Moog Inc (MOG.B) 2008 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Moog fourth-quarter and year-end 2008 earnings conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder today's call is being recorded. At this time I'd like to turn the conference over to Miss 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 August 4, 2008 and in certain of our other public filings with the SEC. We have provided some financial schedules to help our listeners better follow along with the prepared comments.

For those of you who do not already have the document, a copy of today's financial presentation is available on our investor relations home page and webcast page at www.moog.com. Bob?

Good morning. Thanks for joining us. This morning we will report our results for the fourth quarter of '08. We will talk about the '08 year-end results and we will describe for you what we think is likely to happen in our fiscal '09. Before we get to the normal report though, I'd like to do a quick review of our credit situation.

You may remember that in March we increased the size of our revolver by $[150] million. We took it up to $750 million and in June we sold $200 million worth of high-yield debt at 7.25. As we finished fiscal '08 we'd drawn down only $265 million on our revolver. So we had $485 million available, also $87 million in cash.

The revolver is provided by a syndicate of banks and the major participants we think are rock solid -- HSBC, [M&T], Bank of America, JPMorgan. In addition, our fourth-quarter cash flow was positive and John Scannell will describe those results in more detail in a few minutes. So we think we're in good shape in terms of available credit.

Now back to fiscal '08. Total year '08, another great year for the Company. Sales $1.9 billion, up 22%; net earnings $119.1 million, earnings per share $2.75, both up 18%. And we achieved these results while continuing to make substantial investments in R&D particularly in the aircraft business. R&D for the year was just under $110 million, 5.8% of sales.

Historically our R&D expenditures have run closer to 4%. For the year, aircraft R&D was just over $67 million and we spent about half of that in the 787. Our SG&A expense of 295 was up 17% compared to our 22% sales increase.

Interest was up $8 million to just under $38 million driven by our acquisition activity over the year. All in all, these cost increases were overwhelmed by an $80 million increase in gross profit (technical difficulty) million came to the bottom line.

Q4 in terms of earnings, the fourth quarter came out right where we predicted it although we achieved the result in a somewhat different fashion than we had expected. Sales were stronger than forecast, margins a little lower. We got some help from a low tax rate. Sales for the quarter were 491, up 19%. Net earnings of $31.7 million generated earnings per share of $0.73, once again an 18% increase over last year.

'09 guidance -- I presume that most of you have seen this morning's press release in which we revised our guidance for '09. 90 days ago we had projected '09 sales in a range around $2.1 billion and we predicted net earnings in a range between $134 million and $140 million, EPS between $3.08 and $3.20.

Since our last call we have done a new forecast. We now have a somewhat different view as to what the next 11 months are going to be like. I'll describe the forecast in more detail as I go through the segments, but in total we're now projecting sales at just over $2 billion plus or minus about $20 million and earnings per share in a tighter range around $3.08. We're forecasting a range of $3.03 to $3.13.

At this point, $3.08 would be a 12% increase over '08. I recognize that some of you have a more pessimistic outlook based on general economic conditions but I would ask you to stick with me as I move through the segments. I think you'll find that the majority of our '09 sales will be unaffected by the recession.

Now to the segments. In Aircraft Q4 '08, total aircraft sales $176.3 million up 10%. All of the increase was in the military side. Revenue on the F-35 development program, $22 million was up over $4 million, the increase evenly split between work done in our Company and that done by our partners.

Revenue on the V-22 was over $11 million in the quarter, an increase of almost $5 million from the production rate of a year ago. Military aftermarket had a very strong quarter at $39 million. I think this is a record, sales almost $6 million higher than the same quarter of last year.

Part of the increase was shipment of $2 million worth of test equipment and the rest was increased overhaul activity on the F-18, the C-5a, the V-22. Also we had strong parts sales for the [depots]. In total, military aircraft sales for the quarter were $105.3 million, up 20%.

On the commercial side, the only category showing much of an increase in the quarter was our business jet product line mostly having to do with increased production on the Hawker 4000 and the Challenger 300. Sales [of] Boeing commercial were down to a total of $19.8 million and our aftermarket sales of $22.3 million were down 14% from a year ago.

The fourth quarter of last year though in this category had strong sales of initial provisioning spares for business jets which didn't repeat this year. Aftermarket sales associated with just the commercial transport were down about 11% from a year ago. Total commercial aircraft sales were $71 million for the quarter.

Aircraft for the total year of '08 sales $673 million, an increase of $86 million or 15%. As in the most recent quarter, the majority of this increase was on the military side. F-35 development generated sales of just under $102 million for the year, up almost $37 million.

V-22 revenues were up $12 million to a total of $37 million. Our aftermarket revenue dominated by overall activity on the F-18, the C-5, F-15 and F-16 totaled $129 million, an increase of almost $20 million.

On the commercial side, sales of 271 were up 4%, the increase all on the business jet category driven by increased production of the Hawker 4000, the Challenger 300 and the startup of a job that we had been calling an unannounced platform. At a recent NVAA show, Gulfstream announced the platform. It's the G-250.

We've been working on it for over a year, we're supplying the flight control computer, flight control actuators and the high lift system to generated revenue on that program of just over $14 million in the year '08.

Commercial aftermarket for the whole year came in at just over $89 million, 6% (technical difficulty) from the year previous. But I should point out though that this change reflects fluctuations in aftermarket on business jets. The commercial transport (technical difficulty) market for all of '08 was actually up a little from the '07 level.

Now '09 in Aircraft. 90 days ago we forecasted the low end of '09 aircraft sales at $690 million. We now think that they're likely to be lower but only by about $10 million.

Looking at our military book of business, there are only small changes in production rates on the F-18, the F-15, the F-16, the V-22 and the Blackhawk. These programs really form the production base of our military aircraft sales.

Our F-35 development program in '08 came in at $102 million. There's still a lot of work left on this program particularly the carrier version.

We're forecasting F-35 revenues of $96 million for '09, about $6 million lower. On the other hand, in '09 our military aftermarket revenues will be strong.

There's a lot of work already under contract that's on platforms like the F-18, the C-5a, the V-22, F-15 and F-16. We are anticipating an increase in aftermarket revenues from 129 to 141. So in total, military aircraft sales should actually be up by about $5 million in '09 to $407 million.

