Moog Inc (MOG.B) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Moog first-quarter earnings conference call. For the conference, all participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions).

As a reminder, today's call is being recorded. With that being said, I will turn the conference over to Ms. Ann Luhr. Please go ahead.

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

A description of these risks, uncertainties and other factors is contained in our news release of January 31, 2011, our most recent Form 8-K filed on January 31, 2011, 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 at our webcast page at www.Moog.com. Bob?

Good morning. Thanks for joining us. This morning we will report on the first quarter of fiscal 2011 and we will revise our guidance for the year.

We are also going to revise the format of this call. I am sure that you are all aware that in our Board meeting in early December, our directors elected John Scannell President and Chief Operating Officer of the Company, and Dan Fishback, Chief Financial Officer.

I retain my responsibility as Chairman and Chief Executive Officer which I expect in this new arrangement will mean that I have only indoor work and no heavy lifting.

In light of their new positions though, after I provide what I hope will be a broad overview of our situation, John will take you through the segment results and Don will address our financial situation in more detail.

So fiscal first-quarter 2011 overview, I would say that we are off to a flying start in fiscal 2011. First-quarter sales of $554 million were up 12% from a year ago. Net earnings, $33.4 million or 6% of sales, they were up 55% from the year previous as were earnings per share at $0.73.

We do have a pretty easy comparison with the first quarter of last year, though. In that quarter, we were just coming out of the recession, the recession that we experienced in the latter part of fiscal '09. If you look through this quarter's P&L, our gross margin was a little bit stronger on the higher sales. Our R&D was about the same dollar level as last year, but down as a percent of sales. SG&A was up in dollar terms but also down as a percent of sales, and interest was lower than last year. We had very little restructuring expense in this year's first quarter and the stronger sales and slightly stronger margins brought an additional $11.8 million to net earnings. So it was a really good quarter.

Another perhaps more interesting comparison is the $0.73 in this quarter versus the $0.63 that had been our guidance. And there are two principal contributors.

Our tax rate in the quarter brought about $0.05 into the quarter which otherwise would have shown up in later quarters. Most of that was the extension of the R&D tax credit. It came earlier than we had expected.

But there was in the quarter a real sales and a real earnings impact that occurred in our Space and Defense segment. John will describe it in some detail, but it added $0.05 a share to the quarter and incidentally $0.05 a share to the year.

So we are updating our guidance for the year. We are now projecting sales for the year of $2.25 billion, net earnings $126.6 million which will be a record net earnings for our Company, and earnings per share of $2.75. When we hit the $2.75, that will be a 17% increase over fiscal 2010 and it will match our all-time high in earnings per share which was achieved in 2008.

In the rest of our segments, there's some internal puts and takes in our forecast for 2011. Aircraft, for instance, stronger aftermarket sales will for the most part offset a slower ramp up on both the F-35 and the 787, and our industrial business increased sales in our legacy business will support our forecast in spite of some moderation in what has been the frantic activity in the wind energy market in China. Component segment, Medical Devices, we think that we are on track to achieve the guidance that we provided 90 days ago.

With that, I'll turn you over to John who will describe a very interesting quarter for us.

Thanks, Bob. Good morning. Let me start with the Aircraft segments. We Aircraft segment had a solid first quarter and is on track for the year. We are seeing a little shift in the mix on the military side but nothing significant. On the commercial side, we're seeing a slightly stronger aftermarket but we anticipate slightly lower 787 sales.

All in all, steady as she goes.

Total aircraft sales in the first quarter were 12% higher at $196 million. And most of the gain was on the commercial side.

Starting on the military side, military market sales were up 5%, a combination of strong sales in the B-22 and an increased aftermarket. Our aftermarket was supported by some recent small acquisitions.

The F-35 program continued its transition from development into production with our development revenues down almost $8 million while our production revenues increased almost $7 million. Sales on the commercial side were very strong, up 30% from a year ago. We saw significant increases in the Boeing and Airbus production programs as both OEMs increased their delivery rates. The 787 program also continued to ramp up.

On the downside, our business jets OEM sales continued soft, actually down marginally from last year.

We had a nice quarter in the commercial aftermarket, up over 40% from last year. Overall, the aftermarket seems to be firming, but we also benefited in this quarter from a catch up in some recent past dues as a result of some recent facility rules, as well as a couple of unusual spares orders. Looking forward, we don't believe we will continue with the run rate in the first quarter.

The navigation aids market had a softer quarter, with sales down 17% from last year. And here we continue to see some delays in the award of new programs in this business.

For the year, we are maintaining our total aircraft forecast at $797 million. Comparing to our forecast from 90 days ago, we are making a small change in the mix on the military side with slightly lower sales on the F-15 and the F-35 with higher sales in the aftermarket. Net net, no change in the military total.

