Moog Inc (MOG.B) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Moog full-year 2010 second-quarter 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 then, I'd like to turn the conference over to Ms. Ann Luhr of Moog Inc. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements.

A description of these risks, uncertainties and other factors is contained in our news release of April 30, 2010 and our most recent Form 8-K filed on April 30, 2010 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 everybody. Thanks for joining us. This morning we'll report on the second quarter of 2010. We will update our guidance for the year.

We're seeing a slight impact on our sales because of what's happening in the wind energy business, but more importantly, margins in our aerospace segments are improved over our last forecast. We have as a result good news in earnings and in earnings per share.

By now you've no doubt seen our results for the second quarter. Sales $510 million, up 13%; net earnings $25 million, up 6% from a year ago; and EPS, $0.55, the same as last year. You will remember that since last year, we issued equity. Our average share count is up by 2.9 million shares.

In the second quarter of last year, we had begun to feel the impact of the recession on our Industrial business, but it hadn't really hit us full force. As a result, our performance in that quarter was pretty respectable. We made 5.2% on sales.

Comparing to that quarter, our current sales of $510 million are up $57 million, the growth all related to recent acquisitions. Given this year's product mix, our gross margin at 29% was down from last year's 29.9%, R&D of $25.5 million was up $1.3 million but down as a percentage of sales.

Aircraft R&D was actually down in the quarter slightly. SG&A at $76 million, up $7.3 million but down as a percentage of sales. That's because the increase in both these categories is the result of the acquisitions.

We booked $1.3 million in restructuring expense in the quarter. Last year we had not begun to book restructuring charges.

Our interest expense about the same as last year, pretax earnings down $1 million but a lower tax rate, 29.6. So net earnings are actually up by $1.3 million.

Our original guidance for the second quarter was $0.53. At our call 90 days ago, we suggested to you that seasonality in the wind business might result in reduced sales in that product line and the result might be a $0.50 second quarter with a $0.03 difference made up later in the year.

As it turned out, the seasonality in the wind business did reduce sales, but our EPS came in $0.55 anyway. So we're reporting a quarter that in total was better than we had anticipated.

Let me go to the segments. Sales in the Aircraft group, $188.8 million, up 26.8. The increase, the result of the recent acquisitions of the GE actuation business in Wolverhampton and of Fernau Avionics. Including the impact of the Wolverhampton acquisition, our sales in military aircraft, $114 million, were up 11.8. In the quarter, Wolverhampton had sales of 11.9, so the whole increase was Wolverhampton.

Our F-35 development program is winding down. Revenue in the quarter, $14.2 million. The development program was down $9.2 million from a year ago. However, this decline was offset in part by a $6.7 million increase in the F-35 production program.

Also in the quarter, we had a $6 million increase in revenue on the V-22. Military aftermarket, 35.4, included $2 million of revenue from Wolverhampton and was still down $0.5 million from last year.

There was growth in the aftermarket in almost every program except for the F-18. Last year at this time, we were overhauling leading-edge transmission systems for the F-18 at a very rapid rate and that activity generated $7.3 million in sales in last year's second quarter, this year only $1.6 million.

On the commercial side of our business, sales $64.8 million, up 11.5 from a year ago, but our sales include 14.2 in revenue from Wolverhampton. Sales to Boeing commercial in total, $22.5 million in the quarter, a $12 million increase from last year. Of that, 7.3 was Wolverhampton.

Similarly, sales to Airbus, $10.4 million for the quarter, up $4.6 million, the difference all revenue from Wolverhampton. In our business jet product line, sales were way down.

Total for the quarter, $4.7 million, down from over $13 million a year ago. Last year we had much larger sales to Bombardier and the Challenger 300, Hawker on the 4000 and various of our Gulfstream programs.

Commercial aircraft aftermarket is a bright spot though. Sales in the quarter, $21.5 million, up 2.7 and less than $2 million came from Wolverhampton. So even excluding those revenues, sales were up by almost $1 million in the quarter.

Before we leave commercial aircraft, I should mention our agreement with COMAC, the Commercial Aircraft Corporation of China, relative to the C919. On April 15, we signed a letter of intent for the development of the C919 high lift system.

This is a framework agreement to start joint development of the system. COMAC as you probably know has forecasted a global market for more than 2000 airplanes over 20 years starting in 2016. This agreement culminates for us a very long campaign to introduce our capabilities into the Chinese aircraft industry.

Now back to the quarter. Navigation aids business had sales in the quarter of $10 million, up $3.5 million from a year ago. Last year's second quarter, we had only one month of the Frenau acquisition. That acquisition incidentally is proceeding very smoothly and over the last few months, we have had a number of new orders from customers, both foreign and domestic. In total, the product line had sales of $19 million in the first half of this year and we're forecasting $27 million in second half.

