Moog Inc (MOG.B) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third quarter fiscal year 2011 earnings call. At this time, all participants are in a listen-only mode, and later we will conduct a question and answer session. (Operator Instructions).

As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Ms. Ann Luhr of Moog incorporated. 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 and 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 July 29, 2011, our most recent form 8-K filed on July 29, 2011, and in certain other public filings with the SEC. We've provided some financial schedules to help our listeners follow along with the prepared comments. For those that don't already have the document, a copy of today's financial presentation is available on our investor relations home page and webcast page at www.moog.com. Bob?

Thanks Ann. Good morning. Thank you all for joining us. This morning, we will review the results for the third quarter, update our guidance for 2011, and we'll provide our initial projection for 2012. I will provide a brief overview. Don will then describe the quarter in our typical detail, and Don Fishback will discuss the financial parameters. We've got a lot of good news this quarter. Very strong quarter.

You have probably seen the numbers. Sales $583 million, up 9%. Net earnings $33.8 million, up 16%. Earnings per share $0.73, up 14%. Our EPS result was better than we projected. There were a lot of highlights, among them, we had strong aftermarket sales in the aircraft business, our legacy industrial product lines continue to improve, and we made money in medical devices. Looking at the P&L as I said, sales are up 9%. Our gross profit percentage was about the same as last year.

R&D, the same dollar level but lower as a percentage of sales. On the other hand, SG&A was up substantially, reflecting the additional SG&A expense of the acquisitions that we made last year, but also our marketing expenditures are up in the quarter as bid proposal activity on a number of aerospace programs increased. Interest is down in dollar terms and as a percentage of sales, and pretax earnings were up 14%, as were earnings per share.

We are now anticipating a fourth quarter that will look a lot like the quarter we are now discussing. As a result, we've revised our guidance for the year and are now projecting sales of $2.3 billion, which is up about $30 million from 90 days ago. We are projecting net earnings of $132 million and EPS of $2.85, an increase of 21% over last year. We put together our plan for fiscal 2012 and the momentum continues. We are projecting sales growth again of 9% to $2.5 billion, continued growth in net earnings to a total of $152 million, and a 14% increase in earnings per share to $3.25.

In 2012, we're looking for sales growth in all of our segments and an increase in our overall operating profit margin from 10.7% to 11.1%. Also during the last quarter we made two interesting acquisitions. They are both strategic in the sense that they are technology advancements. Our aircraft group acquired Crossbow Technology, Inc., a designer and producer of MEMS-based inertial navigational devices. The folks at Crossbow are able to take MEMS-based accelerometers, package them together with some innovative software, and produce an accurate but inexpensive inertial measurement unit.

In addition to applications in the aircraft market and particularly on UAVs we see the potential for expanded use of this technology it in military vehicles and in commercial asset tracking. We are anticipating Crossbow sales at about $21 million on an annual basis. Our components group acquired a company called the Animatics Corporation. The Animatics innovation is to put together a system of electronic motor components, including a motion controller, amplifier, and a feedback encoder, put these elements together with a brushless DC servo motor in a single integrated package that they call SmartMotor. This slick approach to packaging provides the customer a system with fewer parts, lower costs, and higher reliability. Animatics the company has also developed a sophisticated distribution network that reaches appropriate customers for their product on a worldwide basis.

We are forecasting just over $16 million for Animatics for 2012. So all in all, it has been an eventful 90 days since we talked last, and in a minute, John will discuss the performance in each of the segments. But before he does, I would like to offer a few thoughts on the completion of the space shuttle program which, as you know, occurred on Thursday, July 21. In the 1960s, our company produced servo actuators that moved the rocket-motor nozzles that steered the Saturn rocket into space as part of the Apollo program. So it was a natural for us to compete to provide the thrust-factor control actuators for the main engines on the shuttle Orbiters and for the thrust-factor control actuators on the solid rocket boosters.

We did compete for those applications and we won, and subsequently we were invited to take one of our competitors out and provide the elevon actuators that move the flight control surfaces on the orbiter and to build a valve module that swings the rudder. This all became a huge design effort for our company in the mid-1970s. We received our first order for actuators on the space shuttle program in 1974, and in the 1970s and 1980s we supplied all of the actuators for the orbiters and the boosters. Over the last 30 years, we have refurbished all of the booster actuators that first launched astronauts and then separated from the orbiters, got dropped into the ocean, dragged up the Indian river and came back to Moog for overhaul and refurbishment to be used again to launch more astronauts. At the time that the design and initial manufacturing work was done, this was a very challenging set of applications.

So it's with great pride and I can tell you a huge sigh of relief that I'm able to report that our company provided hardware for 132 launches and never experienced one problem. All our equipment performed perfectly. Like everyone else who has participated in the manned space program, we are hopeful that the NASA leadership and the current administration can find a way to pull together a new plan for our country's future exploration of space. Now, back to Earth and John Scannell.

Thanks, Bob. Good morning. Let me walk through each of the segments starting with our aircraft group. We had a very nice quarter of sales growth in the aircraft group with strength in both the military and commercial markets. Margins were firmer this quarter after a slightly weaker second quarter. For the year, we are revising our sales forecast up and we anticipate that 2012 will see further sales growth. In the quarter, total aircraft sales were up 15% to $221 million, about two thirds of the gain was on the commercial side and one third on the military side. Starting with the commercial business, commercial business is way up at this quarter with strength in all categories.

