Moog Inc (MOG.B) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Moog second-quarter fiscal year 2009 earnings call.

Now, at this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's call is being recorded.

Your hosting speaker, 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 April 24, 2009, our most recent Form 8-K, filed on April 24, 2009, and in certain of our other public filings with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations home page and webcast page at www.Moog.com.

Bob?

Thanks, Ann. Good morning. Thank you all for joining us. This morning, we will report on the second quarter of '09, and we will describe in more detail the guidance that we provided two weeks ago on April 9.

Many of you know it's our practice at the end of each quarter to conduct a thorough review of major programs and product lines in terms of technical performance, contract performance and profitability. Having completed that exercise, I am happy to report that the quarter came in about where we expected, and we were able to confirm the guidance that we provided on April 9.

We've made a small change in our sales forecast for business jets to reflect some recent schedule changes, and we've toned down medical sales somewhat but there won't be any noticeable effect on overall profitability. So those of you who are adjusted to the numbers that we described two weeks ago, you can relax now. I will provide a little more detail on the situation, but there is no more bad news. There isn't another shoe to drop.

Onto the quarter results -- second-quarter earnings came in at $23.7 million, $0.55 a share, right in the middle of the range that we were expecting and projecting two weeks ago. Earnings per share were down 17% from a year ago. Sales for the quarter, $453 million, were down 3% from last year and the decline was all in exchange rates. On a constant-currency basis, sales were actually flat.

Cost of sales -- 70% instead of last year's 68%. As a result, our gross profit was down 9% or about $14 million.

R&D at $24.2 million was down 7%; SG&A, $68.8 million, down 6%; interest at $9.4 million, up ever so slightly. In other income, we had a gain mostly reflecting our minority ownership of LTi REEenergy. Tax rate, 35.1 -- a little bit higher than last year and the result, net earnings $23.7 million, 5.2% of sales.

If you compare our net earnings this quarter with the 28.6 million we made in Q2 last year, the difference has all to do with the industrial sales that are $25.7 million lower resulting in a $7.4 million reduction in industrial operating profit and a $4.8 million reduction in net earnings. Were it not for the global industrial recession, our earnings would've been about the same as last year.

I will go to the segments. Aircraft, Q2 '09 -- total aircraft sales, $162 million, exactly the same as last year's second quarter. The outcome, though, was the result of a 9% increase in military sales, a 16% decline in commercial sales, and the addition of $1.9 million in sales from our recent acquisition of Fernau Avionics Limited.

Military aircraft sales for the quarter, $107 million, up $9 million from a year ago. There were some volume changes in OEM programs, F-18 sales up 16% to $9.4 million, V-22 up 20% to $8.9 million.

On the other hand, revenue on the F-35 was down $2.2 million from a year ago. The change in F-35 revenue has mostly to do with reduced activity in the development program on our part. We are winding down our development programs. Our partners seem to be still pushing to complete theirs.

The big increase in military aircraft sales was in aftermarket. A part of that change was an increase in sales of tactical air navigation equipment we call TACAN. This is a product line that came to us in 1998 in our acquisition of Raytheon's Montag division. We've always included TACAN sales in military aftermarket, since what we acquired back then was an aftermarket product.

Over the last 18 months, we've updated our design and we are now selling new TACAN systems on an OEM basis. With the acquisition of Fernau Avionics, we intend now to combine those TACAN sales with Fernau and make air navigation equipment a product line focus.

Setting aside the TACAN sales, the military aftermarket came in this quarter at $35.8 million, up $7.3 million from a year ago. Major military aftermarket programs for us are the overhaul of the F-18 leading-edge actuators, overall overhaul of flight controls for the C-5, and repair work on V-22 swatch blade actuators.

Commercial aircraft -- sales, $53 million, were down $10 million from a year ago. We saw in this quarter some of the sales reductions we talked about in the conference call a couple of weeks ago. Sales on the Boeing 7-series production airplanes, $8.1 million, were down over $5 million from last year, a reduction of 39%. We've slowed down our production activity on the 87, and our sales in the quarter were $2.3 million, less than half of last year's revenue.

Airbus sales of just under $6 million on the other hand were up 24% from last year. The increase is partly the buildup on the A380 on which we sell some brake system components, but also Airbus places orders in a somewhat erratic fashion.

Business jet sales -- $13.1 million in the quarter were actually up 2% from last year, but we are anticipating declines in the near future in revenues to Gulfstream from Bombardier and Hawker, Hawker Beechcraft.

The other big change in our commercial aircraft revenues was the $3.6 million decline in the aftermarket. The aftermarket came in at $18.8 million, down 16%. Our revised aftermarket forecast of $77 million presumes that the next two quarters will maintain the second-quarter level, in which case we would finish the year down 14%.

I mentioned a minute ago our acquisition of Fernau Avionics. We completed the acquisition in early March. Fernau is a leading supplier of ground-based air navigation systems for military, naval and civil aviation. These systems transmit signals that are used to calculate bearing and range information to aid pilot navigation. They are generally referred to as navigation aids or Nav-aids if you're in the business.

In the one month that we've owned Fernau, sales were $1.9 million. For seven months of the year '09, we expect Fernau will generate $17 million-plus in sales.

The TACAN products that were part of our Montag acquisition are a perfect complement to the Fernau business. Sales of those products were $4.5 million in the quarter and our forecast for the year is $10.8 million. So adding these sales to the Fernau forecast takes the Nav-aids product line to $28 million for the year.

So aircraft '09 -- two weeks ago, we revised our guidance for the year. We changed the military aircraft forecast from $420 million or $409 million, commercial forecast from $260 million to $225 million, and those new numbers taken together with $17 million worth of revenue from Fernau add to a total of $651 million.

The results in the second quarter line-up pretty well with that forecast. On a year-to-date basis, F-18 is a little more than halfway to the $33 million we forecasted. V-22 is exactly halfway to the $38.4 million. The F-35 at just under $56 million year-to-date is running ahead of our forecast for the year, which is now $101 million. But we expect that the workload will moderate over the next couple of quarters as the development program continues to wind down.

In military aircraft, the major change that we have made to our earlier forecast was in the aftermarket. We'd reduced military aftermarket sales by $7 million.

We had very strong sales in quarter two in part because we had a substantial inventory of F-18 leading-edge transmissions that had been returned by the Navy for overhaul. Our concern going forward is that the Navy will not be able to keep up with that rate of return, and therefore some of the F-18 overhaul work we anticipate will slip into 2010.

In all our previous work forecasts of military aftermarket, we had included the $10.8 million for the TACAN nav-aids which we would now like to report together with the Fernau acquisition. So after incorporating that change, military aftermarket forecasts would be $123 million. Year-to-date, military aftermarket sales, not including TACAN, totaled just under $63 million. So we need two more $30 million quarters, and we expect to achieve our revised military aftermarket forecasts. So the entire military aircraft forecast is now at $398 million.

