Moog Inc (MOG.B) 2002 Q4 法說會逐字稿

Ladies and gentlemen thank you for your continued patience. Your conference is due to begin shortly, pending the completion of another conference call. Please continue to hold.

Ladies and gentlemen, thank you for standing by. Welcome to the Moog fourth quarter and year-end earnings conference call.

At this time all telephone lines are in a listen only mode. Later we will have an opportunity for questions and answers with instructions given at that time. If you should require assistance during the conference call please press zero, followed by star. As a reminder your conference call today is being recorded.

I would now like to turn the conference call over to your first speaker, . 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, on Form 10-Q for the quarter ended June 30th 2002, and in certain of our other public filings with the SEC.

And now here's Bob Brady, our Chairman and CEO, with our fourth quarter and year-end earnings.

Morning. Thanks for joining us.

This morning we're reporting results for the fourth quarter of '02, final results for the entire fiscal '02, and we'll also discuss recent trends in our business, and update our projection for fiscal '03.

The fourth quarter was a very strong quarter, earnings 10.3 million with 5.5 percent of 186 million in sales. Earnings in the quarter were 38 percent over last years-reported results. We do in the quarter have the benefit of the change. However if we add that goodwill to last years numbers, net earnings this year were still up 19 percent. This result is all the more remarkable because sales were almost the same as last year in the quarter.

On a per share basis, earnings for the quarter were 67 cents. The sizeable earnings increase on a relatively small sales change are the result of a number of factors, gross margins up, R&D increased only slightly, SG&A in the quarter was actually down from last year as was interest expense. So pre-tax earnings were up 32 percent from last year, and our tax rate was slightly lower. EBITDA for the quarter 27.8 million, up from 27.1 million a year ago.

Results for the whole of fiscal '02 were very much like those in the recent quarter. A big increase in net earnings, 35 percent on a very moderate sales increase.

Sales for the year of 719 million were up only two percent from last year. Once again part of the earnings increase was the result of the 1142 change but if we add goodwill back to last years numbers net earnings increased to 16 percent.

On a per share basis earnings for the year were two dollars and 50 cents. We look at the elements of the income statement. The earnings increased came about because of a substantial improvement in gross margins. Increased expenditure for RRND and SCNA were partly offset by lower interest expense.

Tax rate was lower than last year. The result 37.6 million in net earnings 5.2 percent of sales up from 4.6 percent of sales last year.

EBITDA for the year 105 million 14.6 percent of sales comparable of last years number of 106. Bob Banta will discuss cash flow and debt levels and some details about our pension situation in just a minute.

Our fiscal 02 began 19 days after 9/11. Given the impact of that event on our commercial aircraft business and the fact that we've been operating in a relatively weak industrial environment we're very happy with the results that we achieved in fiscal 02.

The strength of our military aircraft business and particularly the after market military aircraft and a very strong margin performance in aircraft, that I'll describe in a minute, have allowed us to slightly exceed targets we established two months before 9/11.

Let me now turn the performance of our segments I'll start with aircraft. Sales in the fourth quarter 97 million were up six percent from last year an increase of 5.4 million dollars.

This increase knows the net of a $13 million increase in military offset by an eight million-dollar decline in commercial. Military aircraft sales rose 29 percent to 58 million .

The major drivers were the new joint contract for six million and an after market increase of almost four million in the quarter.

On the other hand commercial aircraft sales declined to about 39 million. OEM deliveries to Boeing decreased by almost seven million alone and our commercial aircraft after market current running 89 percent of the level of last years fourth quarter declined by $1.6 million.

For the entire year aircraft sales of 359 million were up six percent compared to last year but as in the quarter a big swing in the mix.

Military aircraft sales were up 28 percent to $202 million. This is a $44 million sales increase over the year previous. 18 million of that increase was in military after market revenues.

Another 10 million in the start up of the F35 joint and then smaller increases on the F18, the F15, the black helicopter in the business.