Our OEM business to Boeing and Airbus was up almost 20% as the Airframers ramp up production. We also saw a big increase in sales of the 787 as the airplane moves ever closer to entry into service. This quarter, we completed our contract negotiations with Boeing on our open scope change assertions. The result was a favorable adjustment to sales partially offset by an increase in our last reserve. The early 787 production units would be expensive as we ramp up volumes and move down the cost learning curve.

Our business jets product line was up almost 50% over last year as this market continues to rebound from the downturn. Finally, our commercial aftermarket was up 22% as traffic and load factors grew. Military aircraft sales up 9% in the quarter, and the strength was in the military aftermarket which was up 44% over last year. We reported unusual strength in this market last quarter, an indicator that we did not think this was sustainable for the year. Well, Q3 was a little lower than Q2 but still a strong quarter, and we are on track for a record year. Also contributing to our sales increase was our recent acquisition of Crossbow.

On the negative side, our flagship F-35 program was down about $2 million from last year but that's the combination of $5 million lower development sales and $3 million higher production sales. We also had 10% lower helicopter sales as the V-22 returns to more normal production levels. Our Navigation Aids product line was flat from last year. For the full year, we are increasing total aircraft forecast by $23 million to a total of $845 million. Similar to last quarter, the strong military aftermarket is a significant driver, but we are also seeing strength across the entire commercial book of business and our acquisition of Crossbow will add $6 million to the total for the year. Looking to fiscal 2012, we are anticipating continued growth in the aircraft segment. For the year, we're forecasting sales of $944 million, up 13% from fiscal 2011.

We believe military will be up 6% driven by growth in the F-35 production program and a full year of the Crossbow acquisition. The real strength, however, will be on the commercial side with sales up 23%. We anticipate growth across most major platforms as Boeing and Airbus continue to ramp up legacy programs, the 787 moves into production, the business jets continue to recover, and the aftermarket benefits from the continued growth in traffic. Our Navigation Aids business should also be up 19% next year based on several new military projects. Turning to margins.

Margins in the quarter were solid at 10.54% up from 9% last year. Although in general our mix continues to shift towards commercial, the military market was also very strong this quarter. For the year, we believe margins will be 10.1%, more or less in line with our last forecasts. Looking to fiscal 2012, margins should improve to 11% as our sales continue to ramp up and our R&D expense falls as percentage of sales. Space and defense. Sales in the quarter were down 9% from last year to $80 million. The big drop was in the Driver's Vision Enhancer program, which is down over $7 million from last year. We also had lower sales of satellite controls.

You may remember fiscal 2010 was the boom year for our satellite business with 32 commercial geo satellites ordered and several nice government programs. Fiscal 2011 is turning out to be a normal year with full-year sales above the average of what we saw in 2008 and 2009. On the positive side, our tactical missile business continues strong, and the NASA business is up based on our work of the multipurpose crew vehicle. Our security and surveillance business is also growing, the combination of the full year of our Pieper acquisition and stronger demand in the government and industrial markets.

Given our softer Q3, we are moderating our sales forecasts for the year by $12 million. The drop is mostly in our defense controls business, where orders we had anticipated this year continue to shift to the right. We are also moderating our tactical missile forecast somewhat to some production delays we have experienced. The year should close out with sales of $346 million, up 6% from fiscal 2010. In fiscal 2012 we are forecasting 8% organic sales growth. The biggest component of this growth will come from higher sales to NASA on the new heavy launch vehicle.

We should also see growth in our security business, which has been on a slow recovery path after the recession. We are anticipating lower space sales with satellites and launch vehicles down from 2011, but the tactical business up driven by the continued replenishment of inventories. Margins. Despite the lower sales, margins in the quarter were up from a year ago to 11%. Last year we took a $1 million restructuring charge in the third quarter which accounts for the difference. For the year, margins should end up at 13.5%. Fiscal 2011 is turning out to be a very strong year as a result of strong DVE shipments in the first half as well as some one-off favorable growth adjustments.

We believe margins in fiscal 2012 will be more in line with fiscal 2010 results and are predicting margins of 11.2%. Industrial Systems. The story in our Industrial Systems business this quarter mirrors what we have seen the last two years. Our legacy business continues to strengthen. Overall and for the year, we believe sales will be up from our last forecast and we anticipate further growth in fiscal 2012. Sales in the quarter were up 21% to $156 million. Of that $27 million increase, about $12 million is due to foreign currency effects as our major trading currency strengthens against the US dollar. Excluding foreign exchange, the growth was all in the legacy business. As in recent quarters, we saw gains in every legacy market we serve. The strength continues to be in Europe and the US.

In Europe, the industrial OEM machinery manufacturers are still expanding, and we saw nice gains in metal forming and plastics. In the U.S., there are few OEM machine builders, so our businesses focus on the simulation and test markets and in the energy market. Within energy, we deliver product of power-generating turbines and oil and gas exploration, and both of these markets are nice increases in the quarter. In Asia, we had a very strong quarter in the industrial aftermarkets driven by some one-term repair orders we completed in the quarter. In industrial systems, our aftermarket activity is typically less than 10% of our sales, but this quarter it was up to almost 12%. Our wind business was essentially flat with last year, but we continue to see strength in Europe and volatility in China.