On the commercial side we're now forecasting '09 sales of 273, up only slightly from '08. This forecast is lower than what we described 90 days ago and the difference all has to do with the strike at Boeing.

We believe that the strike will likely result in a delay of about six weeks on both the production programs and on the 787 and (technical difficulty) '09 will be about $10 million. So in total our revenues to Boeing commercial will actually be down from $76 million in '08 to $72 million in '09.

On the other hand, revenues to Airbus will increase from 20 to 27, partly the result of increased shipments on brake system manifolds for the A380. Our business jet product line is projected to be up $2.5 million from '08. We're projecting steady revenues for Gulfstream and Gulfstream represents about one-third of our business jet sales.

The Challenger 300, we're looking for a slight increase to about $18 million. Bombardier insists that work on the Challenger 300 is [solid]. They've seen very little customer shuffling of either orders or deliveries. They've actually talked to us about increasing the production rate.

Most of the rest of our business is with Hawker Beechcraft, the biggest portion on the 4000. Once again the orders are in place and Hawker insists that they have the backlog and on this aircraft there's been very little in the way of customer changes.

(technical difficulty) seen some weakness on the Premier and we're showing (technical difficulty) Premier. When we put all that together with some other miscellaneous sales in business jets, the total is $65 million, up slightly from $63 million in '08.

The big question in the commercial aircraft business is the aftermarket. We're now forecasting '09 aftermarket at $80 million, down 10% from fiscal '08 and incidentally down 10% from the run rate of the fourth quarter of '08 which came in at $22.3 million. We know that the airlines have taken aircraft out of service but we, like everybody else in the business, insist that the airplanes they remove from service have very little of our content.

We're also aware of the expected decline of passenger seat miles which may be reflected in aftermarket activity and so we forecasted sales lower than the current run rate. When we put it all together, commercial sales forecasted at $273 million and total aircraft at $680 million, up only $7 million from '08.

Aircraft margins. A few weeks ago a fund manager who has been studying our financials asked me why we don't talk about aircraft operating margins pre-R&D because if we did, it would be clear that the decline in our aircraft margins in the last couple years has mostly to do with the very high level of R&D.

Aircraft operating income before R&D expense as a percent of sales for the year '08 and in the fourth quarter ran about 18% which is reasonably consistent with our historical levels. However, given the level of R&D during '08, operating margins came in at 8.2% for the year.

In the fourth quarter, margins came in at 7.6%. In that quarter we took some additional reserves on the F-35 leading-edge flap, this is a fixed-price development contract, and we took additional reserves on the Boeing production work. For '09 we're expecting our aircraft R&D will be down somewhat and therefore our margins for the year will come in a little bit higher at 8.4%.

On to Space and Defense, Q4 another very good quarter; sales $62.4 million up 35%. And a quick summary -- the growth is driven by the Constellation program and our two recent acquisitions.

On Constellation we have a number of cost plus development contracts, most of which relate to the Ares crew launch vehicle. Sales on Constellation in the quarter were $6.5 million up from $1.6 million a year ago.

Our recent acquisition of CSA Engineering, a company specializing in vibration suppression and shock isolation, provided $3.6 million in revenue in the quarter. And in addition, our new colleagues at CSA demonstrated a real ability to provide crucial solutions to valued customers.

A few weeks ago the NASA staff responsible for the Ares launch vehicle visited our company in East Aurora. They described an analysis of a very serious vibration problem on their vehicle and in short order, the technical folks from CSA outlined the solutions. So a few days later, NASA was able to announce that this very serious problem had been solved and that the Ares development program could go forward.

Our other major acquisition, QuickSet International, produces revenues that show up in two categories. During the quarter, QuickSet received additional orders for pan and tilt mechanisms used on the Driver Vision Enhancer system and during the quarter delivered $4.7 million worth of that product. That system goes primarily on the MRAP vehicles and we describe that as defense controls.

That program provided the growth in the defense controls category. In addition to that, QuickSet delivered (technical difficulty) million of product which we categorized as homeland security.

Our legacy business in Space and Defense is in satellite launch vehicles and strategic and tactical missiles and our legacy business provided a solid revenue base of just under $30 million in the quarter. Space and Defense for the year '08, the pattern for the year '08 was very much like the fourth quarter.

Sales were up a remarkable 37% to $253 million. The legacy business was fairly stable, generating over 40% of that total. Constellation provided $22 million in sales growth and the defense controls business almost $33 million in revenue on the Driver Vision Enhancer system drove our defense control sales to just under $82 million, an increase of $20 million over last year.

CSA which came in late in the year produced $6 million in sales for the year. So like the quarter, the solid base of legacy business, growth in the Constellation (technical difficulty) and the new acquisitions made for a stellar year.

Space and Defense '09. I don't think that you would expect Space and Defense to be influenced much by the onset of a recession and our latest forecast reflects that. We're currently forecasting '09 at $276 million up $22 million or 9% over what we just achieved.

Once again, the legacy products and satellites, launch vehicles and strategic and tactical missiles provide a solid base of about $120 million in sales up $13 million from '08. The increases in controls already on order for satellites and an increased production of (technical difficulty) for the Hellfire missile replenishing the inventory used up in the Mid East.

Constellation programs in '09 of $24 million will continue at about the same level as '08. Our defense controls product line will actually decline $13 million to $69 million. This all has to do with the Driver Vision Enhancer program at QuickSet.

In '08 we ultimately delivered $33 million worth of mechanisms for this program. We knew that the program would be smaller in '09 and that that would be our sales challenge in Space and Defense. We have received additional orders so that the DVE program in '09 should be about $18 million hence the decline in defense controls.

On the other hand, we're looking for an $8 million increase in homeland security for a total of $26 million. Our naval applications will increase from $7 million to $12 million, mostly work on the Virginia Class Submarine, and our recent acquisition of CSA will generate in '09 $20 million because we will own the company for the whole year instead of only one quarter.

So that would be an increase of $14 million. I put all that together, the forecast adds to $276 million (inaudible) $22 million. As I said a minute ago, I don't think we have to worry about either the recession or the election with respect to '09 revenues in this segment.