On the commercial side, we think the strength at Boeing and Airbus will continue adding $8 million for the year, but that the 787 will slide to the right, coming down by about $9 million.

We are increasing our commercial aftermarket forecasts by almost $3 million. This may seem conservative, based on our strong first quarter. But as I mentioned, the first quarter had some unusual benefits. Our upward revision therefore in the aftermarket is the net of a stronger general market, tempered by some lower initial provisioning sales in the 787.

Finally, we are reducing our navigation aid forecast by about $1 million, reflecting the program delays we saw in the first quarter.

Aircraft margins. Margins in the quarter were 10.3%, in line with our plan for the year. Margins were helped by lower R&D expense, the result of a $3 million reimbursements (sic) on a commercial transport program.

On the other hand, we increased our reserves on both the G250 and the A400M programs by a total of about $3 million to reflect what we believe will be substantially increased activity on our parts in support of flight tests. For the year, we are maintaining our margin forecast of 10.4%.

Turning to Space and Defense. The Space and Defense segment had a great start to the year. The underlying business is doing well and we had some very nice [plus ups] in the first quarter. We are also thinking that the rest of the year has some upside. Sales in the quarter were off 38% from a year ago to $96 million. This $26 million increase can essentially be attributed to three areas -- Driver's Vision Enhancer, tactical missiles, and security and surveillance.

First, sales in the Driver's Vision Enhancer program were $15 million in this quarter and were only $600,000. The orders and deliveries continue to be erratic, but we're sole-source to both primes and we believe our forecast for the year is looking solid.

Second, our Tactical Missile business was very strong, up $8 million from last year. Replenishment of the missile inventory used in the Gulf and Afghanistan continues to be the primary driver for strength in this market.

This quarter however, we also had $6 million in sales for a storage management system for airplanes sold to an unnamed foreign government. We'll have some residual sales in this program in the second quarter, but then it will be completed.

Finally, our Security and Surveillance market was $5 million higher, mostly the result of our recent Pieper acquisition in Germany.

Looking to some of the other markets, we saw softness in the satellites business as we have forecast. But the business was firmer than we had expected. The commercial Geosat markets has remained relatively strong and we had some orders we didn't anticipate for spares on enhanced VHF.

The launch vehicles were also strong with the Taurus II, a commercial launch platform, up over $2 million. Our NASA business was down from a year ago though we believe it is now starting to stabilize and the year should be better than we had expected.

Looking to the year, we are increasing our forecast for the Space and Defense segment by $10 million.

We now think we were overly conservative in our original forecast for satellites and launch vehicles. As a result, we are increasing our satellites forecast by $7 million and increasing our launch vehicles forecast by $3 million.

On the other hand, we are seeing some weakness in our defense controls business, which we are taking down by $5 million, but are optimistic that NASA will come in better by about $5 million. The forecast for the remainder of the businesses we are keeping the same.

Space and Defense margins. Margins for the quarter were very strong at 16.5%. There were two main drivers for these relatively high margins -- the DVE program and our storage management application. The DVE business brought some nice marginal contribution as in previous quarters when we've had high sales.

On the source management application, we had been awaiting US export approval which was granted in the first quarter. And as a result, we could retire some significant program risks and adjust the profit rates accordingly. For all of fiscal '11, we are increasing our margin forecast 12% from 10.7%, the combination of our strong first quarter and our forecast for higher sales for the year.

Turning now to our Industrial segment. Another good quarter in our industrial business. This segment remains a two-story business.

In the non-wind business, we had another quarter of steady sequential sales growth, the sixth quarter in a row. On the other hand, our wind business remains volatile.

Overall, industrial sales were up 5% in the quarter to $144 million. Starting with the non-wind business, we saw increases in every market we serve with total core business sales up 24%. We describe our core business as those product lines that we had in place in 2008 before we made our big wind energy acquisitions.

Some of the major contributors to the sales growth this quarter were plastics, test systems, metal forming, power generation, and general automation. This broad-based recovery across all of our markets reflects the strength of the Asian economies and the general economic recovery of the West.

The wind business was down this quarter by over 30% from a year ago. In order to explain this result, let me break our wind business into two pieces -- our European business and our Chinese business.

In Europe, our wind sales in the quarter at $17 million were actually up slightly from last year. European business is characterized by stable supplier relationships and long-term planning, similar to our other traditional industrial businesses.

In China, the business is quite different however. Our sales in China in the first quarter were about half of what they were last year. This quarter, some of our larger customers found themselves with an oversupply of inventory on hand and slowed their orders accordingly.

The business in China can best be described as a land grab as young Chinese OEMs bring ever more supply online in pursuit of a growing market. Supply relationships are more transactional in nature than in Europe with second sources common for all large OEMs.