In commercial aircraft, we made a big change two weeks ago. We reduced our sales to Boeing Commercial from $66 million to $47 million. We are forecasting the 7-series production at $36 million and the 787 in about $11 million. Our results through the first half were close to 50% of the new total. We've also reduced our production forecast for Airbus from $27 million to $23 million and we are on track for that number as well.

In business jets, we had reduced our forecast two weeks ago by only $4 million to $55 million. That change based on slightly reduced activity at Gulfstream and Hawk or Beechcraft and in just the last two weeks we've had some schedule changes which suggest that forecast is still $5 million too high, so we will change it to $50 million.

We reduced our commercial aircraft aftermarket forecasts by only $3 million to $77 million, suggesting that the decline from last year instead of 10% would be more like 14%. If the next two quarters maintain the level of the second quarter, we will be okay with that forecast.

In total, then, with the $5 million reduction in biz jets, we've come in at $220 million for commercial aircraft for the year. Add the $28 million forecast for nav-aids which I just mentioned, and the aircraft total for '09 would now be $646 million.

Aircraft margins -- in the guidance we projected at the end of our first quarter, we had forecasted aircraft margins for the year at 9.3%. The second quarter came in at 9%, so we are at 8.6% on a year-to-date basis. Two more quarters at 9% would produce an average of 8.8% for the year, so we would like to revise our projection to 8.8%. It would then reflect our current performance.

Space and Defense Q2 -- a very strong quarter, sales just over $68 million with margins of 14.4%. In comparison with the same quarter a year ago or even with the most recent quarter is overwhelming influenced by the impact of the Driver Vision Enhancer program at QuickSet. You may remember that towards the end of calendar '07, we got a very large order for Driver Vision Enhancer systems going on the MRAP vehicles. In the second quarter of '08, we delivered 5000 systems, generated $17.6 million in sales. In the second quarter of '09, the quarter we are talking about, sales in this program were only $1.5 million.

If we look at the businesses other than the Driver Vision Enhancer program, sales went from $52.5 million to almost $67 million. Of that $14 million increase, $5.3 million was the addition of CSA Engineering acquisition we completed in the third quarter of '08.

Other than CSA, our basic product line grew by $9 million or 17%. Where did that occur? Sales of controls on satellites, military and commercial, $16.7 million were up 17%. Sales of satellite launch vehicles, strategic and tactical missiles and missile defense -- that total was $14.1 million, up 18% from a year ago. In defense controls, other than the Driver Vision Enhancer, sales went from $10 million to $16.9 million.

In the US, we are putting more and more equipment on the Stryker mobile gun system. I mentioned last quarter a big new job in Europe for Krauss Maffei Wegman on a platform called the FLW 100. We continue to provide Gunter (inaudible) equipment for the CV-935 and we are continuing the upgrade of the Tenix M-113 system in Australia.

Our homeland security and naval systems product lines totaled just over $7 million in the quarter, about the same as a year ago. One product line that actually did encounter a serious slowdown was the NASA Constellation program. Sales of $3.4 million were about half of what they were a year ago. For the last few months, NASA, without a new administrator, has been moving very slowly on commitments for the design of the Orion crew vehicle. As a result, our sales activity and cost-plus programs has slowed down. But we do expect that those decisions will get made and the work will come later in the year. In total, though, taking the Driver Vision Enhancer impact into account, sales for the quarter of $68.3 million were down 3%.

Space and Defense in '09 -- two weeks ago, we moderated Space and Defense forecasts from $281 million to $271 million in part in recognition of the slowdown in the Constellation program. We think the $271 million forecast is solid. Satellite business at $59 million for the year, we are already at $32 million.

The rest of the legacy business, in launch vehicles, missiles, missile defense, is forecasted also at $59 million, and we think we are all right with that number. Defense controls is that forecasted at $73 million. We need two more quarters at $13 million or $14 million, and that seems likely even without an additional order for a Driver Vision Enhancer.

We are expecting some acceleration in the work on the NASA programs. It should get us back to $5 million quarters instead of $3.4 million, and we are hopeful that will happen. So in total, we are comfortable with the $271 million in Space and Defense is achievable.

Margins, Space and Defense -- margins in the quarter, 14.4% compared favorably with 13% a year ago, and last year, those numbers were helped by the big Driver Vision Enhancer order.

Those of you who've followed our space and defense business over the years will recognize that these double-digit margins are kind of heady territory for this segment. This is a business that is generally not characterized by long-running production programs. It often has an important cost-plus component, which is lower-margin business. The fixed-price part of the business is often quite risky because we are often implementing genuinely cutting-edge technology.

With all of that in mind, we are not counting on a continuation of 14% margins. We are projecting margins in the last half of the year could get closer to 10%, which would bring us to an average for the year of 13.3%.

Industrial Systems Q2 -- sales in the quarter, $105 million, down 20%. In the quarter, part of the decline was the currency effect. In constant currencies, the sales decline was 14%.

Two weeks ago when we revised our guidance for '09 we reported continued weakness in four major industrial product lines. At that time we knew our sales numbers for the first two quarters, of course, and we knew the trend in incoming orders. And on that basis we developed a revised forecast for industrial systems and reduced our sales projection for the year by $45 million. This morning we will describe in a little more detail what's going on in our industrial business.

I will begin with what historically has been our largest product line, controls for plastics-making machinery. Sales in the quarter, $8.2 million, down 59% from a year ago. Year-to-date sales are down 48%. As I mentioned in the call two weeks ago, our incoming order rate in the second quarter was down 77% from last year.

Historically, over 60% of this business has been in Europe, and business there is very slow. Our major European customers export their equipment all over the world, and they are all on reduced work hours. There are European companies that have closed manufacturing sites, and some which have dependence on automotive and white goods industry, are struggling financially.

In Asia, the situation in this market is equally grim. Our incoming orders were 20% of our shipment in the quarter and 11% of last year's order rate. In light of this situation, our sales forecast for plastics for the year is now $28 million. Year-to-date we are already at $20 million.

The situation in metal forming is similar. Many of our customers sell equipment into the auto and construction industries. Sales in the quarter, $7.6 million, down 45% from a year ago. Year-to-date we are down 36%. Metal forming is primarily a European business, and our second-quarter order rate was down 60% from a year ago. So our forecast for metal forming for the year is now $25 million. Year-to-date we are already at $16 million.

