Moog Inc (MOG.B) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Moog Third Quarter 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded.

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

Good morning.

Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance, and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of today's date, our most recent Form 10-Q filed on May 8, 2007, and in certain of our other public filings with the SEC.

Now, I'll turn the call over to Bob Brady.

Good morning, and thanks for joining us. We'll talk this morning about our third quarter, update our guidance for the balance of '07, and we'll describe our initial outlook for fiscal '08.

Quarter three, we think it was a great quarter. Sales [404], $1 million, up 21% from a year ago. In spite of a 56% increase in R&D expense compared to last year's third quarter, net earnings were up 20.4%. Factoring in the effect of a slightly increased share count, earnings per share were up 18% to $0.59.

Year-over-year, sales were up at all five segments, and operating profit was up in all five all segments. In the quarter, gross profit increased by $33 million, which was more than enough to cover the $10 million increase in R&D expense. Also, in the quarter, interest expense was up by $2.6 million, mostly because of the debt incurred to buy Zevex. Net earnings were up $4.3 million.

From an operational point of view, this was a very busy quarter. Our aircraft group is in the midst of safety and flight testing on both the 787 and the A400M. We're supporting the flight test program in the Joint Strike Fighter. Space and Defense is heavily involved in proposal activity on the Ares I development program. Ares I is the rockets that will launch the crew on the system, and it will replace the Space Shuttle.

Sales have also been very strong this quarter in our Industrial and Component segment. And as you'll hear, we're learning the peculiarities of the market in Medical Devices.

Now, to the segments.

Aircraft Q3. Total sales $149.8, up 15%. Military aircraft sales of $82 million were up only 2%, but commercial aircraft sales were up 37%. There were notable increases on the military side. They were in equipment sold to the Japanese for the F-15J. Sales of over $7 million were up $3 million from a year ago.

Sales of flight controls in the Indian Light Combat aircraft were $2.6 million, up from $800K a year ago. Revenue on the F-35 of almost $16 million was down $1.7 million from last year. On the other hand, the Moog content in this quarter of over $10 million was actually up $300,000 from a year ago. And the difference in total sales was in the billings of our partner companies.

Aftermarket in the military business was $25.2 million in this quarter, down $4.2 million from a year ago. We believe that our situation in the military aftermarket reflects delays in deferred orders, as opposed to lost orders. And we're expecting that revenues in subsequent quarters will show quarter-to-quarter increases.

On the commercial side of the aircraft business, sales $68 million, up $18.3 million from a year ago. OEM equipment to Boeing, sales were up $10.3 million to a total of $22.8. Of this increase, $6.4 million was the 787. Revenue on business jets, $10.2 million, was up $1.8 million, mostly the result of additional shipments to Gulfstream and Bombardier.

Commercial aircraft aftermarket had a big jump this quarter, 21%, to a total of $24.7 million, reflecting not only increased activity in commercial transports, but also increased action in the business jet aftermarket.

Aircraft margins. Margins of 10.6% were an improvement from the previous quarter of 10%. Margins were achieved in spite of the fact that aircraft R&D increased to $17.6 million this quarter, up $1.4 million from the previous quarter. While we're still anticipating a decline in R&D in the 787, it hasn't happened yet. 787 R&D was $11.4 million last quarter and $12.1 million this quarter, all related to the frantic activity to get hardware produced and through safety of flight testing, so the first airplane can fly.

A couple of weeks ago, I had the pleasure to spend a weekend in Seattle at the premiere of the 787. I thought it was a spectacular event. And it was really fun for me because all of our Boeing friends seemed to be really pleased with the work our company has done on the 787. It's nice to have a happy customer.

One other note about margins and the 787, sales in the quarter, as I mentioned, included $6.4 million in revenue recognized on the 787. And at this stage, in a program like that, OEM revenues are not very profitable. In terms of production costs, we're at the beginning of the learning curve, and we're waiting for the aftermarket to kick in. So, there isn't meaningful margin contribution in new airplane program sales. Maybe everyone understands that.

The aircraft update for '07, we're increasing our forecast for aircraft sales in '07 by $16 million, and the increase is all on the commercial side, reflects increased demand for the Boeing 7-Series production, an increase of $5 million to just over $59 million. In addition, we're now forecasting revenue in '07 will be a little over $20 million. For the year, then, sales of OEM equipment to Boeing will be over $79 million.

In addition, we're increasing our forecast for the commercial airplane aftermarket from $89 million to $93. When we factored these changes in, our forecast for the entire aircraft business increases from $557 to $573. On the other hand, given the margin performance of the third quarter, we're moderating our projection of margins for the year from 11.2% to 10.5%.

Aircraft for '08. We're looking for another strong year for aircraft in '08. Sales of $623 million will be up 9% from the current year. We're anticipating sales increases on both the military and commercial side. In military, we expect a major increase in the V-22 from $24 to $31 million, increase in F-18 from $26 to $29 million, and a substantial increase in the military aftermarket for $104 to $119, mostly having to do with retrofit programs on both the C-5A and the F-18.

On the commercial side, we're looking for an overall increase of about $31 million with a total of $287. Boeing OEM, other than 787 production, should be pretty comparable to the '07 level. 787 revenues should be up $5 million to $25 million. But, we're also forecasting substantial increases in business jets from $42 million this year to over $60 million next year, mostly having to do with production revenues on the Hawker and the Challenger 300.

We're also anticipating a 4% increase in the commercial aircraft aftermarket to a new level of $97 million. So, the commercial aircraft total of $287, $330, $6 million in military, total aircraft sales for '08, as I mentioned, are projected $623.

We are looking for an improvement in margins in '08 from the 10.5% this year to 11.4% next year. The volume in aircraft sales will be up in '08. The product mix will be slightly less favorable from a profitability point of view than the product mix in '07. However, reduction in aircraft R&D expenditures will provide an uplift in operating profit. So, that's aircraft for '08.

Back to the quarter. Space and Defense Q3, another strong quarter. Sales $47.8 million, up 32% from a year ago. Once again, Defense Controls drove the sales increase. Defense Controls sales of $17.7 million were two-and-a-half times what they were in the similar quarter a year ago.

And the big increases were in productions for the Marine Corp.'s Light Armored Vehicle, or the Striker Mobile Gun System, were continued production in Europe on the CV9035, and in Europe a gun system we supplied to Mouser in Germany. In addition, we generated over $3 million in revenue on Servo motor controllers for the Army's future combat system.

Satellite and Space Vehicle business up a respectable 15% to $13.7 million. Like last quarter, we see continued improvement in commercial satellite business, an increase acceptance of our mechanism product line or a variety of military satellite and scientific programs. Our Space Shuttle program has wound down now, but we're beginning to see revenue on the Space Shuttle replacement programs, specifically Ares I, a crew-launched vehicle, and Orion, the Crew Exploration Vehicle.

