Moog Inc (MOG.B) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fiscal year 2010 fourth-quarter and year-end conference call.

(Operator Instructions). As a reminder, today's call is being recorded.

At this time then I would like to turn the conference over to 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 November 4, 2010, our most recent Form 8-K, filed on November 4, 2010, and in certain of our other public filings with the SEC.

We 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 today.

This morning we will report the results of the fourth quarter, we will review 2010 year-end results, and we will update our guidance for 2011, the year that we have just begun.

Fiscal 2010, the total year, as I said at the end of last quarter, our recession is over. I don't mean that the entire global recession is over or even that the recession is over in the US. But what I do mean is that our company has adjusted to the current market conditions, and the recession has not been impeding our growth this year and won't be an obstacle to growth in 2011.

Fiscal 2010, now complete, was a very good year for us. Sales of $2.1 billion were up 14%. Net earnings, $108.1 million, up 27%. We have a few more shares outstanding this year than we did last, and so our earnings per share, $2.36, are up 19%.

We continued this year our heavy investment in R&D. We spent $102.6 million in 2010, a slight increase, $2.6 million over last year. But R&D has been begun to decline as a percentage of sales. This year it was 4.9%, versus 5.4% last year.

SG&A expenses, $313.4 million, also down as a percentage of sales.

We did incur restructuring expense during this year of 2010 of $5.1 million, down from $15.1 million last year.

Interest at $38.7 million, a little bit less than last year.

This year's other expenses, primarily foreign exchange.

Last year, you'll recall, we had earnings from our investment in LTi REEnergy.

Pretax earnings were up 35%.

Our tax rate of 27.7% was considerably higher than last year, but nevertheless, as I said a minute ago, net earnings were up 27%.

Q4 -- in terms of net earnings we came out where we expected to in the fourth quarter.

Sales at $572 million were slightly higher than we expected and up 13% from a year ago.

Our gross margin of 28.7% was up from last year's 27.3%.

R&D, $27.4 million, down ever so slightly from last year in dollar terms and also as a percentage of sales.

SG&A, $79.9 million, 14% of sales, also down from last year's percentage.

Interest at $9.4 million was down $1.4 million.

Net earnings of $32.3 million in the quarter were more than double last year.

And on a per-share basis, this quarter was $0.71, double last year, in spite of the increase of 6% in our share count.

2011 guidance -- we are reaffirming this morning our guidance for 2011. There have been some small shifts in the mix of sales, but in total we still expect to come in at $2.24 billion. We are projecting net earnings of $124.2 million, $2.70 a share.

If we achieve that, it will be 14.4% increase on top of this year's 19%.

Now I'll go to the segments.

Aircraft, Q4 -- total aircraft sales in the quarter, $201.6 million, up 14%. This was a 24.8 (technical difficulty) increase, and our recent acquisition of Wolverhampton provided sales of $22.2 million of that increase -- so most of it.

In this quarter we saw -- we also saw increases in both mili and in the commercial aircraft part of our business.

Military aircraft sales, $119.2 million, up 7%. Sales from Wolverhampton provided $9.1 million of that growth. We did have higher sales in the V-22 tilt rotor, on the Blackhawk and in the military aftermarket. And they offset reduced sales on the F-35. We had a net $5.3 million decrease on the F-35.

I think you appreciate that the production revenues are increasing, and they are up by $5.2 million in the quarter, including $2.6 million from Wolverhampton. But the development program is winding down, and it generated revenues of $6.2 million in the quarter, down $10.5 million from a year ago.

Our other military production programs were up about 10%.

On the commercial side, sales in the quarter were way up. Sales, $73.7 million, up 32%. Of the $17.9 million increase, $13.1 million came from Wolverhampton. Including those sales, our revenues to Boeing, $28.2 million, were up 62% in the quarter. Airbus sales, $8.9 million, were up 77%.

Even our business jet product line generated a sales increase of 18% in this quarter, to a total of $7.1 million.

The commercial aftermarket at $23.2 million was up 6%, but it was up 18% from the most recent quarter -- hopefully an upward trend that will continue.

Our navigation aids business was actually down in the quarter by about $1.1 million, and last year's fourth quarter we were completing a very large U.S. Air Force TACAN contract -- that's Tactical Air Navigation, and in that quarterly we also sold $1.7 million in transponder equipment, an order that didn't repeat this year.

Aircraft, 2010, the total year -- sales, $757 million, up $93.1 million, 14%. All of the increase was provided by the acquisition of Wolverhampton.

On the military side, sales of $457.6 million were up 9%, $38 million, but that total included $42.3 million from Wolverhampton.

We did experience substantial growth in some of our legacy programs. The V-22 was up by $20.7 million, Blackhawk, up by $6.7 million. Military aftermarket, up $17.6 million.

However, in total, F-35 revenues at $77.2 million were down for the year almost $23 million. The production program increased by $24.5 million, but the development program is winding down and generated revenues of just under $45 million for the year. And that is down $47 million from the year previous.

Before we add in the Wolverhampton revenues, our sales increases in ongoing production programs and in the aftermarket just about offset the decline in F-35 and in a few other smaller programs.