Offsetting the $44 million increase in military aircraft was a $25 million decline in commercial aircraft revenues. Sales to Boeing commercial declined by 12 million from 72 to a little less then 60. Air bus sales down two million to about 11 million.

Our after market revenues were down almost seven million for the year to a total of over 50 million. Our sales for regional aircraft and business jets were down only slightly. All in all for the year our aircraft business came out pretty dam well we think.

The increase in military after market that we projected came through about as planned. OEM sales to bowling were down about as we forecasted after 9/11 in the decline of 12 percent in our commercial aircraft after market was less of a decline that we had feared.

The other very important aspect of our aircraft business is its margin performance. In the fourth quarter margins were close to the 21st end level of the previous quarter and for the year we came out at 18.2 percent which is under the circumstances spectacular.

The aircraft business then is our good news story. It's almost exactly 50 percent of our business. Overall sales and margins higher than we forecasted. On to the state's business.

Our very good fortunes in the aircraft business were off set somewhat both in the quarter and the year by disappointing performance in our space segment. Sales for the quarter 22.8 million down almost four million from the previous, from the similar quarter last year.

We're gone into the fourth quarter thinking that we might do almost 29 million in sales and come within striking distance of a $114 million target for the year. As it turned out we came in at 107 well short of our target. But 107 was still up four percent up $4 million from the year previous.

The shortfalls sales in the fourth quarter have four components. First simply a delay in deliveries of space products to some customers in Japan. This delay was the result of technical issues, which have since been resolved and that situation will take care of it's self.

The second item has to do with our refurbishment program on controls for spaceshuttle. This is just a ship. Sales for the quarter were 2.5 million there were down a million from levels achieved in earlier quarters. We had anticipated that, that activity might be increasing instead of declining however during the quarter some of the resources that might have been employed on the shuttle program were actually devoted to aircraft.

Which in part accounts for the increase sales in the aircraft segment. So sales come out of shuttle in the space segment and show up in aircraft and our overall results phenomenon has no adverse effect but it does reduce sales in the space segment.

In the satellite area though we have two problems that are real and did effect the quarter. The first has to do with profitability of margins. After a careful review of profitability on a number of different programs both fluid controls and mechanisms we revited our estimates of profitability in the quarter and reduced profits by over a million dollars.

Which incidentally also reduces sales for the quarter by that amount. The major revision has to do with products that we acquired from last year. We've had some of the typical start up problems in shifting production from that company to ours.

Our costs in those products at least temporarily are substantially higher that we anticipated. We think that this is a problem that time and effort will take of. In addition in the space segment we had anticipated an in flow of new orders for the quarter 11 million more than we actually booked.

These orders should have provided the opportunity for another two to three million worth of revenue in the quarter but these orders did not materialize in the quarter.

Of the total, we think about three million will come in the first quarter of '03. This is orders for satellite valves on a long-term contract that we have with , and also for on the .

The bad news is that we believe that $7 million of the orders that didn't come are gone for good. And this total includes the final chapter in . We had thought we might get an order for two more satellites worth of equipment, instead we understand that is now shut down completely.

We also expected to design some Electro mechanical for the on the second launch vehicle. The engine development program was cancelled.

Finally we lost a competition for a fluid coupling on the to a competitor with a special low price. Occasionally this happens, so be it.

Looking back on the entire '02 fiscal year for the space segment, our sales of products used on satellites were up about five million, provided two million of additional revenue, and we saw a $2 million increase in that year for tactical missiles.

Terms of margins, the space segment had a very poor finishing quarter. I mentioned before a reduction in profitability on long-term contracts, about $1 million. That coupled with a much-reduced sales volume in the quarter had the result that margins on 22.8 million in sales were only 5.5 percent. As a result our year-end margins for the segments came in at 11.5 percent, and 107 in sales versus the 12.4 percent we've been targeting.

Industrial. Whereas the space business was a disappointment the fourth quarter, the industrial business actually came out pretty well. Sales 66.1 million down less than one percent from the comparable quarter last year, and the best sales quarter that we've had so far in fiscal '02.