In this environment, volatility is the order of the day with erratic ordering patterns and short delivery cycles the norm. We believe we are well positioned to compete in this dynamic environment but forecasting would remain the challenge. Our longer term strategy of offering a system solution to the wind OEMs remains in place, but this differentiation strategy will take time to play out in China.

Looking to the year, we are keeping our sales forecast constant at $606 million but we are changing the mix between wind and non-winds to reflect our experience in the first quarter. We are increasing the forecast in our core business by $20 million, spread across the range of markets we serve.

In particular, we are increasing our forecast in plastics and simulators by $7 million each and adding $2 million of incremental sales in metal forming at the industry and distribution. On the other hand, we are reducing our wind forecast by $20 million to reflect the volatility in our Chinese business.

This revision brings our forecast for China to $77 million for the year down from $91 million last year. On the other hand, we are keeping our wind forecast in Europe steady at $72 million, up from $63 million in 2010.

Industrial margins. Margins in the quarter were 10%, up nicely from 8.2% a year ago. Despite the change in mix, we believe margins should continue to improve as we move through the year with full year margins of 10.4% as we forecasted 90 days ago.

Components group. Our components group had a solid sales quarter with good profitability. The mix shift from defense to nondefense markets is unfolding a little more quickly than we had anticipated, but the year still looks good and in line with our previous guidance.

Sales in the quarter at $86 million were up marginally from last year. But when we look under the cover, we see a significant shift in the mix, softness in the defense markets and strength in our other markets.

Starting with the component sales into the aircraft market, we saw a decrease in military aircraft sales by about $1.5 million and a corresponding increase in commercial sales. On the military side, we are starting to see the effect of slower defense spending, a combination of some large programs slowing down and lower spending by the depots as foreign military operations starts to wind down.

On the other side on the commercial side, we saw some nice business for commercial helicopter DI systems.

Moving onto the space and defense market for components, we saw considerable weakness in the military vehicles market. Over the last few years we have benefited from several upgrade programs on the major vehicle platforms. The Abrams, the Bradley and the Striker.

These programs are now slowing down. In addition, in last year's first quarter, we had a $2 million sales order for fiber optic modems for the Egyptian army, an order which did not repeat this quarter. Taken altogether, sales of components into this space and defense market were down almost 30% this quarter.

On the positive side, sales in the marine market were up 23%. You will remember that our business here is primarily tied to the fortunes of the offshore oil exploration market. We believe that $70 a barrel of oil is the threshold price for expansion in this market. With oil prices covering around $90 a barrel, the economics of offshore oil drilling are compelling and we are starting to see this reflected in this business.

We are also seeing strength in our Medical business, both in our sales of components for sleep apnea machines for [Respironics] as well as in our cat scan applications.

Finally, the Industrial business is up 40% in the quarter. We are seeing strength here in our three key markets. Closed-circuit TV, slip rings from wind turbines and general automation.

For the fiscal year, we are sticking with our previous sales forecast of $350 million. We are changing the mix, however, to reflect the accelerating trends away from the defense markets. We are reducing our forecast for component sales into the Space and Defense market by $7 million and increasing our sales into the Industrial market by a corresponding amount.

Margins. Margins in the quarter were very healthy at 17.1%, up from 14.3% last year on similar sales. Much of the improvement can be attributed to the favorable mix shift away from the defense markets into the higher margin industrial and marine markets. We also benefited this quarter from some end-of-life shipments for components on the Eurofighter, which had a positive impact.

We are expecting more normal margins for the balance of the year. And we believe we are on track for full year margins of 15.2%.

Medical devices. Two steps forward, one step back. This quarter, we saw significant operation improvement over last quarter and we believe we are on track for the year.

However, we also booked a reserve for a software issue with one of our pumps. More on that later.

Sales in the quarter were up 11% from last year to $33 million. Our pump sales were actually down slightly as we held shipments on one of our infusion pump models, pending resolution of the software issue I mentioned.

Administration sales were up nicely and we saw particular strength in the censors and hand pieces market. We believed that the medical devices market is recovering from the recession of 2009 and this is reflected in our stronger sales.

We took a reserve of close to $1 million in the quarter in connection with the voluntary software upgrade that we are planning. From feedback, we have learned that one of our infusion pump models experiences an internal nuisance fault condition on very rare occasions. When the fault occurs, the pump shuts down and an alarm goes off. In the event of a fault, this is exactly as the pump is designed to perform.

In the vast majority of infusion situations, this behavior has no detrimental effect on the patient. However, in rare intensive care circumstances, a pump failure may be more of a problem.

In such critical situations, users are directed to have a backup pump on hand at all times, the type of redundant approach we design into all of our girl space systems. This redundancy ensures patient safety.

While we believe our pump is performing safely, we are very attentive to the feedback from our customers who are not completely satisfied with our product. We are determined to improve the reliability of our pump through a software upgrade which is currently being tested. Once a new version of software is ready, we plan to upgrade the units in the field.