In total, first half sales for the Aircraft segment, $364 million, and the second half should be up about $14 million to a total of 742. Military aircraft sales will actually be down some in the second half only because of the reduced revenue in the F-35 development program. For the year, the revenue from Wolverhampton will more than offset the decline in F-35 and military aircraft. Sales will be up by $16.8 million.

for the year. On the commercial side, we're expecting increased sales to Boeing both on the 7 series and the 787. Sales to Airbus and sales on our business jet product line should be about the same in the second half of the year as the first, but our commercial aftermarket sales are expected to be up by $5 million. So for the year, commercial aircraft sales should be up by $48.4 million.

Aircraft group margins, our Aircraft group booked a restructuring charge in the second quarter of about $1 million. Margins after the charge were 10.4%, up from 9% a year ago.

On a year-to-date basis, Aircraft margins are 10.2%. 90 days ago, we were projecting margins for the year at 8.6. So the current performance is considerably better than what we'd forecast.

We attribute the improvement to the success of an intense and sustained cost reduction program that the Aircraft group has been running for many months, first. And secondly to the financial performance of the Wolverhampton acquisition, it's doing somewhat better than we had anticipated.

For the next six months, we are anticipating very little in the way of restructuring in aircraft. We hope to be able to hold 10.1% margins for the year as a whole. And the change from 8.6% up to 10.1% adds $11.2 million in operating profit for aircraft for the year.

Space and Defense. Q2, a very strong quarter. Sales, $79.1 million, up 10.8 and you'll hear in a few minutes that margins were respectable as well.

Sales were up in almost all areas of the business. Most of the increase though was in what I've taken to call the legacy portion of the business that includes controls for steering rockets to launch satellites, controls the position satellites on orbit, steering controls for strategic and tactical missiles and missile defense.

Taken altogether, these product lines provided sales in the quarter of $39.7 million, up almost $9 million from a year ago. Sales of satellite controls, $17.6 million, were up $800,000. The big increase though was in launch vehicles and in tactical missiles.

During the quarter, sales for controls used on the Taurus II were $3.4 million in the quarter, up $3.1 million from a year ago. Taurus II you may know as one of the launch vehicles that the Obama folks liked. They call it a commercial launch vehicle. It's one that they've favored in their new NASA plan.

We also have very heavy deliveries in the quarter of engine inlet valves for the Pratt & Whitney RL 10 engine used on an Atlas V and Delta IV. Tactical missiles, sales in the quarter $9.4 million, up $3 million, increased primarily Hellfire a little bit of TOW and Maverick, increased volume on Hellfire and TOW reflect the replenishment of the inventory that's being used in the Middle East and our Maverick deliveries are all for foreign military.

Our NASA business in the quarter, $5.3 million, was up $2 million from last year. The increase primarily reflects activity on the Ares launch vehicle, although our work continues as well on the Orion crew exploration vehicle.

Our situation in the NASA programs is a confusing one because as you know, the Obama administration has announced an intention to cancel the Ares I launch vehicle and significantly modify the Orion crew vehicle.

However, the Congress has legislated that no change will be made to the 2010 NASA plan without congressional approval. As a result, we are obligated to continue to work on contracts we have in hand for both Ares and Orion.

We continue to be awarded contracts for Ares and Orion. And on one of our Ares contracts, we're actually accelerating work to accomplish certain performance goals before the program shutdown.

Even though we're supposed to continue through 2010 unimpeded, we do believe that our revenues on these programs really will ultimately be impacted and we are adjusting our forecast for the year for the NASA programs from $35 million to $25 million. This reduction is certainly not a positive for our year, but you should remember that these are cost plus contracts, generally low single-digit margins.

Obviously, we're not pleased with the impact of the new Obama space program [from their current year's] business. Our concern however goes beyond that impact.

Personally I believe that the administration is making a tragic mistake. It seems that the objective is to rely for the future of manned space and space acts in orbital sciences, producers of the so-called commercial launch vehicles.

NASA itself would become a large R&D laboratory. They talk of visiting an asteroid 15 years from now and maybe Mars 25 years from now.

I don't believe that a mission with an objective 25 years in the future can be taken seriously or will be taken seriously by anybody, but particularly not by the young people that we need to attract into careers in science and technology. All that having been said, at our Company we have a unique set of capabilities to support whatever direction the new space program takes and we do expect that we will participate in some meaningful way in whatever activity develops. Our hope is that the Congress will work out with the Obama administration a more purposeful role for NASA.

Now back to this quarter. Defense controls business, $21 million, up in the quarter. The total included $6.6 million and Driver Vision Enhancer sales up from 1.5, same quarter a year ago.

The rest of defense controls was pretty stable except that there's $3 million worth of work on the Stryker vehicle, the M60 tank and the MLRS launch system that works complete with no follow-on in this year.

Revenues in homeland security and naval applications were about the same as last year, $4.9 million, $2.4 million respectively. Sales of vibration controls of $3.25 million were in line with our recent quarterly history but $2 million short of a very strong quarter a year ago.