We are getting some help from a stronger Euro. The impact comparing the fourth quarter this year to last, about $3 million. Otherwise - otherwise in terms of constant currency, fourth quarter sales this year were actually down five percent from last year. But as I said, still slightly higher than the average of the first three quarters of the year.

Sales in almost all our product lines reflect the strengthening Euro. In addition we had real sales growth of a couple of million dollars as a result of our acquisition of a Japanese . And increased sales of 2.4 million in the quarter in industrial equipment sold on military vehicles.

All of our sales increases in the quarter however were offset by a reduction of over $5 million in control products, and a reduction quarter to quarter of about $4 million in the simulator business.

The simulator business, we have this experience. Our sales in controls for flight training simulators for and are way down. Both of these customers are delivering at rates much lower than last year, and both seem to be well stocked with an inventory of our products.

In addition we're seeing almost no activity in the entertainment simulator business, we're only selling electric simulators for the training market.

Margins for the quarter of 5.6 percent weren't great, but they were substantially up from last quarters 3.3 percent, supporting our belief that we're on the mend. We've discussed before the fact that we have a number of product improvements in cost reduction initiatives under way and our industrial segment and all we have an increasing effect as we move into 03.

We're beginning to see some of that improvement before four. For the year industrial sales 253 million were down a little over three percent from last years 261.

The favorable currency effects for year was not as dramatic as it was in the fourth quarter. It was less then two million dollars. Over the year we did have the strengthening year over but it was offset to something to read my movements in the end.

In constant currencies our sales would have been around 251 about five percent less than last year. As we look at the case in the quarter for the year as a whole we have some areas where we had nine sales increases.

Controls on military vehicles went from 14 to 25 million an increase of $11 million. We have four million of sales from our TSS acquisition spread over a number of product lines. We only own this company for six months of the year.

However, taking our industrial year as a whole overall sales declined by nine million in the basis of what we experienced in plastics controls, turbans and the I talked about.

For the year turned out a disappointing five and a half percent down from 9.1 in 01 and what was historical level occasionally in the 10 to 11 percent range we believe that we have improvement in our work which will bring our industrial margins up substantially in 03.

So let's move now to 03. 90 days ago we projected 03 sales of 764 net earnings of 42.4 million 2.75 a share a 10 percent increase over 02 earnings per share.

Since that time we have seen some shifts in the mix both in terms of sales and margins but the end result is the current projection of sales is pretty close. We're now at 760 and a confirmation of our earnings projection of 2.75 a share.

Excuse me I'll go through each of the segments relate the current outlook both to our fiscal 02 results and to the projection we made for 03 the last time we talked.

In aircraft we're now projecting 03 sales of 394 up from the 386 we described last time. Let me describe the components. We now see no interior aircraft revenues for 03 at 249 million. A $46 million increase from our actual in 02.

The big change is of course our start up time for acting on the F35. We're now projecting 03 revenues of over 40 million compared to 11 million in 02. So that's an increase of $29 million.

But we have some other big increases as well. We're now forecasting a $10 million increase in sales from a V22. This will be in part of the catch up on the some of the mis deliveries in 02 and the contracts to replace that were shipped early in the program and a configuration is now been updated.

After market. Last years after market revenues of 89 million were up 26 percent from the year previous. Now we're looking for another 10 percent increase this year mostly the result of activity in the F18 or we'll be updating hydraulic drive units for the leading edge and over hauling wind hold equation.

These are on firm this work is on firm contracts as a Navy. We do depend on the Navy's ability to pull equipment off aircraft, get it to our company for overhaul and turn it around.

Another major increase will have us on the F15. We have some increase production as a result of the Korean buy but we also have the benefit of a very nice new order for lease to support Japanese production at Mitsubishi.

Taken all together this is a 23 percent increase in military aircraft revenues coming on the heels of a 28 percent increase in the year previous. The military aircraft picture has improved over the last 90 days. We had previously forecasted 227 the major differences are stronger after market the F18 work I discussed and more revenue on F35 the V22 and new F15 order.