Over the last three years we've enjoyed very strong growth in gauge controls for steel mills, primarily as a result of development of the steel industry in China. We are told that in '09 China is expecting to produce 460 million tons of steel, down from 500 million tons last year. Beyond that, it is expected there will be a reduction of 100 million tons of capacity, mostly the elimination of inefficient mills. Our business there at the moment is mostly spares and overhauls.

In the quarter, our steel industry sales didn't look too bad. $9.3 million, sales were down only 2%. However, incoming orders in the quarter were down 37% from a year ago, and on that basis we've reduced our forecast for the year to $31 million, and we are already at $18 million.

The last major market that appears to be in decline is the simulator business. Sales in the quarter, $14.3 million, down 17% from a year ago. However, last year was a year of remarkable growth. Sales in '08 in the simulator business were up 56% to $75 million. This year we now have a very clear picture of the requirements from our major customers, and they include CAE, flight safety, and Rockwell Collins. And we are forecasting on that basis sales for the year of $58 million, which is down from '08 but it's 20% higher than '07. Year-to-date sales are $33 million.

There actually are some positives in the industrial market. Thankfully, our generation is holding up very well for us. Sales of $15.6 million in the quarter, up 32%. Year-to-date at $29.1 million were up 28%. And we expect that sales in the next two quarters will be at about the same level. And beyond that we expect to add $70 million in sales of LTi pitch control systems, and Insensys blade-conditioned monitoring systems. So with the addition of that $70 million we are expecting power gen for the year to come in at $129 million.

Test equipment business is also holding up well. Sales in the quarter, $8.9 million, up 16%. Year-to-date we are at $16.8 million, about even with last year. This is a business that is split rather evenly between Europe and Asia. Only about 12% of it is in the US. And we have backlog and visibility, which supports a $35 million forecast.

In total we are now forecasting sales for the industrial segment for the year of $470 million. As I mentioned, about $70 million of that will come as a result of the LTi and Insensys acquisitions. So we are looking at sales of our legacy products from the last half at about $185, down $30 million from what we achieved in the first half. We believe that this forecast takes into account the weakness I've described in some of our major markets.

Industrial margins -- margins in the quarter, 10.4%, down from the excellent 14% we enjoyed a year ago when sales were 25% higher. We are anticipating that reduced sales of our core business in the second half of the year will adversely affect margins. In June we will complete the acquisition of LTi. Once we own LTi outright, we will consolidate 100% of the sales. But the margin impact of the LTi additional sales will be partly offset by purchase accounting adjustments. As a result, we are expecting that we will achieve margins for the year of 7.1%, and that is before the restructuring expense. We've mentioned restructuring of $15 million pretax. The majority of that will fall in the industrial business over the next two quarters.

Components group, Q2. Sales of $84.5 million, almost exactly the same as last year's second quarter. In real terms, there was actually 4% growth, offset by changes in exchange rates. Our components group makes some sales in Sterling and some in Canadian dollars.

Within the same total, though, there were some big swings. Sales of aircraft, space and defense products were up 16% to $50.4 million. Marine product sales at $11.1 were almost the same as last year. Sales of medical products were down 15% to $12.8, and industrial, at $10.2 million, were down 29%.

The pattern for aircraft products in the components group is similar to what we are experiencing in our aircraft control segment. Military aircraft sales, up 35% in the quarter to $25.9 million. The biggest increase in the Guardian program, $6.2 million in the quarter. Guardian sales up 62% from a year ago.

We also had increases in a variety of military aircraft programs that are in the $1 million or $2 million range. They include a number of Raytheon programs, the advanced technology FLIR program, the multispectral targeting system, the lamps program.

In addition, sales were up in the sniper advanced technology pod at Lockheed Martin and on a number of products for the company FLIR for use on the predator unmanned air vehicle. Most of these military programs are sensible products (inaudible) sliprings of product area in which we offer leading-edge technology.

On the other hand, our commercial aircraft products, primarily electromechanical components used in avionics instrumentation, declined in the quarter by 18% to a total of $6.1 million, the trend not unexpected. Many of our instrumentation products are on older aircraft that are phasing out of production.

Sales of Space and Defense products in the Components group, up 10% to $18.4 million. In this quarter, the growth was not in our bread-and-butter vehicle programs, the Abrams, Bradley and Stryker. Growth was in a variety of components sold for use in space vehicles and in ground-based radar.

In the marine market, as you know, we provide products for remote operating vehicles which are undersea robots, and floating production storage and offloading vessels. These are primarily used in offshore oil exploration and production.

As the price of oil went sky high last year, our sales increased dramatically. You know oil prices are now back to more normal levels, but I am pleased to report that our sales are holding level. At $11.1 million, sales were about the same as a year ago and up slightly from the most recent quarter.

On the other hand, sales of medical equipment down 15% to $12.8 million. Our sales to Respironics in dollars were down 15% to $7.6 million. We're actually delivering higher unit quantities to Respironics but of a product with a lower price.

Sales in the CT scan market were down 5% to just under $4 million.

Revenues in Industrial products, $10.2 million, down 29%. We've seen a 10% decline in sales of slip rings used in closed circuit TV, but much more of the decline is in equipment that we refer to as industrial automation, the full range of components used on all sorts of industrial equipment. Here, our experience seems to reflect the general malaise in the industrial equipment industries.

For '09, the year '09, two weeks ago, we changed our forecast for the Components group to $330 million, a reduction of $13 million, mostly in industrial products. Results of the second quarter, we seem to be on track to achieve that forecast. It's possible we could see further weakening in the industrial market, just as likely that there will be somewhat stronger sales in military aircraft and in medical equipment.

Components margins -- margins in Quarter 2 came in at 17.8%, up from 17.3% a year ago. First-quarter margins were slightly higher and on a year-to-date basis were at 18.1%. We are currently projecting an average of 17.5% for the year. That seems a pretty safe bet for the Components group.

Medical Devices, Q2 -- results and are Medical Devices segments for the last quarter were a mixed picture. There were some real positives -- sales at $34 million, up 50% from a year ago. Of the $11 million increase, $6.7 million was revenue in the recently acquired companies. Nevertheless, sales of the remaining $27.3 million in our base business were up 20% from a year ago and a very strong recovery from the $20 million sales level of last quarter.

Sales of pumps, $10.7 million, up 30% from year ago. Admin sets at $9.7 million, up 24%.

In terms of sales, the only bad news was in sensors in hand pieces -- sales, $3.3 million, down 31%. I mentioned last quarter that our customers for hand pieces were rebalancing their inventory. That product line seems to have recovered all right. On the other hand, you may remember that we sell ultrasonic sensors that detect air bubbles in infusion pumps, so when the bubbles are present, the pumps shut down. We supply these sensors to many of our infusion pump competitors, some of whom are not delivering pumps at the moment, so they are not buying sensors. So the sensor business is down 58% from a year ago.