So that is the dynamic.

In commercial aircraft -- sales, $261.9 million, up 22%, or just under $48 million. But as was the case on the military side, this is after including $51.5 million of sales from Wolverhampton.

Our commercial sales to Boeing at $91.1 million were up 78% for the year. That's a $40 million increase. And 16% of it were revenues from Wolverhampton.

At Airbus, sales of $37.8 million were up $16 million, and all of that increase was from Wolverhampton.

Our business jet revenues for the year were actually down $12.2 million at $26.5 million. Wolverhampton is not involved in those products.

Our commercial aircraft aftermarket at $82.7 million for the year was up only 1% and would have been down 8% were it not for the contribution from Wolverhampton.

For the year, nav aids -- up 24% to $37 million, and the increase all came about because of growth in the Fernau acquisition, an acquisition that we made in February of 2009.

Aircraft for 2011 -- in our last quarter conference call, we forecasted 2011 sales for aircraft at just under $800 million, and that forecast still looks good.

We have seen one mix shift. We expect that commercial aircraft sales will be higher by about $11 million, and the navigational aids business will be lower by a similar amount.

Comparing to the year we just completed, military aircraft sales in 2011, $461.1 million, will be almost the same as this year's $457.6 million.

In 2011 the F-35 revenue will actually be up a little. We expect a $20.6 million increase in the production program to a total of $52.9 million, which will more than offset a further reduction of $17.7 million in the development program.

Other than that, we expect to sell a little less to the Japanese for the F-15, but we are projecting a $15 million increase in the military aftermarket to a total of $[117.7] million. Half of that increase will be generated at Mid-America, the aftermarket specialist company that we bought last May.

On the commercial side, our revenues to Boeing will increase because of the accelerating rate on the 787. We expect Boeing revenues in total to be $105 million.

Revenues at Airbus will be up $6 million.

Our business jet product line should be up $5 million. The increase there will be in the production rate of the Challenger 300.

We are looking for a $6.8 million increase in the commercial aftermarket.

For 2011 we are forecasting our navigation aids business at a level only $2 million higher than 2010. 90 days ago we had a much more aggressive forecast, but since that time the U.S. Navy has delayed a contract for ship-based tactical air navigation, and we have also experienced program delays in other programs as well.

Taken altogether, aircraft revenues, $797 million, should be up 5% in 2011.

Margins in aircraft -- aircraft margins in the quarter were a very respectable 10.9%, compared to 6.4% a year ago. The 6.4%, though, was after a $2.8 million restructuring charge. Setting that expense side, margins last year were 8%.

Part of the improvement this year was lower R&D. This year's fourth-quarter R&D was just over $15.7 million. Last year it was $18.3 million.

The larger improvement in the margins, though, is the result of a sustained cost improvement initiative conducted over the last couple of years by the folks in the aircraft group.

For the year, aircraft margins, 10.1% after a small restructuring charge, compared to 7.9% last year. Before restructuring, this year's 10.4% compares to 8.6% last year.

2011, we are projecting a continuation of the 10.4% that we achieved in 2010. We do have a positive margin shift in F-35. We will have more after 2011, but our R&D will still be high in 2011, and $20 million of our sales increase is 787, a program in the early part of this cost curve.

Space and defense, Q4 2010 -- space and defense sales in the quarter, $89.4 million, up 28%. Of the increase, $4.3 million was generated by recent acquisitions, but real organic growth was over 20%.

In what I've come to call the legacy business, which includes satellite controls, launch vehicles, strategic and tactical missiles and missile defense, sales in the quarter were up 17% to $42.5 million. The increases came on the Taurus II program at Orbital Sciences. Sales in the quarter in that program were $3 million, up $2.4 million from a year ago.

In the tactical missile business, we were up $5.2 million, primarily because of increases in Hellfire and TOW.

The really big increase in the quarter, though, was in defense controls. We had a very strong quarter in that driver's vision enhancer system. Sales were $11.9 million, less than $100,000 a year ago, so a big change.

The NASA programs at $4 million in the quarter were down $2 million from last year, reflecting the uncertainty and the delays resulting from the administration's redefinition of what used to be the Constellation program.

As we now understand it, work will resume on what was the Orion crew exploration vehicle. It will be renamed, of course.

Work on the Ares I launch vehicle will be transferred to a new, heavy-lift launch vehicle, a sort of Ares V light, which will also be renamed.

The balance of our space and defense business in this quarter was up about $4.8 million, primarily in security and surveillance, and almost entirely the result of our recent acquisition of the German company Pieper.

Space and defense, 2010, the whole year -- for the year, space and defense did $325.5 million, up $51 million or 19%. Of the increase, $6.7 million came from acquisitions made during the year.

Legacy business -- sales of $163.1 million, up 29%.

Very strong sales in satellite controls. I mentioned on our last call that we have been delivering in 2010 on orders that came in 2009 for 32 commercial GEO satellites. A more typical year would be 20 to 25.

Over the year our satellite controls business was up $8.8 million.