The European market is characterized by mature players with well established supply chains built on long-term relationships. This is the environment where we do well. We can work with our customers to design superior solutions which meet their particular requirements and enhance the value of their machine. The Chinese market is less mature and I would describe it as a transactional relationship between OEMs and suppliers. OEMs typically want multiple sources of supply for major components and there is little room to differentiate. Longer term, we believe the Chinese market will mature, and our strategy of highly engineered products tailored to our customers' requirements will be a winner.

That will take some time however, and in the meantime, we will have to manage through the ups and downs in the world's largest wind market. Wind remains a major thrust for us, and the shift in public opinion away from nuclear energy following the Japanese earthquake bodes well for this market in the long-term. For fiscal 2011, we are increasing our industrial systems forecast to $629 million driven by the continued strength in the industrial machinery market and the boost in the aftermarkets we saw in the third quarter. We are moderating previous wind forecast by $10 million mostly to account for the unpredictability in China. Looking out to fiscal 2012, we believe the story we have seen for the last two years will continue to play out.

We anticipate our sales will increase by 8% to $680 million. Given the volatility in the wind market, we are forecasting flat sales for 2012, although the sales mix will continue to shift from Asia to Europe. On the other hand, our traditional markets -- industrial machinery, energy, simulation and test -- will all be up. This growth will be a combination of market and scope growth as we continue to innovate and increase our scope and supply at our major customers. During the downturn, many of our customers repositioned themselves. There's now a new focus on energy efficiency, premium performance, and services. China remains a major market for the end products, but new markets in Russia, India and southeast Asia are growing in significance. Margins in the quarter in Industrial Systems were relatively soft at 8.9%.

In this quarter, we took a $1 million charge for a recall action on actuators used on a train-sway application in Japan and we also had some higher marketing expenses than normal. Given the softness in the quarter, we anticipated margins for the year will be 9.8%. In fiscal 2012, margins should increase to 10.5%. Components. In our components group we continue to see the defense business soften and the non-defense business strengthen. This pattern is no surprise, and overall the year is on track with our last forecast.

Sales in the quarter were down 8% from last year but last year's Q3 was a record quarter for this group. Walking through the markets tell the stories. Sales in military aircraft were down 22% in the quarter. 12 months ago, we delivered a large order for the Eurofighter and that business was gone this quarter. Our activity on the guardian program was also down in the quarter as the production rate moderates; and in addition, we are seeing reduced amount from government spares on the Blackhawk program. Turning to defense, we supply a range of products which go on military vehicles and this business was down 33% in the quarter.

We have enjoyed a very nice defense business over the last several years as a result of the U.S. activities in Iraq and Afghanistan. Many vehicles were supplied with upgrade systems to improve their survivability and theater, and many of those programs are now winding down or completed. On the positive side, we saw the marine business increase by 36%. In this market, we supplied products used in offshore oil exploration. As long as oil stays above $70 per barrel, the economics of offshore drilling are compelling and this market should continue to grow. Our medical market was also up 21% driven by higher sales to respironics or sleep apnea machines. Finally, our industrial market was up 7% in the quarter. We include sales of slip rings for wind turbines within this market. Last quarter you may remember we talked about the slowdown at Sinovel, the world's largest manufacturer of wind turbines in China, and this quarter, that effect resulted in $2 million of lower sales.

However, the sales drop was more than compensated for by the strength of the general industrial market, as well as the benefit of a partial quarter of Animatics, our recent SmartMotor acquisition. For the year of fiscal 2011, we're sticking with our forecast of $350 million. There's some minor mix shifts, but nothing of significance. Looking out to fiscal 2012, we should see sales of $372 million, a 6% increase. Marine, medical, and industrial should all be up with the Animatics acquisition contributing $11 million of additional sales over 2011. Components margins.

Margins in the quarter solid at 15.2%. Down from last year, but as I mention, that was a record sales quarter and had the benefit of significant sales of the Eurofighter which were nicely profitable. For the year, we are increasing our margin forecast slightly to 15.4%, and in 2012, we expect margins of 15.5% in line with this year. Medical. We have a better story to tell in our medical business this quarter. Sales are up significantly, and we're in the black. We completed a restructuring in the quarter which will bring benefit in future quarters. We are still a long way from where we would like to be, but we believe we have the first quarter on our road to recovery under our belts. Over the last few quarters we, have broken this business down into three operating area. Sales, operations and new product developments.

This has helped us explain the challenges we were facing. So let me stick with that approach this quarter before getting into the specifics of the sales by line item. Let's start with sales. In Q3, we had several very positive developments. First our exclusive distribution agreement for IV pumps in the U.S. market came to a close. As we look to the future, we will be using a combination of direct sales and non-exclusive distribution. With a new channel to market, it will take us some time to gain momentum, but we believe we are now building a solid foundation for future growth. We also got back into the market with our IV pump, which had been on voluntary shipment hold. Finally, we started to ramp up sales on the new enteral pump for the international market.

Turning to the operations front, our facility in Costa Rica which manufactures administration sets is in full production, and we are starting to see our average costs come into line with our expectations. We still have a ways to go, but things are looking better. Finally, our product development efforts have had some wins and some losses in the quarter. On the positive side, our new enteral pump is performing well. On the negative side, the FDA has further tightened requirements for pumps and we learned that our new large volume pump has to would through another full 510(k) certification process. Up until very recently, we had been planning for a simplified and accelerated certification process based on existing certifications.

