Moog Inc (MOG.B) 2011 Q4 法說會逐字稿

(Operator Instructions).Ladies and gentlemen. Thank you for standing by. Welcome to the Moog fourth quarter and full-year 2011 earnings conference call. (Operator Instructions). 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, November 4, 2011, and our most recent form 8-K, filed on November 4, 2011 and in certain of our public filings with 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 documents, a copy of today's financial presentation is available on our Investor Relations home page at our webcast page at www.moog.com. Bob?

Thanks, Ann. Good morning. Thanks for joining us at this early hour. This morning we'll report the results of our fourth quarter, fiscal 2011. We'll review the 2011 year-end results and we'll update our guidance for 2012.

A few years ago an analyst that was writing about our Company that our guidance is generally so detailed and so accurate, that there's not much likelihood of an upside surprise. Most of the time that's an appropriate observation. But every once in a while, one or more of our segments has an unexpectedly strong quarter, and occasionally our expenses run below our expectation. And this was the case in the fourth quarter of 2011.

In our guidance we projected earnings for the quarter as $33.7 million, and EPS of $0.73. In the quarter, three of our segments, Space Defense, Industrial Systems and Medical Devices all delivered results much better than we forecasted. Our interest expense and our corporate expense were a little bit lower than we've projected and our tax rate was lower, the result was a blow-out quarter, where earnings were $38.2 million, earnings per share $0.83. 17% higher than last year.

So it was a very strong quarter. And John will describe it in more detail in just a minute. As a result of a very strong fourth quarter, we also have a very strong year. Sales $2.33 billion, up 10% from a year ago. Our gross margin as a percent of sales was up slightly at 29.2%.

R&D for the year was up $3.8 million, but down as a percentage of sales. SG&A was up slightly as a percent of sales at 15.2%. Interest and other expenses were down for the year and as a result net earnings for the year of $136 million were up 26% from a year ago. Earnings per share $2.95, were up 25%. And considerably better than the $2.85 that we'd been forecasting only 90 days ago.

For 2012, this morning we're increasing our EPS guidance for 2012. We're still projecting sales of $2.5 billion, an increase of 8%. Net earnings of $152 million, but we brought in some shares in the last 90 days, so our earnings per share will be $3.31 we think on $152 million. And that will be a 12% increase over a very strong fiscal 2011.

We're aware that some investors are anticipating that 2012 will be a recessionary year. And, therefore, they might consider our projection optimistic. It is a projection based on what we know at the moment. We believe that our Aircraft Business for 2012 is solid.

The Military Aircraft Business, the platforms that are important to our Company, 35, F-18, V-22, Blackhawk will be adequately supported in the short-term and we believe in any defense budget scenario, and whatever cuts are mandated in the next few months, will not have much an impact on 2012 anyway. Our commercial aircraft business is growing, as production programs strengthen and the 787 goes into production. We believe that our forecast for Space and Defense is well supported.

Remember that in the recession of 2009, our Industrial Business was the hardest hit. And we can tell you that if there is an industrial recession in our future, as yet we have seen absolutely no signs of it. Our incoming order rate in both Europe and Asia is strong. We believe that the strength in Europe has to do with the fact that our customers are machine builders, who export into emerging economies.

We believe our components group has adjusted to lower levels of military activity. And our forecast for 2012 for the Components Group we think is a conservative one. And in Medical Devices we have a projection which we also think is conservative, particularly given the performance of the last two quarters. In spite of what we read every day in the International news, we in our Company are optimistic that 2012 will be a year of continued growth and sales, earnings and earnings per share. Now for a more detailed description of the performance in our segments, here's John.

Thanks, Bob. Good morning. Let me start walking through the segments with the Aircraft Group. In Aircraft we had a great sales quarter with strength across the boards.

Fiscal 2011 also finished with sales up 12%, compared to last year. We saw growth in both Military and Commercial platforms, as well as in the after market. We believe next year fiscal 2012 should be another year of growth driven mainly by the Commercial side of the business. But let me start by putting fiscal 2011 into the broader context of this business.