There is one other bright spot in the quarter, the performance of the two recent acquisitions. They both met our expectations in terms of sales. AITECS had sales of $1.6 million, Ethox $5.1 million.

The dark side of the picture in Medical Devices is the financial performance. With $34 million in sales in the quarter, our operating profit was slightly negative, $77,000 to be precise. Here's the situation. The acquisitions are in their early days, and purchase accounting adjustments in the quarter of $1.1 million not only offset their operating profit contribution, they actually drove them negative. So in the quarter, on $6.7 million in sales from the acquisitions, the operating profit effect was actually a negative $423,000. Nevertheless, on $27 million in sales of pumps, sensors and hand pieces, we should have expected to make something in the neighborhood of $3 million and we only made $346,000.

The shortfall has two major components. Last quarter, we described a software problem we encountered in the controls on our internal feeding pumps. I characterized this as a very subtle problem. We believe it is triggered very infrequently by different rates at which electronic components power up when the pump is turned on.

The problem software was developed a long time before we acquired the Zvex product line. Nevertheless, it's a problem we need to correct on units that have been delivered. Last quarter, we established a reserve of $800,000 to take care of that problem. There are 110,000 of these pumps in the field; 77,000 are in Europe.

In developing our initial reserve estimate, we presumed that the pumps in Europe would have their software upgraded when they were returned to a service center once every two years for calibration. This is normal practice. We presumed that we could upgrade the software as part of that routine service. It turns out, though, that the European authorities have decided that the software update has to occur faster than that, so the pumps have to be recalled and updated independent of the normal service.

There are lot of pumps. The result is an additional expense estimated at $1.2 million. So we booked that additional reserve in the quarter, and when we are done, we will have spent $2 million fixing this software problem.

When we got into the medical devices business, we were counting on the fact that our company's ability to design and develop reliable products and ability that we demonstrate on a regular basis in our aerospace and industrial business would avoid this kind of problem. But as I mentioned, this issue predates our association with Zvex but it does remind us of what we knew going into this business. Technical problems on equipment in the field can turn out to be very expensive.

The rest of our cost problem has to do with price variance on purchased material and particularly admin sets. We have contracts with suppliers that also predate our acquisitions that provide the suppliers with the opportunity for price increases based on increased material costs. They have this opportunity to change prices every quarter, and the effect has been a very substantial narrowing of our margins, particularly on admin sets.

A long-term solution to this problem is the development of our own production facility for admin sets. That facility is under construction and will be online hopefully in time for a substantial benefit in 2010.

So, Medical Devices for the year '09, in terms of sales, we want to change our forecast to $124.5 million. The forecast presumes a continuation of pumps sales at about the level of Q2, some growth in admin sets, and a recovery in the sales of sensors. We are currently forecasting AITECS at $4.9 million sales for the year and Ethox at $19.3 million. All of that taken together with about $9 million of associated equipment gets us to $124.5 million.

In terms of margins, we are anticipating a return to profitability, but it is modest profitability. We are now projecting $3.3 million for the year or about 2.7%.

Clearly, this is turning out to be a tough year in the Medical Devices segment. We had weak sales in the first quarter. We are in the midst of an extensive field update. Our product cost picture has worsened. When we decided to enter this market, we chose to begin with acquisitions to accelerate our entry. This approach has not been without its problems, but we still believe that these problems can be solved and that this business still offers the potential we originally envisioned. It's going to take some more time and some more effort to achieve it, but we will get there.

In summary, we are now projecting, for '09, sales of $1.841 billion, only $9 million less than what we talked about two weeks ago. The change in the forecast, a reduction of $5 million in business jets and $4 million in medical devices.

We believe we can achieve operating margins overall of 10.2%, which should produce operating profit of $188 million which, before restructuring, would then produce net earnings of just over $94 million or about $2.20 a share. However, we still anticipate incurring $15 million pretax in restructuring expenses over the next couple of quarters. That will reduce net earnings to $83.5 million or about $1.95 a share. We suggest that there is enough uncertainty in our projections that the market ought to be bracketing our forecast with plus or minus $0.20.

Looking at the segments in more detail, we are projecting aircraft at $646 million, margins of 8.8%; space and defense at $271 million, margins at 13.3%; industrial at $470 million, operating margins at 7.1%; components group at $330 million, profits at 17.5%; and medical devices sales of $124.5 million, operating profits 2.7%. All of those projections support the forecast I've just described.

A moment on 2010 -- we are still not ready to provide a precise forecast for 2010, but I can't reiterate some of the things we said a couple of weeks ago. In the aircraft business, we are anticipating that increased production of the V-22, increased aftermarket revenue, will offset a decline in revenues in the Joint Strike Fighter development program since that program winds down and we start slowly into low-rate initial production. Also, as we are anticipating margin improvement in aircraft as a result of reduced R&D and the fact that a smaller percentage of our sales will be on cost-plus contracts.

Space and Defense -- we are anticipating some stability in the legacy products, controls for satellites, launch vehicles, missiles and missile defense. We are expecting a buildup in the level of work on the NASA programs, and we are hopeful that defense controls will benefit from another Driver Vision Enhancer order as part of a program called Family of Systems.

We are hoping to maintain margins at the level we expect to achieve in '08. We are predicting the industrial business will continue at the level of the last half of fiscal '09 but with improving margins as a result of the restructuring that has already begun and will continue over the next few months.

The most important impact -- and let me be clear about this -- is that the LTI acquisition will be complete in June of '09. Our current forecast anticipates that the combination of LTI and Insensys will add, at a minimum, $150 million of additional sales in 2010. So, we are anticipating that wind energy sales in 2010 will be in the neighborhood of $220 million. That would compare with $70 million in '09.

If the rest of our industrial business then maintains the level we anticipate over the next six months, and we add the $220 million in wind energy we should wind up in 2010 close to $600 million in Industrial sales and with stronger margins than this year.

The Components group has been a solid performer since we've owned them. We expect the very strong position we have in slip rings will generate sales increases in 2010. We hope to be able to maintain the margin performance we've enjoyed in recent years.

Last but not least, we are expecting sales growth in Medical Devices -- provided in part by the recent acquisitions -- a substantial improvement in margins. Hopefully, we will have a year that doesn't have a $2 million recall and does have the benefit of our own production facility for admin sets for at least part of the year.

All in all, we are anticipating an improvement in 2010, independent of any recovery in the global industrial economy.

Before I turn you over to John who will talk about a number of subjects, let me make a quick comment on the defense budget. In short, what the administration proposed would work very well for us. We like the support for the F-35; the F-22 is not important for us. Removing the vehicle portion of future combat systems eliminates a program that we had won but continued dependence on the current inventory of military vehicles will be good for our aftermarket and upgrade businesses. We will be happy if Congress would just past the administration proposal as is.