Now, let me give you a little more detail on the sales in the quarter. Total sales of $38 million were up 14% from last year. Sales of pumps were up 30%. IV pump sales were up as we caught up on orders which had been frozen pending the completion of the software correction, and enteral pump sales were also higher as we ramped up production on the new international pump. Sales of administration sets were also slightest higher as the pump volumes grew. Finally, sales of sensors and hand pieces were very strong, up 31%. In this segment, we sell a range of sensors to other pump manufacturers used to detect air bubbles in pumping applications.

Recalls of large-volume pumps in the hospital market have generated significant demand for alternative pumps from other manufacturer, and this in turn drives our sensor sales. Based on our strong third quarter, we are increasing sales forecast for the year to $138 million. This forecast assumes that Q3 was an outlier and that Q4 would be in line with the average sales we saw in the first two quarters. For fiscal 2012, we're forecasting sales up slightly to $145 million as we enjoy the full benefit of IV pump sales. Margins, this quarter, we had an operation profit of $1.2 million.

90 days ago, we predicted a loss of $1.5 million, so the turnaround was significant. The higher sales helps, as does the positive sales mix with higher IV pump sales. Our Costa Rican facility is doing better, and we had lower SG&A expenses. In the quarter, we completed a restructuring and took a charge of $300,000. With the restructuring behind us, we are forecasting an operating profit of $400,000 in the fourth quarter on sales of $33 million. For fiscal 2012 we anticipate an operating profit of $5 million, an improvement of over $6 million from our fiscal 2011 results.

So let me put it all together. Fiscal 2011 is coming together very nicely. For the year, we are now forecasting sales of $2.3 billion, net earnings of $32 million, and earnings per share of $2.85, up from last quarter's forecast of $2.80 and a 21% increase over 2010. Sales forecast is up 30 million from 90 days ago with increases in aircraft, industrial, and medical, overwhelming lower sales in space and defense. EPS will be up based on the strength we have seen in the third quarter. Looking out to fiscal 2012, sales should be up 9% to $2.52 billion. We're forecasting increases in every segment with particular strength in the aircraft business. Margins should improve to 11.1% from 10.7% in 2011. Taken all together, this should result in earnings per share of $3.25, a 14% increase over 2011. We think the year will start slowly and then accelerate with quarterly earnings per share of $0.73, $0.76, $0.85, and $0.91. Now let me pass you to Don, who will provide some color on our cash flow and balance sheet.

Thanks, John, good morning, everyone. Our net debt increased by $5 million during the third quarter to $624 million. As both Bob and John have mentioned, we completed the Crossbow and Animatics acquisitions using $37 million of our available cash and debt, and we also issued during the quarter $468,000 Class A shares to the sellers of Animatics. As a result, after some minor rounding effects, our fee cash flow in the third quarter was $30 million, bringing year-to-date free cash flow to $71 million or 73% of net earnings. Net debt as a percentage of total capitalization continued a downward trend to 32.9% compared with 37.9% a year ago.

Our leverage ratio is now at just under 2 at 1.99 times, and we currently have $531 million of unused borrowing capacity on our $900 million revolver. Diving a bit deeper into the balance sheet, I would like to single out a couple of topics. First, our customer advance has increased by $23 million to $103 million in three months. As you know, this reflects our contract negotiations with our customers, and we've been emphasizing cash as an integral part of our negotiations, and we are having some notable success. Most of this quarter's increase is associated with our space and defense group scattered amongst a variety of contracts.

Staying with liabilities. Our loss reserves increased $7 million during the quarter to $48 million. From quarter to quarter, yes, our loss reserves do fluctuate based on a number of factors including the timing of the receipt of the contract, which is typically a development contract or an updated cost estimate. This quarter -- third quarter -- there were two programs worth noting; Boeing 787 and the Gulfstream G250. Earlier, John mentioned we completed contract negotiations with Boeing on our open 787 scope changes. We increased our loss reserve on this program due to our projection of higher costs of early production units. We are very happy to have these negotiations behind us. We also recorded another adjustment on the Gulfstream G250 program. You'll recall from last quarter that we are seeing cost increases in the later stages of qualification which require us to record adjustments to our loss reserves. During the certification process this quarter, more difficulties surfaced than we had anticipated, increasing our cost estimate again. We now expect that our post-certification endurance test will be completed by the end of this September, and we believe our reserves are adequate. Moving to the asset side of the balance sheet, our accounts receivables and inventories both increased from last quarter.

About a quarter of the increase relates to stronger foreign currency translations relative to the U.S. dollar and to the two acquisitions that we mentioned. The balance of the increase results from the third quarter's higher sales, some quarter-end milestone billings, some tactical missile programs in space and defense, and the wrapping up of activity in anticipation of future quarter's higher sales volumes, particularly in aircraft and industrial. Our capital expenditures were $17 million in the quarter and depreciation and amortization totalled $24 million. Year-to-date, our CapEx was $52 million while your D&A was $71 million.