For the balance of the year, we're increasing our forecast in the legacy product lines, primarily due to the satellite activity and work on Taurus II. Defense controls, we have strong orders for the LAV-25 turret drive system, particularly from the Saudi National Guard, and we also have new orders for Driver Vision Enhancers.

We now expect to do over $19 million in DVEs this year compared with $16 million last year. So these increases will offset the reduced revenue on Constellation and we're still anticipating sales for the year in Space and Defense of about $320 million, an increase of $46 million over last year.

Space and Defense margins, 11%, considerably stronger in the quarter than we projected projected. We are now at 10.9% for the first six months.

Last year's second quarter had margins of 14.4% but that was a quarter that had the advantage of an unusually favorable product mix and we said at the time, don't expect that to continue.

Even though we reduced our forecast for the year for Constellation for the year, revenues in the next six months will still be greater than the first. So except for the increased EVE revenue, our sales mix over the balance of the year actually doesn't change much.

But the increased DVE sales will result in increased profitability. So we're now protecting margins for the year at 11.2%. Our previous forecast was 10.2. That change adds $3.1 million in operating profit.

Now onto our Industrial business. On the face of it, Industrial had kind of an okay quarter. Sales, $120.4 million, up $16 million from same quarter last year.

As you'll hear in a minute, operating profit was down some. I think to understand what's going on in the business though, it's helpful for me to describe the quarter's results in terms of the core business on the one hand and the new wind energy business on the other. And what I'm calling the core business is everything other than our recent acquisition in wind energy.

Tracking revenue in that part of our business over the last few quarters does tell a story. In fiscal 2008, this business averaged quarterly sales of $133 million.

We started off 2009 at 110. Second quarter was down to 103. The third quarter dropped to $84 million and then we began the slow recovery.

Fourth quarter of last year was $88 million, first quarter this year $91 million and this quarter, $94 million. So we are on a positive trend.

Compared to the first quarter this year, the improvement is easy to spot. It's in sales of controls for plastic equipment. In the quarter they were $14 million, up from $12.9 million in the first quarter.

The rest of the product lines that we call capital equipment held pretty even. So there was a $1 million increase in that total from $37.7 million in capital equipment, up from $36.7 million last year. The rest of the business was up because of an increase in power generation.

So what's the rest of the year going to look like for the core business? Based on incoming orders, we think the plastics business will continue to be strong. We're looking for quarters in the 12 to $13 million range.

Incoming orders in the quarter was pretty strong particularly in Europe in the packaging and bottling industries. We had relatively strong incoming orders in metalforming and presses, sales in the quarter 6.1, incoming orders 7.7.

Our initiatives in the market for our specialized test equipment is developing real traction. Sales in the quarter, 8.6. We delivered a large rig for testing railroad train bogeys in India.

We also had a breakthrough in China, an institute with the acronym, ASRI. This is a lab for testing aircraft equipment. The test business has been running between 8.5 and $9 million a quarter but over the next two quarters, we're looking for more like $13 million.

Simulator business also had a strong quarter in terms of orders particularly in Europe. Sales in the quarter 10.9 and our order book would suggest the next couple of quarters will be 12 or 13.

Most of the rest of our core industrial product lines seem to be pretty stable. As a result, we will be looking for core industrial business other than wind energy to generate about $100 million a quarter over the next two quarters.

And now to the wind business. Wind energy business has turned out to be a bit of a roller coaster ride for us. We did $44.9 million in wind energy in the first quarter of this year and in the past 90 days, our sales were $26 million. And at that sales level, it's not a very profitable product line.

About half of our wind energy forecast for the year is in China and it seems that the Chinese wind turbine manufacturers don't install turbines in the winter in Mongolia or anyplace else. Also as it happens occasionally in China, we have had to hold up deliveries to simulate payment.

The results were that sales in Asia in quarter two were a little over $11 million compared to $31 million just last quarter. On the other hand, incoming quarters in Asia were $49 million for the quarter.

Situation in Europe is quite different. Sales of $15 million in the quarter were down only a little from last quarter, incoming orders $14 million, well below expectations.

We think we are seeing a definite slowdown in Europe. We had expectations of orders from Spain and that market seems to have slowed considerably and we think some of our turbine customers in Europe still seem to be having financing issues.

In view of that, we moderated our forecast for the year. Last time we talked, we were forecasting wind energy sales for the year of $190 million and given the slowdown in Europe, we are now thinking $190 million will be more like 165.

However, if that 165 forecast is correct, that still leaves $96 million in sales over the next two quarters which ought to be a big help to improving profitability. So if wind energy gets back to $48 million a quarter, we will be looking for Industrial segment sales of about $148 million a quarter over the next couple of quarters compared to $120 million in the quarter we are talking about.

Industrial margins in the quarter were a very modest 6.8% compared to a healthy (inaudible) last year and 8.2% in the most recent quarter. I mentioned the $26 million of wind energy sales in this quarter were not very profitable. Industrial operating profit in the quarter after an $87,000 restructuring charge was $8.1 million, brings our year-to-date Industrial operating profit to 7.5% of sales year to date.