Space and Defense margins. Margins in the quarter 9.6%, heavily influenced by the relatively large component of cost plus work. Nevertheless, margins for the year 11.6% compares well with last year's 13.1%.

Last year was helped substantially by the wrap-up of some long-running space shuttle contracts. The 11.6% for '08 compares very nicely to our long-term history in this segment. For '09 we're projecting only a slight moderation to 11.2%.

Industrial, Q4. The recession that everybody is now talking about hasn't found our industrial division by the fourth quarter. Sales $136.3 million were up 23%. In the quarter we were still getting a boost from foreign exchange, but even without that sales were up 17%. Revenue was up in every major product category particularly strong in motion simulators, in metal forming and in steelmaking equipment.

During the quarter, our revenue in the simulation market increased 62% to over $21 million driven by very strong sales to CAE in Canada, FlightSafety in the US and a number of smaller customers right around continental Europe. Sales of equipment on metal forming machines and presses, up 30% in the quarter to over $12 million. Strength in this business is predominantly in Central Europe where a number of press manufacturers have selected our controls.

Steel mill equipment sales up 29% in the quarter to over $13 million. As we have said in previous quarters, this is a combination of demand for controls on new and refurbished steel mills in China and on upgraded mills in Europe, many of which are meeting the demand for higher grade steel generated by the Chinese auto industry.

Industrial for fiscal '08. The same three markets -- motion simulators, metal forming presses and steel mill equipment -- led the charge for the entire fiscal year with growth percentages ranging from 33% to 56%. In addition to the markets I've just mentioned, we experienced 10% growth in plastics to a total of $78 million, 16% growth in power generation to just under $50 million. For the year our entire Industrial Systems product line generated sales of $532 million up 22% from the year previous.

Industrial for '09. 90 days ago we were forecasting industrial sales for '09 in a range centered around $653 million. That would've been a 23% sales increase over what we just reported. During the quarter, the last 90 days, we have redone that forecast and we're now projecting a midpoint in sales of $575 million, still an 8% increase over '08.

Our new forecast does include $11 million in revenue from a new acquisition of Berkeley Process Control. On a comparable basis we reduced our sales forecast for industrial by almost $90 million. Half of that change is in different exchange rates. Our new forecast for instance is based on the euro at $1.35.

90 days ago we were forecasting based on $1.52. Now one might ask if we're heading into a recession, why are we forecasting any sales increase in industrial? And the answer all has to do with the acquisition of LTi REEnergy, a company in the power gen market. We're forecasting power generation at $102 million in '09 an increase of $50 million from '08 and $46 million of that change is revenue we expect to consolidate when we complete the acquisition of the remaining 60% of LTi REEnergy. And that will occur in June of '09.

Excluding LTi, our legacy power gen business for the year is forecast at $56 million. $40 million of that will come from Asia, both Japan and Asia, all working on completing the infrastructure development in China. We know there is talk of slower growth in China but we don't believe it will influence infrastructure development in the near term.

We're forecasting our '09 revenues in metal forming at $52 million and the test equipment business at $38 million will be comparable to '08. This is a reflection of increased activity but at lower exchange rates.

In plastics, we think we're likely to be affected. Our products are used on machines which produce bottles that contain all sorts of liquids and the packaging industry is likely to be affected.

We control machines used in automobile production of injection molded dashboards and blow molded fuel tanks. Our products go into machines that pound out compact discs and DVDs.

Ultimately a recession in the US and in Europe will slow down sales of that sort of equipment than the demand for our product. The decline that we predicted for plastics for '09 is about 7%.

In the motion simulator business, in steel equipment and in most of our other product lines, we're anticipating a dollar sales decline somewhere in the range of 4 to 10%. Based on the kind of thinking I've just described, we're now forecasting industrial sales in the range I mentioned $575 million plus or minus $20 million. The midpoint would represent an 8% increase.

Industrial margins. Margins for the quarter, 12.3% were about the same as the fourth quarter last year. Industrial finished the year at 13.8% up from last year's 13.2%. We have been predicting margins of a little over 14% so we came in a little light for the year and for fiscal '09 we will project just a continuation of what we achieved in '08 or 13.8%.

The Components Group, Q4. Once again another excellent quarter. Sales of $90 million, up 23%. The biggest increase in both dollar volume and percentages in the Marine business, sales were up 17% to $13.8 million. Increase is in sales of slip rings and fiber optic rotary joints used on undersea robots. The marine industry calls them ROV's or remote operating vehicles.

$5.8 million sales increase does include $1.7 million generated by the PRIZM acquisition. PRIZM you may recall is a company we bought recently that makes multiplexers used in the marine market.

Marine wasn't the only business up smartly in this quarter. Aircraft sales, $28.3 million, up 18%. The biggest increase coming on the Guardian program produced sales of $4.5 million in the quarter up from just $1 million last year.

Guardian you will remember is the Northrop system to protect military aircraft from shoulder fired missiles. Other major program increase was on the multi-spectral targeting system, Raytheon Target Acquisition System used on the Predator. Program sales over $1.3 million, an increase of 48%. Also mentioned the Lockheed Longbow radar program which came back to life in the quarter and generated $700,000 in sales.

Space and Defense, part of the Components product line increased by 31% to $17.9 million; increased sales the result of continuing activity on the Bradley fighting vehicle, the Abrams Tank and the Stryker Mobile Gun System supplemented I should say by increased shipments on the multimedia slip ring for a variety of applications in the Army's future combat system.

Sales in the Medical product line up 8% to 14.6. Increase was the sales of slip rings to Philips Medical for CT scan machines. Sales of motor-blower assemblies for Respironics sleep apnea equipment down slightly in the quarter. Our unit volume is increasing but we reduced unit prices in line with a continuing cost reduction effort. Our industrial products, sales were up 12% in the quarter to $15.2 million, the increase primarily the result of the Techtron acquisition, a company with a product line of slip rings for closed circuit TV.

Fourth quarter for the Components Group that I just described was like a microcosm for the year. Sales for the year $341 million were up 20%; sales up in every category. In the aircraft business, our products are used to power and control all sorts of electroptic devices including Fleer systems, targeting systems and radar.

