quarter.

If we were to compare fourth-quarter sales with last year, we need to (technical difficulty) $31 million this year include $7 million of revenue from recent acquisitions. Sales in the product line we had in place a year ago were actually down $2 million.

Pump sales for the quarter of $7 million were down 29%. Our field sales people will report that alternative care clinics, major customers for our pump products are simply holding off on new purchases. We hope that over the year, we could increase our sales penetration in hospitals. But capital budget in hospitals are in many cases funded by endowment income and they're currently severely restricted.

On the other hand, sales of admin sets at $11 million were up 11%, reflecting the fact there are more pumps in operation. Sales of sensors and hand pieces at $3 million are running about half of last year's rate.

We sell air bubble detection sensors to many of our infusion pump competitors and the reduced volume indicates that sales of infusion pumps are down across the industry. It's not just us.

In addition, the customers that buy our hand pieces for use in cataract surgery seem still to be working down inventory. Sales of service, software and other accessories at $3 million were up substantially from a year ago; more equipment in the field, older equipment not being replaced, more services required.

Recent acquisitions, Ethox and Aitex, generated sales of $7 million in the quarter, down just a little bit from the most recent quarter. For the year, 90 days ago we had predicted a result for the year of $110 million and an operating loss of $8.1 million.

The actual results are slightly better. Sales $111 million, up 7% from the year previous. Sales increase however is all in acquisitions. On a comparable basis, the business we owned last year generated sales of $90 million and was down 13%.

2010. Our forecast for 2010 is $129 million, a 16% increase over 2009. Part way through '09, we acquired Ethox and Aitex which over a period of nine months generated (technical difficulty) $21 million in sales. So our 2010 forecast for these operations at $29 million is only slightly more than the level of activity over the 12 month period.

Aside from those product lines, our forecast $100 million is up $10 million from 2009 and about half the increase is infusion pumps. We're forecasting pumps at $33 million, up 18%. Our forecast is not presuming a recovery in demand from alternative care facilities or hospitals. Rather it's projecting the effect of a broader product line, including a new large volume pump and broader worldwide distribution.

We're projecting revenues from admin sets at $42 million, a 9% increase from last year based on the larger number of units in the field. Forecast (technical difficulty) sensors and hand pieces from $12 million to $14 million. We think our hand pieces (technical difficulty) worked down their inventory.

Medical Devices margins. In the fourth quarter, Medical Devices segment reported an operating loss of $763,000, 2.5% of sales, and about one third of that loss was restructuring expense. For the year, that (technical difficulty) Devices operating loss to $7.4 million, a negative 6.7%.

In 2010 we are projecting a $13.4 million margin improvement to get us to a positive $6 million or 4.7%. The earnings improvement will come as a result of $18 million of increased volume, the avoidance of product recalls (technical difficulty) improved efficiency through the restructuring and an improved cost structure as our new production facility for disposables comes on line in the second half of the year.

So in summary, we are forecasting total sales for 2010 at $2.120 billion, an increase of (technical difficulty) 15% largely as a result of recent acquisitions. We're forecasting an 11% increase in Aircraft (technical difficulty) the GE acquisition more than offsets reduced sales on the F-35.

Space and Defense sales, a 16% increase. The drivers, our tactical missile business that is in backlog and a somewhat speculative increase in NASA. Wind energy acquisitions provide a 26% increase in the Industrial segment to 573.

The Components Group will be up a modest 6% based on Guardian, Sniper, Blackhawk and the CH-47. And finally, we are looking for a 16% increase in Medical Devices (technical difficulty) growth coming in new pump products, sales of disposables and increased revenue from recent acquisitions.

Our margin projections for 2010 we think are fairly conservative. We are projecting in 2010 restructuring expense of $5.7 million as opposed to the $15 million we spent in '09. We are anticipating a $31.8 million increase in pretax earnings should produce net earnings of $102.9 million, earnings per share of $2.25 million, up (technical difficulty) from '09. We think you should consider a range of plus or minus 10% around the 2.25. We have a forecast for EPS in the quarters, $0.47, $0.53, $0.59 and then $0.66.

It's been a tough year in many parts of our Company. The folks on the firing line have done a first call job meeting the challenge. Many parts of our Company have been resized and in some cases, they have been reshaped. We are now ready in 2010 to resume what we expect will be a consistent pattern of growth in sales, earnings and earnings per share. Now, I'll turn you over to John Scannell. Here's John.

Thanks, Bob. Good morning. The story this quarter is one of continuing free cash flow improvements as well as the sale of equity to fund our GE Flight Controls acquisition. It's a similar story for the year, improving cash flow and the completion of eight acquisitions. As usual, let me start with our cash flow.