And Strategic Missiles and Missile Defense, revenue totaled just under $5 million, about the same as last year. The Tactical Missile business was down to $5.6 million, reflecting the completion of Maverick. Our Tactical Missile production is now mostly Hellfire, TOW, Tomahawk, Vertical Launch ASROC and the [in-loss] Non Light-of-Sight missile for Raytheon. Naval Applications, our new initiative was down a little bit this quarters, sales of $1.4 million.

Space and Defense for '07, given the continued strength in the commercial satellite market, we're increasing our forecast for satellite hardware by $3.5 million up to $50. We're making a number of other smaller adjustments in other product lines. And in total, we're increasing our Space and Defense forecast for '07 from $180 million to $182. That will be a 23% over last year's sales.

Margins, Space and Defense. Last quarter, we had margins in the segment of 15.1%, helped quite a bit by the wrap-up of a large Space Shuttle refurbishment contract. We said at that time that we didn't expect that performance to repeat every quarter. This quarter's Space and Defense margins were still a very respectable 12.9% and, for the year, we're not projecting year-end margins of 13.5%. This is a slight improvement from what we were projecting last quarter, and it's a big improvement from the 9% this segment actually achieved last year.

Space and Defense '08. After the spectacular 23% increase in '07, we're projecting an '08 of a more normal 7% increase to $196 million. You may remember that in '07 there was a big change in the mix of business in this segment, a sizeable reduction in sales of fin controls from tactical missiles, but a huge increase in the Defense Control's product line. It went from $35 million in '06 to $62 million in '07.

The major drivers for that increase in revenue were the Marine Corp.'s Light Armored Vehicle, $18 million in revenue in '07. But, that program will finish in the early part of '08 and generate only about $4 million in revenue. We are looking for modest increases in other Defense Control programs for '08, but we're expecting to end the year at around $51 million in Defense Controls, down $11 million from '07.

So, where are the increases coming? The big increases in '08 will be costs plus development jobs on Ares I and the Orion Crew Exploration Vehicle. They're both part of the system that will replace the shuttle. In '08, we're looking for $13 million in revenue on those programs, up from $3 million this year. So, a $10 million increase there.

We're also expecting a substantial $10 million increase in '08 sales on launch vehicles, in particular launch vehicles related to commercial space transportation initiatives. This is a newer market that's recently heated up, and we're very optimistic that our heritage will help us secure a sizable amount of the available business.

We're expecting, in '08, the Satellite business at $48 million, be close to level at '07. Strategic Missiles and Missiles Defense at $26 million, will be up about $6 million from '07, but the Tactical Missile Business will be down about $3 million. We're looking for an increase of about $3 million in Naval Applications to a total of just under $11 million.

Given the shift from fixed production contracts, fixed priced production contracts, like Light Armored Vehicle and Space Shuttle, towards cost/clause contracts on Ares and Orion, we're projecting slighter lower margin performance with Space and Defense in '08. We're projecting 12%, down from the 13.5% we think we'll get this year, but up substantially from the 8% or 9% levels of a couple of years ago.

Industrial, back to the quarter. Q3, sales $111.7, up 12% from a year ago. Our sales growth does benefit from the strengthening foreign currencies. In the quarter, the currency impact was $4.4 million. That leaves organic growth of close to $8 million, or about 8%, and quite respectable in the markets in which we operate.

Controls for plastics machinery, our largest market sales were almost $19 million, up 13% from a year ago, growth primarily in Europe where all of our top customers are seeing increases sales. Revenues in the Pacific and the U.S. were comparable to a year ago.

In the Motion Simulator business, sales at $11 million, were our next biggest market in the quarter. Revenue was actually down $700,000 from a year ago, but this simply reflects the timing of deliveries in a business where revenue comes in large chunks. For the year in the Simulator business, we're forecasting about $50 million, up from $41 million in '06.

The market for Metal Forming and Presses provided sales of just over $10 million, an increase of 21% from a year ago. The growth in this market is also coming from Europe where demand is strong for controls on all kinds of metal forming and presses.

Turbine market sales of $10 million, down slightly from a year ago. And this particular quarter, sales were down in Asia-Pacific, in part because, in China, we sometimes hold shipments until payment is available, and there were some delays in that this quarter. Overall, though, our projection for Turbine Controls this year at $42 million is just slightly lower than last year's.

Controls from test machines provided $9 million in sales this quarter, up 21% from a year ago. Sales are strong in all major market areas, but particularly in the Asia-Pacific where we've begun to deliver equipment to Ford in Australia for what's called Kinetic and Compliance Machine. And we've delivered a test rig to Suzlon in India to test the blades on wind turbines.

Gage Controls for steel mills, sales continue to be strong. Sales in the quarter $8.3 million, up 16%. Sales have been robust for our European customers, and we're seeing sizable orders for spares in the China market.

Aftermarket sales maintain $10 million plus level achieved last quarter, so we're feeling pretty good about our revised forecast of $39 million for the year.

Update for '07. Last quarter, we revised our overall industrial forecast to a range of $415 to $435 with a mid-point up toward $25. Given the continued strength in plastics, simulators, metal forming, steel mills, we're now slightly over the top of that range. And our new forecast for Industrial for '07 is $436 million.

Margins. Industrial margins for the quarter were a handsome 13.8%, up from 12.1% a year ago. Our Industrial segment has been running over 13% for all three quarters this year, so we're nudging our forecast for year from 13.3% to 13.5%.

Industrial '08. We're projecting a continuation of the consistent growth in our Industrial business, particularly compared to our new forecast for '07 of the $436. We're forecasting '08 at $479 million, plus or minus $10. Mid-point will represent a sales increase of $43 million, or about 10%.

We're looking for big increases in a number of key markets. Specifically, we're forecasting the Test Equipment business to be up $8 million to $49 million, Simulators up $10 million to $60, Controls for oil and gas -- and kind of a new area for us to talk about -- will be up $6 million to $19 million. Oil and gas equipment used to be included in Other.

In our other major markets, we're forecasting Plastics up $5 million to $77, Turbines up $6 million to $48, and we're hoping that a big portion in the aftermarket will take us up $9 million to a total of $48 million.

In Industrial, we're hoping to maintain our margin performance of 13.5%, what we're currently projecting for '07.

Back to the quarter. Components Group Q3, Components Group another excellent quarter. Sales $72.8, up 19% from a year ago. Sales up in every major market area. Of the $12 million sales increase, over $4 million was in Aircraft. Aircraft sales were close to $25 million in the quarter, over a broad range of customers and programs.