The commercial aircraft sign we're moderating a little. We're now projecting '03 revenues of 145 an eight percent decline from a 157 million in '02. Declines in both '02 and '03 are almost all in revenues on original equipment to Boeing. We're now projecting original equipment deliveries to Boeing in '03 of 43 million compared to 60 million in '02.

Decline in sales to Boeing is currently off set in this category by increase revenues on our business jets programs there up about five million in total. We're projecting only a slight decline in the after market revenues of just under 50 million about six percent less than the rate that we've been running for the last six months.

The projection I've just described for commercial aircraft in '03 is a reduction of 14 million from what we discussed in our last call. We've decided to take a more conservative view on the on going production of Boeing particularly their fiscal '04 production rate. That causes a $7 million reduction in our forecast as you know Boeings '04 production influences our level of effort in the later part of '03 and therefore the revenues that we'll recognize in '03.

In addition we've reduced somewhat our forecast for the after market. We had in our previous forecast used the run rate for the third quarter of '02 based on our fourth quarter experience we've our '03 forecast down to match our entire '02 experience $50 million.

When you put the two components together though compared to what we said in our last conference we're seeing an increase in the military side of 22 million decrease in the commercial side 14 and that increase over our last forecast of $8 million in the aircraft segment.

Turning to margins we're coming off an excellent aircraft margin performance in '02. Completing the year in 18.2 percent. In '03 we're going to see a lot more relatively lower margin cost plus revenue. In the F35 program last time we had projected '03 margins of 15.6 based on the changes since then we've increased our margin expectation to 16.4 percent.

Space segment. 90 days ago we were much more optimistic about the space business than we are today. At that time we thought we'd finish '02 at 114 million and came out 107. We had anticipated incoming orders for the quarter quite a bit higher than we experienced and we think some of those orders are gone for good.

In addition as a result of reviews our margin performance in the fourth quarter suffered. Given that sort of circumstances we took a hard look at our forecast for '03, revised our earlier projections in 104 down to 98 million and the change is all in order for equipment on satellite and space vehicles.

We've also chosen to be more conservative with respect to margins. We finished last year at a 11.5 percent but in the final quarter with sales at a rate only a million less then the run rate we're projecting for '03, our margins sank to 5.5 percent.

With that we think that 7.5 percent for '03 is now a sensible expectation. Our sales for '03 materialized in accordance with this forecast, our revenues and satellite and space vehicles will be down $8 million. This reflects the completion for in our work and the crew returns vehicle and a reduction in our satellite business.

Launch vehicles at about 11 million will be up a million from '02 was a result of a number of new current tracks on the second Gen reusable launch vehicle. We'll see an increase in missile defense, the ground base missile defense system which will be offset by reduced deliveries on tactable missiles. Do you know we completed the contract in '02 in the AGM 142 and we are now seeing a lower production rate on hell fire.

Industrial segment. We are now projecting industrial revenues for '02 at 268 million. This is an increase of 15 million over '02 other then a $4 million increase in combats and tools, that's industrial equipment used on military vehicles. Our '03 forecast is roughly comparable to '02 sales increased by the impact of a stronger Euro.

There are actually some swings in product lines, we're looking for a trivial decline in the turban business, sales of 41 million in '02 will be down to 28 million in '03, that will be offset by increases in plastics material caps and an increase in repairs, currently influenced by the TSS acquisition in a couple of new jobs in the simulator business.

Another relevant comparison in industrial is the delivery rate in our fourth quarter. For the most part of our '03 forecast matches up with the revenue rates by product line that we experienced in the fourth quarter of '02. So we're not anticipating an upward change.

Our current projection of 268 is down six from what we forecasted 90 days ago and that change is a more conservative view of our prospects in turban controls. With respect to margins we're still comfortable with industrial of 7.5 percent.