Free cash flow this quarter was positive $16 million, about the same as in the third quarter. For the second half of fiscal '09, we (technical difficulty) close to 100%. For the full year, our free cash flow was $36 million, considerably (technical difficulty) forecast a couple of quarters back.

Net debt actually decreased slightly in the quarter by $3 million and that result of positive free cash flow plus $75 million of net proceeds from our equity offering offset by the $90 million we paid for the GE Flight Controls business.

Capital expenditures in the quarter were (technical difficulty) while depreciation and amortization was $21 million. For the year, capital expenditures came in at $82 million, about $8 million under our most recent forecast, where depreciation and amortization was $6 million. Interest payments in the quarter totaled $10 million and our cash tax payments were $5 million. We contributed $6 million to our US defined benefit pension fund.

Our equity-based compensation in the quarter (technical difficulty) loss reserves excluding the GE acquisition increased by only $400,000 from the prior quarter. Taxes. The tax rate in the quarter was a pretty normal 28.7%.

For the year, the tax rate was a relatively low 23.1%. This lower year annual rate was driven by several one-time effects in fiscal '09 which we described in the previous quarters, including our declared dividend from Japan in the first quarter and our LTi equity earnings through May of 2009. In addition, the lower rate was the result of a favorable mix of earnings in lower tax jurisdictions.

Capitalization. On October 2, we sold 2.675 million shares at $29.50 per share to yield net proceeds of $75 million. We used the proceeds to fund the GE Flight Controls acquisition. Our leverage ratio, defined as net debt divided by adjusted EBITDA, increased this quarter to 2.94, up from 2.78 at the end of Q3, in line with our forecast.

We anticipate that our ratio will stay around three times for a quarter or two and then start to come down as earnings improve. At the end of the quarter, we still had over $400 million of available funds between our unused credit line and our cash balances.

Our senior debt facility does not mature until 2013 while our subordinated notes mature in 2015 and 2018. So we are not facing any short-term maturities. On October (technical difficulty) our net debt to total cap stood at 41.4%.

Forecast for fiscal '10. We believe that we continue to see improvements in our cash generation in fiscal '10. We're anticipating capital expenditures of $75 million while depreciation and amortization would be $16 million higher than fiscal '09 at $93 million. We're forecasting $60 million in free cash flow for the year, a 58% conversion ratio.

Pension expense in fiscal '10 will be $22 million, up from $15 million in '09. For our US (technical difficulty) decreased by about 7% this year, however, we use a five-year smoothing method on market fluctuations, so the impact (technical difficulty) is relatively small. On the other hand, the discount rate used to measure the projected benefit [obligation] decreased from 7.25% at the end of fiscal (technical difficulty) to 6% at the end of fiscal '09.

On the measurement [base], the fair value of the US (technical difficulty) assets was $313 million, however, our projected benefit obligation was $121 million. So in contrast to last year, where we were overfunded, this year we were actually underfunded on our management [base].

We contributed a total of $24 million to our plan in '09 and we are planning to continue with this level of contribution through fiscal 2010. Interest expense for fiscal 2010 is budgeted at $39 million and stock compensation expense is forecast to be $4 million. For fiscal 2010 we're projecting a tax rate of 27.7%. And finally to reiterate what Bob said, we're predicting earnings per share at $2.25 plus or minus $0.10 per share. Now let me pass it back to Bob to lead the Q&A.

Ken?

(Operator Instructions) Cai von Rumohr, Cowen & Co.

Thank you very much and good performance. Bob, could you explain -- the $4.4 million budget contract loss reserves, what were those for and kind of how are the outlook on those programs going forward?

The 4.4 million was actually an inventory write-down. It was not -- this is not loss reserves. And I don't want to be too specific about it. I would simply say that we did -- like everybody else have formulas that establish normal inventory reserves. But then in special circumstances, we will look at particular programs and worry about the salability, realizable value of the inventory that we have on hand.

And I would simply say that in the business jet product line in that category, we have over the last couple or three years been prepared in facilities and inventory to support deliveries at production rates that are not currently being achieved and we don't -- we're not optimistic that they're going to be achieved. So we believe that the prudent thing to do was to take that inventory write-down to get our inventory balances to levels (technical difficulty) the value can actually be realized.

So this was essentially a demand, not an execution related issue. So there were no real execution related worries in the quarter?

Nope, that's right.

Then could you to give us some color on R&D for the year, how much it was on aircraft and the 787 and where you expect it for the year 2010?