In the mid-80s, Moog was selected to supply the flight control actuation systems for the for the B-2 bomber. This began a long journey to reposition our Company from a component supplier, to supplier of flight control systems. Acquisitions in the 90s, broadened our capability to include high lift systems and actuation systems for business jets. But the journey started in earnest in 2001, with our selection of the F-35 development program.

This is followed by the 787 in 2004, and the A350 in 2007. These major jobs were overlaid on several smaller business jet programs. We recognized that our involvement in these programs would require a heavy investment in R&D, which would then be followed by the ramp-up of production as these airplanes would enter service. We would margins compressed for several years as the R&D load built up, then as production ramped up, margins would start to expand.

The low point of margin compression occurred for us in fiscal 2009 and since then we're experiencing slow, but steady margin expansion. Fiscal 2011 was another step on this journey. F-35 continued to shift from development into production, 787 entered into service and the A350 development was in full swing. As we look out to 2012, our development activities on the A350 will continue at pace.

We're starting to see the forecasted production ramp of the F-35 and the 787, and we anticipate that margins will continue to improve into next year. Now let me go back to the quarter. In the fourth quarter totally aircraft sales were up 13% to $228 million. We recorded gains in each of our major markets.

Military aircraft sales were up 13%, driven by an increase in the F-35 production and another quarter of strong after-market sales. We also had the benefit of a full quarter of our recent cross acquisition, which added about $4 million to the total. On the commercial side, we had growth in Airbus and business jets into the after markets. We are enjoying the increased rates at the OEMs, the recovery in the business jet markets, and the flow-through of higher utilization rates into our after markets.

Our navigation aids business was also up nicely in the quarter as several anticipated Military contracts were finally awarded in our favor. For the full-year fiscal 2011, we saw 12% increase in our aircraft sales. Military sales were up 9%, driven by a very healthy after market. After market sales had the benefit of some significant upgrade programs on several platforms, as well as additional sales from a couple of acquisitions in 2010.

On the commercial side, sales were up 20%, with growth across the boards, that market continues to expand and the 787 moved into production. Looking to fiscal '12, it should be another year of growth. We're anticipating sales in Aircraft Segment of $944 million, up 11% from this year. There will be some growth in the Military side, as the F-35 production ramps up by $22 million, but this will be tempered by somewhat lower sales in motor craft.

On the commercial side, we're expecting about $60 million higher sales with strength in all markets. Finally, Nav Aids business should also be up nicely as a result of work on recently awarded Military contracts. Margin in the quarter were 9.4%, down from 10.9% last year. In this quarter we see additional costs for the completion of the Gulf Stream 280 contract, we increased our reserves by $3 million, combination of increased effort to complete the flight test program and higher cost of the early production hardware.

We also incurred $1 million of additional costs on the A400 M contract, in connection with activities to complete commercial certificate income of the program. For the year, margins of 9.9% compared with 10.1% in fiscal 2010. Were it not for the additional reserves in the fourth quarter, margins would have been 11.2% in the quarter and 10.4% for the year. Looking to fiscal 2012, we believe these issues will be behind us and we anticipate margins of 11% on the higher sales.

Space and Defense. Sales in the quarter were up 3%, compared to a year ago, but we saw significant shift in the mix. For the year we've had good sales growth of 9%. But again the mix of products was quite different from fiscal 2010.

As we look out to fiscal 2011, we should see some further sales growth with a continuing shift in the mix. Sales in the fourth quarter were up $3 million to $93 million. Our NASA business was up $8 million from a year ago. The new Space Launch System, or SLS, is getting into gear and we're seeing our development ramp up.

The other sales plus in the quarter was the Security and Surveillance business, as that market continues to improve. On the downside, we saw a sales drop of $8 million, and our Driver's Division Program. For the year, sales grew $30 million on the positive side, our Security Surveillance business was way up. The result of a full-year of the acquisition and a general recovery in that market.