John?

Thanks, Bob. Good morning.

I'm following my usual format, starting with a look both at our cash flow for the quarter. I will then discuss our tax rate and some additional items of interest from the balance sheet.

I speak to our credit situation and in particular address our covenant head room, a topic which is receiving much interest at the moment. I have good news to report on goodwill impairments and will finish with a cash flow forecast for the remainder of the fiscal year.

Q2 cash flow -- free cash flow this quarter was negative $4 million. Year-to-date we are positive $8 million. Net debt increased by $137 million, the result of our five acquisitions in the quarter. Cash flow from operations was $18 million. Working capital, excluding cash, increased $33 million over the quarter, driven by our recent acquisitions and the timing of receipts on very long-term contracts.

Capital expenditures were $23 million, while depreciation and amortization was $18 million. Amortization interest payments totaled $9 million, and our cash tax payments were $6 million.

Taxes -- our tax rate in the quarter was a relatively high 35.1%. You'll remember that, in the first quarter, we had the benefit of a couple of one-time effects. Our second-quarter tax rate is a reflection of a more normal rate, coupled with our anticipation of moderating future earnings in lower tax jurisdictions for the remainder of the year.

Some other items -- our non-cash equity-based compensation expense in the quarter was $1 million. Contract reserves dropped by $1.8 million over the prior quarter as we completed work on various contracts. At the end of March, our net debt to total capitalization stood at 42%.

Now, let me talk to the credit situation. At the end of March, we had $384 million of unused capacity on our credit facilities and over $68 million in cash on hand. So, from a credit availability point of view, we are in good shape.

The other question folks are asking is in relation to our covenants. The most important covenant at present is the maximum leverage ratio under our senior revolving facility. This covenant states that our net debt over an adjusted EBITDA must be less than 3.5 times. The adjusted EBITDA allows us to add back non-cash expense and also includes the 12-month trailing pro forma EBITDA from acquisitions. At the end of March, we stood at just over 2.7 times, and based on our revised guidance for fiscal '09, we anticipate remaining comfortably within this leverage covenant.

Goodwill impairments -- this is a topic which is getting a lot of attention in the present climate. In this quarter, we performed a review of our goodwill. This was triggered by the significant drop in our stock price over the last three to four months. The good news is that our review has concluded that we have no goodwill impairment issues to worry about.

Finally, fiscal '09 forecast -- given the reduction in our earnings guidance, we are revising our free cash flow forecast for the year. Last quarter, we projected $44 million of free cash flow for fiscal 2009. We now believe we will be breakeven for the last two quarters, making us positive $8 million for the year.

The difference from the previous forecast is driven by the reduction in our forecasted net income of $37 million, which includes anticipated restructuring costs of about $15 million. As we look out to fiscal 2010, we believe our cash flow will improve as capital expenditures moderate and cash flow improvement initiatives start to bear fruit. We are keeping our forecast for capital expenditures for this year unchanged at $95 million.

Depreciation and amortization will be higher at $77 million as a result of our recent acquisitions, while interest expense will be $38 million.

Finally, we are inching up our forecasted tax rate to 27.2%, driven by lower forecasted earnings in our foreign subsidiaries.

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

Kevin, I am ready for questions.

Yes. (Operator Instructions). Cai von Rumohr, Cowen.

Yes, thanks so much. Bob, you had mentioned $15 million in restructuring. Can you be a little bit more specific in terms of how that spreads among your businesses, how much of that will be cash outlay, and the expected savings you expect to enjoy in 2010?

Let me take the easy parts first. We expect that the $15 million will be almost all cash. It will primarily fall in our Industrial segment. It mostly has to do with staffing adjustments in Europe and Asia. In our industrial business in the US, which is heavily in the simulator business which as I mentioned is down somewhat. We've been able to redeploy a number of people and move them to our Space and Defense operation because we are very busy there. So we don't expect that we are going to have a staffing adjustment in the US, but we do expect that it will occur in other places around the world. We've already made an announcement in Germany, and there will be others to come.

So, as to the timing, the arrangements for staff reductions in countries other than the US have their own complexities. As a ,result the timing is difficult to predict. So I can tell you that we expect that the $15 million will show up in the third and the fourth quarter, and it probably won't be half and half but we are unable to predict just how much will occur in the third quarter and how much in the fourth.

With respect to the savings, the savings will be substantial. I am disinclined to quote a number. At the end of the third quarter, as is our practice, we will provide our guidance for next year in terms of sales and earnings, and that guidance will take the benefit. At this stage of the game, I would just as soon not describe a number for how much we are going to save. Those kinds of numbers get divided by somebody's guess and turned into a number of people, and that triggers rumor mills that are unnecessary and incorrect, and I would just assume not go there, if you don't mind.

Can I ask you, though -- but I mean it sounds like most of the restructuring is basically going to be reduction in force.

As I mentioned, Cai, I think I ,mentioned if you set aside the industrial acquisitions that will occur this year, our industrial business is a business in which we are primarily a manufacturing company and a business in which we employ a couple of thousand people, or at least we did at the start of the year. That business is down over 25%.

Now, as I mentioned in the call a couple of weeks ago, we've had the opportunity. We had maintained a staff of contract people that we were able to reduce rather easily. We've also, in our European and Asian companies, gone to reduced hours. But given the order rate of the last quarter, the second ,quarter and our projection for the rest of the year, we need to reshape that part of our company to deal with the level of activity that we are now experiencing.

John, you know, you had mentioned that CapEx is flat this year. Why haven't you paired that, and what do you expect to pair it for next year? Could you be a little more specific in terms of the cost initiatives? What are you doing to try to get inventory receivables into better lines and what are your targets?

On the CapEx, Cai, we've had a forecast of $95 million for the last I think three or four quarters. We haven't changed it. The reason for that is it is driven mostly by additions of buildings that have been put in place 12, 18 months ago. About a year ago, a year and a half ago, with all of our facilities doing very, very well, there were several building projects were initiated. They are being closed out over the course of the next two quarters.

There was also the ramp-up in capacity in preparing for a stronger commercial book of business, and most of that equipment is on 12 to 18month lead times, so the equipment that is already on order is coming in. Now, we've slowed it all down over the last 6 to 9 months but that doesn't work its way through until the start of next year. So next year, we would see a moderating of the buildings that are finishing up this quarter and the next two quarters. That won't recur next year, so we would anticipate that, both from a buildings perspective plus a capital built-up, perspective, we see fairly significant reduction next year. I think, next, quarter, we would probably come out with a more specific number, so again, Bob, I don't want to quote a specific number right now, but I think we would see a significant moderation next year.