$2 million worth of slip rings for use on Black Hawk. Sales of various products used in aircraft avionics for Rockwell Collins exceeded $1 million. Sales of slip rings, motors and resolvers to FLIR systems for use on various FLIR pods, close to $1 million, as were shipments of instrumentation actuators for the CH-47.

Sales of components in the Space and Defense market, up $1.8 million to just over $12 million. The biggest programs were the Commander's Independent Viewing Platform for Bradley, fiber optic modems for the Egyptian Army, and slip rings used on both the Bradley and the Abrams tank.

Once again, the biggest percentage increase in sales was in the Marine market, 27% increase to $9.3 million, products for slip rings, both electric and fiber optic, and multiplexers used on undersea robots. Over the last four quarters, our Marine sales have been fairly consistent in the $6 to $7 million range. So, to step up to over $9 million this quarter is a big change and something of a surprise. We are forecasting in this market a fourth quarter of about $8.6 million, and that's based on the current backlog. But, then, for '08, an average of a little over $7 million a quarter.

In this third quarter, sales in the Medical market, $13.8 million, were up 26%. Sales in the market strongly influenced by shipments of motor blower assemblies to Respironics. This business was up quarter-over-quarter by 33% to just over $9 million. Sales of slip rings to CAT scan customers were about the same as in previous quarters.

We're projecting a modest increase in sales of CAT scan slip rings in '08, although some of our customers in this market are beginning to worry about a general softening in the demand for CAT scan machines due to a change in reimbursement for diagnostic imaging.

Lastly, our Industrial Components business, $12.6 million, up 6% from last year. The largest single Industrial market is closed circuit TV systems.

Components Group, update for '07. It seems that every quarter we increase our Components Group forecast for the year, and this quarter won't be an exception. I hope this upward pressure continues forever.

Last quarter, we were projecting a year-end at $274. Today, we'll increase that forecast to $281. A big increase is a $6 million increase in the Medical market from $47 to $53 million. Aircraft, up $3 million, will be offset by a reduction of just over $3 million in Space and Defense. And we're increasing the Industrial portion by $1 million to (inaudible).

Margins. In the quarter, the Components Group generated margins of 14.9%, down from 16.4% a year ago, but up from 14.2% in the most recent quarter. As I've said in the past, margins in the Components Group vary with product mix and with the balance between OEM and aftermarket sales. If we project similar margins for the fourth quarter of '07 as we had in this quarter, we should finish at 15.8%, a slight increase from the 15.5% we were projecting 90 days ago.

Components for '08. As I said last quarter, given the diversity of products in the markets in this segment, sales forecasting is more art than science. We begin '07 projecting a 9% sales increase. And based on our last update, it looks like that increase will be more like 18%.

For '08, we're starting with a somewhat more aggressive forecast. We're projecting sales of $314, a 12% increase over the current year. We're projecting increases in all the major market areas except Marine. I'll trip through them quickly to identify the major influence.

Aircraft, we're looking for a $6 million increase to $102. And the increase on the military side reflects orders for an integrated motion control package used on the Guardian Anti-Missile System. As you may know, Guardian is the Northrop Grumman system designed to protect aircraft, military and/or commercial from shoulder-fired missiles. It uses a laser to blind the seeker head on the attacking missile. We expect to deliver over $10 million worth in equipment in '08, which is an increase of $8 million over the current year.

The other major increase is on products delivered to Raytheon for the Multi-Spectral Targeting System used on the Predator. We're anticipating deliveries of over $3 million in this program, double the volume in the current year.

Space and Defense market, we're looking for a $10 million increase to almost $62 million, increased principally in slip rings and associated equipment used in the Future Combat System, the Bradley Fighting Vehicle and the Striker. Also, there's a substantial retrofit program under way for the Commander's Independent Viewing Station on the Bradley.

I mentioned earlier our forecast for the Marine market anticipates a continuation of a level slightly lower than what we experienced in the current quarter, looking for $29 million in sales, just a couple of million less that we're anticipating this year.

The Medical market, we're projecting a $9 million increase to $62 million. $5 million of that should come from Respironics. The balance, mostly slip rings used in CAT scan machines made by new customers. There are early signs that are our local sales representation in Germany and Japan and China can advance our penetration into manufacturers of CAT scan machines, like Siemens, Toshiba and Hibachi.

The Industrial part of the Components market, we're forecasting an increase of $9 million, 18%, to a new level of $58 million. Part of that increase will be $4 million in additional revenue from the recent acquisition of Thermal Control Products, a manufacturer of industrial blower assemblies.

The other large increase is in Wind Energy, and we're forecasting $3 million worth of sales growth, delivery of various products to some of the major wind turbine manufacturers, like Entercon and Gamisa.

We're also forecasting increased use of slip rings in nuclear testing, and the application of our brushless motors, a variety of diesel engine pump and fan applications.

In fiscal '08, we're projecting Components Group margins at 15.8%, a continuation of the level we expect to achieve in '07.

Medical Devices, Q3. Most of you will remember about a year ago, at the beginning of the third quarter, we acquired the assets of Curlin Medical and began our foray into this market. The move was a result of a study we conducted to determine whether our capabilities in the [grind] and manufacturing over reliable products would allow us to participate in the growing market for healthcare and medical devices. We are looking for attractive growth rates in this market, and we are also looking for relatively high operating profit in the neighborhood of 20%.

Then, you will remember at the end of last quarter, we acquired Zevex, another manufacturer of infusion pumps, these pumps used primarily in enteral nutrition. So, this is our fifth quarter of the Curlin business and the first full quarter of the Zevex company.

Before I get to describing the results of this segment for the quarter, let me review what we were hoping to do in this fiscal year. The fourth quarter of last fiscal year, after we acquired the McKinley product line, we had projected our Medical segment for the year '07, sales of $40 million and operating profit of about $8 million, or the 20%. So, we expected that, on average, this combination of products would produce about $10 million in sales per quarter, and about $2 million operating profit.

Then, two weeks before the end of our second quarter, we acquired Zevex. We projected that in addition to $2.4 million in Zevex sales in that quarter, Zevex would add a little over $22 million in sales for the second half of the year and, after the normal purchase accounting adjustment, Zevex would generate operating profit for the year of about $1.8 million.

So, in Zevex, we were looking for a couple of quarters a little over $11 million in sales, and the total for the six months of $1.8 million in operating profit. So, that was our plan for '07.

Since we're just beginning the merger of these organizations and they're still intact, we're able in this quarter to report how each of the product lines is doing. In subsequent quarters, there'll be sufficiently integrated that we'll be reporting sales and profitability for the total.