We are anticipating improved profits from operations for the balance of the year and even after an additional $2 million of restructuring in the next six months, we are forecasting the margins for the year at 7.7%, down from our prior forecast of 8.6% as this forecast reduces operating profits for the year in Industrial by $6.5 million.

Components. This quarter another strong performance from the Components Group. Sales $89.8 million, up 6%. Sales of aircraft components, $37.5 million were up $5.5 million in the quarter.

The biggest change was in military products. For many months, we've been late on deliveries of fiberoptic controls for the Eurofighter and the holdup was the availability of a specific component.

That problem has cleared and we've caught up on deliveries and that provided a sales increase in the quarter of almost $3 million. We also had a big quarter in de-icing systems for military aircraft of $2.5 million in the Blackhawk and $1.6 million for the V-22.

We've talked in the past about the Guardian program at Northrop, a system that protects aircraft from shoulder fired launch missiles. Program is once more running smoothly, sales in the quarter $6.5 million.

Military aftermarket was also strong in the Aircraft business but sales of products for commercial aircraft were up only modestly in the quarter, reflecting slightly increased component volume, avionics customers, Rockwell Collins, Honeywell. Sales in products in the Space and Defense market, $19.6 million, up 6% and the increase relates entirely to the CROWS program at Kongsberg.

CROWS is the Common Remotely Operated Weapons Station. We are delivering a slip-ring system that's now at full rate production, 80 systems a week, generates $3.5 million in sales a quarter.

Our sales of electrooptic equipment for armored vehicle were actually down in the quarter. Production rate on the Commander's Independent Viewing System for the Bradley are down from 20 per week to 15. And in general, the pace of remanufacture for armored vehicles is slowing down these days. On the other hand, sales of components in space vehicles, fairly consistent.

The other big change in the Components Group is in the marine market. Sales in this market in the quarter were $6.3 million, a little more than half of what we experienced a year ago.

On the other hand, they're down only $1 million from last quarter and we hope we are at a bottom. Incoming orders have turned up sharply.

We have said all along that sales in our marine market tend to follow the price of oil. As that price declined from the peak to the current level, our sales declined dramatically. But it appears that the price of oil has at least stabilized and we think that our prospects for future sales increases in this market are favorable.

On a brighter note, sales of products in the medical market, up 7% to $13.7 million. Compared to the most recent quarter, sales in this market were up 28%.

Sales, motor blower assemblies to Respironics have increased in both quantity and in dollar terms and sales of slip rings used in CAT scan equipment were down from a year ago but way up from last quarter. So we are hoping that the recession's impact on our medical components is at an end.

An increase in our Industrial part of the Components business was even more dramatic. Increase in the quarter, 24% to a total of 12.7, driven by slip ring sales to Sinovel, China's largest wind turbine manufacturer.

Wind energy slip ring sales in the quarter of $2.6 million were up 300%. We're also encouraged though by increased sales in general and industrial automation, improved demand for applications such as air moving equipment for computer servers and motors used on pumps and fans for diesel engines.

For the balance of this year, we are projecting continued strength in the Aircraft business; steady improvement in marine, medical, and industrial, all of which will offset a slowdown in defense controls. So we're holding our forecast at $356 million.

Component group margins, last year's second quarter, our Components Group was still enjoying the very high margins that we've experienced in this business since our ownership. In the later quarters of fiscal 2009 though, the product mix shifted towards military and space and margins declined somewhat.

Last quarter, margins were 14.3% and we referenced this trend. In the quarter that we are now describing, an improvement in our Industrial business and relatively strong aircraft aftermarket resulted in margins in the quarter of 16%, on a year-to-date basis were at 15.2. Our year-end projection for the year of 15.1% now looks pretty safe.

Medical Devices. Q2 was a pretty good sales quarter. Sales, $32.4 million were down $1.6 million from a year ago but that quarter a year ago was the highest sales quarter we ever recorded in this business before or since. It had the benefit of very strong infusion pump sales, including a one-shot order from Abbott for enteral pumps. And in that quarter are two very recent acquisitions, AITECS and the Ethox, achieved pretty strong sales.

Total sales for our Medical Devices segment in the first quarter of this year, one quarter ago, were $29.4 million. So this quarter we are up $3 million from that level.

Total pump sales, $9.4 million, were up from $9.3 million a quarter ago. Sales of all of our pumps were up except the syringe pumps. On the other hand, sales of sets at $11.7 million were up from $10.4 million last quarter.

The real increase in sales though was in sensors and hand pieces. Over the last few quarters, our sales of these products ranged from 2.9 to $3.4 million. In this quarter, the sales were $4.6 million. So we've seen a real recovery in these products. Sales of other accessories, services, contract manufactured products at $6.7 million were also up from quarter one.