Launch vehicle business -- also strong in the year, driven by revenues on Taurus II. We did $11.7 million this year on that program, up from $2.3 million a year ago. You'll remember that Taurus II was one of the launch vehicles that this administration considers commercial.

Our tactical missile business, $47.3 million, was up $16 million, primarily the replenishment of Hellfire and TOW.

In defense controls we had a very strong year in sales of the driver's vision enhancer system. Sales for the year, $29.7 million, up $16 million from a year ago.

Since this program began a couple of years ago, we have now delivered a total of $78 million worth of these systems.

In 2010, for the year our NASA programs, including the cost plus development work to replace the space shuttle, generated a total of $19.9 million, up $1.5 million from last year.

Other major increases in space and defense were in security and surveillance. Sales in this category at $32.3 million were up $9.4 million, largely the result of the Pieper acquisition, which provided sales of $6.3 million in the last five months of the year.

Space and defense for 2011 -- we are projecting 7% growth to a total of $347.8 million. Growth will come primarily in security and surveillance, in part because we will have a full year of the Pieper company.

We are projecting security and surveillance sales of $56.5 million, up from $32.3 million in 2010.

In the legacy business we are actually projecting a modest decline because we are expecting that sales of controls for satellites will be down to a more normal level.

Launch vehicle business will also be down because of a lighter workload on Taurus II. We have completed the refurbishment work we had been doing on the Minuteman strategic missile. The only uptick in the legacy business will be in tactical missiles, driven by sales increase continuing in Hellfire and the TOW missile.

In defense controls we are projecting $22.8 million in driver's vision enhancer systems, down from $29.7 million. But the Marine LAV-25 is back and should be up $12 million from only $3 million in 2010.

The new NASA plan for replacing the shuttle is still taking shape. We forecasted $15.7 million for 2011, down from $19.9 million.

As a result of all these puts and takes, plus some other changes, should result in a $22.3 million increase or 7%.

Space and defense margins -- in the quarter, space and defense operating margins of 12.6% were down from last year, a comparative 13.6% last year in the same quarter, but in last year's fourth quarter we had a particularly favorable product mix, including some very profitable refurbishment programs.

Margins for the year for space and defense were 11%, up from 10.6% that we had previously forecast. For 2011 we are projecting 10.7%, very close to the 11% that we just achieved.

Industrial -- industrial Q4, a strong fourth quarter. Sales in the core business, quite a bit better than we had forecasted, and sales in wind energy were a little bit better.

Total sales in the quarter, $159.9 million, an increase of $22.3 million or 16%.

Oftentimes strengthening foreign currencies add to our sales increase. In this quarter, exchange rates actually worked against us, and on a constant currency basis our sales increase would have been 20% instead of 16%.

The last couple of quarters, I have described our industrial business in two categories. I have talked about the core business, that set of product lines that were in place in our peak year of 2008, before we made our most recent wind energy acquisitions.

In 2008 our core business averaged $133 million a quarter. In the third quarter of 2009, in the depths of the recession, sales of those product lines got down to $84 million. We have been recovering ever since. Last quarter those products generated $105.6 million.

So there is a recovery underway in the core business, but it's got a long way to go to get back to the peak levels of 2008.

There was real strength in the quarter in capital equipment. Those sales totaled $40.7 million, up 32% from a year ago. Sales in the controls on plastics machinery were a big contributor, an increase of $6.1 million.

Sales were also up in specialized test equipment, and metal forming and presses, and in material handling.

In addition to capital equipment, sales going into oil and gas applications were up from a base of only $1 million last year to $3.5 million this year, and aftermarket revenues were up 11%.

Sales through our distribution network were up in the quarter 54% to a total of $10.3 million.

All in all, a much better quarter in our core business.

Complementing that, sales in wind energy of $54.3 million came in slightly ahead of our last forecast and brought us to a total -- wind energy total of $154 million for the year.

So let me do the whole year, 2010, industrial.

In making the year-to-year comparison in the core business, it is important to remember that in 2009 core business started strong and went downhill. Fiscal '10, 2010, started weak and improved all the way through.

In the end the core business in 2010 produced $391.6 million, up only 2% compared to 2009.

The strength was in the capital equipment part of the business. Those products were up 11% to a total of $158.3 million. The growth -- sales in controls for plastics and in specialized test equipment.

On the other hand, sales in 2010 in simulation were down 19%, and power generating equipment, down 17%.

A dramatic increase over the year occurred in the wind energy business. Sales comparison is $154.1 million compared to $69.4 million in 2009.

You should remember, though, that we completed the acquisition of the LTi REEnergy product June of '09, and only then did we begin recording sales. So the 2009 figure includes only four months of that product line.

The reality is that the wind energy sales overall in 2010 would have probably been about the same as they were in 2009 if we had owned this product line for the whole year.

The way sales were recorded, though, our industrial sales were up 20%.

For 2011 we are forecasting continued improvement in the core business. Our forecast for the year is, up 12%, but it's only 3% over the run rate of the fourth quarter.

We are projecting a conservative 10% increase in wind energy, which would take us to total sales of $606 million, up 11%.