We expect that capital expenditures will increase in our fourth quarter as we continue building test equipment for the Airbus A350 XWB and constructing our new facility in Wolverhampton as we've planned. For all of FY 2011, we are now forecasting $80 million for capital expenditures while holding our forecast for D&A at $96 million. With respect to pensions, our global defined benefit pension plan contributions in the quarter were $9 million compared to pension expense of $8 million. Year-to-date our pension contributions were $29 million while our pension expense was $24 million. In summary, with respect to cash flow, we are still forecasting free cash flow for fiscal 2011 to be $90 million.

While we decreased our CapEx forecast by $10 million we are now thinking that increases in our working capital will offset that gain. As we look out to FQ 2012, we are forecasting our free cash flow to be $110 million. Our capital expenditures will increase to $105 million in fiscal 2012, and the reason our CapEx is up in fiscal 2012 compared to fiscal 2011 is because of the Wolverhampton building that I've already mentioned. We've also got a new building built in east Aurora, New York, in association with the growth of our aerospace businesses, and we'll have increased spending on our tooling and test equipment for certain commercial aircraft programs as they transition into production. Depreciation and amortization are forecasted now at $108 million in fiscal 2012.

Global defined benefit pension plan contributions will continue at the current pace in 2012 at about $38 million while our estimated defined benefit pension plan expense will decline to $25 million. Taxes, our effective tax rate in the third quarter was 25.9%, slightly lower than last year's third quarter. Year-to-date, our tax rate was 27.4% compared to last year's 27.8%, so about the same. Our projection for all of FY 2011 is now 27.5%, down slightly from our last quarter's model, and we are forecasting FY 2012's effective tax rate to increase to 29.9% due to lower foreign tax credits associated with changes in legislation that were passed about a year ago.

So to wrap up, we think we are in pretty solid financial shape to weather any storms associated with our government's potential inability to reach a responsible agreement on the country's debt ceiling, and we're also in good position to take advantage of any acquisition opportunities as they arise. As you know, M&A is an integral part of our growth strategy, and we continue to look for strategic acquisitions.

So now, I will turn you back to Bob and John for any Q&A. Bob?

(Operator Instructions). We will go to the line of Cai von Rumohr of Cowen and Company. Please go ahead.

Hi, guys. Yes, thank you, guys. Good quarter. Could you give us a little more color on the contract loss reserves, you know, because while the reserve went up by $7 million presuming you amortized some, so how big were the reserves on both the 87 and the 250 and walk us through kind of that negotiation with Boeing? I mean, what did you get out of it if you had to take a reserve up front?

Well, I wouldn't tie those two things together necessarily. And although I'm sure a lot of people would be fascinated, we don't think it would be appropriate for us to delineate all of the elements of our settlement with Boeing. It is a complex multi-faceted settlement. I think, as we said in our prepared remarks, the result was that we booked some increased sales in the quarter. The increase in loss reserve has to do more with an estimate of how we are doing and coming down the learning curve particularly with respect to the early units. I guess what the thing we could add in commenting on that is that we think that the way we booked the 787, the orders we have on the books -- that we think there won't be continuation of adjustments of that loss reserve. We think we are all settled down on the 787. Do you want to talk about what would the total amortization? I don't know that we want to do it by quarter but --

Of the losses related -- maybe we can do that offline, but the loss reserve did go up by about $7 million or $8 million in the quarter. The two items that we singled out, Cai, between the 787 and the G250 were the major items. There was a handful of other issues as well. Those were the major items.

I think the G250 reflects our continued learning on the amount of effort involved in getting an aircraft flight control system certified. As you recall on the G250, we are doing not only the actuation but the flight control computer, we have an entire system. And certification for the FAA involves some effort, and every quarter we reevaluate where we stand, and we think because we are closer to completion that we probably have it covered now.

Because they -- I think you mentioned they expect to certify in September, and so that should technically be the end of it.

We are pretty close, we think.

And you feel relatively comfortable on the production side -- that you are okay there?

Yep.

And A350, are we kind of in the clear there for the moment?

Yeah, A350 is, we think, are moving along well. We continue to book R&D expense on the A350 about where we anticipate.

And then on the acquisition front, how much did you you pay, you know, for those in terms of cash in the quarter and what kind of are they going to be, you know, underwater in terms of GAAP EPS basis for the first couple of quarters?

Let's see.

The cash burn --

Crossbow I think we paid a net --

$32 million.

$32 million for Crossbow. Incidentally, both of these we think, as I mentioned, we think of as strategic acquisitions. We think Crossbow is very much of a technology play. We believe a lot of companies and a few companies including major players have been attempting for over a decade to develop MEMS-base inertial measurement units that are really accurate and cost-effective, and we believe that these guys at Crossbow have done it. And so we believe that, you know, this is a company with sales at a run rate of about $20 million, and I will be surprised if it doesn't get to $100 million in relatively short order. So we paid up. Great little company in Milpedas just outside of San Jose. Animatics -- Don, what was the cash outlay there?

The cash outlay was $5 million.

And the rest was stock. This is a company that has taken an interesting approach. As I said, they've done a really slick packaging job taking a small brushless DC motor and wrapping it with an integrated motor controller and feedback transducers. And it is a neat little package that eliminates cabling. The result is that in certain applications, there are fewer parts, lower costs and you don't have the issues -- cabling issues -- that sometimes affect reliability. So it is a neat little operation, and also, we believe that they have done an unusually good job of developing a global distribution network which incidentally we think we can complement finding the appropriate customers for this sort of device. So we are optimistic about prospects for that product as well.