Tactile missiles were also up as the replenishment of the TOW and Hellfire inventories continued. Finally, the new NASA SLS program resulted in a ramp up of our cost plus development efforts. On the negative side, sales of satellite products were down from the boom year we had in fiscal 2010. Looking out to fiscal 2012, we're forecasting a 5% increase in sales.

We believe our development work for NASA will continue to grow and the tactical missile production work will also be up. These were compensated for lower sales on the Driver's Vision Enhancer. Margins in the quarter up 12.5%, were similar to last year. For the year, margins were up very healthy, 13.8%, up from 11% in fiscal 2010. This year we had the benefit of the Storage Management contract we described in earlier calls.

As we look to fiscal 2012, we believe margins will return to a more normal level of 11.7%. Turning to Industrial Systems, sales in the quarter up 8%. In total, fiscal 2011 closed out with sales up 15% over last year. About one quarter of this growth was due to foreign currency fluctuations, but real organic growth in the year was still 11%.

All the real growth came in the Legacy Businesses. Looking to fiscal 2012, we should see further growth of 8%, as we experience some nice improvements in a couple of particular markets, as well as a slight recovery in our wind business. Sales in the quarter were $173 million, up $13 million from last year. Three-quarters of that change was due to stronger foreign currencies relative to the US dollar.

The real growth was all in the Legacy part of the business. Several of our Legacy markets are starting to level out after eight quarters of sequential growth, however, we still saw nice gains in steel mill equipment and metal forming, we also had very strong growth in test systems, up 45% over last year, as we ramp up work on a large project to equipt automobile test facilities in India. Finally, our Simulation business was also up as the demand for civil aircraft training systems improves.

Wind sales were down this quarter from a year ago. Although Q4 was our best quarter of the year. The wind market in Europe has firmed up and continues to grow, where the market in China continues to be challenging. For the full year, we had strong sales growth across all our Legacy markets.

Every major market we started was up double digits in 2011. Our Legacy business has recovered from the low points of fiscal 2009 of $385 million to almost $500 million in fiscal 2011. We are almost back to the high water mark we hit in fiscal 2008 of $532 million. The sales growth through this recovery has been a combination of market recovery, scope growth, and the development of new markets as we continue to invest in R&D throughout the downturn.

Let me give you some examples. We've seen a market recovery in our simulation business, as the airframers have increased production rates and the commercial transport utilization have improved. We've seen scope growth in markets such as metal forming and oil and gas, as we've worked with existing customers to solve their higher-level control problems and increased our scope of supply.

Finally, we've developed new market positions in test systems in semiconductors, where we've brought innovative products to the market, winning us positions at new customers. Our wind business has been a challenge in fiscal 2011. We finished the year with sales of $132 million, down from $154 million last year.

As we've discussed before, the weakness was all in China, where the basis of competition has shifted over the last two years. Back in 2009, when we bought LTI, the wind business was expanding rapidly and it was a supplier's market. China was about 60% of our sales, with the balance in Europe. The Chinese OEMs could not make turbines fast enough and the supplier market was immature and under served.

Since 2009, the growth has cooled dramatically in China, though the competition has emerged and it's become a buyer's market. The result has been consolidation of the OEMs, and significant pricing pressure for suppliers. In this environment, we've worked to maintain our position of key customers and improve our processes to reduce costs. Longer term product innovation will be the key to success.

This will be our focus over the next few years. In total, wind is still our largest industrial market and our business in Europe has been growing steadily. While our wind business in fiscal 2011 did not achieve our original forecast, it was still a major contributor to our overall results and provides significant opportunities for future growth. Turning now to fiscal 2012, we're forecasting 8% sales growth.

We're sticking with our wind forecast from 90 days ago, with 60% of the sales going to European OEMs. Our Legacy business will also be up, although we're anticipating little growth in the underlying markets. Our growth will be driven by new products and a variety of specialty applications including test systems, (inaudible) generation and simulation.