The capital equipment part of our industrial business, we're forecasting a 10% increase to $173.8 million. We expect in that part of the business a modest decline in plastics. In 2010 we know we had a very strong year selling blow molding controls in Asia in a market that we don't think will continue.

On the other hand, we are expecting substantial growth in metal forming and in specialized test equipment, and we have been competing for many months for a very large set of test equipment installations in the auto industry in India, and we are optimistic that that business will come our way and by itself provide a $10 million increase in test equipment sales in 2011.

We are also looking for recovery in the simulator business and in power generation, other than wind.

So I've mentioned our forecast for wind energy is up 10%. In 2010 our wind energy sales in Europe were $63 million. We are forecasting an increase to $71 million. And this forecast is based on new applications rather than a market turnaround.

2010 sales in Asia were $91 million, and we're hoping for a 5% increase there.

And our sales in the US will just get started in 2011. We hope to be in the $2 million to $3 million range.

Industrial margins -- in the quarter margins were very close to our prediction. After a modest restructuring charge of $150,000, margins in the quarter were 10.3%, compared to only 5.5% last year. Last year we had $2 million of restructuring in the fourth quarter.

For the year margins came in, after restructuring, at 8.8%, compared to 6.8% last year. For 2011 we are projecting 10.4, slightly better than the fourth quarter.

Components group -- components group had an exceptionally strong third quarter, the last -- the one we talked about 90 days ago. In that quarter we had sales of $95.7 million, which included almost $8 million in sales on the Eurofighter aircraft, a program on which we were catching up on deliveries, fiber-optic controls that had been held up for the lack of a component.

We anticipated lower sales in the fourth quarter. We have predicted $85 million, but the quarter came in stronger than that. Sales were actually $89.6 million. Still only 1% above the same quarter last year.

Comparing the quarters year over year, sales in aircraft were up $2.1 million, and industrial sales were up $3.8 million. But we had a big decline in revenue in the defense controls category.

We have been delivering a variety of components to upgrade the Commander's Independent Viewing platform and the target acquisition system on the Bradley Fighting Vehicle. This program was running at 20 systems a week. It is now running at half that rate. So revenue was down on that program.

In addition, in last year's fourth quarter we were delivering fiber-optic modems to the Egyptian army. That program has had a production break, so revenues in the total space and defense category were down in the quarter $4.8 million.

Revenues in our marine product line, $9.1 million, up only slightly from last year, although they are recovering from a low point in 2010 of $6.3 million, experienced in the second quarter.

In medical equipment, revenues, $11.6 million, were down a little from a year ago, and this simply reflects fluctuations in our deliveries to Respironics.

The good news is that revenue in the industrial product line, $15.2 million, is up 33% from a year ago, and the growth seems to be across the board.

We saw an increase in closed-circuit TV products. We had increased delivery of wind turbine slip rings to Sinovel, and a broad ranging increase in component sales for industrial automation.

Components for the year, total sales, $360 million, up 4%. Big increases in aircraft and industrial offset a downward change in revenue on marine products.

The big aircraft program is the Guardian program. It generated $23 million in sales in 2010. However, that was just a slight increase from the year previous.

The growth in the business was primarily in deicing systems on both the Blackhawk and V-22. They generated $20 million in sales for the year.

We are experiencing a wind-down in revenue on a number of aircraft programs, including a turcon, a system like Guardian that protects helicopters; a Raytheon program called FLIR; at Lockheed, the Arrowhead missile program.

However, for the year aircraft component sales were $147.1 million, up 15%.

Space and defense category is up only a little from last year, $81.2 million in total. Increased sales of space systems and $10.6 million in revenues on the CROWS -- that's Common Remotely Operated Weapons System (sic) -- and that program for Kongsburg overcame the rate reduction in that Bradley program and an overall reduction in repair and overhaul activity in military vehicles.

The marine product sales were down substantially in the year. This year's sales of 32 -- $30.2 million were down 29% from a year ago. A year ago was a fairly high level.

As I mentioned, we believe that sales in this market have bottomed out, and we are looking for continued improvement in 2011.

Medical equipment sales, $48.3 million, down 4%. As in the fourth quarter, the sales level reflects fluctuations in deliveries to Respironics.

In 2010 the change was primarily reduced quantities, although we did deliver during the year a larger proportion of a cost reduced and lower priced unit.

For the year, industrial component sales, $53.1 million, up 19%, reflected the same pattern as the fourth quarter, sales increases driven by increased deliveries of wind turbines slip rings to Sinovel, slightly increased sales in CCTV, and increased activity in a broad range of industrial products.

For 2011 -- we've built the current day components group on the foundation of our acquisition of Litton Poly-Sci in the year 2003. At that time it was a $130 million business, and two years later we acquired the slip ring companies from Kaydon, which total sales were about $40 million.

Over the years we've made a number of smaller bolt-on acquisitions, and it is now a $360 million business. But for the first time, we are not forecasting for next year a sales increase.

The basic dynamic is that a number of aircraft programs are winding down -- I mentioned some of them -- and activity on military vehicles, primarily the Bradley and the Abrams, is also slowing down, as is repair and overhaul activity on military vehicles.