In the meantime, we are holding shipments on this particular model. We hope to resume shipments sometime in the second quarter and subsequently upgrade [the fields] population.

For the full year, we are sticking with our sales forecast of $140 million. The infusion pump issue may be a bit of a wild card but we are optimistic that sales of that product will bounce back once we restart shipments.

We have also introduced large volume pumps to hospital markets which we believe will generate sales in the third and fourth quarters. We also believe that the general medical devices market is forming.

Medical Devices margins. We had a $1.5 million operating loss in the quarter. We saw significant operational improvement over the fourth quarter as our operations in Costa Rica ramped up to full production and we improved our supply chain. On the other hand, we took the $1 million reserve on our software field correction plan that I just described.

Comparing to the same quarter a year ago, our sales were up 11% but our operation result is no better. The higher cost this year are in two main areas.

First, we continue to invest in R&D to bring new products to market; and second, we have built a more extensive direct sales force to broaden our channels to market. For the year, we are re-iterating our forecast of a modest operating profit of about -- of $3 million.

Well, let me summarize our guidance for fiscal '11. Putting it all together, we are now forecasting sales for the year of $2.25 billion, net earnings of $126.6 million and earnings per share of $2.75, as Bob reported.

Our sales forecast is up $10 million from 90 days ago with the increase all in the Space and Defense group. We are seeing some mix shifts in the other businesses, but nothing significant. Profitability will be up as a result of the increased sales and the strength we have seen in the first quarter.

Overall, EPS will be up $0.05 from our last forecast. We believe the second quarter will be our lowest quarter with a strong finish in Q3 and Q4. In Q2, we are to experience lower wind sales as a result of seasonality. We believe the quarters will be $0.63, $0.68 and $0.71.

Now I will simply pass it to Dan Fishback for more good news on our cash flow.

Thank you, John, and good morning, everyone. Let me jump right into a couple of financial metrics that we've shared with you on prior quarters.

Our net debt came down by $37 million in the quarter. After adding back the effect of a small acquisition, our free cash flow in Q1 was $40 million continuing a string of some pretty solid cash flow quarters. You recall that we are forecasting free cash flow for all of 2011 to come in at about $90 million, so it really is a great start. And relative to Q1 net earnings, our 120% conversion ratio also looks pretty good.

However, we don't expect this quick pace to continue for the duration of the year. So let me try to explain why.

During our first quarter, customer advances increased by $15 million to about $89 million, particularly in our Space and Defense segment and a number of tactical missile programs. This result is achieved by our contracts folks doing a really good job negotiating favorable contract terms. In this quarter, the timing of the cash receipts associated with these contracts worked in our favor.

Also during the quarter, we began receiving some payments from Boeing for some of the 787 hardware that we've delivered to date.

And lastly, our Q1 wind sales were down noticeably from last year's strong Q4. As a result, our Q1 cash flow was helped by strong collections. Inventories and receivables were otherwise relatively calm during the quarter.

Our capital expenditures in the quarter were $18 million. This compares to depreciation and amortization of $24 million. We do expect CapEx spending to accelerate as we progress throughout the year. We have started building test equipment on the A350 and will soon begin construction on a new building in Wolverhampton in the UK as part of our original acquisition strategy to move operations out of the current 70-year-old GE facility and into a new nearby neighboring facility.

We are still forecasting $90 million of capital expenditures for all of 2011. And we estimate depreciation and amortization for 2011 will be about $96 million.

On a quick comment on pensions, global pension contributions in the first quarter were a normal $9 million compared to our pension expense of $8 million. And turning to round out cash flow looking ahead, we have left our free cash flow forecast for all of 2011 unchanged from last quarter at $90 million. The result will be a conversion ratio of 71% and I would like to think that that is a conservative forecast, but we will see.

Turning to taxes, our effective tax rate in the quarter was 27.0%, pretty close to last year's first quarter. You recall that the December 2010 legislation passed by Congress and signed by the President included some tax provisions. This provided us a benefit in the quarter related to the extension of the R&D tax credit. But you'll remember that Bob mentioned this in his opening remarks.

We had already assumed this benefit in our previous 2011 modeling, but we did not expect it to happen in December of 2010. So we've benefited from the timing of this in our Q1 and it won't repeat during the balance of this year. As a result, we are still forecasting our effective tax rate for 2011 at 29.2%.

As we reflect back on some pretty uncertain times in 2009 and 2010, not only for our Company but for the global economy in general, our balance sheet has since strengthened appreciably. Today our leverage ratio which is net debt divided by EBITDA is 2.1, back to the pre-recession levels. Our net debt to cap ratio is now at 35%, well below its recent peak at the end of 2009.

Earnings are good, cash flow is solid and our prospects for organic growth are exciting. We believe we are also very well positioned to continue our complementary acquisition growth strategy as we identify and pursue those opportunities.