Major growth, the Northrop Grumman Guardian System and the Raytheon Targeting System. Our electronic components are also used in avionic systems produced by Rockwell, Honeywell, Boeing and Lockheed. Helicopter deicing, [Horton] slip ring applications, supply to most military helicopters and particularly the Blackhawk.

Sales of aircraft products for the year in the Components Group were $110.3 million, up 15%. Of that, 24% was aftermarket and it was actually down slightly from last year.

Space and Defense category for Components is dominated by products used to take power and control into the turret on military vehicles and to power the tank driver's viewing system. Primary platforms are the Abrams, the Bradley and the Stryker.

We have other space and defense applications. They include motors and components on missile controls, solar array drive assemblies for space vehicles. Sales in the Space and Defense category of $66.4 million, up 24% from last year. Of this total only 12% represent aftermarket.

Sales of products used in the marine industry had a fantastic year in '08. Revenues $46.4 million up 53%. And the product line includes slip rings. Some are large slip rings, some small and some are very, very large. It also includes fiber optic rotary joints and multiplexers that direct the signal traffic that comes through the slip rings.

Most of these products for the marine industry are designed and built in a company in Halifax that was part of the Kaydon acquisition. In the 12 months before that acquisition, this company was doing $13 million in sales and in '08 they did over $40 million.

Product line sales in Marine supplemented by the acquisition of the PRIZM line of multiplexers generated over $5 million in sales for the year. Our Medical products category has been dominated in recent years by the motor and blower assemblies sold for Respironics and slip rings sold to various CAT scan manufacturers, primarily Philips. Sales this year were up 8%, just under $57 million and the growth was primarily in CAT scan equipment.

Our industrial business in the Components Group grew by a little over $10 million, 21% to a new total of $60.8 million. The growth was primarily the acquisition of a couple of companies -- Thermal Control Products first, a manufacturer of motor-blower assemblies, and then Techtron, a competitor in the CCTV slip ring business.

How about '09? Our forecast for the Components Group for '09 is $367 million. It's an increase of 7.5%. We made our last major acquisition in the Components Group in fiscal '05. So the Kaydon companies were part of our Components Group (technical difficulty) our organic growth (technical difficulty) '06 to '07 and then '07 to '08 has been over 15%, more than double what we're projecting as the growth rate for '09.

In thinking about the recession's potential impact on the Components Group I first considered that 83% of the sales in the Components Group go into Aircraft, Space and Defense, Marine or Medical. Revenues from the Marine business may be influenced by declining oil prices but other than that we don't think any of these markets will be much affected.

In the Aircraft business, we're forecasting for '09 $126 million, an increase of $16 million, all the result of increasing production rates on Guardian and the Multi-Spectral Targeting System for Raytheon. These are firm contracts with delivery schedules that aren't likely to change. We're actually forecasting a modest decline in our avionics business as some of our older electromechanical cockpit displays are being phased out of production.

Components sales in Space and Defense are forecasted at $74 million up $8 million and the biggest increase is actually a new program. (technical difficulty) were used on a remote weapon system platform. [Onsberg] has won the opportunity to supply 6500 remotely operated weapon stations to the Army for a variety of vehicles and we're currently being qualified to support those deliveries.

The rest of the sales increase in this category reflects small production rate increases on the Bradley, the Stryker and future combat systems. And we also have a new order for fiber optic modems, a product sold to the Egyptian Army for secure communications in the combat area.

The Marine business we're forecasting at $48 million up only $2 million last year. We're actually forecasting a decline in sales for the equipment used on undersea robots but we have a very strong order book for the very large and expensive slip rings used on floating storage production and offloading system platforms. These slip rings go for anywhere from $800,000 to $2 million a piece and we have a backlog that will support $14 million in sales.

Medical products we're forecasting at $56 million in '09 down $1 million, once again reflecting lower pricing to Respironics in line with our continuing cost reduction efforts. CT scan business is expected to be stable.

In the 17% of our Components Group revenue that we call industrial, about 25% is in slip rings used in closed circuit TV. We projected those sales flat. The only growth we're projecting is in the wind energy market.

Our industrial automation category, a very broad portfolio of products used in factory automation, diesel pumps and fans, material handling, robotics, packaging and other stuff. This part of our business grew 46% last year but mostly (technical difficulty). We projected stability but no growth.

This is one part of our forecast where we may be a little vulnerable but it's $40 million worth of business, 2% of our Company's overall total sales; so a little erosion in this area could very well be picked up elsewhere in the Components Group but in any event, it won't kill us.

Components Group margins. Components Group fourth-quarter margins were a healthy 17.9% up from 14.7% from last year. The fourth quarter result allowed us to finish at 17.8% up from 15.7%. We do recognize that our margin performance in this group is very much a function of product mix, therefore we believe we ought to be a little conservative in projecting the future so we are using '09 margins of 16.5%.

Medical Devices Q4. Medical Device segment Q4 had a reasonable quarter, not quite as good as the third quarter but a lot better than the second. Sales of $25.9 million were up 11%, so that is good.

On the other hand operating profit of $2.1 million was down $700,000 from $2.8 million a year ago. It's also about that amount lower than what we expected on that sales volume.

The shortfall is all related to increased costs including increased prices on material and on purchase components. Also we have some unusual scrap costs in the quarter as a result of product improvements that we made during the quarter.

(inaudible) sales $9.5 million actually down a little from a year ago, the difference all in enteral feeding pumps. Sales of IV pumps $3.6 million were actually up 58%. Sales of administration sets at $10.3 million were up 48% from a year ago and of course this is the pattern that we expect in this business.

As time goes by we deliver more pumps. The installed base increases and there should be increased consumption of admin sets.

Sales of sensors, handpieces were $5.5 million up 88% from a year ago continuing the pattern that began last quarter. The growth drivers are ultrasonic handpieces used in cataract surgery. Two big customers, AMO and Bausch & Lomb, have embraced this product.

Medical Devices for the year. This is our third year in our history in the Medical Devices segment. We started in '06. We acquired Curlin IV infusion pumps, McKinley disposable pumps and in that year sales were $13 million.