We are expecting to offset these revenue reductions through increased sales in marine products, medical and industrial equipment.

In marine we are seeing increased demand in slip rings for remotely operated vehicles used in offshore drilling. In medical we are expecting an upturn at Respironics. And in industrial we're anticipating further improvements in wind energy.

Margins -- the components group has regularly surprised us on the upside with respect to margins, and this quarter was no exception. Margins came in at 17.1%, compared to 12.3% in the same quarter a year ago, and for the year, components group margins were 16.7%, up from 16.1% last year.

We are, however, concerned about the impact of flat sales in a growing cost environment and the shift in product mix away from mature aircraft and defense programs into increased industrial activity. Accordingly, we are moderating our margin outlook to 15.2%. Hopefully we will see some positive surprises next year as well.

Medical devices, Q4 -- 90 days ago we were forecasting medical devices sales in the fourth quarter at slightly higher than the third quarter, and we hoped that the segment would be operating in the black.

It would be an understatement to say that we didn't achieve those results.

Sales in the quarter, $31.4 million, were $600,000 higher than the same quarter a year ago but $2.1 million lower than the most recent quarter.

The much more important bad news is that we had an operating loss in the quarter of $3.5 million, $3 million worse than the most recent quarter and the same quarter a year ago, and $4.5 million worse than our last forecast.

So let me use that as a benchmark to describe how the loss incurred.

Before I begin to plow through the details of the shortfall, though, let me ask you to remember that our medical devices group is currently a collection of product lines that we have assembled by acquiring five different companies over the last few years, and we are in the midst of rationalizing these different and disparate operations.

We are in the midst of developing a coordinated sales organization, which includes a number of new people. We are managing an ambitious product development effort and a challenging FDA approval process. And we are consolidating our production operations, particularly the production of administration sets, into a central facility in Costa Rica.

The folks involved in this business are doing their best, but this is certainly an organization in transition. And we should not be surprised when they are less able to project sales and costs with the accuracy that we have available in our more mature organizations.

All that having been said, here are the details.

The sales fell short of our recent forecast by $2.3 million. $600,000 was lower pump sales, and the balance, $1.2 million, was a combination of lower sales and much lower than average selling price in admin sets.

In addition, in the quarter a reorganized billing process uncovered billing errors from earlier quarters which required a correction of $0.5 million.

The result of all that was a loss margin of $1.8 million.

We've talked in the last couple of calls about the challenge we are facing in a new and more extensive FDA approval process. We have new products that we are trying to get approved, and we are learning that much more extensive testing is required.

In the quarter we have made decisions to incur $700,000 more than our original plan for material to be used in the production of test samples assembled for various test procedures required by the new FDA approval process.

Lastly, we have talked in previous quarters about the reduction in excess expense in our Costa Rica facility. We are making progress, but this quarter we still missed our cost plan by $2 million, made up of excess labor, excess material and unbudgeted freight expense.

As we were ramping up production, we'd fallen behind in the delivery of admin sets, and in the interest of minimizing the impact on our customers, we have been air freighting the admin sets to various locations around the world. We are now very close to being caught up.

There is some good news. In the month of October we produced in Costa Rica 1 million admin sets, which is the production rate that we have been trying to achieve.

We are hopeful that in the quarters to come I won't be talking about excess expense in Costa Rica.

So those are the details, and that's how you get from a plan of $1 million profit to a $3.5 million operating loss in the quarter.

For the total year, the fourth quarter brought us sales for the year to $126.6 million, up 14%. Pump sales were up $4.1 million; set sales, up $6.5 million or 17%; sales of sensors and hand pieces were up $5.8 million, almost 50% over the year previous.

In terms of operating profit, we were almost breakeven prior to the fourth quarter, but that quarter leaves us for the year a negative $4 million, or a minus 3.2%. This is actually an improvement compared to fiscal 2009. In that year our loss was $7.4 million.

It could be called an improvement, but it's not at all the magnitude that we had hoped for.

So what about 2011? 90 days ago we provided a forecast that in 2011 medical devices would have sales of $150 million, operating profit of $8 million.

Given the experience of the fourth quarter, we're moderating that forecast. We're now looking for sales of $140 million and operating profit of $3 million, 2.1%.

This does presume that we will get FDA approval on our large-volume pump and that our new and expanded sales force and our broadened distribution network will have the desired effect.

We're forecasting an increase in pump sales from $37 million to $45.7 million, forecasting an 11% increase in sales of admin sets to over $[50] million. We're forecasting sensors, hand pieces, contract manufacturing and accessories to a total of $43.9 million, a slightly lower level than in '09.

I know it seems that every quarter we have to reassess our position in this market. For the first three quarters of this year, we seemed to be making reasonable progress in both sales and costs. This quarter was of course a real setback.

It now seems clear that we've built an infrastructure that presumed a higher level of sales, to achieve even reasonable profitability. And in light of what we believe are the real prospects for the future, we don't think it's sensible or advisable to dismantle that infrastructure.

So we do think we'll have to be less ambitious in near-term earnings expectations, evidence, the modest earnings forecast for 2011.

Also we think we will have to be more cautious in adding to that infrastructure in anticipation of growing sales.