The R&D for the year came in an amazingly right on $100 million. Aircraft was just under 63 and we are forecasting a continuation at about that level. Aircraft we expect will come down slightly but not much. It will still be around $60 million, a slight increase in R&D in our Industrial businesses.

So you'll still be at about 100 (technical difficulty)

That's our current plan.

And then a quick one for John. You know your depreciation and amortization is up a lot. Could you break out what the intangibles numbers was for '09 and where you see it going for 2010 and what is impacting it?

So the amortization is a combination of the first year accounting adjustments and then the amortization of the intangibles for the acquisitions. So you have kind of what I would call the short-term 12 to 18 months inventory stepup backlog, stuff like that. And then you've got the intangibles which typically have kind of an eight to 10 year lifetime.

If we look at '09, the short-term -- the kind of the opening balance sheet stuff, that was about $11 million. That goes to about $15 million next year. And the total for amortization for next year is -- I think it's 30.1 -- just over $30 million. (technical difficulty) $21 million I think it is this year.

Okay, great. And then I assume that (inaudible) that should start to burn off as we go into (technical difficulty)

So be careful again (technical difficulty) half of it is what I call the first 12 to 18 months and then the other half of it is the ongoing amortization of a 10-year period (technical difficulty) so that $15 million includes obviously the (inaudible) GE business but it also includes the other acquisitions that we have done during the course of the year as they slowly start to burn down.

Okay, and then could you give us just -- you walked through kind of all the numbers. But just what are you seeing in terms of demand if you think about October? You mentioned the flip in the wind energy business. Give us some color. Are there any areas that are getting better and areas like wind where maybe things look a little bit weaker?

If I compare the fourth quarter -- I'll of focus on the Industrial business. If I look at the fourth quarter compared to the third quarter, there were a couple of product lines that actually showed improvement.

Plastics, controls, simulators. And this kind of gets to the -- does one swallow a summer make. So what we have -- as I mentioned, the forecast provided for 2010 is using the average of the last two quarters and projecting that going forward. I just don't know that the upticks that we have seen in the fourth quarter really represent a trend yet.

We have sales objectives, I won't call it a forecast. We have sales objective in our Industrial business which we show improvement over what I have just described. But you just don't know whether it's going to be realizable.

I think we need more time and some more (technical difficulty). On the other hand if you look at the Aircraft business, I don't have to tell you, in the business jet part of that business; man oh man, it's slow walking and soft singing except for Gulfstream. So we think it's prudent to recognize that and hence the inventory write-down.

Thank you very much.

Eric Hugel, Stephens.

Can you talk about at first I guess in terms of your commercial aftermarket sort of trends in the quarter, can you sort of draw any conclusions as to sort of where demand is sort of trending sort of have we hit the bottom yet? Have you seen any indications that things are starting to stabilize or get better?

Well, Eric, first I would tell you that our commercial aftermarket revenues tend to bounce around a little bit. So I am reluctant to draw a trend but if you insist, I can tell you here's how the numbers go. If you start in Q1 of '09, $21 million in Q1, 19 in Q2, 20 in Q3, 22 in Q4.

So one could say well, that looks like it's gotten better. But I wouldn't count on it yet. Our forecast for 2010 is the same as -- very much -- very close to the same as what we achieved in 2009 except that there is an addition for the aftermarket portion of the (technical difficulty) acquisition revenues.

Okay. With regards to the 2010 contemplated restructuring expenses, can you sort of break out for us what segments are going to see most of those dollars and maybe sort of somewhat in terms of timing as to when we think they're going to pull through P&L, first half or something like that?

It's principally industrial and aircraft and I think the timing will be in the first couple of quarters. And this is for the most part simply the timing of the expense recognition of plans that are already in place.

So it's not that we're going to make changes that aren't already planned or known about in the Company. It's just that we are -- some of the restructuring rearrangements that we're making take time to accomplish. And so the people, although they are advised that their employment will come to an end, it's not going to end this week. It's going to end six months from now.

Right, you mentioned in terms of Aircraft R&D, you said ex your guidance for 2010, I guess ex R&D would've been around 17%. So when R&D comes down [going to see] 14% margins or whatever, when would we expect that to happen? I mean you still have some 787, A350s sort of ramping (technical difficulty) right? What kind of timeframe should we be thinking about there?

Well I think it will ease down in 2012 and I would be thinking in the years subsequent to that, we will be headed in the direction that I am applying. 2010-2011, I think we'll still be heavy on the A350.

Okay and last, with regards to Boeing I guess OEM expectations for 2010, what kind of build rate expectations do you have built in?