In terms of cash flow improvement projects, I would say it is across the boards. It's in receivables, it's inventories and payables. I would say, though, we found that particularly the working capital side to be more stubborn in terms of seeing the benefits, short-term, than we had hoped. Perhaps some color on that -- I think that what -- first of all, there has been significant short-term changes in the orders, the forecasted orders that we've seen from our customers. As Bob mentioned, even in the last two weeks, we've seen -- we've reduced our forecast for the biz jets by $5 million. That's based on revised production forecast levels from our customers. So that has been changing very quickly.

Now, you pass that through to the other side, from us to our suppliers, our vendors, and typically they are smaller companies that we have -- it's more difficult to just turn off the incoming inventories. We are working to do that, and we are also coming off a period of a year ago where we were in a scarcity mode and there was a lot of orders placed to make sure that we had sufficient materials on hand to meet a ramp-up and various programs, but also because of the fact that lead times were going out.

In hindsight, we over-ordered. At the time we didn't think that. So slowing that down, particularly with our vendor ,base which typically is smaller, smaller companies that can't turn it up as quickly as our customers tend to turn it up on us has meant that we have continued to see working capital either increase or not come down as quickly as we had hoped. But as I say, initiatives across the board working all of those issues to try and reduce that as we move forward.

Where were your payables and customer advances at the end of the quarter?

Customer advances were down marginally, and payables were also down marginally in the quarter. I think customer advances were down about the $1.5 million, and I think payables were down $4 million or $5 million. I can give you the specific numbers later.

Can I ask a question? I mean, why, if your DSOs are going up and people are paying you more slowly, are you paying down your receivables? Why aren't you doing the same thing to you suppliers that others are doing to you?

Well, we are trying to but I would say, on the receivables side, a lot of it is timing. Because of the long-term contracts that we have, there are timing effects that you see. From one quarter to the next, you get a significant spike in one direction or the other, and it is tough to draw a trend through one quarter. So some of that -- I mean we've done a review of the receivables and the inventories -- inventories, unbilled receivables tend to be in the same bucket. A lot of that is timing issues from one quarter to the next.

I would say, Cai, though, that it's not practical for companies at our level to treat our suppliers the way we are treated by our customers. I will give you an example of what I mean.

A few years ago, when it was fashionable, many of our customers insisted on reducing what they called reorder leadtime to lead times that are substantially less in terms of months than what the real leadtime is if you take into account the leadtime for material and then fabrication and assembly and test, which puts us in the circumstance where we have to forecast requirements so that we have the material on hand and are able to support their schedules. As John mentioned, many of our suppliers are relatively smaller companies and you can't jerk them around the way we are jerked around by some of our customers, your favorite companies.

Okay, thank you very much, guys.

Tyler Hojo.

Good morning, everybody. Just on the debt balance, I appreciate the kind of prepared remark discussion but could you maybe just talk about your comfort level with the 42% debt level debt to net cap, and if you are kind of looking for additional acquisitions here or if the focus is going to be more on deleveraging?

Well, the timing of acquisitions is not very predictable. Many of the acquisitions that we've completed over the years have had gestation periods of a year or two years. The fact that we've acquired so many companies in the last few months does not mean that acquisition rate is typical or going to be maintained. More particularly, I can tell you that we don't have that many acquisitions that appear to be likely to complete in the near future. There are still acquisition possibilities, but there aren't that many that are close to completion. So, I don't think there's going to be that demand.

With respect to the debt level, generally the acquisitions that we make are in effect bankable. And the EBITDA contribution that they provide will support the additional debt that is required to complete. So although debt to cap may move up a little bit in terms of debt to EBITDA, the ratio generally doesn't change as a result of the acquisitions.

42% debt to cap, we are not particularly uncomfortable with that. We've lived in the past with a debt levels at that level or slightly higher.

Okay, that's helpful. Just a clarification here -- you mentioned $1.2 million in reserves in the Medical segment. Was that incremental to the $800,000 in Q1?

Yes, I tried to make that clear when I said that. So when we are done, this little escapade is going to cost us $2 million to make a small upgrade in the software that is part of the control for 110,000 internal pumps in the field.

Okay, perfect. Then just lastly, if you could maybe, if there are any, if you could point out any potential opportunities coming out of the stimulus.

I am hopeful that, a year from now, we will be able to look back and recognize where the stimulus package actually stimulated. Perhaps the stimulus package will provide continued support for the development of wind turbine farms, but other than that and the potential support for some items in the defense budget, I am unable to identify particular facets of the stimulus package that are going to have much influence on our company.

It seems, to me, a lot of the stimulus money is going to be devoted to keeping in place and employing government employees who are already in place and building roads and bridges, and we aren't in the roads and bridges business.

Thank you very much.

Michael Ciarmoli, Boenning.

Thanks for taking the call. I guess you have -- can you disclose -- it looks like your backlog was up, and it always seems to be a sequentially or a seasonally stronger quarter. Can you give us the backlog breakdown by segment?

We can. We typically will disclose it in the 10-Q.

This is Don Fishback. Before Don does that, though, let me make a quick speech that I generally make. Our backlog, particularly because of the aerospace business -- aerospace and defense business is often influenced by the receipt, or not, of orders that are relatively large and come in chunks. As a result, I've cautioned people against trying to draw conclusions from the movement of our backlog.

We go to a lot of trouble to try to forecast sales, and we've provided for you a rather detailed sales forecast. I would certainly discourage anybody from trying to divine from our backlog movement that something else is going on other than what we've forecasted. It is just really hard to do.

That's fair. You know, I was actually -- I mean, it looks like the bookings were pretty strong., Considering, in this environment, I would have thought the book-to-bill would have maybe dipped below one, so I didn't know if there were any particular orders you could point to where you are seeing real signs. You did say that Space and Defense was a sign of strength. Maybe you could elaborate a little bit on that.

Yes, Don, why don't you (multiple speakers) --?

Why don't I read them out real quick? So in aircraft, it is $405 million backlog at the end of March. Space and Defense is $164 million. Industrial Controls is $134 million and that's where you're going to see the biggest drop, which shouldn't be a surprise. The Components group is $194 million. And Medical Devices is $16 million.

Okay.

So the patterns are pretty much descriptive of what the tone of the call is.

Okay, that's hopeful. Then, just shifting gears, I you talked a little bit about NASA, about the Constellation program. How do you think I guess the decision to hold off the shuttle retirement -- you know, they've talked about less funding for Constellation and you're obviously seeing the reduced funding now. Do you have any input on how that impacts the program longer term here?