We still believe, though, that the prospects for the new products that we do have in the pipeline and the potential that can be achieved with a larger sales force and a broader distribution network will allow us to make steady progress in profitability over the next two years, and I am still targeting 15% operating profit in 2013 on a sales level that is I believe achievable.

So, put it all together, let me summarize our guidance for 2011.

Forecasting a sales increase in 2011, 6% to $2.24 billion, an increase of $127 million.

We'll get a little help from having more revenue months from recent acquisitions of Mid-America and Pieper, but most of the sales growth is organic.

Aircraft is forecasted to be up 5% to just under $800 million.

On the military side, growth in F-35 will offset -- in the production program will offset the wind-down in development, and growth in the aftermarket will offset some other program-related reductions.

On the commercial side, increased production of the 787 and the Challenger 300, and a modest increase in the aftermarket should produce a 13% increase in sales.

In space and defense we are forecasting that increases in tactical missiles, the return of LAV-25, but primarily growth in the security and surveillance business, will overcome a reduced sales level in commercial satellites, and the result should be $348 million in sales, a 7% increase.

We are forecasting an 11% increase in industrial, to $606 million, driven by sales of controls for our metal forming machines and presses and specialized test equipment.

And we are forecasting a modest 10% increase in wind energy.

We are forecasting slightly lower sales in the components group at $350 million. Increases in marine, medical and industrial should almost offset the wind-down of some long-standing aircraft and defense programs.

And in medical devices we are forecasting an 11% sales increase to $140 million, premised on the introduction of new products and strengthened distribution network, both in the US and overseas.

We are projecting a modest increase in overall operating profit margins [from] (technical difficulty) [10].2% in 2010 to 10.7%. This should produce $239 million in operating profit, $124.2 million in net earnings, and $2.70 a share, a 14.4% increase.

We are updating the quarter estimates that we provided 90 days ago. We still think the year may start slowly, with quarters of $0.63 and $0.63, and then accelerate in the second half to $0.71 and $0.73.

We fully expect that 2011 will be another step on what should be a new trajectory of annual increases in sales, earnings and earnings-per-share. We believe that our company is back on track.

So here is John.

Thanks Bob. Good morning.

Q4 was another good quarter for cash flow to finish out the year with a very strong performance. This was (technical difficulty) a year of steady improvement in our balance sheet, our leverage ratios and our liquidity.

Let me start with some color on the quarter and then summarize the year we are closing. I will finish with the highlights we expect for fiscal 2011.

Q4 -- free cash flow this quarter was positive $39 million, and net debt was down the same amount.

In the quarter, we elected to contribute an additional $10 million to our US defined benefit pension plan, bringing our total for the quarter to $19 million.

Absent this additional $10 million payment, the fourth quarter was our strongest cash flow quarter in the year.

Working capital excluding cash was up slightly, the result of some acquisition and foreign currency movements.

Capital expenditures accelerated to $21 million in the quarter as the A350 program starts to ramp up.

Depreciation and amortization came in at $23 million.

Interest payments were $8 million.

And we paid $6 million in cash taxes.

Our tax rate was a relatively normal 27.4%.

Now let me turn to fiscal 2010 in summary.

For the year, we had $129 million in free cash flow, a 120% conversion ratio.

We spent $30 million on some small acquisitions, with the remainder going to pay down debt.

Capital expenditures came in under plan at $66 million.

And depreciation and amortization was $91 million.

Our US [DB] pension expense was $12 million, but we elected to make $40 million in cash contributions to start addressing the underfunded status.

Interest payments during the year were $[37] million.

Our tax rate's finished the year at 27.7%, in line with the historical averages.

This year we had no unusual items in the tax rate, so the rate was essentially the result of the mix of foreign and domestic earnings.

At the end of the year, our net debt (technical difficulty) [down] to $652 million from $752 million a year ago. Our leverage ratio improved to 2.28 from 2.94 over the period, and our net debt to total book capitalization improved to 36.8% from 41.4%.

Overall, a very good year for the balance sheet.

Fiscal 2011 -- our forecast from 90 days ago remained substantially unchanged, but there has been a slight shift between two of the components. Pension expense will now be higher than we had anticipated, but we think the tax rate will come in a little lower.

Here are the key numbers.

We expect free cash flow to the $90 million in fiscal 2011, a 72% conversion ratio. This is lower than the fiscal 2010 number due to the combination of 6% sales growth and higher capital expenditures.

Capital expenditures will be $90 million, the increase from fiscal 2010 mostly driven by aircraft programs.

Depreciation and amortization should be $95 million.

Our pension expense has edged up from 90 days ago, as the final discount rate came in at 5.25%, 25 basis points below our previous thinking. The expense on a US plan will be $19 million. We are planning for $30 million in contributions through the year.

On the positive side, we had been anticipating the renewal of the R&D tax credit during our fourth quarter, and that did not happen. So we are now assuming that the fiscal 2010 benefit will roll forward into the fiscal '11 tax rate.

In addition, we are assuming a slightly reduced foreign tax rate.

The combination of these two effects will reduce our projected tax rate to 29.2%, from the 31% we expected 90 days ago.