I assume because these are strategic, you know, and because of the up-front inventory step-up and intangible amortization, from a P&L perspective, they will be dilutive for the first couple of quarters?

I think we assumed that there was not going be any significant effect. I mean, tt will be in the noise, so...

Got it. And the last one, you mentioned M&A. Are you seeing additional opportunities on the M&A front?

Yes. It's kind of hard to characterize the continuing flow, but there continue to be opportunities to explore. I think in the past I've said we probably actually complete on less than 20% or 25% of the opportunities we look at so, you know, we are still -- we continue to shop.

Thank you very much.

Thank you. Next we will move to the line of Tyler Hojo with Sidoti. Please go ahead.

A question on R&D. You provided us with a lot of information. But are you still expecting R&D spend to be about $110 million this year? And maybe as a follow-on to that, just kind of interested to see if there is any opportunities for you guys to expand your market share on some of the re-engined aerobodies?

Well, we actually have revised our R&D forecast for the year ever so slightly. We are now thinking it will be just a little less than $107 million as opposed to $108 million the last time we talked.

Okay.

So that is where we are. With respect to market share on the narrow bodies, the question for us is okay, in each case -- when they re-engine, to what extent are they going redo the wing? And to what extent will they be changing the actuation in the wing? And in neither case is it completely clear. It is likely -- my guess is that at Airbus they will redo the wing partly because of the re-engining but also to strengthen the wings so that they can add winglets. As you may know, in improving efficiency, winglets can provide almost as much or as much benefit as a bigger engine.

So we think that Airbus will probably redo the wing and there will probably be opportunities there. We don't really know what Boeing is likely to do. It may be that they won't need to redo the actuation to re-engine in the fashion that they intend. So, although we -- it seems that both are going to go ahead in that direction, I don't think in either case will there be the opportunity to do anything on the scale -- in terms of actuation, anything on the scale of what we are doing on the 787 or the A350.

Great. Thanks for the color there. And just with the two deals that have been done, just wondering what the expectation is for interest expense both for the fourth quarter of the year and into fiscal 2012, and what we should look for share count?

Sure, Tyler, this is Don. We have got a forecast for interest for the year at $36 million. So about the same level on the fourth quarter as we saw in the third. And then in 2012, our forecast is about the same: $36 million.

Okay, great. And any move in the share count?

Share count only moves a little bit, but I will give you our numbers. We have 46.2 million average shares outstanding for 2011, and then 46.7 million in 2012. Most of that move is because of the shares that were issued associated with the Animatics transaction.

Got it. Great. Thanks so much.

Thank you. We'll go next to the line of J.B. Groh at D.A. Davidson. Please go ahead.

Good morning, guys. Thanks for taking my call, I guess it's close to afternoon for you. Maybe you could go over the R&D profile for 2012. I think we kind of assumed there would be a little bit of a holiday on 787 and aircraft before the A350 picks up, so that 90 basis point improvement you got in operating margins in aircraft 2011 over 2012, can you kind of explain how you get there? Is that lower R&D? Is it just better margins on core product? Just help me understand that.

Well, as a percentage of sales, it's a little lower R&D. It is not a major decline. But in 2012, the 787 is pretty low in fiscal 2011. It is down a little bit in 2012, but we anticipate some R&D expenditures associated with the work we expect to do on 787-9 version. The A350 will continue at a level pretty close to what we are seeing in fiscal 2011. Fiscal 2011, I think we have disclosed this, we are anticipating R&D at around $37 million and then fiscal 2012 will be a little bit lower than that, maybe in the $34 million, $35 million range.

For the 350.

For the A350. We built into our forecast for 2012 an expectation of R&D expenditures not really big but some on the Chinese 919 and a little bit in anticipation of work that will probably be done on one or both of the narrow-bodies. So taken all together, aircraft R&D will be up a little in dollar terms. The increase incidentally is the acquisition of Crossbow, a company which has, relative to sales, fairly heavy R&D expenditures. In total, our R&D expenditures as a percent of sales in 2012 will be -- the total company will be pretty close as a percentage of sales to what they were in fiscal 2011. What they will turn out to be in fiscal 2011.

Okay. I can do that arithmetic. And then could you talk about capacity utilization? Boeing has been throwing out some pretty wild numbers in terms of eventual production rates on the narrow-body and I'm sure that your CapEx plan for 2012 incorporates everything that they have said, but if you look beyond that, you know, they are throwing this 60 number out there and we are already going to be at sort of a record number. Can you just give us your comments on that in terms of meeting that demand?

Yeah. The big increase that they are talking about, though, is primarily on the 737 which I think, as you know, is not a platform that is big for us. So they keep jacking up the 737, it doesn't result in a lot of CapEx demand for us. More important for us, of course -- the 787 and we think we are well facilitized on the 787. We think we have capacity at the moment to cover the rate probably into 2013 if not beyond. We have some money to spend on the A350. But we think, as Don mentioned, our CapEx expectation for 2012 is within our depreciation and amortization. And so we don't see the expanded production rates at Boeing and Airbus as presenting any particularly strong demand on our CapEx.

Okay. Great. Thanks for the update.