Well, I hope that it won't. We designed here, at Moog, hardware that is on the existing shuttle system, the orbiter and the solid rocket boosters in the mid to late '70s. We were certain that hardware would be flying right into the middle '80s. Nobody, at the time that equipment was designed, envisioned that it would be flying in 30 years. It scares the hell out of me every time they launch a 30-year-old shuttle system. So we are hopeful that extending the shuttle program doesn't develop a lot of traction and that the replacement, the Constellation system gets accelerated.

There is this problem that you've got an army of folks supporting the shuttle at the moment, and if there is going to be a three or four-year break, what the heck are those folks going to do with waiting around for the Aries and Orion to get deployed? So there is that problem, but we are hopeful that the shuttle launches won't be extended and that the Constellation will not be delayed.

I think the delay at the moment really does relate to the fact that there is not, there has not been a shuttle administrator in place. Now, you may think, well, why would the shuttle administrator have much influence over the design of the space capsule? I think, going back in history, folks at NASA will tell you that Mike Griffin had a lot of influence over the design of the space capsule, and I think that NASA is waiting for the new appointee to have an opportunity to take a look at what they are doing and get comfortable with it before they continue.

So I think that is what's going on. Hopefully, once all that gets sorted out, we will go back to the hurry-up program that we were working on a year ago.

Okay, that is helpful. Then the last question I had, just with -- obviously the auto industry is a mess. I would imagine GM's plan to sort of furlough some of their factories for nine weeks this summer -- is that already included in your guidance? Does that change anything on your industrial outlook, or potentially create more weakness that had been unforeseen?

I hope that we've already seen that. As I tried to suggest, I think the dramatic drop in incoming order rate for controls that go in big equipment that we experience in the second quarter is reflective of the fact that most auto companies have just stopped buying anything. So I am hopeful that what happens with GM and Chrysler over the next few months really isn't going to have much more detrimental impact than we are already experiencing, because we are basically, I think, projecting a future that anticipates that the auto companies aren't going to be buying any equipment.

Right, okay. Fair enough. Well, thank you for the color.

J.B. Groh, D.A. Davidson.

I have a question on the Industrial Systems margins guidance that you gave. That is pre-restructuring, correct, of the $15 million?

Yes.

Okay, so if my math is correct, given what you did kind of in the first half, that looks like you've got to be at around 4.5% for the last half of the year?

Yes. We are kind of guessing at that, but we think that is a conservative estimate. It could be better than that.

Okay, okay. Then again, we are not certain on as to how that breaks out between the two quarters?

No.

How about on the Driver Vision Enhancement? Any opportunities for that MRAP ATV vehicle that is going to be bid here shortly?

Well, there is a huge opportunity, I think, and it is a program called the Family of Systems. It is a potential big buy for Driver Vision Enhancer systems that will go on a wide variety of vehicles. It is supposed to be big numbers, and it is still a competition. DRS and BAE and other companies are involved and it hasn't completed yet. It's not clear that the selection at the prime level will be made in this fiscal year. It's possible, but we are hopeful that we will see business in that program in 2010.

Okay. Then one other thing that I noticed, that corporate expense was down a little bit versus the first quarter. Is that just a reflection of business levels and some cost controls there? What should we look at as a new kind of run rate? You did down about $1 million from the first quarter to the second quarter.

Oh, that is the equity-based compensation is what's going on. (multiple speakers) in our first quarter.

We, like everybody else, thanks to the decision some years back to expense options, we, like everybody else, are (inaudible) expenses for options that are currently under water.

Fun! Okay, thank you.

But these are pretend expenses that of course will never be unbooked.

Eric Hugel, Stephens Inc.

Bob, I've been following you guys long enough to fully appreciate your comments with regards to the space margins that they go up and they go down. But just some perspective with regards to the commentary -- in the second-half margins, bringing them back down around 10%. Is there anything specific that you are seeing, or just based on sort of, historically, these things can just move all over the place, that you feel more comfortable being there?

It's more what you described, Eric, but I can tell you this, that the current relatively high margins have been influenced in part by this phenomenon. We've had a number of programs in the space business where we are building, designing big design projects. You build only one or two pieces of hardware, and these are the kind of contracts where, if everything works perfectly, you make a nice margin. But it's risky business.

And the point I'm getting at is, in the last couple of quarters we have been remarkably successful technically. And the programs that have closed out and been delivered have not experienced last-minute test failures and have not incurred additional costs to redesign or correct problems that crop up late in the program.

Now, maybe our folks are just getting smarter and smarter and it will continue in this fashion. But I think it's prudent to anticipate that what we've enjoyed in the last couple of quarters is perhaps not what we should project at least in this kind of guidance.

It's not that the work is going away; it's just that you don't want to predict success?

Yes. We don't want to predict perfection.

Perfection -- that's probably a better way to think about it, yes.

With regards to -- I got on the call a little late; maybe you're addressed it, but with regards to your Boeing OEM work, you are looking at year-over-year being down 22.5%. And this quarter it was down about $5 million. Were you affected this quarter continued by the Boeing strike, by like sort of the continued effects of it -- that a lot of suppliers were talking about that?

Yes. What's really -- I guess I would describe it this way. We have a production facility that was running along at rate. And when the strike occurred, we continued producing, built up an inventory cushion. And, given what everybody had anticipated and that Boeing confirmed, which was a reduction in some of their production rates, we've kind of slowed that train down. And as you know, on our Boeing business, we are booking revenue on the basis of long-term contract accounting. And so the sales level really reflects the level of effort, labor and material input. And in the quarter we've slowed that down.

I was sort of thinking the major whatever they announced was the 777 cut. My understanding is, you really didn't have much work on the 777.

Oh, no, we do have quite a bit of work on the --

Oh, you do?

Yes.

But I think that cut is out in 2010, June of 2010. So that's a bit out yet.

My understanding was that if you look out, let's say, to this quarter coming up in terms of what Boeing is going to produce, they're going to be back at full rate.

Yes, but as a for-instance, on the 777, where full rate at the moment is seven a month, 84 a year, we are actually only going to have to build 68 this year because they took the strike, we had an inventory balance that we can now burn down. So our production rates, and therefore our revenues, don't match perfectly with their production rates. There is an inventory adjustment that gets in the middle.

But is the inventory stuff that you built but didn't ship?

Yes.

So when you ship it, will you book the revenue -- oh, oh, because you booked it, you continued building it as program accounting? Okay, I get it.

Yes.

Can you give us, finally, an update just on where things stand on 787, hardware testing, and the production ramp?

Yes. We are very close to complete on -- long ago, through safety of flight, so our stuff is all ready to fly. We are largely complete on qualification testing. There are some parts of qualification testing, endurance testing, which will go on for another year. But I would describe our situation as very comfortable with respect to test completion.

And where do things stand based on the current schedule where you actually start producing under like initial --?