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

Are there any questions?

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

To start with a technical one, John, could you just refresh our memory, you have $19 million of pension expense now. What was it before?

This year it was -- this is on the US [DB] plan, so we are planning about -- just over $19 million for fiscal 2011. This year it was about $12 million, and in '09 it was about $5 million. And that is mostly the discount rate. Obviously the return on the assets has an impact on it, but it really is the discount rate that drives that expense change.

And how much -- when you gave us guidance in July, what were you looking for for pension at that point?

The difference between the number 90 days ago and now is about $4 million in the expense, and it's two elements. The discount rate came in 25 bps below what we had anticipated, but it also turned out that the mortality table our actuaries used -- had to use a new mortality table, which also had the effect of about a $2 million negative impact in terms of increasing the expense. So you put the two together, and it was about $4 million in total expense for fiscal '11, higher than we are projecting about 90 days ago.

The good news is that our actuaries have determined that we are all going to live longer.

Okay. Well, that is good. That's good.

If I look at your fourth quarter, the equity in earnings of LTi and other was a negative of $2.8 million. What was that?

Well first of all, in the fourth quarter of fiscal 2010 there were no equity earnings, in the fourth quarter. So I'm --

Could you try to question again? I don't --

The question is, if you look at your line of equity in earnings of LTi and other, it was essentially negligible for the first couple of quarters. And now it's a negative of $2.8 million. So I just wondered what that was. It was also negligible last year. Usually it's sort of background static. Now it's a negative of $2.8 million.

I think there were two effects in roughly half. One of them was some foreign currency movements, and the other one was just some additional corporate expenses, some consulting and legal expenses that we had.

Yes, the corporate expenses looked like they were somewhat higher in the fourth quarter. Could you give us some color on that?

It's just some yearend consulting type of stuff. It's nothing unusual I would say.

Okay, great. And could you give us what the R&D breakdown was in aircraft?

We could. Do you want to do that, Bob?

And what you expect for next year?

Are we talking -- well, let's start with the fourth quarter. I think what you are looking for, fourth-quarter, 787 was down to $2 million, A350 up to $8.4 million. The total in aircraft was $15.7 million.

Okay. And then where is that expected to go as we move forward into 2011?

In fiscal 2011, here is our forecast. We forecasted on the 787, $9.5 million in R&D expense (technical difficulty) on the (inaudible) and that I think will be the [redesign] (technical difficulty) We owe them the redesign of one actuator for the -9 as part as our original contract commitment. And $44.3 million on the A350 -- for a total for aircraft in 2011 of $64.3 million.

So we are still clicking along with pretty high R&D in aircraft.

And what we have baked in for 2011 for the entire company is $110 million. It's up in absolute dollars, but I think down as a percentage of sales.

Okay. Because it was $102.6 million.

Right.

So -- okay. So it's up. Okay. So it's up (multiple speakers)

And part of the increase is in businesses other than -- I mean, there are increases in business other than aircraft.

Okay. Okay. That's good. And then maybe give us some color, Bob, if you would, on the medical sector. You've kind of had this mess. You say that you are now working, you're up to speed in Costa Rica. Give us of some of the benchmarks. When do you expect the large-volume pump to be approved? And what other pumps are in approve? How are you doing in terms of ramping up the sales force? And maybe kind of how do you see the year unfolding sort of just sequentially?

Well, I think the reality that we have had to face is kind of the base sales level is -- unfortunately seems to be a $2 million or $3 million less than what we need to support the organization that we've put in place. We think we will just have to be patient for a couple of quarters.

In terms of approval on new products, we expect that -- we are hoping that we will be able to introduce at least one of our new products in -- towards the end of this calendar year.

We are in the awkward circumstance that we have a couple of new products in development that we are not really able to discuss. So there is quite a bit of activity underway.

We have added to our sales force. I think we now have thirty -- a sales force of 35 direct salespeople, which is considerably more than we had a year ago and considerably more expense. So we are in that circumstance of building up the sales organization to achieve the sales level not of this year but of next year and the year after.

So I think we are trying to be realistic. We do think that Costa Rica, that whole issue I think will be pretty well worn down, and I think we will -- we won't be talking a lot about Costa Rica next year.

We think we could still be slightly in the red in the first quarter. We expect to turn the corner in the second quarter of next year, make a little money next year. But we think -- I haven't -- I have not given up on my target of 15% operating profit in 2013. It may be on a sales level a little bit lower than what I had in mind a couple years ago. But that's okay.

So I think we will get there. It's certainly been a problem for us, and we have tried to describe it in what seems to me to be excruciating detail. I think if you will be patient for a couple of more quarters, it will come around.

Okay. The last one, the one at the end of calendar -- this calendar year, that would be the large-volume pump?

Yes.

Okay. Thank you very much. I will let someone else go.

Eric Hugel, Stephens.

Cai got most of my questions, but I don't -- first of all, I guess I was curious, I guess Saudi is about to place an order for a lot of F-15s. I know you have good exposure there. Can you talk about sort of the potential of that order and maybe sort of some magnitude and some time frame around some of the products that they are looking to buy and what you have on that?