Thank you. We will go next to the line of Eric Hugel at Stephens. Please go ahead.

Good morning, guys. Hey, you talked about medical distribution business, sort of getting out from the medical distribution agreement. Was that the B. Braun contract?

Yes.

Okay. That's a positive there. And what kind of costs are going to be associated with now doing a direct -- having a direct marketing force? Or are you going sort of weave into some of the acquisitions that you have done in the past?

Well, I'm not sure what you mean, Eric, by weaving in. We have been working to bring the acquisitions together into a consolidated sales operation and developments -- one single segment, so we have already been doing that. And we have already hired direct-sales folks to pick up where Braun has left off, and we are also in the process of signing up non-exclusive distributors. Now, the addition of sales folks was actually something that we had been doing over the last 6 to 12 months because it takes some time to get those folks on-board and ramp them up. The non-exclusive distributors is something that we had to wait until the present agreement ran out. I would say we are staffed for that direct channel. We are not anticipating -- we did some restructuring during the quarter and if anything we looked at how much -- what the ramp rate we could afford to make sure we are making money. We will only add staff as we start to see the sales grow.

Fair enough. You talked about I guess your outlook in the fourth quarter for the medical business sort of going back down to sort of the run rate that you were in Q1 and Q2. Are you just sort of being conservative there or were there sort of clear signs that some of the demand in Q3 was sort of one-timish or lumpyish?

I think we are being conservative. We hope we are being conservative. I think we should be conservative in this business. Q3 was a surprise. 90 days ago, we forecasted the kind of run rate that we had seen for the last two quarters which was about $33 million a quarter and it jumped up to $38 million, and that was more sales than we had anticipated on a couple of the product lines. Obviously, we got back into the market with the IV pump but we anticipated the new enteral pump into the international market is doing well, better perhaps than we anticipated, and the sensors and hand piece business is going particularly well. It was stronger than we had anticipated and in Q4 we don't want to take one quarter and decide that that may be a pattern. If would be nice if it is higher, but we are trying to say no, let's forecast $33 million and make sure that we can make some money at that, so that is what we are focused on doing.

Good. You noted in industrials, in the industrial business, the margins were a bit weaker than expected because of an actuator recall. Talk about what kind of impact that was? How big was the impact from that?

It was about a million dollars in the quarter. This is an application we do in Japan on a train sway for the bullet train in Japan. A comfort thing. It is not a safety thing, so there is no issue there. In the course of doing some work on new actuators, we discovered an issue with the supplier. We don't believe there are problems with the units in the field because they have all been functioning perfectly for quite some time. However, we think our customer may want us to recall quite a few units out of the field and we have taken a reserve to account for that. That is what the reserve is.

And lastly, you mentioned I guess I think it was in your -- maybe in the components business on the defense vehicle side feeling some impact of declining work as I guess troops withdraw from Iraq and declining OCO spending and stuff like that. Can you talk about your exposure there and how you sort of see that playing out in terms of business potentially trailing down over the next couple of years? Things like driver DDE, those are pretty profitable things and can you talk about sort of how you see that progressing?

I think that is more in the space and defense business. What the DVE is in the space and defense business in particular, so just means the DVE -- the DVE look back, give you the history. In 2009, it was $16 million. In 2010, it was $30 million, and in 2011, it is $30 million, and next year, we are forecasting that dropping back to $19 million. About a $10 million to $11 million drop into 2012 from what we have seen in 2011. If you look back, you will discover that we are not particularly good at forecasting this, and that's because it seems like big orders come, there's a rush to get them out. We have a great quarter, and then the following quarter is not so good. We're making our best guess based on the best information that we have from our customers, and what we are seeing in the defense budgets and -- as I say, that is down about $11 million. The other defense businesses are a range of activities on a range of military vehicles. We have seen softness this year. On the component side, it's various retro-fits and upgrades that have been completed on the Bradley and the Abrams tank. And then in our space business, it was more the other side of the space and defense segment -- it was more a range of new programs that we thought were coming along that just seemed to have been pushed to the right. There hasn't been program cancellations, but stuff is pushing to the right.

So, for next year, what we think right now is that in it will probably be flat with this year. That we are hoping that we have seen in terms of that drop-off, which has been quite significant this year versus last year, is that will flatten out next year on the back of some of these programs coming through plus some of that will be driven by hopefully success at the OEMs in foreign military sales.

Great. Thanks a lot, guys. Good quarter.

Thank you.

Thank you. Next to the line of Michael Ciarmoli at KeyBanc Capital. Please go ahead.

Hey, good afternoon, guys. Nice quarter. Thanks for taking my call. Just a follow-up on the defense. You know, it looks like for 2012, you are going to get some good growth on the topline, but the margins are going to get hit by about 230 basis points. Is that a function of that DVE? Is that the big driver of the margin falling off?

Yeah, I think the way I look at it is not so much that the margin next year is falling off. It's that in 2011, we had particularly strong margins and the very strong DVE sales helped. And I think we described a couple of programs over the past two quarters. We described a storage management program that we had as well that really contributed some very nice margins. Our space and defense business is a business characterized by large programs typically that come and go, and you get a mixed shift in profitability between programs, and I think we had that mix to turn out to be particularly nice in fiscal 2011 and as we look at fiscal 2012, we think maybe it could be nor normal back to what we saw in fiscal 2010.