Last year we added the Zevex enteral pumps, generated sales of $68 million and for '08 we finished the year $103.4 million of which pump sales were $38 million, admin sets about $35 million and we sold $21 million worth of sensors and handpieces and another $9.3 million of associated equipment. Operating profit for the year was $9.1 million or 8.8%, a little less than our most recent projection of 9.2% but still in the ballpark.

We know that we have still got a lot of work to do to broaden our product offering in this segment, to rationalize our production operation and to improve our channels of distribution. But we're in the market, we're getting educated and we still believe that there's a great potential for us in this (inaudible) business.

For '09, we've not changed our forecast for this segment. We're still expecting it will be a year of continued development, anticipating the introduction of important new products and the development of some new customer relationships. We're forecasting 14% growth to $118 million.

The introduction of new IV pump products will generate an important increase in IV pump sales. However our unit volume in enteral pumps was unusually high in '08.

Our European customer, Numico, in '08 was replacing their installed base with our pump and they are now complete on that. Also we had an unusual 5000 pump order from Abbott and that is one that we will repeat. So in '09 we're expecting a reduction in volume on enteral pumps and then that effect will be an increase in pump sales from $38 million to just under $42 million.

We're forecasting 30% growth in the sale of admin sets to over $45 million, growth made possible by the increase in our installed base of both IV and enteral pumps. We're forecasting only modest growth in sensors and handpieces and in associated equipment.

We're looking for margin improvement in the Medical Devices business, we're projecting operating profit for the year of $13.5 million up from $9.1 million this year. Margins therefore will come in at 11.4%.

So, in summary, our guidance for '09. Our revised forecast for '09 projects a sales range of around a midpoint of $2.015 billion. Of that, Aircraft sales are projected at $680 million and military aircraft represents 60% of that total.

We believe we're on platforms that will be strongly supported for the foreseeable future, the F-18, V-22, Blackhawk, F-35. We also believe that the military aftermarket will be strong.

On the commercial side of the aircraft business, Boeing and Airbus as you know have backlogs to carry them for years. On our business jet platforms, Gulfstream, Challenger 300 and the Hawker 4000 platforms all seem to be solid. The concern could be the commercial aircraft aftermarket but our forecast anticipates a reduction in sales in that area comparable to the reduction we saw after 9/11.

Space and Defense forecasted at $276 million and we believe this forecast is solid and may even have upside potential in the Driver Vision Enhancers and in the Constellation program. If you add the Aircraft segment and Space and Defense, it adds to almost $1 billion of our '09 forecast.

In addition, our Components Group forecast of $367 million includes $200 million of sales on Aircraft and Space and Defense products. We projected modest increases in these categories based on Guardian, the Multi-spectral Targeting System and activity related to military vehicles like the Abrams, the Bradley and the Stryker.

In addition, the Components Group forecast projects $48 million in Marine applications and $56 million in Medical Devices. So the Components Group forecast of $367 million -- over $300 million we think is solid in markets not likely to be affected by any recession.

Our Medical Devices segment forecast of $118 million is focused primarily on outpatient clinical care and that need will be there regardless of economic conditions.

So that brings me to our Industrial forecast of $575 million. Our Industrial business as you know is not a catalog component business that depends on general economic conditions. We're a supplier of customized high-performance systems for selected markets. You're familiar with these markets.

Given the LTi acquisition, power generation will be the biggest of our industrial markets. So this is in the energy business.

Our product line of motion bases used in flight training simulators now ranks next to plastics as our second biggest market and we believe that the demand for pilots and pilot training will also be independent of general economic conditions. Market for gauge controls and steel mills is driven by industrial development in China which may slow down a little but it's not going to stop.

As I said a few minutes ago, I think that over the long haul the market for plastic controls will ultimately be affected by a long recession as would metal forming equipment. We believe that in these markets and in the other markets important to us, we put together a reasonable and reasonably conservative forecast and as a result, we believe that the $2 billion sales forecast we've described is achievable.

On that basis, we're projecting midpoint operating margins of 12% which would produce operating profit of $241 million, net earnings of $133.6 million and earnings per share of $3.08, a 12% increase. If we're on that trajectory, the quarters should be $0.72, $0.76, $0.79, and $0.81. Even if we come in at the low end of our sales range, just under $2 billion in sales, we would expect earnings per share of $3.03 still a 10% or double-digit increase over '08.

Given our view of our '09 prospects, our Board of Directors considers our stock at its current price an irresistible investment. At a meeting yesterday the Board authorized management to buy from the market up to 1 million shares of our stock. The Board expects that this investment will be in addition to and not an alternative to our continuing acquisition campaign.

Now for just a little more detail on our cash flow, our tax rates, our pension expense, here's John Scannell.

Good morning. I will begin with a discussion of our foreign currency exposure and follow that with my usual view of cash flow both in the quarter and for the year. I will then address our pension situation, a topic receiving a lot of press at the moment. I'll talk about our tax rate and some additional items from the balance sheet and I'll finish with some additional guidance for '09.

Foreign currency. Given the recent strengthening of the US dollar, I would like to provide some perspective on our foreign currency exposure. About one-third of our revenues are denominated in currencies other than the US dollar. We are exposed to both translation and transaction risks but our business involves extensive intracompany transactions which create a natural operational hedge. Let me illustrate the point with our updated guidance.

Bob mentioned that our new sales forecast for '09 is down by about $90 million in our Industrial business and half of that is due to currency effects. When we work through all the translation and transaction impacts of this $45 million reduction in sales, the impact on the bottom line is negligible.

Cash flow. Free cash flow in the quarter was positive $29 million, helping to reduce our net debt by $20 million. Cash flow from operations at $52 million was the strongest quarter in the year.

Working capital was down $3 million in the quarter as inventories and receivables moderated from previous quarters in line with the sales change from Q3 to Q4. Capital expenditures were $23 million while depreciation and amortization were $17 million.

Interest payments totaled $9 million and our cash tax payments were $17 million. In addition, we contributed $8 million to our pension plans worldwide.

For the year, our free cash flow was positive $16 million, a significant improvement over our negative free cash flow of $72 million in fiscal '07. Fiscal '07 saw the big ramp-up in working capital as we geared up to support new aircraft programs. Capital expenditures this year totaled $92 million down from $97 million last year.