In this quarter, though, the results are as follows. I'll do Zevex first. In the quarter, the Zevex product line produced $13.4 million in sales, an operating profit of about $200,000 after very heavy purchase accounting adjustments. Since we have a large pump order in hand, we are expecting Zevex sales in the fourth quarter of close to $16 million, and operating profit of $1.8 million. So, the Zevex product line is on track to achieve the results that we envisioned for the year.

On the other hand, in this recent quarter, the third quarter, the Curlin product line produced sales of only $8.3 million, not $10 million, an operating profit of only $600,000, not $2 million.

You may recall that in the first quarter this year, before we bought Zevex, our Medical segment did achieve operating profit of $2.1 million, but on sales of $11 million. In that quarter, Curlin pump sales were $5.7 million. In the current quarter, however, Curlin pump sales were only $2.8 million. And given a gross profit of over 50%, 5-0, 50%, that difference in pump sales makes all the difference in operating profit.

So, the key question, then, becomes what's going on with the Curlin pump sales? Our folks have a number of theories that explain the fall-off in pump sales. Here are two. We know that a couple of large volume orders drifted out of this quarter into either quarter four or perhaps next year, and this may largely, or at least partially, explain the low shipment level in this quarter.

There's also a theory that, over the last few quarters, some of the large users of infusion pumps, faced with a need to replace equipment recalled by Baxter, may have accelerated their orders. They may have worried that without Baxter, the current supplier of infusion pumps would not be able to accommodate the increased demand figured by the Baxter recall.

The steady state for demand for infusion pumps on a monthly or quarterly basis will become clearer over the next few months. Our field sales people are forecasting Curlin pump sales in quarter four of $4 million, up from $2.8 million this quarter. This should bring total sales for the Curlin product line to $9.3, and generate an operating profit of $1 million, or almost 11% of sales. Still not 20%, but a lot better.

So, when we add the two product lines together, the Medical segment results for quarter three were $21.7 million in sales and operating profits of just over $800,0000. For quarter four, we're looking for total sales for this segment of $25.2 million, and $2.8 million in operating profit. For the year, then, this would bring us to a total of $69.6 million in sales, operating profit of $7 million, or about 10% of sales.

So, for the year in total, we're doing all right on sales, but to meet our profit objectives, we need some improvement. These are early days in this business, and we're still getting acquainted with the demand patterns, and still determining the shape and magnitude of both our R&D and our selling expense levels.

So, what are we forecasting Medical devices for '08? Our plan for '08 projects total sales for this segment of $109 million. Of that total, a little less than $20 million is projected sales under the Curlin pumps we've been talking about. This compares to our forecast of $15.6 million for '07. Half of the increase in the pump sales is forecasted from the international market which we're just beginning to access, and the other half is from the hospital market which we think offers great opportunity because, up to now, our efforts in this market have been limited.

In addition to the Curlin pump sales, we're envisioning $17 million in sales of Zevex Spectral Feeding Pumps, $11 million in McKinley Disposable Pumps, $33 million in (inaudible), $18 million in sensors and hand pieces, and $10 million worth of accessory and equipment sales.

At the moment, for the entire product line, we're projecting operating margins of 15%. And we hope as the year goes by that we'll be able to inch that projection back closer to the 20% we've been talking about.

So, now, let me summarize our guidance for '07 and '08. In our last conference call, we were projecting '07 sales of $1.5 billion using the mid-point of our Industrial range. In going through each of the segments in this call, I've described increases in our forecast for the end of '07, and some of them were sizable. We're now projecting sales of $1.542 billion. So, $1 billion, $542 million.

In terms of margins, we moderated our projections for Aircraft and Medical. Margins in the other segments have increased somewhat but, nevertheless, overall, our margins come down from 13% to 12.7%, and on higher sales. And the 12.7% yields a half a million more than we had previously projected in operating profit.

We're expecting higher interest expense based on our cash usage, but a lower tax rate. The net effect is a net earnings increase to $100.6 million, and an increase in EPS by $0.01 from $232 to $233. This would result in EPS growth year-over-year of 18%.

For '08, once again using the middle of our Industrial range, we are projecting total sales of $1.72 billion, an increase of 12% over '07. I described a small reduction in Space and Defense margins, but Aircraft and Medical margins should be up. And in total, we're projecting operating margins for the whole company of 13.1%, generating $225 million in operating profit.

Interest will be up $4.3 million to $33.4. Corporate and stock option expense up slightly from '07. Our tax rate, a more normal 32.4%. The result is net earnings of $116.2, or $2.67 a share. That's $2.67 a share, a 14.6% increase over current forecasts for '07. If we achieve that result, it will be our 14th consecutive year of positive growth in earnings per share. And in 13 of those years, the increase percentage has been in double digits.

On a quarterly basis for '08, we're forecasting this pattern. $0.64 in the first quarter, $0.65 in the second, and then $0.67 and $0.71.

Now, I'll turn you over to Bob Banta.

Thanks, Bob. I'll try to move along here, so we get to your Q and A.

In the last 90 days, our debt, net of cash balance, has increased by $47.6 million. Our cash usage, then, in this 90-day period can be detailed as follows.

First, we borrowed $7.2 million in early May to fund the purchase of a small acquisition for our Components Group. That's TCP, that Bob mentioned in his comments on the Components section. We also borrowed $22 million for our contributions we made to our U.S.-defined benefit pension plan. This compares with our expense in the quarter of about only $3.3 million for these U.S. plans.

We decided to make additional contributions this quarter in order to take advantage of some sizeable tax savings. These contributions, mostly made this past June, will result in lower pension contributions in '08.

In addition, by making the extra contributions before we filed our U.S. tax return for fiscal '06, we got $8.5 million of cash tax benefits. The other tax return was filed this past June 13th.

And now, for some of the benefits. First, we won't be making any contributions to our pension plans, U.S. pension plan, in the fourth quarter of '07. And more important, for all of '07, we will have contributed $28 million. That number will drop to $6 million in fiscal '08.

Now, back to the current quarter. Capital expenditures were $25.4 million, about $11.8 million above our depreciation and amortization levels of the quarter. They were set at $13.6 million. The balance of the debt increase was used to fund working capital to support our growth and sales.

Looking past '07, which has not been a great year for cash flow, we're initially projecting that we'll see cash flow from operations for '08 amounting to $120 million. This will be a substantial improvement over '07, up by $102 million.