Based on our current order book and what we can see in the pipeline from our distributors, we're now expecting sales in the next quarter to be comparable to this quarter. And by the fourth quarter, we are anticipating increased sales, looking for a level slightly north of $35 million based primarily on increased pump sales.

By that time, we hope to have introduced our long-awaited large volume pump product line. Based on these projections, we're sticking with our $129 million sales forecast for the year.

Medical Devices operating profit. In the face of it, operating profit in this quarter was just about breakeven. For the first six months of this year, our operating profit for this segment has been $152,000. However I could make some pro forma adjustments which would make the picture look better.

First when we made our first acquisition of the Curlin product line, part of the package that came with Curlin was a machine shop. The shop produced parts for Curlin, but also performed contract machining for other companies.

As you may know, this is a very competitive business in Southern California and it was not a profitable operation. In the last quarter, we sold off that shop and in the process, we incurred what I will call a restructuring charge of $400,000.

In a somewhat similar vein, you'll remember that in past quarters, we have complained about the increasing costs of subcontracted components for our disposable products. Our solution for that problem is to develop our own production facility and in that facility, produce all of the disposables for all of our product lines.

This facility went online finally last week. It's in Costa Rica. It's a big factory at 76,000 square feet. It currently employs 180 people and it's on its way to 280. And by the end of the year, it will be producing 40 different products with an annual volume of 12 million units in total.

These are products formerly subcontracted all over the world. We believe that once this facility is fully operational, it will make a big improvement in our overall profitability and also maintain the quality levels we are interested in.

However, the startup has been a big project and has been expensive, more expensive than we anticipated. Over the last six months, we have incurred costs of $2 million associated with the facility. The effort has been in training the staff, debugging the various production processes and performing what's called seal strength testing on the packaging.

As I said, we began delivering product last week, so the startup costs recorded so far this year were just that, costs that produce no revenue. So if you let me make those two adjustments, operating profits for the first six months on a pro forma basis would have been $2.5 million without Costa Rica.

One other analysis I think is worth sharing, those of you who followed the progress of our Medical Devices segment remember that we acquired -- we started with an infusion pump company named Curlin. We then bought an enteral pump company named ZEVEX and the disposable pump product lines from a company named McKinley. Through various restructurings, we've consolidated all of these operations in our facility in Lake City.

Then in the early part of last year, 2009, we acquired AITECS, syringe pump company in Lithuania; and Ethox, a manufacturer of disposables in our hometown of Buffalo. These acquisitions, along with the Costa Rican plant are initiatives intended to strengthen our product position in the long term. But in the near term, these last two acquisitions have suffered reduced sales for a variety of reasons and neither has contributed to operating profits.

If I could focus on the three original acquisitions that are now functioning in Salt Lake and factor out Costa Rica and then compare results for the first half of this year to the first half of last year, here's the comparison. Sales just under $50 million, up 5.5%; gross profit up 43%; and operating profit before restructuring would have been around $2.8 million, an increase of over $5 million over the loss of last year.

Admittedly in last year's first half, we incurred about $2 million in costs dealing with a couple of product recalls and they were part of last year's loss. But even factoring out those costs, the substantial improvement in profitability has been achieved in what I could call the core of our Medical Devices product line.

Getting back to the real numbers though, given what we think we can achieve in sales in the next couple of quarters, we are now anticipating operating profit for the year of $3.4 million, down $1.1 million from the $4.5 million we had been forecasting. So now let me summarize.

For four of our five segments, we've maintained the same sales forecast we provided a quarter ago. In our Industrial segment, we described a $25 million reduction in wind energy, offset by a $5 million increase in the legacy business. So the change is $20 million, changes our total sales forecast from $2.12 billion to just plain $2.1 billion.

The important changes though in the quarter are in margins. We've changed our projections for the year for Aircraft from 8.6 to 10.1, Space and Defense from 10.2 to 11.2 and those changes add 14.3 in operating profit.

On the other hand, we reduced operating profit in industrial and medical by $7.6 million and the net of all that is a sizable increase in operating profit, which taken together with some other refinements in our P&L in interest and in corporate expenses results in a net earnings improvement over our prior forecast which was $102.9 million, an improvement to $107.4 million, earnings per share from $2.25 up to $2.35.

EPS of $2.35 per share would be a 19% increase over last year. On a year-to-date basis, we're already at $1.02. We're projecting the next two quarters at $0.64 and $0.69 respectively. And, John has even more good news with respect to cash flow. Here is John.

Thanks, Bob. Good morning. Q2 was another quarter of positive cash flow. Our leverage ratio continues to come down as our earnings recover and our cash flow reduces debt. Given the strong performance thus far in the year, we're increasing our forecast for cash flow for the rest of the year. Now let me provide you with some more details.

Over the last 90 days, our free cash flow was positive $11 million. This is down from the very strong $44 million in the first quarter, but you remember that last quarter, we enjoyed some fortuitous timing on receipts and expenditures which we said would reverse in the second quarter.

In this quarter, working capital grew by $12 million. Through the first half, we generated $56 million of free cash flow, a conversion ratio of 120%.