Depreciation and amortization at $63 million was up $11 million over '07. Our overall growth in working capital for the year was just under 16% compared with our sales growth of 22%.

Taxes. Our tax rate in the quarter was an unusually low 18.6%. In this quarter we saw the benefit of reduced state and local tax levels in both the US and Germany. For all of fiscal '08 our tax rate came in at 29.1%.

Pension. Pension expense in fiscal '09 will be $15 million down from $20 million in '08. While our asset values decreased this year, our convention of smoothing market fluctuations over five years cushioned the impact.

In addition, the discount rates used to measure the projected benefit obligation increased from 6.25 to 7.25%. On the measurement [days] the fair value of our US qualified plan assets was $336 million. This compares with our projected benefit obligation of $328 million.

So we were overfunded on our measurement [days]. However, with asset values at suppressed levels, we believe now is the time to put money into the market. We have therefore elected to increase our contributions to our US qualified plan in '09 to $6 million per quarter.

Previously we had anticipated only starting this increased contributions raise in the fourth quarter of '09. So the increase over the year represents an additional $18 million cash investment.

Some other items. Our non-cash stock compensation expense in the quarter was $900,000. Contract reserves increased by $4 million over the prior quarter associated primarily with our commercial aircraft book of business. At the end of September, our net debt to total capitalization stood at 37%, down from 37.8% at the end of fiscal '07.

Let me finish with some forecast numbers for '09. We believe that we will continue to see improvements in our cash generation in fiscal '09. Capital expenditures should be close to our '08 level with depreciation and amortization $6 million higher at $70 million.

As mentioned earlier, we're planning for increased pension contributions which after tax will reduce our previous forecast for free cash flow by $11 million. Putting it all together we're now forecasting $44 million in free cash flow for the year.

Interest expense for fiscal '09 is budgeted at $39 million, very close to our fiscal '08 result. We anticipate that the increased cost of our high-yield debt will be compensated by reduced borrowings and a slightly lower rate on our revolving line of credit that we had planned. Stock compensation expense is estimated at $6 million.

For fiscal '09 we're projecting a tax rate of 25.3%. This is lower than we had forecasted last quarter helped by the reinstatements of the R&D tax credit for both '08 and '09 as enacted in the TARP legislation as well as higher foreign tax credits. Now let me pass you back to Bob to lead the Q&A discussion.

Thanks John. (multiple speakers) start the Q&A?

(Operator Instructions) Cai von Rumohr, Cowen and Company.

Thank you very much and nice review. Can you walk us through the contract loss reserves, how much, what programs and if there were any other adjustments in any other areas?

The loss reserve -- change in loss reserves in the quarter was really made up of a couple of components. We took additional reserves on our Boeing production book for '09. You may remember that in last quarter we went through a description of the impact of the 787 delay on our overhead expense in our commercial aircraft production facilities driving our cost up somewhat and also costs of material expedite charges on certain components.

So in the quarter, we had a rather large influx of additional orders from Boeing for '09 and using the same thinking, increased our reserves by something less than 3 million. In addition to that, we have been talking for the last three or four years about the F-35 and we've talked mostly about a huge cost plus contract we have on the development of the primary flight control.

In addition to that, we have a fixed-price development contract for the actuation for the leading-edge flap. And we're getting towards the end of that development program. There have been some unexpected occurrences which took us into loss reserve territory. So we set up loss reserves on that program, something less than $1 million. Those are the major components.

Great, your tax rate being down, I assume that is because in fiscal -- because it was passed on October 3 you're picking up two years of R&D tax credit. How much is the '08 credit worth approximately?

No; actually, Cai, that's not the case. This is John. In our fourth quarter, when we went through the review, we determined that we couldn't pick up the R&D tax credit for '08 in our fourth quarter. So in our lower rate for '09 we have both the '08 tax credit and the '09 tax credit. We actually have two years.

(multiple speakers) a gain in the third quarter for the '07 tax credit when we did the final tax return on that. The real driver in the fourth quarter was state and local taxes. When we went through the final review of our taxes there was some tax rate adjustments in a variety of the states that we operate in and that had the effect of reducing the tax rate by less than 1 percentage point.

However when you went back, we had to true it up for the three quarters plus it had an impact on the deferred tax liability. It actually brought down the tax rate in the quarter to the 18.6%. So that really was what drove it in this quarter.

I guess I may have misspoke. What I meant was your fiscal '09 tax rate of 25.3% has as you indicated two years of R&D tax credit. Approximately how much is the '08 credit worth for the nine months that you didn't have it? How much is the carryover from '08 in the '09 tax credit, the dollar number?

I'm not sure if I have those dollar numbers to hand, Cai (multiple speakers)

I'd estimate it to be in total between the two years of a few million dollars and it's probably split pretty evenly so maybe about $1.5 million or so per year (technical difficulty)

While certainly your estimates look realistic, I guess I would as I look at kind of where you were in the fourth quarter, would I guess question a little bit metal forming looks like it sort of was off in the fourth quarter and you're expecting a higher run rate for the next year. It looks like the same is true of plastics.

Was that fourth quarter drop-off the summer and so you have a good book of business in both of those areas or should we be kind of nervous?

I think that the comparison you're making is the fourth quarter to the third quarter.

The fourth quarter of '08 and then looking forward off that run rate -- for example in plastics, the run rate it doesn't -- it looks like it's a little under $72 million. And so is that because you were down in the fourth quarter from the third? I know you have seasonality in your business but (multiple speakers) parse out the seasonality from kind of where you're seeing the business slowing.

You are exactly right. Plastics and metal forming are both businesses that have a large component in Europe and in Europe, our fourth quarter which is the September ending quarter, is generally a pretty low quarter. As you know, the Europeans -- many of them still take August off. So we don't consider the fourth quarter deliveries in markets like that in Europe representative of what the year is going to be.

Okay, great. And then one last one so I don't take it (inaudible) over. If you could just walk through in your industrial markets, Bob, what are you seeing in terms of color? Have you seen -- in what areas have you seen orders dry up or signs that they will dry up? In what areas have you seen that maybe things are going to be fine? I guess some of that is encompassed in your guidance. But just what areas have you seen any signs of slowdown to date if any?