First, we'll see the drop of $22 million in the pension contributions that I just mentioned. We'll also see the collection of a $15 million receivable that will be owed by Boeing in May of '08. As most aviation observers know, Boeing's standard terms for those involved in their 787 program is that suppliers get paid 30 days after Boeing delivers its first airplane to an airline. This week, Boeing again reiterated its first delivery date as sometime in May of '08. So, we should see this $15 million cash payment next June. And of course, that's part of fiscal '08.

We'll also see a sizable shift in our sales mix towards programs with better payment schedules. Our growth in '08 sales will not consume as much working capital as in '07. And perhaps, more important, capital expenditures in '08 will decline from $98 million to $70 million. Depreciation and amortization is forecast to be about $60 million in fiscal '08.

'07 has been our year of building test rates for the 787, and expanding the production facilities in which we'll manufacture all the future deliveries. So, in summary, we're expecting '08 cash flows to be much improved over '07 levels.

Now, let me finish with a few other details for your models. Loss reserves came down by $2.2 million in the last 90 days to $14.3 million as of the June 30 balance sheet. We had very nominal addition to these reserves in the quarter, and the reductions were costs charged to these reserve balances that were previously recorded.

Our tax rate came down in the quarter to 28.4%, as we benefited from additional R&D tax credits and additional extra territorial tax savings on sales overseas. These benefits were calculated by some tax consultants that we had been employing, and they finished up their work in the quarter, so the final benefits could be recorded. In the fourth quarter, we'll see some additional tax benefits. We project the Q4 quarterly rate to be 30.1%, and all of '07 to now average 30.8%.

At the end of June, our total debt to capitalization was a respectable 39%. And finally, the total unused amount under our $600 million bank credit facility was $262 million. Lots of capital credit to take care of our needs as we move forward.

So, thank you. And we're now ready for Q and A.

[Kent], we'll go back to you.

Great. Thank you very much. (OPERATOR INSTRUCTIONS).

Cai von Rumohr, Cowen & Company. Please go ahead.

Hey, Cai.

Hello, thank you. Basically, like listening to facts through a fire hose, but very good.

And it's all the web. It's all in print.

Okay. A couple of questions. R&D, maybe tell us where do you expect 787 R&D to be in the fourth quarter, and R&D for the year? And like, what should we be thinking about for next year?

Well, Cai, I'm glad you brought that question up.

The R&D situation in our company, we're in an interesting situation in that, as you well know, the 787 R&D expense, which is a substantial portion of our R&D in the quarter, $12 million out of a total of $28, $12.1 million out of the Aircraft total of $17.6, that R&D expense is -- it's not simply a matter of deciding what tasks you're going to perform and spending the effort to get done the tasks that you decided on.

As I think you and others appreciate, we're in the midst of safety of flight testing, preparing lots of different designs of hardware for delivery to the aircraft, so they can fly the first airplane. So, what we're doing -- the work in the quarter on the 787 is the work that needs to be done. And the tune is, in part, called by what's going on in the safety of flight testing. When there are small anomalies, things need to be fixed or redone, the work has to be done.

I had anticipated that our 787 expenditures in Q3 would probably be a decline from what we experienced in Q2. But, as you can tell, it didn't turn out that way. And as a result, we have projected -- we expect that the effort will come down some in Q4, but not as much as we had previously thought.

So, when we put our 787 expectations together with all the other things that we think we're going to be doing in our company, we now have our R&D expectation for '07, we now have that up to a total of $103 million, which I think is substantially higher than what we might have guided this entire community to in the past.

In part, this is a result of the analysis done updating '07 in preparation for our '08 budget. And we have recently gone through that exercise, and it's come clear to us that we've -- given the levels we're running and the commitments we've made, it looks like that's where we're going to wind up in '07.

Fortunately, sales in '07 are strong enough, and gross profit in '07 is strong enough, that it looks like the year is going to come out a little better than what we had originally projected, in spite of the increase in R&D.

Now, with respect to '08, what we have built into our '08 forecast is a slight reduction in R&D. I'll start first with the Aircraft segment. In Aircraft for '07, we're expecting a total of just over $64 million and, in '08, a total of $54. So, we're looking for a $10 million decline in the Aircraft part of our business. But, we're planning on increased R&D in all of our other segments.

And so, in total, the decline we're projecting is only $3 million. So, we're looking at $100 million in R&D for '08. A decline, as I mentioned, of $10 million in the Aircraft business, but an increase of $5 million in our Industrial business, largely having to do with plans that we have for an updated controller for use in our Specialized Test Equipment business, a business which has been growing nicely, and plans we have for improved electronic controller products for other applications, and the continuing refreshing of our Servo valve and Servo motor product line.

The rest of the increase, the other $5 million, is spread through the other segments. Part of it is that in the Medical segment we had R&D for Zevex only for half a year.

So, I think compared to the expectations that some people have had as to what our '08 was going to be, the reduction in R&D, at least as we have it currently planned, is not as great as you might have expected. That's our plan at the moment. We are making provision in the plan. We are providing for a substantial effort on the A350. I don't want to put a number on that.

But, I will say this. The Airbus plan for procurement of primary flight controls on the A350 continues to evolve. I think when we first engaged Airbus, with respect to the A350, the old A350 we thought it was going to be a relatively small deal because the flight controls were going to look like the A330. Then, they decided to design a new airplane, so it looked like there would be a bigger task for companies like ours.

But, at that time, we thought that they were going to probably spread that task among at least three suppliers. We now believe that it's likely that they'll spread it between probably only two, and probably it won't be a 50/50 split. It'll be more like 70/30 or 80/20.

So, in our plan, we've made provision for rather substantial investment on the A350. That may or may not happen. First of all, we have to win those competitions. And secondly, they have to stay on the program schedule. But, we provided for it in the plan that I've just described.

So, that's kind of a summary of where we stand on R&D. I don't know if that helps or helped enough.

No, that's helpful. Just a quick follow-up, 787, where will that be next year approximately?

I don't -- I hate to duck your questions, but I don't think I want to -- what we've been doing with the 787 is reporting R&D quarter-by-quarter as we spend it. But, I've been trying to avoid making a projection.

Let me just say that it'll be substantially lower than what we're projecting for this year. It will be--.

--Okay--.

--Well less than half.

The other issue is that your SG&A was also massive in the quarter. Why was it so big? Where will it be for the year? And what should we think about for next year?

Let's see if we can start with the next year question first. Give me a minute here.

For '07, we're looking for just under $232 million, I think. And for '06, about $256. And I think the percentages turn out to be about the same.

About 15%.

Yes. And let's see, with respect to the percentages, I think in the current quarter, we're about 17% of sales. Last -- a year ago, I think we were at about 16%. The principle differences are in level of bid and proposal activity, and that has mostly to do in the quarter with the A350. We're not under contract, so that's still a bit in proposal.