Let me put it this way. We are content to have you guys focus on your assessment of what the Boeing production rates are going to be. We are building [on] rates that satisfy Boeing at the moment and we have our own opinion as to what they're going to be in the years to come and I don't want -- I'm unwilling to predict Boeing production rates that are different than what Boeing is predicting.

JB Groh, D.A. Davidson.

Maybe I will attack Eric's question in a different way. Would you say that you are shipping at a rate that is consistent with the build rate schedule that you put out there or are you above or below it?

We're shipping at the current rate currently. I think the (technical difficulty) all has to do with what's going to happen next year or the year after that.

Right, okay and then on the 787, I looked at your number there. I thought maybe you would probably see some increase in activity second half of the year. Is that not the case or what -- can you give us a little color as to what is going on there?

Second half of (multiple speakers)

2010, your fiscal 2010.

Well our activity level on that program -- the development program is pretty much over and we were -- how can I put this? We were pretty close to on schedule and so to some degree, what we're doing in 2010 is sort of dog paddling, waiting for Boeing to catch up. And therefore the production activity on the program is fairly modest.

Got you. And then just one more. Could you maybe tell us how much of that increase in the backlog is from acquisition and how much of that is just carving that between acquisition and organic?

We're shuffling to come up with (technical difficulty) total acquisition. I don't have that -- about 100 -- somewhere between 105 to $110 million is the increase from a year ago (multiple speakers) 270. The increase is a little over 200 (multiple speakers) 230 or so.

Half?

Half is acquisitions.

Great, thanks for the color.

We actually do have organic growth in some parts of our business.

Michael Ciarmoli, Boenning & Scattergood.

Thanks for taking my questions. Just I guess, Bob, on the your exposure to some of the wheeled vehicles in the military, Bradley, Abrams; I may have missed what your assumptions were for 2010 and what you're baking in. It looks like some of those funding buckets might be at jeopardy, especially Bradley upgrades. And just wanted to get your thoughts on that outlook.

You have perhaps more insight than we do. We are involved in those upgrade programs and we have forecasted -- the plan we have in place is the plans on those programs being completed. In total (technical difficulty) the total of Defense Controls is -- that part -- on the military vehicle part of the Components Group -- I think that's what you're talking about.

That part of our business in 2009 was a little over $50 million -- actually $66 million. And we have it forecasted to decline about $4 million in spite of -- I know there is a $5 million pickup in the CROWS program. So I think we are projecting that the military vehicles part of that business would be going from (technical difficulty) million to about $56 million. So perhaps we have baked in some of what you're talking about. We will have to look into that more carefully and get back to you.

Okay, yes. It was specifically the Bradleys (technical difficulty) emergency to continue those upgrades. You're seeing [L3s] lower their expectations for the propulsion systems or transmission systems. Okay. And I think everything else (technical difficulty) guys provided a lot of data that's really helpful. Thanks a lot.

Eric Hugel, Stephens.

The $60 million free cash flow expectation for 2010, is that reliant on any sort of payment from Boeing on 787?

No. Have you heard that they started to pay?

Well that's what I'm saying, that's what I'm trying to figure out, if we are reliant on sort of a big chunk of payment there.

The people that we deal with at Boeing think that they don't have any money.

Last quarter, there were some software problems I believe in your pumps and some medical -- can you give us an update as to sort of how the fix is progressing there?

I think it's done. I think that's all zero. There's a software glitch on enteral pumps primarily in Europe and the fix was relatively straightforward. It was just costly because it involved returning the pumps to get it all done.

Okay and lastly, maybe you can comment a little on the M&A pipeline and maybe also -- maybe some background. I guess when we asked you this question last quarter, you sort of said you had a pretty good pipeline but you weren't expecting anything sort of in the near term to hit and hence GE comes down the road. Maybe you can sort of give us an update on sort of what maybe happened with GE, where did that come from?

Yes, well that's -- you kind of your finger on the difficulty with that question and answer. I actually was until very close to the end, quite pessimistic that we would ever complete the GE acquisition.

We had been in discussions for some long time and we are quite far apart in terms of valuation. And let's see, I'll put it this way. We are not -- we of course aren't conversant with the internal what goes on at inside GE. But apparently something happened inside GE and their stance changed rather dramatically.

But said more simply, I would have said four or five weeks before we closed the deal that it was very unlikely that we would ever complete. And if that's when the question was asked, I would've said I don't think anything is very likely to happen.

To your question about the pipeline, yes, there continues to be pipeline deals to look at, opportunities. I continue to be surprised at multiples that sellers are expecting and in some cases getting.