In terms of incoming order rate, we have the same phenomenon that I just described. In the September ending quarter you do have the influence of the August phenomenon in Europe. So as in shipments, it's not a good idea to extrapolate incoming orders in the fourth quarter.

But to your question, most of the businesses that we're in were in this circumstance. The customers still have the requirement for our products. The incoming orders are strong and particularly in Europe, they're all worrying about what the future is going to be like.

So I think what is reflected in our forecast is a kind of a consensual estimate, a consensus among our people and our customers as to how our business is likely to be affected particularly in plastics and in metal forming, the businesses that may actually be influenced if a serious recession sets in. But I think it's very much the situation that if we are on the threshold of a recession, we haven't seen the beginnings of the impact yet.

Terrific. Thank you very much. Good commentary.

Eric Hugel, Stephens.

I got on the call a little late so pardon me if you answered this already. But can you give us an update as to I guess one, where things sort of developments stand on the 787 as well as address the expected or the hoped-for payment from Boeing that you were hoping you would get by the end of the year? It seems like you had some nice cash flow in the fourth quarter. It would seem that maybe you got that payment as well as the A350.

787, as I mentioned before, we are through safety of flight. All our stuff is ready to fly. We're now finishing qualification, qual testing will, with a couple of exceptions, exceptions being endurance testing, long-running endurance testing. We expect to be through qualification testing by the end of this month, by the end of November, I should say.

So, we are in good shape. We expect that the duration of the strike will be an additional delay in 787 and as a result, we reduced our revenue forecast on the 787 to reflect about a six week delay. That is not altogether a bad thing for us because we have been able to delay the fabrication of hardware (technical difficulty) some of the products that have not yet completed qualification so that in the late stages of testing if we run into (technical difficulty) we won't have to make changes to hardware that's already built. So we are pretty relaxed about the 787 at this point.

With respect to the payments, Boeing toward the end in discussions of waiving their payment terms so that you could get paid in advance, decided to turn that into a negotiation. And their notions of the benefit that should be provided to Boeing in exchange for early payments didn't match with our inclinations.

We did not successfully complete that negotiation and we haven't been paid and that isn't what made our cash flow in the fourth quarter. And so at the moment we're back in the circumstance, the original contract terms obtained and we will start getting paid for what we've delivered when Boeing delivers an airplane and you tell me when that is going to be.

The A350, we have begun development on the A350. We spent a little under $4 million in [Q4] in R&D on the A350 and we think that will be a substantial job for us in fiscal '09. As far as we know, the schedule still is what the schedule was. I know there are rumors around that the A350 schedule will be stretched but we haven't heard anything official from Airbus.

With regards to your share buyback plan, I mean I guess your debt to cap right now, your total debt to cap is around 40%, net around 37%. It looks like '09 is going to be a decent cash flow year, about $44 million cash flow. Are you thinking about increasing leverage to buy back shares or would you only buy back shares out of cash flow?

I'm just trying to think about in this kind of market where people are pretty focused on sort of balance sheet flexibility and stuff like that. While it might be -- while you might see this shares as cheap and opportunistic to the extent that it might limit your financial flexibility to sort of go out there and do acquisitions and maintain a reasonable debt to cap, how do you feel about that?

In early part of our remarks we kind of reviewed our credit situation. We came out of the year with $485 million of available credit on our revolvers and $87 million in cash. So we're looking at that total as kind of available capital to be in addition to the positive cash flow to get us from where we are now until when the market reopens in a sensible fashion.

We're talking about 1 million shares and at prices like today's price, that would not make a huge dent in the available capital. So we don't expect that we will be limited on our acquisition capability by the decision to authorize the acquisition of one million shares at prices like today's prices. And it would be a really good investment for our Company.

Finally, the lower tax rate for the fourth quarter, was that within your expectation, within your plan or was that just sort of a surprise?

It really (inaudible) come out of the final tax returns for the state taxes I think up in Germany. So we hadn't planned that it would come in that low. It was slightly lower that we had anticipated. And then it was as I say, it was the effect back through the first three quarters and reevaluating a deferred tax asset. So the impact was kind of large in the fourth quarter but over the year it wasn't -- over the year the tax rate came in quite close to what it came in last year at just over 29%.

It's not quite that our tax department is like the Oracle at Delphi, that you'd send in a question and a mysterious answer emerges. It's not quite like that but it's a little like that.

I guess maybe some -- maybe a little more clarity -- where in the quarter -- it is very impressive the cash that you generated without getting the Boeing payment. Can you sort of maybe delve a little bit more into that? Sort of -- was it just sort of liquidation of inventories that were building up or sort of what -- what sort of triggered that?

I think we have been telling the story for quite a while I would say through '07 and in the first couple of quarters of '08 that the large buildup in working capital that we have been seeing was putting a variety of materials facilities, equipment in place in preparation for aircraft programs going into production.

What we have seen in this quarter -- a certain amount of our cash flow is just a timing issue as to what goes out and what comes in in a particular quarter. But also I think if you look over the year, this year we had a 16% growth in working capital at slightly less than sales. Last year we had a big growth and in the fourth quarter working capital actually moderated slightly. It was slightly down in line actually with a slight reduction in sales from Q3 into Q4.

So you just do a sales to working capital comparison, the fourth quarter you would actually be expecting that to be marginally lower than working capital, and that's really compared with an investment of between $40 million and $50 million in working capital in each of the first three quarters. So really it's a working capital inventory receivable story plus the fact that it's been a focus attention for the last several -- last couple quarters and the last year or so.

Karl Oehlschlaeger, Macquarie.

Maybe I missed it but in Space and Defense, it looks like you bumped up your margin expectations a bit there and I think before you had mentioned that is going to be more of a weighting towards I guess cost-plus work which is lower margin. But can you explain kind of what has happened there?

Part of it is that we have increased our sales forecasts on some non-cost plus products, among them the Driver Vision Enhancer. Although we don't expect to do the volume in '09 that we did in '08, we are now forecasting doing $18 million of that product and that's not a cost-plus sort of a thing. So it's a little bit of a product mix shift, I guess I would say.