I'm sure that you noticed that our margins began to improve in the fourth quarter of '02, we mentioned a couple of times that we certainly taken steps to stimulate that margin improvement and we expect that it will continue as the year goes by.

So when we put the entire picture together, we're know expecting '03 revenues 760 million, six percent up from '02. Net earnings 42.4, 2.75 a share. A 10 percent increase on a per share basis.

The respect of the quarters we think that each in the quarters and '03 will experience about the same 10 percent EPS increase that we expect for the entire year.

We are delighted to be able to report at this point that our military business continues to improve in the passion that it has. Sales growth coupled with impressive margins supports our plans for double digit growth and earning per share even during this period when commercial air craft sales are declining, space business is slower that we'd like and we're operated in a relatively very weak industrial economy. Over the years we repeatedly emphasized the importance of the diversity in our product lines.

We carry our technology into a number of different end markets and it's extremely rare that all of them are in trouble at the same time. I think looking back the experience of '02 and looking forward our projections for '03 are a nomadic reflection on the strength of our diversity. I will now turn you over to Bob Banta. Bob will discuss cash flows, debt reduction and pensions.

Thanks and good morning everyone. First a couple of details to finish up the '02 story. Depreciation and amortization was $25.6 million in '02 and capital expenditures in the same fiscal year were $27.3 million. On to debt. Our total debt long and short term net of the cash balances that we had at year-end cash balances of 16 million was then a net 300.5 million. now that's down 20.7 million from the third quarter level rather significantly. And down by 58.5 million from the end of '01.

During the year net cash proceeds from our equity offering last November of 39 million less about 11 million - 11.4 million in cash for acquisitions that we made note to means that the difference 31 million of debt reduction came from operations throughout the year. We think that's rather significant and of course a lot of it occurred in the fourth quarter. Now before I talk about debt reduction for '03 I just want to go over some of the details on Moog's various defined benefit pension plan. We have defined benefit plans in about six countries and as a reference we have operations in 20 different companies. At year end our total projected benefit obligations PBOs were estimated by an actuary to be 264 million. These benefit plans had about 150 millennia dedicated trustee type of assets.

So we were under funded by 114 million at the end of '02 and that compares to an under funded status at the end of '01 of 78 million. This change resulted in an after tax minimum liability adjustment to our shareholders equity of 21 million in '02. now throughout the year we have strong earnings, earnings of 38 million. We also had favorable currency translations and our effort offering provided a significant increase to shareholders equity also about 39 million.

So our shareholders equity actually increased by 64 million in '02 in spite of that negative pension investment that I just mentioned. And with debt down by 59 million as I mentioned a moment or so ago and net equity up by 64 million our long term debt to cap ratio came out at the end of the year at 49 percent compared to 59 percent when we started the ball game.

So now we get the cash planning for '03. We continue to assume a very strong cash flow from earnings and you just heard about those. We'll also increase our outlays for pensions from the seven million that we paid in '02 to about 17 million and therefore with those internal cash flow we'll still be able to reduce debt by 20 million by '03.

This debt pay down like '02, will be more noticeable in the latter quarters of fiscal '03, rather than right at the beginning, particularly when one considers in the first quarter we have our usual rather high interest payments and a few other things that just before Christmas.

One more data point regarding the pensions. We've used an assumption of 8.5 percent going forward to '03 and beyond. This compares very closely to what we've actually achieved over the last 10 or 11 years in our pension plan performance, and we think it's reasonable as do our actuaries.

Those actuaries estimated the pension expense for '03 under , and those estimates have been built into the 275 per share that we're guiding people and quite comfortable with for fiscal '03.

So let's go back now to your thoughts on questions and answers Bob.

we're ready for questions.

Absolutely.

Ladies and gentlemen if you do have any questions, please press the one on your touch-tone phone. You'll hear a tone indicating that you've been placed in queue, and you may remove yourself from queue by pressing the pound key.

If you are using a speakerphone we ask that you please pick up your handset before pressing any numbers. Also if you pressed one prior to this announcement, we do ask that you please press one again at this time.