So let me now turn you back to Bob and John for some Q&A. Bob?

John, you there?

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

Yes. Good quarter. Your legacy Industrial business looks like it is up $7 million sequentially. And it looks like you are forecasting that it will be flat for the rest of the year. How come it is not a little bit better than that?

Well, it could be a little bit better than that. As you know, historically, tried to forecast that business conservatively, but I would look at it on the positive side. We are forecasting that business for the year, our current forecast is now $457 million and if we have three more quarters that look like the first quarter, we were pretty close to there. So we can now say as they -- even though we have just jacked that part of our forecast up by $20 million, it still looks like it's not a big stretch. So maybe it will come out a little better.

If you look at fiscal '11 over fiscal 10, it is actually a 17% increase for the full year. So on a run rate basis, you're correct. You could say if it keeps accelerating quarter over quarter at that type of pace is that conservative. On the other hand, I think we are cautious to say quarter over quarter we are going to continue to experience that improvement. So 70% over 2010 seems like a pretty sporty increase in -- and maybe it will do better, but the run rate of the first quarter is repeated for the rest of the year, as you say.

And did you -- because I know the past sometimes you've just taken the current quarter run rate and annualized it, given these are short leadtime business. Is that the way you constructed this forecast and maybe give us a little bit of color on some of those areas? I mean, do you still expect plastics to fall off as you go through the year? Because normally you would expect the second and third fiscal quarter to be a little bit better than the first.

Yes, it actually -- let me put it this way, it is not simply -- the forecast is not simply taking the run rate of the first quarter and multiplying by four. There actually is a bottoms up forecast that is prepared by the people who operate this business.

We do a little hedging in some parts of that forecast. And I can tell you that we're not anticipating that the plastics run rate will continue. We think that will moderate as the year goes by.

On the other hand, we think that test equipment business will be stronger for the year, metalforming close to where it is. The simulator business should strengthen a little as the year goes on. PowerGen will be about where it is.

So there are -- it's, like I say, it's not simply an extrapolation. There is some analysis that stands behind the forecast and some of those traditional markets we expect will strengthen as years go by. Some, we think, will back off a little from what we had in the first quarter.

Okay, and then you had mentioned, you know, that how difficult it is which I certainly agree in projecting the wind energy business. But you are into this quarter. What is your guess as to where this quarter might be?

The second quarter?

Yes.

We're -- . Last year as you'll recall, I think the second quarter was a particularly weak quarter. And the excuse is that some of our major customers are supplying turbines to windfarms in Manchuria and nobody builds windfarms in Manchuria in the winter. So we are actually forecasting pretty modest sales in the second quarter, and then strength later on in the year. Last year in the fourth quarter, our fourth quarter we had particularly strong sales over $50 million in the quarter.

And as we now understand, some of the customers were pushing us for deliveries in the fourth quarter. And the first quarter, all of a sudden, hit the brakes because they found themselves carrying inventory, more inventory than they wanted to.

Got it. If I may ask another one on Medical, your Annual Report mentions that you are working on various pumps and I think you've mentioned the large volume pump. Could you update us on the status of the large volume pump and of the other pumps that you mention in the Annual Report?

Well, the Annual Report I think referred to products.

Products. Excuse me.

And we have introduced a large volume pump to the hospital markets and we think it's reasonably well-received. We are anticipating sales in the third and fourth quarter.

We do have another version of the large volume pump that we are still working on and may present to the FDA later in the year. And we have some other products that I would describe more as private-label products and not necessarily pumps. And some of those are close to introduction. And as time goes on, we may be in a position to describe those in more detail.

But since they haven't yet been introduced to the market, and we -- I think I ought to just leave it there.

Okay. Terrific. Thank you very much.

Michael Ciarmoli with KeyBanc.

Good morning. Nice quarter. Thank you for taking my call, my question. Just if I can, on the Space and Defense business, you did say 12% operating margins for the full year. I think the slides on the web don't have that up-to-date.

I think you're right. There is a misprint on the one slide early on. It should be 12% not the 10.7%.

And then just -- so it would seem like given the strength you pushed up the revenue a little bit. I mean to get that 12%, it doesn't look like you are baking in much if anything from margin upside or strength. You would probably be running at levels below almost all of last year. What are the puts and takes in terms of -- I don't want to call it conservative, but maybe the mix or what is happening there?

I think there's a couple of things going on. We had a particularly strong first quarter and as we mentioned there was a couple of uppers there as the DVE business was very strong. And we have seen in past quarters when we've had a very strong DVE sales that we get some nice margin contribution. We think the DVE is on plan for the year, but it is about $23 million for the year versus $15 million in the first quarter. So that goes away.