In aircraft controls, sounds like you guys took the reserves for some F-35 development work and work on Boeing. Can you explain a little bit more what was going on there and how big of an impact these items were to margins and how we should think about the remaining risk that there is on these items going forward?

We had been talking about margins in the fourth quarter slightly on the positive side of [90]%. And we came in $2 million plus -- in dollars $2 million plus short of that. And it had to do with the fact that in our review that we did on the F-35, we decided that a reasonable expectation, our EAC was going to increase and therefore we weren't going to move into loss reserve territory.

We have a as you may know process in our Company of reviewing thoroughly every major program on a quarterly basis. And it's in those reviews that we make the judgments as to where we think the EAC's on a program like that are going to come in.

On the additional reserves for Boeing, it's the same sort of cost pressures that we described in the previous quarter and we had anticipated that the orders that came in this quarter which would increase the loss reserve on the production book of business for '09, we had anticipated that those orders would come in -- drift in over the course of the year. And we -- Boeing orders when Boeing wants the order and it's not a consistent pattern and there was a substantial slug of orders that came in this quarter which had the effect of increasing that reserve.

I think the reserve for the '09 book of business is adequate at the moment. I would be surprised if we will be talking about additional reserves on that book of business in subsequent quarters.

And on the F-35, how should we think about the margin related to that work in '09? Is it zero margin work for that one piece of the development work now that you have taken the reserve or do you book it at a sort of go forward normal rate?

Once we take the reserve then the costs as they are incurred, are covered by the unwinding of the reserve. So you can think of it, yes, as zero margin work.

I think it's important to stress we have got -- this is a leading-edge. It's a smaller contract. The main part of our F-35 business is a cost-plus contract with the primaries.

Right.

It still is pretty limited margins.

Okay and then finally, you talked a little bit about the impact of R&D in the quarter and how big of an impact is that going to be -- what is your R&D expectation for '09 and how much flexibility do you have there with that do you think or do you choose to be flexible?

Our R&D in the quarter -- total R&D in the quarter was $28.9 million. Of that $18.2 million was aircraft. And in '09, we are projecting R&D for the total Company of $110 million which is almost precisely the same level as in '08, however, the Aircraft business we expect will be down about $10 million to let's say $56 million and the increases will be in other of our segments.

So, we are expecting a modest increase in sales, same level -- same dollar level of R&D, slightly lower percentage largely the result of less R&D on the Aircraft business. And that's basically a reflection of a reduction on the 787. There is a buildup on the A350 if the A350 stays on schedule and the net is that we would come out about $10 million lighter.

How much flexibility do we have? We have -- most of the staff is permanent staff. We do have though a sizable expense in terms of contract engineering supporting our staff. And in a portion of what we are calling R&D expense is actually material and construction of equipment of various types. So we do have some flexibility. If the need reduces, we can reduce the expenditures.

JB Groh, D.A. Davidson.

Most of my questions have been answered. But, Bob, maybe you could talk about what you're seeing on multiples for potential acquisitions, the prospect of maybe some increased activity given that we may have a capital gains tax increase shortly and how you're looking at that in the context of the buyback and such?

Let me answer the last question first. We said in our remarks and in the press release we put out, we don't see any stock buyback as an alternative to acquisitions. I mean we think that the available capital that we have described is likely adequate for the foreseeable future and buying back -- if we get to this number, buying back 1 million shares of stock at these kinds of prices isn't going to put much of a dent in that powder keg.

In terms of multiples, it's kind of all over the map. We think that there are some particularly US aerospace sellers that still have stars in their eyes with respect to multiples and occasionally there is a transaction that supports that belief. We are not involved in them.

On the other hand, I think in businesses outside of I will say aerospace, I think that sellers are more realistic both in the industrial business and medical devices to some degree even in the companies our Components Group is interested in. And in real small companies, we have seen interest on the part of owners who are thinking of selling their business.

We have seen interest in getting it done relatively soon. But I don't think the US aerospace industry has adjusted yet. Maybe it is just our experience but like I say, I think there are sellers, potential sellers who still have an adjustment to make.

So in other words, you have got say the $572 million in cash and availability plus maybe $44 million of free cash flow in '09 that's available less what you pay for the million shares which is $30 million to $40 million?

Yes, that's the arithmetic.

Okay, thanks a lot.

And we're not going to buy 1 million shares next week (multiple speakers)

Bob Franklin, Prudential Financial.

On the topic of business jets, you mentioned that the demand was coming from Bombardier and Hawker and that they insisted that the demand was there. Are there other manufacturers that you either work with or know of who are not saying that?

The only other manufacturer that's a major customer for us is Gulfstream. Other than those three companies, we really don't have any insight and I don't know. We have folks who attended the [NBAA] conference and came back with opinions about what is happening in sort of props and other airplanes. But we don't have any real experience in that business. We're not in that business.

Okay and then again, you said that Bombardier and Hawker were insisting that the business was good. Did you get any sense from Gulfstream?

On the particular platforms that -- what we are involved on and you should understand that at Hawker, we're a supplier on the 4000 and the Premier and at Bombarider on the 300. Other than that, we don't have any direct contact.

One other question on your bank facility. Are there covenants there?

On the senior bank facility, I would say there are the usual covenants, yes.

Do you have a leverage covenant?

We do, well -- yes, we do have a leverage covenant and we have an interest coverage covenant but we are very comfortably inside those covenants at the moment.

Can you tell us what they are?

Can I tell you what the specific covenants are?

Yes.

Our interest coverage has a minimum of 3 and right now we are at over 7 and our leverage ratio is a maximum of 3.5 and right now we're just over 2.

Thank you. At this time then we have no further questions in queue.

Okay folks. Thank you all very much for coming and listening. We were a little windy today but I guess that happens when we're doing a quarter, a year and an update as interesting as the update of '09. Thanks for coming and listening and we will see you next time.

Great and thank you. And ladies and gentlemen, this conference will be available for replay starting today Thursday October 30 at 1 PM Eastern time and it will be available through Sunday November 30 at Midnight Eastern time. You may access the AT&T executive playback service by dialing 1-800-475-6701 and then entering the access code of 967432. (Operator Instructions)