Our first question will come from the line of with Merrill Lynch. Go ahead.

Morning.

Morning Suzanne.

I was wondering, you had forecast for next year, what assumptions for '03 and '04 are you using for Boeing and Airbus?

For Boeing we're using for '03 and '04 a total of about 285. We formerly had a higher number in for '04, and that's the change that we've made as we move '04 down that will influence our level of activity in the last half of '03. And as you know, we work revenues on our Boeing contracts on a long-term basis, so that the revenues are a function of laboring and material input.

Does that include the 717?

Yeah, that includes the 717 at 12, which as you know doesn't mean much to us 'cause we have hardly any content - 717 means about $11,000 in aircraft for us.

OK. And for Airbus?

Airbus - I don't have those numbers in front of me. It's somewhere in the high 200's - 275, 280.

Our sales to Airbus are in the $11 million a year range. It's mostly flight control sold to the Airbus suppliers. We do have one job on the on the 330 340. But our total - our revenues for the year often times are more influenced by the inventory management of our customers at Airbus than they are by the .

OK.

And just indications of sales sensitivity to for next year? If we say go down by another 50 aircraft let's say, what kind of impact should we expect to see on - from a sales and possibly cash flow perspective?

Margins maybe a little stronger early in the year, than in the tail end of the year, but if you're trying to define how all that is going to influence our performance quarter by quarter, my suggestion is that you take our advice and figure the quarters are going to come in next year probably in the neighborhood of 10 percent, stronger than the quarters for this year.

OK that's helpful, and then on the pension, can you give us in terms of the earnings impact what the incremental pension expense was for this fiscal '02 as well as what the incremental EPS impact is expected to be in '03?

Our pension expense over the last couple of years is gone up two, two and a half million a year.

And that's the expectation for '03?

Yeah.

OK and then does that incremental run through the segments or is that through the corporate expense line?

No it runs through the segments.

OK and then the 8.5 percent rate, is that a blended rate or is that the US return assumption?

The US returns assumptions, we have different assumptions for each of our funds.

OK so that's going from 9 ...

We are presuming an 8.5 percent returns on assets in Japan.

OK I just want to make sure that the US was going from 9.5 to 8.5.

Yes.

And then the corporate expense, can you give us what the corporate expense was for '02 and then what the Delta is to '03 and maybe some of the puts and takes within that in making up the Delta?

Corporate expense in '02 was about 11.5 million, we expected to come down to something around, we expect to come down around $1 million, the major impact are two, in '02 we paid a rather substantial sum in a consulting fee to an accountant other than our public accountant to help us set up, let me put it this way, help us re-organize our activities in Europe, to achieve better tax efficiency. Also in '02, we make some mark to market adjustments under a deferred compensation plan that we had and we got tired of watching that deferred comp saying bounce around marking to market, so we changed the plan and no longer have that impact. So, those two impacts, those two items pretty much account for the change downward in our corporate expense for '03.

OK great and then lastly, what is the timing as far as when you start to see the full benefit of the cost reduction actions taken in the Industrial Control Center.

I think we'll see improving margins over the course of the year.

OK great.

OK.

Thank you.

We have a question in queue from the line of James Croome, with Morgan Stanley, go ahead please.

James.

Good morning another quick question, are you changing your discount rate and are you changed our way assumptions on the pension, are you changing the discount rates?

Yeah, that came down during the year, it was 6.9 percent in the PPO going forward at the end of the .

OK and then you mentioned your cash flow estimates for the year, but you didn't talk about what your cap ex assumptions were. I was wondering if you could talk about that a little bit.

Yes that's in the numbers are taken out. It'll pretty much mere the depreciation and amortization about 25 million each. 25 26 million each year. The last million will depend on how the currencies translate the depreciation or capital expenditures on our over seas activity.

And then lastly this is more of sort of an industry question on the industrial side. Could you just give us one more detail on where you're seeing any strength in terms of like or other areas and if you're seeing other opportunities to sell industrial .