We looked at a company the last couple of weeks, put an offer in and we're out of the race because we weren't even in the ballpark. And this just happens to be in the aerospace business. It's only one example but an example where multiples are still pretty high.

Should we expect that going forward given -- you're going to be generating decent cash flow this year. But given you're sort of in the low 40s right now, you issued equity to offset the higher debt to cap when you did GE. Did the acquisitions become tougher for you because to do a decent sized acquisition, you're probably going to have to issue equity?

One could say a little bit tougher. On the other hand, most of the acquisitions we're looking at are actually not that big and wouldn't make that big a difference. GE's -- there aren't many around that are in that size category.

So we don't feel particularly constrained. I guess I would put it this way. As we explained when we made the issue, when we issued the equity, our rationale for issuing the equity was that in view of our leverage covenants and all that sort of thing, we didn't want to run up to the point where we would be frozen out. So we don't think we're frozen out.

Where is your sort of level -- what level of debt to cap or sort of EBITDA turns -- when do you sort of start to get uncomfortable?

Well in '09, in the early part of '09, there seemed to be, on your side of the aisle there seemed to be an unusual focus on bank covenants (technical difficulty) in our case it actually came down to coverage ratios. We have had a 3.5 times limit. We went to the banks and got it changed to 4 so folks like you could quit worrying about it.

We're under 3. We wouldn't be terribly comfortable -- terribly uncomfortable being over 3 in the low numbers but we wouldn't get close to 4. We think we have a limit that we're not going to get close to.

Cai von Rumohr, Cowen & Co.

Bob, you mentioned that in terms of the restructuring that in some cases, you have to give folks six months notice.

Well you don't have to. But some of the plans that we made actually involve moving work from one place to another and it may take a few months to accomplish that.

I guess well the question is, when do take the restructuring charge, does that include the cost of paying those people over those -- until they are laid off or is that only for the cost of when you actually lay them off and the severance and all of that?

You would think that was a simple question. The answer is, it depends. And it works like this. If you tell somebody you are going to be laid off six months from now and here is the severance that you will be paid, if you tell them that and you commit to the payment, you actually can book the expense today.

On the other hand, if the person leaves three months from now instead of six months from now, you are updated to make that payment. If you want the payment of severance to be an incentive to stay until the end of the period, you can book the expense right now. And so that is how it is, that some of the expense of plans we already have in place is not being booked. In this quarter, it will be booked in the quarter when the people actually depart.

And so of the 5.7, you said that's going to be in the first and second quarters. So there is some cost, some expense I should say, that is being (technical difficulty) the operations of folks who are sticking around I guess (multiple speakers) until you move stuff to the Philippines.

So essentially, the benefits of the restructuring in addition to having the expense hit in the first and second quarters, you kind of have the drag of those folks who are around but will be gone at some future time. And so as we look at the year, how should we think about kind of -- if you do the 2.25, how does that lay off approximately by quarters?

We have the quarters forecasted as follows and I think you know our forecast of quarters isn't perfect. But the way we have them laid it's first quarter $0.47, then $0.53, $0.59 and $0.66.

So essentially if they lay off like that, you are going to have a lot of momentum going into 2011.

Boy, I hope so. I love that idea.

In terms of the cash flow, you just had a pretty good quarter (technical difficulty) like the CapEx that you missed this year, you haven't shoveled it into next year. How does the cash flow, John, lay out essentially by quarters? Is it equal or --? Give us some color.

I'm reluctant to forecast cash flows by quarter because our history is that the quarters tend to be erratic. A lot of it is just you book an extra week of -- there was a big salary accrual because it came in this week of the quarter rather than the first week or next week. So the easiest thing is just to assume kind of a flat rate.

We've done about 15 or 16 each of the last two quarters. We're assuming that we're going to continue with that as we run through the year. Having said that, there could be ups and downs from one quarter to the next in that. And forecasting cash flows is a very, very difficult process.

Right but when you look at the year, it's not like all the CapEx is in the first quarter. There are no visible things today that would tell us they shouldn't all be somewhat positive, obviously with variations, but there's nothing on them.

No, there's no -- I mean again, there's puts and takes on it. If you take in a restructuring charge this year but folks go next year, you pay out the cash next year. So that's an example of something that would vary quarter to quarter. But a (inaudible) the earnings start to improve if you assume kind of a reasonably constant conversion ratio, then you should start to see better cash flows towards the back end of the year.

And so also the interest expense, is it fair to assume that it will be trending slightly downward as we go through the year?

Marginally high. It's not -- the cash flow won't have that much of an impact on the interest expense.

Very helpful; thanks so much, gentlemen.

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