Over the last 90 days, net debt increased by $13 million. Capital expenditures in the quarter were $16 million, while depreciation and amortization was $22 million.

Interest payments were $9 million and we paid $5 million in cash taxes. Our effective tax rate in the quarter was 29.6%. A year ago, our tax rate was an unusually high 35.1%.

In the second quarter last year, we identified that the recession was going to affect the remainder of our fiscal year and in particular, reduce our earnings in foreign tax jurisdictions where we enjoy lower tax rates. The higher forecasted tax rate for the total '09 fiscal year resulted in a catch-up entry in the second quarter, resulting in that abnormally high rate.

Contributions to our US defined benefit pension plan in the quarter continued at our $6 million run rate and our leverage ratio, defined as the net debt divided by an adjusted EBITDA, ended the quarter at 2.67, down from 2.75 at the end of last quarter. Finally at the end of March, our net debt to total capitalization stood at 38.5%.

Now let me update our forecast for fiscal '10. Last quarter we forecasted $75 million of free cash flow for the year. Given the strong performance in the first half and our forecast for stronger earnings, we are updating our guidance to $90 million.

We believe capital expenditures will accelerate from the raise in the first half as the A350 program ramps up. So we're sticking with our previous forecast for the year of $75 million.

Depreciation and amortization should end the year at about $91 million and we're revising our estimate of interest expense downsizing to $38 million. Finally, we continue to forecast a tax rate for the full year of 27.1%. Now let me pass you back to Bob to lead the Q&A.

We put out a lot of numbers and we appreciate that we stand between you and lunch. But we are happy to take your questions.

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

Good quarter. Good cash flow performance also. So, Bob, your R&D was 25.5 in the quarter. Could you give us some help in terms of how that sits between 787 and total aircraft?

Total aircraft in the quarter was 14.7. The 787 was only 2.6 of that. The 14.7 also includes a little bit from the acquisition of Wolverhampton, but not a lot.

And then for the year, where is that expected to be?

Well, we are still forecasting the year at about $100 million. We think Aircraft will be 61.2. We have the 787 forecasted for the year now at 9.7. We are at 5.7 year to date.

Okay and then -- okay, so on Components, you mentioned that kind of the mix would be shifting away from military and it sounds like marine is picking up. That seems to be a more profitable, hardier business. How come we have margins forecast to go from 16% down to around a little under 15% in the second half on better mix and better volume?

That is a good question and if we were confident that the mix that produced the 16% in the second quarter were going to persist for the rest of the year, one could expect that it would come in higher. The mix in the second quarter was helped.

As I mentioned, there was a strong military aftermarket. And the profitability throughout the product lines in the component group is not all completely uniform. So we do consider forecasting margins as a bit of a guessing game. We would like to be on the conservative side. I don't want to get hung out on a high margin forecast and then get surprised on the downside.

Also, I would add, Cai -- this is John -- that the actual mix for the full year forecast doesn't actually change much from the first half, if you annualize the first half. The military (inaudible) the aircraft (inaudible) is actually up a bit and the marine is only up very marginally from the first half. So we are starting to see better incoming orders, but we think it may take a couple of quarters before that turns into real sales growth.

Great and you had mentioned that the $2 million of startup in Costa Rica, how big was the startup in the second quarter and how much -- are they going to be bigger, less roughly in the third (multiple speakers) and fourth quarter? Even give us general color.

Second quarter was the expensive quarter. We encouraged costs there of about $1.3 million in the quarter.

We are now starting to deliver, but we think that the next quarter, I'll call it the excess costs, were -- that plant as it's getting rolling, will probably be in the $600,000 or $700,000 range. Probably in the early quarters of next year, we will begin to see the real cost benefit.

There is no denying that it's taken us more time, more effort and more money to get this plant up and running than we had originally anticipated. On the other hand, we think it's a nice operation. We have gathered what we think is a competent staff.

It turns out in this particular area in Costa Rica, there's kind of a cluster of medical devices companies. And so we are able to acquire a management staff that has experience in this area and some people. So, we spent more money getting it going than we thought we were going to, but we're still optimistic that in the end, it will be the right move to have made.

Great and last one, John, congratulations. I guess the cash flow guidance moves up another $15 million to $90 million but the CapEx plan appears not to have been changed. So that's more than the net income moved up. So what are the pluses on the cash flow front?

Well first of all, I only report it. It's the guys that run the businesses that do it. So the congratulations should be directed towards those guys.

I think what is, you're right, we're not moving up the CapEx. You got about a $5 million increase in the net income. So the increase is really $10 million.

And it's really a reflection of the fact that the working capital efforts that have been going on that we have talked about over the last year or two are really starting to bear fruit. The first half, we were at $56 million. You get an 4 to 5 from net income, that gets you to 60. That's 90 over the last two quarters.

That's a run rate of 15. So that feels like that's a very achievable number. So it's really just a reflection of the fact that the focus on cash has started to bear fruit.