Well, we have been producing. We've delivered the six ship sets that are part of the flight test program, and in '09 we're in the process of building about 10 ship sets. So we are producing at a relatively low level.

When would you expect R&D for the A350 XWB to ramp?

Well, it's already begun, so -- I don't think that there's going to be a real steep ramp. In this last quarter R&D on the A350 was about $4 million. And we are anticipating -- let's see. We are at about $7.5 million year to date. Our forecast anticipates another $14 million, $15 million. So the ramp will be over the next couple of quarters.

Finally, you talked about adding internally a new facility for manufacturing the admin sets. What kind of CapEx is that going to be? Or is that going to be a CapEx, capital expenditure this year or next year?

The facility is actually going to be a leased facility, so we are not building the facility on our nickel. But there will be rather substantial leasehold improvements and equipment. And in the budget we have that John was talking about, I think there's about $4 million of that in this year.

That's most of it this year. There will be a small trickle over into next year, but most of it is this year.

And is the cost for starting up that business -- is that this year or next year? Because start-up costs on that kind of stuff would have to be booked right up front. Right?

You book those as you start to hire people and you train them and (multiple speakers) --

(multiple speakers) -- expenses incurred.

Yes.

Has incurred, so again, so that's mostly going to be next year?

Yes. The benefit will be next year. And I think, on balance, we probably won't see much benefit in the first half of next year. But I'm hopeful that it will kick in, in the last half.

Chip Rewey, Cramer Rosenthal.

Can you quantify the dollars that you will have on the purchase accounting for LTi in 2009, because we're closing the acquisition, booking a lot of revenue. But because the purchase accounting is going to zero, so it's probably a pretty significant margin drag on the industrial segment. If you could just flesh some color around that out, it would be helpful.

And I've got a couple of questions. A follow-up to that is, you did say that industrial margins will be up next year. What sort of margins are we looking for out of the Wind segment, which will be your number one segment in 2010?

We're looking -- I'm taking your last question first. After what we forecasted for purchase accounting, we are anticipating margins slightly in excess of 10% out of the combination LTi and Insensys, the $220 million that I mentioned in the prepared remarks. So we think, compared to what we're going to be experiencing in the last half of this year, we think that will be a rather substantial contribution.

Don, do you have the purchase --?

The purchase accounting -- it's about $4 million to $5 million in the four months that we loan LTi at the end of this fiscal year.

Chip, I emphasize, those are very preliminary numbers. We're still taking a hard look at all that, but those are preliminary estimates at this point in time.

And that $4 million to $5 million basically drives the wind business that you have to a zero margin for the last four months of this fiscal year?

No, it won't be a zero margin. There will be some contribution from it all right.

It will at least cover the incremental borrowing costs, for sure.

Changing gears and looking at medical, Bob, you are going to do a 2.7 margin there, by your guidance this year. Your recall will cost you $2 million, or about 160 basis points. So, backing that out and giving you credit for that, you are going to do a 4.3 margin, and that's a pretty far cry from 20% when you started to talk about this segment.

So what are we looking for into 2010? What sort of profit improvement programs do you have here, and when can we see some margins in this business that justify the ownership of the business?

So I guess you're going to hammer me with that 20% margin prediction until I get there, aren't you?

Yes.

Give the guy a break.

Okay, I'll give you a break on that. But what are we looking for, and then how quickly can we improve going to 2010?

I'm not ready to predict what the margins in 2010 are going to be in the Medical segment. I think, as I said or you said, hopefully there won't be a big recall. We're hoping to improve the profitability by establishing our own supply for admin sets. And that capability will have an impact not only on the IV and enteral pumps, but also on the FX acquisition which -- a company which currently also purchases a number of products that look like administration sets.

We do have new products coming online. We are introducing in this quarter a new software library that can be an option on infusion pumps. This is a drug library, improving the safety capability of the pumps. We have a large-volume pump; we've talked about that in previous conversations. That's coming along reasonably well, and we expect to apply for 510-K approval in May or June and have that product in place and online for 2010.

So there are a number of initiatives going on that make me hopeful, and I'm hopeful that there will come a time when we actually get the margins that are 20% or pretty close, and I'll be able to say, so there. It's been a long time.

I look forward to it.

But we finally got there. Thanks for your patience.

Directionally, it can be up next year?

Oh, yes, I think so.

And so back to when you can think about seeing another $150 million in revenues next year in the Wind segment at like a 10% margin is incremental, plus the makeup of this $4 million to $5 million purchase accounting that will all hit in 2009, and that should all be -- if we're trying to look for '010, we can add those things to 2010?

Maybe I'd make it a bit easier. We're thinking that 2010 the Wind business will be about $220 million and 10% margins that's after the purchase accounting adjustment, approximately. (multiple speakers)

What's 2009, for the total revenue and the total margin for just the Wind portion for an apples-to-apples?

We are saying that the revenue in 2009 for the four months will be about $70 million. We are not being specific on the margin in '09 because we've got equity accounting for the first eight months and then we move into some heavy purchase accounting adjustments. So I don't think it's a comparable number to '010. It's a difficult comparison to make. So I think what we've said is that there still will be contribution in the last four months, even with the purchase accounting adjustments.

Ronald Epstein, Merrill Lynch.

This is Elizabeth, actually, for Ron. We were wondering if you could give us any color on the simulator market, when you think it will be turning around, what sort of demand you are seeing on that side of things.

Well, looking back, I think it may be that '08 was the anomalous year. Our sales -- what's happened here is that a couple of years back we were able to introduce into the market electrically actuated motion bases which got us into a position that we became the favored supplier for flight training simulators for CAE, Flight Safety and, to a lesser extent, Rockwell Collins and others. And on that basis our simulator business was strengthening dramatically. We went from like $41 million in '06, $48 million in '07, and then '08 skyrocketed to $75 million.

One of the things that we now understand was happening in '08 was that CAE and Flight Safety were acquiring simulators to facilitize their own training facilities. And what has happened in this year is that they are either not enlarging those facilities or they've completed the facilities that they wanted to build. And so that part of their demand seems to have gone away, and they are ordering simulators for which they have customer orders. And the result of that seems to be that our sales this year as we have them now predicted will be $58 million.

Now, if it weren't for the $75 million in '08, if we were looking back to $48 million in '07, we would think $58 million was nice growth in that business. But we had this one big step in '08 as those companies equipped their own facilities. So I'm hopeful that the $58 million kind of number is a typical number and that there will be probably modest growth going forward. I don't anticipate that we're going to see another year that shows 56% growth in one year.

At this time we have no further questions in queue.

Well, thanks, everybody. Thanks for coming and listening and we'll see you next time.

Ladies and gentlemen, that does conclude your conference. We do thank you for joining while using AT&T executive teleconference. You may now disconnect. Have a good day.