Margins. Industrial systems margins in the quarter were 10.8%, and for the year were 10%. We had margins of 8.8% in fiscal 2010. The recovery in the Legacy business drove the improvement, by the competitive situation in the wind business tempered the gain. In fiscal 2012, we should see margin improves again to 10.5%.

Performance. This quarter repeated the pattern of the last few quarters, Defense sales stronger than non defense sales. This is also the story for the year. Looking to fiscal 2012, we should see the Defense markets stabilizing, with a non defense markets providing some top-line growth. Sales in the quarter were essentially flat with last year at $89 million, our major non defense markets were all strong.

The Marine business, where we supply components using offshore oil expiration, was up almost 30%. This business is strong when above $70 a barrel. The Medical business, a combination of motors for sleep apnea machines and slip rings for cat scan machines was up 26%. This business continues to recover from the 2009 downturn.

Finally, our General Industrial business was up 16%, driven by our recent acquisition of Animatics, on the other hand, the Military aircraft business was down 10%, and our Defense Controls business, component and systems, which go on military vehicles, was down almost 40%. It's similar story for the full-year fiscal 2011. With our non defense markets up about 20% and our Defense markets down about the same percentage.

We enjoyed a boom in our Defense markets over the last few years, as the war efforts in Iraq and Afghanistan intensified. Back in fiscal 2007, our Military Aircraft business was $70 million, peaking at $123 million in fiscal 2010. Fiscal 2011 it dropped back to $105 million. We saw a similar increase in our Defense Controls business, going from $43 million in fiscal 2007 to around $65 million in fiscal 2009 and 2010.

This business dropped back to $40 million in the year just ended. In both these markets we won multiple contracts for system upgrades on a variety of platforms, and those upgrades are now mostly completed. As we look forward to fiscal 2012, sales for the Components group should be up about $20 million. The growth is all in the industrial markets with our Animatic acquisition contributing 50% of the total.

There will be some slight shifts in the other markets but nothing significant. We believe we'll see further erosion of our Military Vehicle business, but increases in our Space business will balance this out. The Military Aircraft market should be essentially flat fiscal 2011, as were the Marine and Medical markets.

Margins. Margins in the quarter were unusually low at 10.1%. In addition to a less favorable product mix than normal, we took a $2 million write-down on the technology investment we made a couple of years ago. In 2009, we invested $2 million in a Data Compression Technology to be used in CAT scan machines.

At that time, the market for CAT scan machines was going to ever higher data rates and Compression Technology offered a cost effective solution to increased system performance. Since that time, however, the market growth has shifted to lower-end machines as the demand in Asia has exploded. And the need for Compression Technology has waived. So we wrote off our investment this quarter. For the year we had margins of 14.3%, but we anticipate these will improve to 15% in fiscal 2012.

Turning now to Medical. Our Medical business continued to improve this quarter. Sales were strong and we made money again. It's been a tough year for this business, but we closed it out with record sales and a positive contribution.

Looking out to fiscal 2012, we are forecasting a modest sales increase and a continuation of positive operating results. Sales in the quarter were $37 million dollars, up 18% from last year. Sales in the second half of the year were $75 million, up from $67 million in the first half. In this fourth quarter, we had gains in both pumps and administration sets.

Pump sales were up over 30%, driven by the new Enteral Pump we introduced at the International markets. Sales of administration sets were also up almost 30%. General set sales are a function of the install base of pumps. Although they tend to fluctuate quarter-to-quarter, based on distributer orders and then use of stocking policies.

For the full year, sales were up 12% from last year, with strength in pumps, sets, and our sensors and hand pieces line. Growth was the result of a combination of factors. First, the Medical Devices market is recovering from a significant downturn, following the financial crisis in 2009. The drop in the stock markets at that time affected the value of hospital endowments, which in turn led to lower capital spending in 2009 and 2010. And our pump products are capital purchases.

We saw these recover in fiscal 2011. Second, we had a new product in fiscal 2011. Our International Enteral Pump which drove additional sales. And coming with higher pump sales, were higher sales of administration sets. Finally, our Sensors Product Line benefited this year from a recall of a competitor's hospital pump.