And it's mainly the working capital?

Yes.

Terrific, I'll let someone else go. Thanks and good quarter.

[Kevin Ciabattoni], Boenning and Scattergood.

First off, can you give some color on the Joint Strike Fighter? It looks like production is ramping here this quarter. Where do you guys see that headed? And then what kind of offsets are you looking at with R&D ramping again with maybe COMAC rolling on?

I'll start with the last question -- your last question first. COMAC, we signed an agreement and we have a very small team on site in China. The R&D expenditures in this year will be -- you won't notice them in the $60 million aircraft R&D column.

So it will be -- this 919 will start show up as an R&D expenditure measured in millions next year and the year after. The F-35, the development program we are forecasting for the year, it will wind up at a little over $40 million.

We are at about 28 year to date. So we're expecting another $12 million or so. On the production program, we are at a little over 13 at the moment and we are expecting to wind up at around $31 million for the year.

Okay, that's helpful. And then shifting into the wind energy, you guys gave a pretty good explanation of what happened in China. Can you give some more color on the issues in Europe? And also if you guys have any exposure to the issues that Vestas is having in terms of inventory?

Yes, I think it's -- to understand our situation, I think it's important to recognize which customers we serve and which we don't. The major part of our business, wind turbine business in Europe, is an electronic pitch control system that is used in electric pitch controls and some of the major players, Vestas, in particular don't use that system.

So we are not a supplier of Vestas or ENERCON. So our customers companies like REpower and Ecotecnia and Fuhrlander, some of the other names in Europe. And we actually aren't a lot of help as to what is it that's driving or not driving the wind energy business.

Our sales staff going into this year had a much higher, much more optimistic forecast for sales of our equipment to wind turbine customers in Europe. And quarter by quarter, we have been moderating that sales forecast, based on the incoming order activity, the inquiries we have, the quoting we are doing.

About all I can tell you at the moment is Spain in particular seems to have slowed down dramatically for us. And other than that, what we've heard is that a number of the other wind farm projects, particularly the offshore wind farm projects, have sort of gone to parade rest and we are presuming that at least in part, it's financing and perhaps economics.

I mean, Europe we are told, most of the good wind areas already have wind farms on them and so many of the projects and prospects are offshore or they are repowering, removing small turbines to replace them with big turbines. And I think the economics of those projects may be a little tougher. But we don't pretend to be the experts on exactly what's going on in that market.

That was helpful. And then the last -- and then one quick last one. You said I think Taurus II was $3.4 million in the quarter. Where do you guys see that kind of going directly?

We think that will continue to be a big program for us. We are at about $5 million year to date and think the next couple of quarters will be another 3 or $4 million.

JB Groh, DA Davidson.

Congratulations on the numbers. I'm just curious, Bob, what's your acquisition appetite? You've done a couple deals this year. What are you looking at? What are you are seeing in the market in terms of valuations and attitude from sellers and how has that changed over the last three to six months?

We continue to be in the market. We are seeing smaller opportunities. We don't foresee -- we don't have anything in the pipeline that's going to be comparable to the Wolverhampton acquisition. That was a $90 million deal. The Company this year will do over $100 million in sales.

But we have some others that are possible. In terms of the attitude, it's hard to generalize. I do think that many sellers particularly in the industrial markets are more realistic.

Many of them have been battered in the last couple years and they either have moderated their expectations or they've withdrawn from the market. In the aircraft business though, we haven't seen a lot of properties but at least it's my opinion that the sellers still have pretty lofty multiple expectations. So it all depends on the deal, I think.

Okay and then on 787, I know you don't want to talk about fiscal 2011, but when do you expect to see the ramp-up in the 787? Does that hit you what, three to six months prior to changes at Boeing in terms of rate?

Yes, our deliveries -- six months is probably a reasonable leadtime to think of -- our sales -- accounting for 787 and the rest of our Boeing business on a long-term contract accounting basis, so we are recognizing revenue based on costs incurred. So we are in advance of our deliveries which are in advance of their deliveries.

But we're looking at -- the schedule that I'm looking at at the moment, we are expecting to deliver 25 aircraft this year and our fiscal year ending in September, 44 next year, then 63 and then 2013, we are forecasting 119 aircraft. So it will be a big deal in 2013.

Is that margin dilutive and at what sort of volume does it get pretty good?

Well this is commercial aircraft business, in the commercial aircraft business the production of OEM equipment is never particularly profitable. I mean the business model is you recover your costs if you can on the OEM equipment. But throughout this period, although there won't be repair and overhaul activity, there will be initial provisioning spares and so I think it should be a net positive for the Company.

And in terms of CapEx, you probably geared up for this a couple of years ago?

Yes, we think we are well facilitized. To your point, we are equipped way the hell earlier than (multiple speakers)

Thanks a lot.

Eric Hugel, Stephens.