I mentioned that we had rather substantial sales on the F-15, the Japanese F-15 equipment, in the quarter. And we pay commissions in Japan, so our commission expense was up rather substantially. The other element is that we picked up some additional SG&A in the acquisition of the Zevex, which came in -- was practically zero in our history, and came in at the quarter. And I think the SG&A expense was $4.7, something in that range. I think those are the major elements.

But, I mean $232 implies, like, $46 million in the final quarter. That doesn't make a lot of sense. Because the $232 -- it must be higher than $232.

Well--.

--There's corporate expense on top of that, Cai.

Oh. So--.

--So, I think you're doing a little bit of mismatch. We've got some corporate expense on top of that for the year.

Yes, you're--.

--Okay. So, if you add the corporate expense into the SG&A as you reported, what does it look like?

We had about $16 million in.

Plus in the op stock.

And the $3.3 in stock options. So, you add about $19.3 million in.

Okay.

Does that work?

Yes. I think so, yes. Okay. And the last one, Medical, Baxter basically just hit the wall yet again. What do you think that means for your business?

Well, the -- for those who aren't following this business, a quick summary. Baxter encountered a requirement to recall infusion pumps, oh, I don't know, a year or two years ago, something like that. And our Curlin company has benefited from that from a couple of points of view. The pumps that were in the field had to be, over time, removed from operation and, therefore, replaced. And also, Baxter was not delivering pumps.

Recently, they've reintroduced -- they, Baxter, had reintroduced a pump -- I think it's called the Colleague -- and delivered about 5,000, and encountered some more problems. And that's now a recall.

The benefit on that one, though, I think to us will be limited for this reason. That particular pump is a large volume pump used mostly in hospitals. And that, at least for the moment, is not the sweet spot of our infusion pump business. So, we think there probably will be some side effect that will benefit us, but it won't have the effect that the recall of a couple of years ago had.

Thank you very much.

Thank you.

Thanks. Bob Stallard, Banc of America. Please go ahead.

Hey, Rob.

Afternoon, guys, or say morning. Jumping the gun there.

Bob, in the past, the aftermarket performance has been very strong, and that was yet again the case this quarter. This is a tough area to predict, but you made a fairly conservative forecast going out into 2008. What do you think are the major changes versus what we've seen in 2007 in the aftermarket?

Are you thinking commercial, principally, or military, or--?

--Commercial aerospace aftermarket.

Commercial aerospace, yes. We're currently -- we were at $84 million last year, which was -- last year '06 -- way the hell up from $65 million the year before. On the other hand, this year, we're going from $84 million to $93 million and, as you point out, our forecast for '08 is a rather modest increase to $97 million.

I think you said it a minute ago, I mean, it's pretty unpredictable. As I'm sure you've noticed, our aftermarket kind of bounces around quarter to quarter. It's actually been more consistent this year than it has in previous years. I think the quarters have oscillated between $21 and almost $25 million.

So, it's just a guess. There are a number of kind of offsetting factors for us in the aftermarket business. There continues to be the demand because of the airlines are flying lots of airplanes. There is competition. There are -- everybody in the aircraft business is trying to be in the aftermarket. So, there are the [Moskanso's] and other major players who buy parts from us, but they do the repair and overhaul.

So, we're trying to be conservative and reflect what we think is likely kind of the low end of what one might forecast. I guess that's the way I'd described it.

Okay. And you've given us some very detailed build-up for next year. Putting aside the aftermarket and foreign exchange, which area of your various businesses did you find the most difficult to predict as you put the guidance together?

The Components Group is -- as you can tell, it's a little tough for us to predict. Our initial forecast for this year was a 9% increase in sales, and it's turning out to be 18%. So, we were a little on the low side there.

And that is a business, it's a little bit like our Industrial business. It's hundreds or thousands of relatively small orders. It's not the big programs that you can identify, like our Aircraft business and part of our Space and Defense business.

So, Components. Industrial, I'm feeling pretty good about Industrial because of the current strength, both in Europe in Asia. Of course, things could change in the global industrial economy over the next 18 months. But, I'm feeling pretty good about that.

I guess it would come clear that we're a little uneasy at the moment with what's going on in the Curlin product line in our Medical segment. And we've just had kind of a surprisingly weak quarter after three or four pretty stable quarters. And I think situation is confused somewhat by the impact of the Baxter recalls over the last few quarters.

But, as I tried to suggest, we think we're going to have sales, $109 million, next year plus or minus, and we have the opportunity to shape the new company that will be formed out of the combination of the Curlin and Zevex acquisition. So, we can react to the market as it develops.

But, all in all, I think it's a pretty solid forecast. I'm sure you realized, because I've said in other of these calls, it is not our intent at this stage when we're providing guidance for our next fiscal year to describe the absolute best thing that could happen. What we try to do is to project what is a very likely outcome. And we'll be perfectly happy to exceed our projection, and we hope that we won't disappoint.

And I think you're the guy that keeps saying our guidance is so precise that we very rarely surprise on the upside. And we're hopeful that some day we'll have an opportunity to prove you wrong on that again.

You can't help being accurate, Bob. Now, I'll just finish off with a question about the Medical business. You made a few deals there in recent history. Do you think we can expect a period of maybe these deals bedding down before you go and add some more things on?

Well, we certainly intend to bed these deals down, and I like that phrase. There are a couple of things that could happen that would be worth doing, but our general -- if we make another major move in that business, it will be because an unusual opportunity has been presented.

We're, at the moment, not exactly on the prowl for precisely the reason you suggest. We think we need to get the companies we've acquired organized and running in a predictable fashion.

Okay, that's great. Thank you.

Thanks. J.B. Groh, D.A. Davidson. Please go ahead.

Hey, J.B.

Hey, how are you doing?

I'm good.

A couple of questions. Could you give us the operating cash flow in the quarter for the nine months? You might have gone through that but, as Cai said, it's drinking from a fire hose.

Um-hmm.

Yes, cash flow from operations was a negative $18 million.

That's for which period?

Quarter three.

Quarter three, yes.

Okay. And then, CapEx was--?

--We mentioned earlier, $25 million. So, free cash flow was a negative $43.

Okay. And so, that improves, as you said, significantly next year. When you talked about R&D on 787, is there a chunk in there allocated for a potential Dash 10, a probable Dash 10?

No, that hasn't really gotten started. We're still plowing through the set of base designs. There's a little conceptual work being done on the derivatives, but it's insignificant compared to the effort that's under way to get the first complement of hardware through safety of flight test, so it can fly.

But, I think -- would the incremental spend be pretty marginal versus what you've invested so far?

Oh, yes.

I mean, knowing what you know now?