Yes we the worst of the industrial situation is in the control business. As I mentioned we're forecasting in 03 a decline from the $40 million level in 02 down to around $28 million.

Other than that we're actually seeing signs of life in some of the rest of the businesses but they certainly aren't dramatic. We're seeing a little strengthening in controls for plastic machines and one of our major customers in Europe is a company named . They make injection-molding machines. They were real big fires in the machines for compact disks.

In 02 that product line just stopped and we're we've recently booked some orders from . We're seeing a little strength a little more strength in blow molding controls in the Pacific.

We've seen some a better order rate in the fourth quarter for material test customers MPF and . We will have the impact in 03 that will have an additional six months of the products that we acquired in this GSS acquisition.

We in the last six months of the year booked about four million in sales for products acquired in that acquisition and we would expect that next year having the entire 12 months we'll see an additional three or four million dollars.

That's spread among a number of our different product categories. It will probably show up it'll beat off a little bit our business. They succeeded in selling some of their products to CAE.

So it's kind of odd or cross the industrial specter expect for turbans. I think I mentioned that we have on contract a business that will increase or combat controls by about three million buck.

Thank you.

of new opportunities for . The only recent happenings is the increased application of and racecars. Formula 1 and that's a relatively small business you may have heard us mention it's a business we like because the race car folks have a they're in a big hurry and they get a lot of money.

But beyond that there aren't notable new applications for industrial .

Thank you very much.

And again ladies and gentlemen as a reminder if you do have questions please press the one on your touch-tone phone at this time.

We will next go to the line of please go ahead.

Yes, good quarter guys.

I think at one point you chatted about having some severance costs in the industrial sector as I recall a little over a million this year and then some costs savings next year. Could you give us some sense about how the flow worked there. Was there any more of the severance expense absorbed in this quarter and how much if any of the three million cost savings was there in the last quarter?

We dared over the course of '02 incur some severance for staff reductions in our various industrial operations. That occurred mostly in Europe, in the U.S. I guess I could say mostly near us.

In the U.S. most of the staff reduction in our industrial business was absorbed in our aircraft business. Fortunately the same skill steps and we actually have engineers design and development engineers who are able to move back and forth in industrial and air craft and so in the - so we won't have a that luck - the other thing I wanted to say is and we have not chosen every quarter to carve out that little piece and call that restructuring.

We think restructuring is an out of date phenomenon. People are tired of hearing about it, so we just suck it up. In '03 we are not anticipating that we're gonna see that any where as near as that of restructuring in the industrial business and the cost reductions that result from that, you know are the basis on which we are anticipating an increase in margins from the 5.5 percent that we experienced in '02 to the 7.5 percent that we are talking about next year.

I think in dollar terms that's an increase of some where in the neighborhood of $6 million, so you unload about a million of severance and pick up about five million in savings on sales that are you know not a hell of a lot different.

As we start '03, we have a over a 100 - a little over a 100 people less then what we carried earlier in '02 in these industrial activities. So rough average salary and benefit rate of 50 thousand or so a person, that's the five million and we did have almost a million eight - $800 to a $1 million of costs in '02 to find a grace were made for those people. We've a company and those costs won't be with us, so that five million plus warm until they get to six or so, the five you've just mentioned and that's been accomplished.

So we start out '03 with that sense of improvement towards the goal of 7.5 percent margins in the industrial area.

OK. And you know if I look at what you're telling me about the tone of business. I mean my recollection is that the proven myth margins are among your weakness in industrial factor?

Yes. They certainly - there was a time when they were good and general electric rearranged our life in that respect and they got pretty poor.

What is your making?

Business went but I should say this kind of business that we have left will be, it will be positive margin business. Part of the you know the decline that we're talking about 40 million down to 28 million some of, much of that is simply reduced activity among the turban manufacturers but some of it is business that we have just opted out of.