Well, you may be better informed than I am. All I know about it is -- I've read about is F-15s, and weren't they talking about a total of 84?

Yes, I guess they were talking about a big buy and then some refurbishment. I'm not sure what you might be doing on that, if anything, but -- in terms of new buy. Can you -- maybe what kind of content you have on an F-15?

Yes. I can -- we -- actually, the F-15, there has been some redesign work. And our content has dropped from what we had done historically over a period of 40 years, where we had the pitch and roll control assembly system, which was originally designed back in the '60s. And typically on this, on older F-15s like that, we had, I'm going to say, somewhere in the $600,000, $700,000, $800,000 ship set quantity.

They have now gone to a fly by wire configuration, and our content has actually dropped significantly. So now we're at the kind of the $100,000 to $200,000 per ship set range because of that.

Okay, fair enough. Can you just maybe talk about -- you went through it all in pretty good detail, but can -- maybe on an overall high-level basis for ex I guess the LTi can you just talk about in Q4 and for the year what your organic sales growth was and what the organic sales growth expectation actually is for 2011?

Well, the -- 2011, that's a pretty easy question to answer, because in the forecast we haven't included any new acquisitions. So one could say, well, what about more months of acquisitions that you made in the middle of 2010? And in terms of the overall sales growth, I don't think that's a big number.

So I think you can look at the increase we're talking about in 2011 as almost all organic.

If you look at the increase from 2009 to 2010, the acquisition of Wolverhampton -- John has those numbers in front of him.

So rattle them off, John.

The total sales increase was about $265 million. Of that, about $200 million was actually acquisitions. And you can split that into two big ones. It's the LTi stuff, which was about -- just over $80 million. And the Wolverhampton stuff, which was just over $90 million. There was a couple of other small pieces.

So if you back that out, and you do -- you take up to forex, the real growth was about $55 million, or 3% in the sales line, ex acquisitions and forex changes.

Great. Thanks a lot, guys.

Michael Ciarmoli, KeyBanc.

Is actually Kevin Ciabattoni on for Mike.

A couple of follow-ups on Cai's questions. In the medical segment, you said that you were air freighting units there, just kind of playing catch-up. Is that still ongoing? Or have you finished that out?

We're pretty much caught up. We'll have -- the excess freight expense in the fourth quarter was in the neighborhood of $0.5 million. I think we will be much less than half of that in the current quarter, $100,000 or $200,000, something like that. So we are pretty much caught up, and we at rate, so it's just a matter of cleaning up the backlog.

Okay. And then on the aerospace R&D line, anything in terms of programs out there over the next couple of years that you've not baked in that you can discuss in terms of what might be out there?

Well, I would put it this way -- in 2011 -- the only forecast we're providing is 2011-- and in 2011 we have what I will call a budget for a couple of program possibilities. But I am not inclined to discuss those in detail.

That's fair enough. Commercial --

To just go on, there are airplane programs that air framers are working on, but they haven't discussed in public. So it's not our role to be describing what airplane companies are trying to do, that they are not describing.

Gotcha. Looking at the commercial aircraft aftermarket, how has that progressed? Better or worse than you expected? And maybe give us some color there.

Our expectation, we have -- we were not one of those companies that was looking at how full airplanes are and talking about increases in commercial aircraft aftermarket. Our commercial aftermarket has been kind of volatile quarter to quarter. It's kind of -- I think I said last quarter, it has kind of bounced around $20 million in the quarter, plus or minus a couple.

This quarter we were up to $23.2 million, but that included $2 million of sales from Wolverhampton that weren't part of our company a year ago.

So I guess I would say that the commercial aftermarket, we are forecasting a very modest increase in 2011. I think I just described that. I think we are forecasting an increase from about $83 million to just under $90 million.

So it hasn't shown much growth in the year that we are in. We are looking for a little bit of growth in 2011.

And actually some of that is initial provisioning on the 87 as that starts to ramp up. So we are not forecasting anything dramatic.

John makes a good point. I think, absent the initial provisioning, we are forecasting very modest growth in the aftermarket.

We hope we will be surprised on the upside, but there is not a direct connect between revenue passenger miles and our aftermarket revenues. As I say, it bounces around quarter to quarter. There are a dozen factors that influence it that we have no control over, mostly having to do with what airlines are doing with their inventory of repair and overhaul items.

Okay, that's helpful. And then just one last one. With regards to the continuing resolution, what's the impact on your portfolio there? If that were to run into let's say the middle of next calendar year, specific programs there on your end that might be at risk?

Resolution of what? Sorry.

The federal budget, defense budget, continuing resolution.

I don't know of anything that we think is particularly at risk. I think our portfolio will be adequately supported with the continuing resolution. That is actually what we -- what really comes to mind is the NASA budget, and that is sort of what we planned on there. So I don't see that as a big risk.

Okay. That's all I had.

(Operator Instructions). And at this time, I am showing no further questions in queue.

That's great. Thanks, everybody. Thanks for checking in. We will talk next time.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thanks for participating and for using AT&T's Executive Teleconference. You may now disconnect.