Yes, I think the changes are likely to be probably limited to the rudder.

And how much of what you've done on 787 is applicable to A350, or is apples-to-oranges? Is it full queen sheet, or is there something you can take away from--?

--No--.

--What you've done on the new product?

The A350 architecture is distinctly different from the 787 architecture. On the other hand, the A350 hardware will look quite a bit like what we've done on the A400. And it'll all be different sizes, so that it won't be taking a design from one airplane and just applying it to the other.

But, what Airbus, at least as I understand it, what they intend to do at the moment is pretty much replicate the architecture they implemented on the A380, which looks a lot like the A400.

So, for us, it's not starting from a completely blank sheet, but it's -- though, there may be a little bit of carryover from the 787, but not so you'd noticed.

I think in the past you've mentioned that working with Boeing this time around has been quite a bit different due to the way they throw the RFPs out there, and the package you get, and the package you deliver. With this restructuring at Airbus, do you think things change the way they request for proposals, as well?

Well, we only see Airbus through kind of the narrow lens of the primary and secondary flight controls. So, I don't know if what we see is representative of what's going on in all other areas of their business.

But, that having been said, it does appear that their intentions, with respect to the A350 over the last year, how they intended to handle that procurement have certainly moved in the direction of the Boeing 787 and away from what both Boeing and Airbus have done historically. I don't think they intend to go quite as far.

On 787, Boeing put out one entire primary flight control actuation package. And as we understand it at the moment, Airbus doesn't intend to do that. They actually have -- suppliers will be invited to bid the whole package, but also to bid each of the elements piece by piece. And my understanding of their intention is that they'll probably split it at least two ways.

So, is it safe to say that that change in the way they're doing things transfers a little bit of risk and, also, some more opportunity?

Absolutely.

Okay, great. And then -- hey, could you give us the purchase accounting adjustments detail in the quarter? I think in the Q, you said it would be $6 million for the year.

Yes. Yes, that's right. The total for the quarter, third quarter, was -- let's see here. For Medical, it was $2.3 million.

And what is that year-to-date? How close are we to hitting that $6 million? Would you expect it to be in the--?

--We've got $1.7 million forecasted for Q4.

$1.7 million for Q4, okay. All right, thanks a lot.

J.B.?

Yes.

Let me tag on to that. I think given whatever we said about purchase accounting adjustments for the Medical segment, we may have conveyed the impression that the $6.1 for this year would be substantially lower next year. And I think the reality is that because so much of purchase accounting for Zevex will fall in next year, the purchase accounting doesn't decline dramatically. What we're projecting for next year is about the same as this year.

What we've got to keep in mind is that Zevex was only with us in '07 for six months--.

--Right--.

--(Inaudible.) And so, we've got some early inventory write-offs and backlogs that have to be absorbed in the early quarters, and that really kind of front loads some of the costs in '07, and it kind of normalizes into '08.

But, presumably, that's in your 15% margin guidance for '08?

Yes, it is.

So, you have the first two quarters a little weak, and then getting stronger as you anniversary, and eventually moving towards that, hopefully, 20% goal?

No, it actually stay pretty stable throughout the year. This is the amortization of intangibles, and that goes on for a long time.

Okay, okay. All right, thank you.

Thanks. Ron Epstein, Merrill Lynch. Please go ahead.

Hey, Ron.

Good morning. This is actually [Sara Sony] for Ron Epstein.

This doesn't sound like Ron Epstein.

Not at all. A question for you on the Bombardier C-Series. Could you provide us with your thoughts on that platform?

Well, let's see. He clears his throat. If we are invited by Bombardier to participate, we'll consider it.

The reason I'm so hesitant is that we spent quite a bit of time with Bombardier. The last time they were seriously considering the C-Series. And at the end, we wound up with a rather important disagreement over the flight control architecture that they were intending to employ. And as a result of that, we basically parted company. We, in effect, withdrew.

And so, I think -- now, the people there have changed, so I think it kind of comes down to the question of what they intend to do on the airplane. And if they persist in embracing the architecture that they had in mind the last time, we will not be a participant.

Is that--?

--Got it--.

--Enough?

When do you -- what's sort of the timing in terms of when you anticipate you get further color on what they--?

--I don't really know--.

--Plan to do?

I'm not in touch with the current timing of the planning of the C-Series. We'll be glad to get back to you, but -- with what we know, if we know anything. But, we aren't -- because of this issue over architecture, we probably -- we're not the company that you probably ought to be asking that question.

Okay.

Thanks. Did you have any further questions?

No, that's it. Thank you.

All right, thanks. Eric Hugel, Stephens. Please go ahead.

Hey, good morning, guys.

Hi.

I guess you addressed sort of your M&A appetite with regards to Medial, but can you just update us on what you're seeing in general in the other areas of the market which you've been very insistent that you're definitely still looking at acquiring companies, then?

Yes, I guess I could trip through them. We continue to look.

The Aircraft business, I guess I'd describe this phenomenon. There are some opportunities. What we seem to be bumping into these days are opportunities wherein we're interested in some part of the business, but not the whole thing. There are companies that seem to be sort of coming on the market that are odd combinations of products. And as I'm sure you appreciate, the very high price expectations in the Aircraft business seem to persist.

Space and Defense, there may be opportunities there. And I don't think the Aircraft pricing model has carried over Space and Defense. We have a much broader range of opportunities in our Industrial business because of the broader range of products, and markets, and our international presence. If you've watched our history, most of the Industrial companies we've acquired are outside the U.S.

The Components Group continues to find what I guess would be fairly described as these bolt-on acquisitions like the thermal control products. And this is basically the idea of, as in the case of Respironics, taking an electric motor that is part of a motor blower assembly and becoming a supplier of the motor blower as a sub-system, if I could call it that. And the acquisition of this company provides that additional capability.

So, that's kind of the way we see it. Nobody's going to announce, in advance, acquisitions until there's actually a deal made. But, there's a lot of activity. That hasn't stopped. And we continue to believe that there's a lot of opportunity.

The important thing, Eric, is that we just told you about an 11.5% increase in sales '07 to '08. And if you took out the -- added the second half of Zevex to normalize Zevex, it's really about a 10% growth in core revenue.

So, we're in the fortunate circumstance, when you have core revenues going up that much, which is probably near a record for us over the course of time. But, we can afford to find that acquisition or acquisitions, plural, that is what we want, what helps our various product lines. So, that's a nice circumstance.

Maybe this next question is a little bit more theoretical of longer-term, but sort of -- you're talking about ramping up production on 787, obviously a low margin business. Sort of how do we think about the timeline of that crossing over to get to sort of, like, average margin? Sort of what point, is that 5 years, 10 years down the road?