And as we mentioned, we had another unusual application that we had a strong contribution in the first quarter, but that kind of peters out in the second. So generally, you get back then to the underlying business. And that business, it's a nice business it's in the 10% to 12% range, but it's a combination of cost plus development, those not so cost plus development work that tends to have low margins, and then a variety of production programs.

So I would say that first quarter was unusually positive rather than the rest of the year being negative in any way.

Okay. But it sounds like for the rest of the year you are forecasting maybe more towards that lower end of a 10%, 12% range where in prior years you maybe had been a bit towards the higher end?

Yes and, again, I think it's a mix issue, quarter to quarter and year over year. We are now at 12%. Last year, we did 11.3%. Previous year we had a very strong year in '09, 14,6%, but that was very, very high DVE sales that year. And the year before that, in '08, we were 11.6%.

So if I take the average of the '08, '09, and '10, we're probably at around the same average in '12. Or in '11, sorry.

Fair enough. And then just on shifting over maybe to the components with some of the pressures on ground vehicles. Is that still sort of a moving target?

I know it looks like Bradley, Striker, Abrams could be under pressure and then we recently had Secretary Gates a couple weeks ago talking about maybe more money devoted to those platforms. I mean, it is that sort of your best guess right now, using the data that is available and maybe those programs could see some upside?

Potentially. It depends really on the particular program and the opportunity. Our sense is on our Components business where we sell slip ring systems that many of those vehicles have already gone through an upgrade of that system. And we also sell a variety of other gun positioning systems and power management systems in our Space and Defense segment.

And the folks there think that there may be future upside because of upgrades there. But I think the upgrades may have already happened for the slip ring side of the business, so therefore we are being a little bit more conservative there.

Okay. Fair enough. And then just the last question I've got regarding the 787. Does your outlook change at all with what Boeing said last week? And in terms of, I guess, a production ramp, what are you guys expecting maybe as we get towards the end of this year versus maybe what Boeing has had to say?

We have revised downward our revenue forecast for the year on the 787, but that is not because we are anticipating a major change in their production rate. We actually are building up a little more slowly than we had anticipated. We -- our deliveries are supporting their schedule and we expect that that will continue through the balance of the year. They haven't changed the production schedule for our equipment yet. They may, but we aren't anticipating much of a change.

They, as I'm sure you are aware, they have 50 some customers that have been waiting for airplanes for a couple of years. And even though on the airplane there were delays in certification and delays in first delivery, once they get the airplane certified, they want to be in a position to deliver.

So we are not anticipating a big downward change in production rate or revenue on the 787 beyond what we've just done.

Great. Thanks.

Eric Hugel with Stephens.

Good quarter. Just, maybe, a follow-up on the 787. You guys being a risk-sharing partner, as you deliver the product and obviously Boeing isn't delivering their accumulating inventory. You are getting paid for that cash, right? Or is that just accumulating as a receivable?

Well, when the -- the original contracts on the program, at least for our Company, and I think for most everybody, stipulated that we didn't start getting paid until they started delivering airplanes. So according to that contractual arrangement, we wouldn't have been paid anything by now.

The reality is that as part of negotiations on other subjects, Boeing has moderated their position and actually has begun to pay. And we're not --. We don't feel comfortable describing specifically the terms of that arrangement. But as Dan Fishback mentioned, in this quarter, we did begin to see some cash payment on our deliveries on the 787.

Great. When do you start to feel -- aside from the 787, I mean there's a number of programs ramping up, the 777, the 37, the A320. When do you guys really begin to feel the bulk of that in terms of your revenues? So what is the timeframe?

Well, actually we've begun to see a little of it in this quarter. Sales on the Boeing original appointment in this quarter were up about 6% from a year ago, and the A320 doesn't have much of an impact on us. We don't have much equipment on the A320. And Airbus, our participation is on the A330, A340 and the A380 through our Wolverhampton acquisition.

So, I guess, to answer your question we would expect that there will be kind of a slow steady improvement in revenues on the production programs.

And where are your -- could you tell maybe what your major exposures are on terms of the [end] production programs?

Setting the 787 aside, you could think about it this way. We have somewhere in the neighborhood of $250,000 to $400,000 worth of equipment on 47, 67, 777, relatively little $50,000 a ship set on the 37, something like that.

To move over to wind. In terms of China, it seems like you guys -- it seems like the situation in Europe is pretty -- is okay. China seems to be the question mark there. Can you maybe talk -- you talked about sort of what you are seeing.

Can you talk about the competitive landscape and maybe what the market is doing, versus what you are seeing? You talked about sort of multiple suppliers to the OEMs. Who are the competitors? Are they local Chinese companies?

Our major product in the Chinese wind energy market are pitch control systems that position the blades on the wind turbines. And the competition there, we have competition from another non-Chinese company. It's actually a spinoff from one of our competitor companies. One of our reps. Is that right?

The Chinese wanted [us in].