Okay. And then just shifting to the aircraft, you guys are getting the margin expansion next year. When you guys do your long-range planning, can this get up to the 12% range? Can you even get up to to a 14% that you guys were doing in 2002 or 2003 or is there simply more R&D in the program that are in the pipeline?

We think the marks in that business will return into the 13%, 14% range. It is really a question of whether that is in fiscal 2013 or fiscal 2014. We think that will happen. As I said, the answer to one of the other questions -- we don't think that either Boeing and Airbus -- or Airbus in their new engine narrow-body programs are going to offer us the opportunity to spend R&D money in the amounts that we have on the 787 and the A350. So we think that R&D expenditures as a percentage of sales in aircraft will continue to run down and the margins will improve.

And is it going to be more of a function -- I mean I'm sure it will be a combination of R&D running down and volume increases. And given some of the numbers that Boeing has thrown out there, I mean, could they surpass maybe that 13% to 14% if the volumes truly materialize?

I wouldn't count on that.

Okay.

You know, as Boeing cranks up their volume -- the volume on their programs, let me put it this way. As soon as they announce that their volumes are going out on a program, they send out a letter saying since our volume is going up on this program, we hope that all of our suppliers will reduce their prices because their costs are declining.

Sure, sure.

So there will be price pressure. So --

Fair enough. Great. Thanks, guys.

Okay.

Thank you. We will go next to the line of Gregory Mccass kill at lord Abbott.

Thank you for taking my call here. Just with regard to the medical, so I could understand the restructuring benefits and particularly the three segments as you are operating it there. If you could go through the sales, the operations, and then the new product development and how that is different from where it has been and kind of what you are planning there.

Well, I -- put it this way, Greg, what we described in the past was our focus has been on growing the topline. We believed that that was possible and as the topline grew the profitability would fall out and therefore we would have a nicer bottom line. I think when we took a step back in the last couple of quarters, we said well, that strategy clearly hasn't worked for us so let's -- so that we can make money at the type of sales level we have been running. We are still looking to grow the business, but let's do it at a perhaps slightly slower pace to make sure that we are making money as we go along. What we did was we were planning on building out the sales force more aggressively, putting more sales folks in the field and letting them ramp up sales. What we said is, let's try to put as many folks in the field to contain the costs and we'll accept a slightly slower ramp on the sales side.

Costa Rica has been a strategy for a while. It's just that's now actually, the facility there is up to full-rate production and we are starting to see the cost benefits that we had hoped for. And on the R&D side, we had been investing significantly with a view to bringing new products to the market, and as we explained, the shift in the FDA's approach to pump manufacturers has made that a more arduous task and slowed the process, and we've also focused in on the key projects as we see rather than have a broader range of products. Essentially resizing the organization to make it profitable at the run rate that we have got right now accepting that the sales growth will be slower than we would have hoped but that as we move forward, we will continue to have positive results in the business.

So the expectation of kind of flat sales in fiscal 2012 is perhaps in part because it will take some time to get the sales force ramped up and therefore the sales to come through the new channel -- the non-exclusive distributors?

Yeah, I mean we are being cautious. Sales are going to be up $7 million but it is not significant. And that is partially that we have some new products, but as we said, our large-volume pump, which we had high aspirations for, we learned this quarter that they had a process in the medical device business which will be similar to quality by similarity in the aircraft business. You have something and this is essentially a slight modification of it, essentially just making it a bit bigger and that process was in place and that process now seems to have essentially gone, so now you have to go back through the full re-certification process and that just takes significantly more time.

So the growth in sale that we hoped for that would come with that product, we are pushing out beyond 2012. We hope again that we're being somewhat conservative in that, but we are trying to make sure that we pick a topline that we are very comfortable with, and then make sure that we can make the bottom line look respectable.

But that pump is a totally new product or a variation?

No, it's a derivation on products that we already have in the portfolio.

Okay, so you don't have a large-volume pump in the field at this point?

No.

Okay. Very good. And then the IV pump is back and selling well?

It is back and it is -- I mean as I said, we caught up on shipments that we had in backlog because of the voluntary ship hold that we had in the quarter. We are now facing into the shift from the exclusive distribution agreement with B. Braun into our own direct sales force. One interesting sidenote is the fact that we've gone through this voluntary software recall means that we need to know where every pump is in the fieldd and has the unusual positive that our new direct sales force has to actually know where every single pump is and in every single hospital. Whereas previously, that was essentially, you were isolated one step from that with the B. Braun organization. I guess there's some silver lining even in the cloud that we had a voluntary recall.

So the pump location software is in place?

The software is in place. Now, there's a process that will take probably six to nine months of actually going out into the field and upgrading each of those pumps as we go around to all the various locations where the pumps are. It is a software field upgrade -- it's something that's done and then you plug it in and upgrade the software. So there is no taking it apart or anything, but it will take some time. But as I say, it has the advantage that our new sales organization we get to each of the folks that have the pumps.

And then each situation will produce revenue then?

I'm -- no, I don't understand why -- the upgrade doesn't produce any revenue as such. The upgrade is a correction to the software.

I see. Excuse me. And then finally, on the enteral pump that you introduced -- and is going well in Europe, I guess?

Yes, yes.

Okay. Thanks very much.

Thanks, Greg.

And there are no further questions in queue at this time.

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