Oh, I don't think -- it's not 10 years. But, I think, if I could use your five years -- I'm glad you weren't looking for one year. I think in five years we'll be at a full production rate. We'll have our supply chain fully developed. And I think the aftermarket will be beginning to kick in.

We are participating with Boeing in their GoldCare program, and I don't think they've had a lot of takers as yet. But, to the extent that they have takers for that program, that could accelerate the development of the aftermarket, from our point of view. So, it'll be sometime over the next few years.

As you know, the commercial airplane business is a long-term play. You develop business, and then live off the aftermarket. And that's the way it is with us and, thankfully, we have the aftermarket that's growing nicely. We were talking a few minutes ago of the levels of the aftermarket. I mean, it's close to $100 million out of a less than $300 million commercial aircraft book of business in '08. So, that's where the money is.

Is there anything that you guys need to do in the near term, or do you have any sort of view as to when sort of -- getting ready for the next generation sort of narrow body replacement at Boeing and/or Airbus?

I think we're doing that. And the most important -- the two most important things that we can do to be prepared for the narrow body -- maybe three. At Boeing, it's to do a good job on the 787. And at least to date, as I mentioned, they're awful happy with the work our company has done.

And the other thing is the -- I mentioned this last quarter, the job we've won in the 747-A -- to provide flight control computer electronics for the aileron and spoilers on that airplane, which puts us in a circumstance when at the time there is a narrow body, we will be accompanied with flying -- flight control computer on a Boeing transport and whatever our history is on the 87.

With respect to Airbus, I don't think Airbus will care whether we've done flight control electronics. They look at us as an actuary company. And in that case, it will be dependent on the A350.

But, I think we're a long way away from the narrow body. My personal view is that with the way the current narrow bodies are selling, I don't know why either Boeing or Airbus would be in a big hurry to spend billions to obsolete products that are selling as well as they are.

So, I think we've got plenty of time to get ready for the narrow body. And I think given the position we have on the 787 and the position that's maybe available to us on the A350, we could very well be in the position where we're not desperate at the time of the narrow body competition. And that would be a good position to be in.

Okay. My final question is more, I guess, on the Medical side, with regards Curlin, the pumps. You talked about seeing most of the growth internationally--.

--(Inaudible)--.

--And at hospitals, sort of areas that you're not really focused on right now. I mean, is the core markets that you're selling to now, I mean, are they growing? Or are you seeking just sort of entering into different markets? How should we think about that?

Well, that's a good question. Let me be -- paint a little background.

The Curlin product line, the Curlin company that we acquired, most sales, not all, but most sales go through a large nationwide distributor, the B. Braun Organization. B. Braun is the -- it's a German family-owned company with a large U.S. presence. Hundreds of sales folks. But, in the infusion pump market, that organization has focused on the outpatient market, clinics, ambulatory clinics, and not so much on the hospital market.

And oddly enough, even though it's a German-owned company, there has not been a serous effort to take the pump and offer it -- until we made this acquisition, there hadn't been an effort to take it into the European or Asian market. So, we've begun that. We've begun -- approach the European/Asian, principally, the European market, and expect some success. So, we expect a couple of million of sales growth selling the current Curlin pump into that market.

Secondly, the pump is a more precise pump than its competitors. And in hospitals, for instance, it's finding application in the neonatal clinics where more precise fluid flow is important. And so, we're beginning to see increased sales in the hospital part of the market.

So, in general terms, we do expect growth in both of those areas. Now, we're at a little bit of a loss to explain the pattern of overall unit deliveries quarter-to-quarter. So, I think, as I tried to say a few minutes ago, we'll wait to see how the next few months pans out.

And the confusion, from a forecaster's point of view, is trying to understand what has been the effect in previous quarters of the Baxter recall of infusion pumps which were competitive with the Curlin product line. We know that we certainly benefited from that. The thing we don't know is to what extent we benefited from that.

Are you still seeing predictability in the admin set--?

--Oh, yes--.

--The aftermarket portion?

The admin sets are selling pretty much according to forecast. There does seem to be a pattern there that has been predicted, wherein the admin set sales slow some in the late Spring and early Summer. And the way this is explained by the folks in the field is there are fewer discretionary procedures in the late Spring and the Summer. Both the patients and the doctors want to play golf, and they don't want to get operated on. So, there seems to be this seasonality in infusion pumps.

And I guess, finally, with regards to entering the hospitals and international, would those sales go through B. Braun, or are those direct?

Well, I think the answer is in the hospital market it will be both. In the international market and Europe, we're still working with the various B. Braun distributors in various European countries.

Curiously, B. Braun has national sales organizations in most of the major European markets, so -- as opposed to the U.S., we're dealing with one nationwide sales force. There's not one Euro sales force. There's a sales force in Germany, and Italy, and France. And so, we're working our way through a development of product introduction in those countries.

How does Zevex work in terms of how do they sell their product, direct or through--?

--Yes, Zevex, at the moment, goes direct in the U.S. And Europe has a very large customer, the company Numico.

Numico is a producer on enteral food, the kind of food that goes through the pump, and they're a big customer for the pumps. And Numico, the deal was just announced that they've just -- I think a deal has made. They're being acquired by Danone, a big French company.

So, you could say in the U.S. we go direct, and in Europe, with that pump, we mostly go through Numico.

And perhaps, is there any opportunity with perhaps Baxter or some of the other guys? I know you've said in the past that the main reason, at least you see, that they're in this business is to push their drugs. And it seems especially Baxter is having numerous problems producing the pumps that they might look to outsource that.

In the long-term, we hope that it turns out that way. Our intention in this business is to be the pump supplier of choice for all of the companies that are more interested in selling the fluid that goes through the pump.

And it will -- if we're successful, there will come a time when our pump will be so much better accepted and received in the market than the existing pumps that everybody, all the pump purveyors, will beat a path to our door. But, we've got some work to do to get to that position.

At the moment, you have the circumstance, particularly in the hospitals, where, as it's described to me, there are hospitals that have historically used only Baxter pumps. So, everybody is trained that way. They've got all of the administration sets and cabinets, and it's kind of a big pain in the neck to say, okay, now we're going to change to something else. Baxter has a recall, they have to do something, but they don't jump to the idea of, well, let's change out every pump we have in the hospital.

But, as I said, our plan is to become the pump supplier of choice.

Okay, great.

We don't intend to get into the business of providing the fluid that goes through it.

Maybe that's another set of acquisitions.

No, I don't think so.

Thanks a lot, guys.

Thank you.

Thanks. And at this time, I'm showing no further questions in queue.

Thank you all very much for coming and listening, and particularly this long. We'll see you next time.

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