And there is a competitor, a German company that was acquired by Emerson. And other than that, there are indigenous Chinese competitors that are developing. But we believe that we still have a strong position there. We build pitch control systems. We do the final assembly in Shanghai.

So we are regarded as a local producer from that point of view.

So you don't feel like you are losing market share? You feel like all the stuff that you're seeing is really just the market itself?

We have --. I think in general our market share is holding. We have some ups and downs, some customers are buying more stuff from us and less from others and some customers are buying less from us and more from others. So it's kind of a mixed picture.

But in general, I think our market share is holding okay.

Okay. Can we maybe have a similar discussion on the medical pumps business in terms of where do you think in your key markets your shares are, versus competitors? How good your new pumps are selling versus the competition that they are going after?

We produce two kinds of pumps. We produce infusion pumps. You can picture this as the pump that would be hanging on the pole in the hospital room providing hydration or medication to the patient.

But the reality is that most of our pumps are not used in hospitals. Most of our pumps are used in so-called alternate care clinics. And we have, I think, modest market share. I mean, we don't by any means have a dominant market share in that product.

In the hospital infusion pump business, we have a very small market share. We are actually -- you can also say we are just entering that business. Our pumps have been used in neonatal clinics and then some oncology applications. But we, up till now, have not been a big participant in the hospital market for infusion pumps.

Do you have -- you want to talk about the competition?

We think that we have in the -- probably in the low single double digits percentages in the ambulatory market that we are in. The other piece, I would say, is that our sales channel has been through [the broad] as we've talked about in the past. So in terms of the competition and stuff we are gradually building a direct sales force as we start to move more towards direct sales. And that would give us a better understanding of the end market and the end channel.

On the intro side, a lot of our sales are international. We sell through third-party internationally. And we believe we have a very strong position internationally in that business.

Competition on the IV side in the US is companies like Smith's, Hospira, company called CME. A variety of larger and smaller companies that typically have their own direct sales and broad distribution. And that is part of the reason that we feel going direct would help us longer term to build this overall marketplace.

So I think we feel like we have a reasonable potential of the market, but we've got a lot of upside potential as well. (multiple speakers).

Competition in [enteral]?

Competition in enteral is [Avis] is the big guy. Providian is also very big. Each of them have approximately, we would estimate, a third of the markets. They are the big guys in the US market on the enteral side.

So, there is a lot of opportunity for you to grow there? Still.

Absolutely. Yes.

Great. Could you maybe update as a little bit on sort of the business jet? What are you seeing in terms of the programs, other major programs that you were on as well as some of the --? You know it seems like the business at least bottomed and some guys are talking about raising rates a little bit -- can you talk about what you were expecting?

Our participation in the business jet market is very specific with particular platforms. We are seeing an upturn in sales because of activity on the Challenger 300, Bombardier. We are a supplier on the Hawker 4000 and the Premier Hawker Beechcraft and they are not doing much of anything.

And we have a number of programs at participation in a number of programs at Gulfstream. We are just completing development work on the G250 for Gulfstream. But we are not a participant --. We're not -- with one exception, the Citation 10, we are not a supplier to Cessna or the other companies that make up the business jet market.

So I think that there is talk these days that that market is firming up. I think that has mostly to do with the lower end of the market -- the Cessna Citation. And that doesn't have any impact on us.

And last, maybe you can update us on the M&A markets or what you're seeing in terms of opportunities? Volumes of opportunities in terms of valuations?

Our pipeline, I would say, has slowed a little bit in terms of potential acquisitions. But there's still a regular flow of properties to look at. In terms of valuation, it would seem that with the exception of companies acquired by [trans-time]. Trans-time pays handsomely. It would seem that maybe valuations are coming down some.

BAA pulled their platform solutions off the market. You know, there are a couple of others, properties, that I think came to the market anticipating big multiples of EBITDA and they didn't complete.

But -- so -- I guess I would say there is nothing terribly exciting going on in the M&A market at the moment. But we continue to be active and to look at varieties and -- look at properties in a variety of different businesses.

Great. Thanks. Good quarter.

Tyler Hojo with Sidoti & Company.

I was wondering if your outlook for full year R&D spending has changed at all. I think before, you were at $110 million.

Well, we are still at $110 million. We haven't changed that forecast.

And have any of the puts and takes changed at all? I believe we are looking for something like $5.9 million in funding for the 787 and about $36 million for A350?

In terms of the spend, you mean? Yes, no, it is about the same. A350 may be slightly higher, but it is about the same. The total for aircraft, we are thinking it's going to be about $60 million of the $110 million which is in line with what you're saying about 90 days ago.

Okay, great. Just a clarification for the Medical Devices segment. When exactly do you expect that to be profitable? Is that a 2Q event, or perhaps more back half?

I am hoping that that will be close to breakeven in Q2 and it will start making money in the back half.