We, all in times and purposes have determined as a company we will not participate in an electronic auction and that drops us out of some competitions. When all the customers give a dam about is price and there willing to buy stuff from anybody it's not the right place for us to be.

OK but it makes something of an opportunity because it looks like you certainly make more money in plastic's and materials tests than you do in IGTs so it makes a possible opportunity in industrial.

Yeah it's a you know industrial margins are a little volatile and we think that 7.5 percent is you know the sensible middle of the road expectation. Could it better? Yeah it could be better. And in the mix I think is going in the right direction.

OK and in the space factor if I kind of add that the of those margins you know really are a lot more respectable near double digits and historically the pricing has been better there and it doesn't look like your expected run rate is any different or is actually better than it was in the fourth quarter.

Yeah the difficulty is though that our space business over the years has almost always had the benefit of a couple of, every year a couple of relatively significant jobs with nice margins on them. We did rather nicely in '02 on the work we did on the crew return vehicle and we had a nice job that we haven't talked about too much selling a gas management system to Stanford University for a NASA project.

The business we have in '03 at least as we see it now is not long on those kinds of opportunities it's more on going productions. But once again you know we're historically space business we've been in the 11, 12 percent range 7.5 percent is a we think a pretty conservative projection but we just had a kind of a train rack quarter and it's probably an inappropriate time to be conservative.

Looking at the aircraft area you know given that your a fairly dramatic mid shift there towards development which will be lower margin and clearly you know less favorable volume in the commercial side. Those margins you know given, given looking at that, looked to be very impressive. Are there you know is there anything else happening there like further catch up on, is jet engineering disarm changes?

I think we're pretty well caught up. There will be some continued changes in '03 on the biz jets but not of the scale that we've accomplished in '02 you know taken all together in the aircraft business we've talking about almost $400 million worth of business and there are lots of puts and takes and so the 16.4 percent that we're projecting is the result of a lot of arithmetic and you know I think it's pretty damn respectable margins. I think the 18.2 percent that we averaged in '02 would not be realistic to anticipate that that was going to continue indefinitely.

Well more of a question was you know 18 you know was well above where you've been is 16 really do able given the mix shift to development for that's kind of imply pretty good performance. Does that have any risks?

It's - I think it's pretty reasonable it's in terms of dollar terms it's pretty comparable to what we achieved this year. Let me put it this way I'm not worried about the sixteen four.

Here's a way to help you through that . So joint strike fighters as we said earlier are going to go up to near 40 million. That's a 29 million increase. And you're right to point out that'll be cost lower margins but the increases that I've spoke of on the military after market was further growth and at 15 a couple of nice new orders cordial in the Mitsubishi Japan production.

Those three alone will go up by 23 million year over year so it's almost as much increase as we're getting on the joint strike fighter and all three of those platforms or programs or you could think of as a much more mature relative to anything else and margins will be nicer so we got the lower margin joint strike fighter coming along but the growth it's nearly as equal in those three platforms on which Moog has been firmly transferred many many years going way back and therefore our efficiencies will be nice. So I would emphasize Bob's conclusion 16 or a little over 16 percent we're quite comfortable with.

Last question. You indicate I guess that cash contributions for pensions going up 10 million to about 17. What was your recovery in '02 and what more or less would you expect it to be in '03?

Yeah we're wrestling with exactly how much we can put on and out but it's probably what - I'm a little apprehensive about each everyone's understanding but if you mean what will recover strictly form military jobs it's probably going to be what we figured yesterday three to four million maybe as high as five. It's still being worked you know the actuaries play a role there.

There's a lot of terminology that I'm a little apprehensive - that's the low side of a number. Our total recoverable number in G&A looks like a number near 10 million but then you need to factor it times the percent that is government kind of funded - I guess that's what you're after so it'll probably be somewhere three to five million probably more I almost should say four to five. So hopefully that's suitable. We're refining that number as we build it in to our overhead rates going forward.

Going off line. Thanks again.

OK.

And we have no further questions in queue at this time.

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