Bob, just want a question on the Costa Rica medical facility. I assume that anything that comes out of there needs to be sort of like certified by some government agency, the FDA or whoever approves that kind of stuff. You said you started delivering product last week. That mean that everything is certified or is it process by process and there's still a lot of stuff that needs to go on there and so there's still risk?

The facility is certified and I think it's good to go.

Can you talk about -- you mentioned the Obama plan. I guess his sort of new plan for Constellation would just be to use the capsule as an escape vehicle for the space station. Would there be any -- is there anything that you have on the capsule that would be sort of salvageable for that?

I think so. And you have to be -- determine what that means. What does it mean to say that we are going to continue Orion and use it in that fashion? I think to a large degree, that was just politics.

We're going to announce this new plan. We're going to offend all the people who care about Ares I. Let's see if we can bring Lockheed into camp by saying that well, we're not going to cancel the crew vehicle too.

So I think there is a lot of discussion, negotiation on the part of a lot of parties before the NASA plan for '11 is worked out. I think you may be aware, the folks in Congress who represent the districts that include NASA installations aren't at all happy about the administration's so-called plan.

And if you listen carefully, other than canceling or Ares I, there isn't a plan. There is vague talk about spending more money and doing R&D, but there is this fact. The NASA administrator after the budget was proposed, the budget that exposed the fact that they were intending to cancel Constellation and at that time, Orion; the NASA administrator sent out a comminque to all of the NASA stations basically asking, "So what do you think we ought to do now?"

So I'll be surprised if there isn't a compromise that results in a NASA plan for 2011 that looks more like the program of record than the administration's new outline.

Lastly on the A350, can you talk about the R&D ramp there? It seems that that program is rapidly falling behind schedule at Airbus. Are you concerned about sort of a similar to 787, sort of hurry up, do all the work and then wait and spin your wheels for a while?

Well I don't know. I don't think it's going to turn out anything like the 787. I think if Airbus begins falling seriously behind schedule, they'll be much quicker to acknowledge that and reschedule.

But to your point, our R&D activity in the next six months is up substantially from the effort in the first six months. On a year-to-date basis, we are just over $13 million and we expect to spend another 20 or 22 in the next six months.

So we will be investing. But from our point of view, what we will be doing needs to get done. There may be the question of whether it needs to be done this year or early next year, but sooner or later, the design work has to be done. Looked at from our perspective, the management of the program seems to be quite competent.

Okay. Are there any maybe provisions in there? Because basically what happens is when they go in sort of delay mode, you just have to keep your engineers sort of spinning your wheels and it costs you extra. Is there any protection in there for you if the delay is on their side but they are going to foot some of the cost for that?

No, we are never protected from that. On the contrary, when programs get delayed, that generally provides the airframer the opportunity to explore more options and suppliers like ourselves line up wind up spending more money.

Exactly.

So the engineers get kept busy doing something.

All right. Thanks a lot.

Tyler Hojo, Sidoti & Co.

Just to kind of follow up to Eric's question, just looking at R&D, you're basically projecting R&D consolidated to be basically flat year on year. And I'm just wondering if you could maybe talk broadly about where you think that goes. I mean you've talked a little bit about COMAC and some other development efforts. But if you could maybe just talk to us in big picture?

Well what we have said is that R&D for the Company, and particularly for the aircraft business in the last couple of years has been unusually high. We think of ourselves as being in an usual period given the number of new airplanes in design. And we'll work through that and two or three years from now, there will be many fewer airplanes in design and the R&D in the aircraft business will be coming down from what's currently between 8 and 10% of sales, will be coming down to 4 or 5% of sales.

And we expect that that will happen. Our hope is that we'll have growth in other parts of our business. And one of the advantages that we have is that the engineering talent that we are currently employing in the aircraft business, the same kind of engineering is done in Space and Defense and in our industrial product line. So we'll be able to redirect that activity, probably spend a little less money but it will be a smaller percentage of a much larger sales base.

So that is what we expect will be happening over the next few years. On COMAC, let me make one clear distinction. On the 787 and the A350, we have the job to do, the primary flight control actuation and a major portion of what is called the high lift system. High lift is a term that's used to describe the actuation that extends the leading and trailing edge when the aircraft needs more lift. So therefore, high lift.

On the C919, what we announced is that we have a deal to do the high lift system but not the primaries. The development effort to primary flight controls is a substantially bigger and more expensive R&D effort than the one to do the high lift system. I don't want to be conveying the impression that the C919 is going to take the same kind of R&D investment as the 87 or the 350.

That's good color. Just kind of a follow-up. If you look at the op margin level that aircraft controls was at basically in '02, '03, '04, is basically what you're saying is you see the business getting back there? In other words, nothing has really changed in terms of kind of the makeup of the business?

Yes, we expect that the margins in aircraft over the next couple or three years will get back into a range more like 14 or 15% where it was a few years ago, when we were spending 3 or 4% on R&D instead of 9 or 10%.

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

Okay, time for lunch. Thanks, Ken.

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