Great. And one last one for me. Going back to the wind side of the business, a lot of the OEMs are talking about pricing pressure as a key theme right now. Just wondering if you've seen that at all? Just given your suppliers' status in wind and maybe if you could talk about some of the dynamics on that side of the business?

We have seen pricing pressure particularly in China. I would say more in China than in Europe. And as you know, we are not yet much of a participant in the US market. So we haven't seen a lot of pricing pressure in the US. But we are only pursuing a couple of three different opportunities.

But in China, you know in this wild and woolly market that John described, price is important.

Right. And, I mean, just looking at the wind market today, do you think that -- I mean, you obviously made some fairly sizable investments to get into this market. Are you a bit disappointed relative to when you made those deals? Or do you still -- pretty optimistic in terms of the long-term prospects of wind?

I think that's an interesting question. From this point of view, the major acquisition that we made in the wind energy market, we acquired in two steps a company, LDI Re Energy, and we completed that acquisition in June of '09. And all up, we will have paid $72 million for that company. And that company in 2010 did $140 million in business.

And the point is that we think that acquisition may be one of the best acquisitions we have ever made in terms of the relationship between the value of the business and the price that we paid.

Apparently because there was a time as we were looking into 2010, we had a sales forecast that was much higher than what we actually achieved. There are people that have the impression that this market has been a disappointment. And the reality is that -- and relative to the investment that we made in this business, we think that this is one of the best investments we have ever made. And it's paying off handsomely.

Admittedly the China market is, I said a minute ago, it's a wild and woolly market at the moment. As John described there are -- it's a -- the Chinese government is backing a lot of investment in wind energy, the development of wind energy and windfarms.

There are five major players in the market, but there are another 70 or 80 small players that are trying to get established in the market. It's an immature market competition, is based on availability and price. As John mentioned it's more transactional than relationship and it's a difficult business to forecast and in terms of the consumption quarter to quarter on the part of the customers, it's a volatile business as well. So it is a roller coaster ride.

But nevertheless, we are anticipating that even the China business this year will be for us a $77 million business. In China alone. And another [$70 something million] in Europe and will begin to make headway in the US market and most of that business all goes back to an acquisition for which we paid $72 million.

Yes. Okay. Really appreciate the color there. That's all I have.

J.B. Groh with D.A. Davidson.

Thanks a lot. Good quarter.

Cai von Rumohr.

Yes, commercial aftermarket. It looks like you are assuming essentially no growth for the rest of the year. Is that --? Are you just being conservative or was there something abnormal in that quarter to give you those numbers?

The first quarter had a couple of -- and when you say no growth, we are actually forecasting -- we did $26 million in the first quarter and we are forecasting the year at just over $92 million. This is $3 million higher than what we said 90 days ago. But it is not the run rate of the first quarter. And we did have a couple of unusuals in the first quarter.

We had -- we did some facility moves towards the end of our last fiscal year. And we -- as a result of that we had some past due that we got out in the first quarter. So we had an unusual push just in terms of getting material out the door that contributed to the sales pickup.

We also had a couple of spares orders on unusual, what you call, unusual spares orders that the folks in the business say that's kind of a one off that is not going to repeat. So those were kind of pickups in the first quarter. We are seeing a general firming and that's what we said. We think that firming -- that is why we have increased the forecast for the year by about $3 million.

But on the flipside, we think that with the later introduction of the 787 to the market, we probably see slightly less initial provisioning of the 787.

So unusual first quarter with a couple of particular gains that won't repeat. And then a year's total firming up the aftermarket in general, but tempered with some lower 787 initial provisioning.

Terrific. And then the last one.

Could you give us -- you know, you gave us the guidance for most of the items for some of the line items, corporate expense, FAS 123, and interest expense for the year, what you are assuming?

Yes. Let's see. Our corporate expense that we have got forecast right now for '11 is $19.4 million. Our equity-based compensation is 7 -- a little over $7 million to $7.2 million. And interest is forecast right now at $38.8 million.

Thanks so much.

Eric Hugel.

Just real quick. Was there any meaningful sort of acquisition growth? What was sort of the organic growth rate versus, I guess, the 12% sales, total sales?

Acquisitions, new acquisitions in the first quarter added up to only $5.9 million and $4.9 million of that was the acquisition of Pieper, a security and surveillance company in the Space and Defense segment.

Great. Thanks.

We have no further questions in queue. Please go ahead with any closing comment.

Thanks very much everybody for coming to listen and sticking with us for over an hour. See you next time.

Ladies and gentlemen, this conference is available for replay. It starts today at 12 PM Eastern, will last until February 28 at midnight. You may access the replay at any time by dialing 800-475-6701 and entering the access code 190-702. Those numbers, again, 800-475-6701, and the access code, 190-702.

That does conclude your conference for today. Thank you for your participation. You may now disconnect.