We supply sensors on a rival pump, which saw huge sales increase as the market demanded alternative pumps for the recalled units. Looking at fiscal 2012, we're forecasting very moderate sales growth, we have the benefit of our new International Enteral Pump and recall issues behind us, a full year of IV pump sales.

On the other hand, we're building a new sales channel for our IV products domestically, following the termination of the (inaudible) Distribution Agreement, so we're cautious about forecasting much growth in that market. In addition, sales of sensors and hand pieces will be slightly lower.

Medical margins. This quarter we had an operating profit of just over $2 million, or 5.6% of sales. We had the benefit of the restructuring from last quarter, as well as a strong sales quarter. We're keeping our forecast for fiscal 2012, as an operating profit of $5 million for the year.

While this may appear conservative based on the performance of the last two quarters, we're not inclined to set expectations too high for a business which is coming out of some very challenging times. Let me finish this section on Medical Devices with some thoughts about the future. When we embarked on our Medical Devices journey back in 2006, we believed we could be successful in this market by developing superior pump products. The better mouse trap strategy as I like to call it.

A lot has happened over the last five years. We've acquired five smaller companies, and have integrated them into a single operating unit. We have restructured our supply chain for administration sets by building a Greenfield site in Costa Rica, we've built a direct sales force to replace the exclusive distribution agreement. We've invested heavily in R&D to develop new products.

And finally we've experienced a dramatic shift in the regulatory environment that the FDA has focused its attention on medical pumps. As all this was happening, we, like most other suppliers struggled with various product recalls, in addition, the Industry experienced both a financial and economic crisis, which dispels the historical notion that Medical Devices was a recession-resistant market. We've weathered all these difficulties and learned a lot about this Industry along the way. Unfortunately what we have not yet had a real opportunity to validate is our original strategy of building a better pump.

We have tasted success with our new Enteral Pump for the International markets, but given the increased FDA scrutiny, have not yet been able to introduce new products into the US markets. The new products are in the works. But it will be fiscal 2013 before we have a chance to bring these products to the Domestic market and validate our strategies. In the meantime, we plan to spend fiscal 2012 improving processes, completing our development efforts and focusing on profitability.

We believe fiscal 2013 will be the opportunity to prove our original thesis. Most can be successful by building a better product, with a longer term the business will be strong contributor to the overall performance of the Company. So let me finish with some summary guidance. We're very pleased with the way fiscal 2011 ended up. Sales were up 10% to $2.33 billion, earnings per share were up 25%

In fiscal 2012, sales should be up 8% to $2.52 billion with increases in every segment. Operating margins should improve to 11.1%, from 10.6% in 2011. This will result in earnings per share of $3.31, 12% increase over 2011. We think the year will start slowly, and then accelerate with quarterly earnings per share $0.73, $0.76, $0.87, and $0.95. Now let me pass it to Don, who will provide some color on our cash flow and balance sheets.

Thank you John. Good morning, everyone. Over the next few minutes I will cover our cash flows and some of our financial ratios. I'll discuss a couple of balance sheet items and then I'll describe our tax rate and our pensions. They seem to be attracting a lot of interest this reporting season.

I'll start with cash and net debt. Net debt increased by $12 million during the fourth fiscal quarter, to $612 million, although free cash flow in the quarter was $42 million. The difference relates to $29 million that we used to repurchase some of our stock. So let me describe that in a little bit more detail.

During our third quarter, you recall that we issued 468,000 Class A shares to the sellers of Animatics, which is a motors business that we acquired as part of our Components segment. In our fourth quarter, just ended, we decided to buy back shares in the Treasury, essentially neutralizing the dilutive effect of issuing those shares as part of the Animatics transaction.

More specifically, we purchased 766,000 Class A, shares during our fourth fiscal quarter, for a total cost of just under $29 million, or an average of price of $37.69 per share. We had available to us an outstanding authorization from our Board to repurchase up to 1 million shares, and we've now fully exhausted that outstanding authorization. We have no further plans to purchase any more shares at this time. For the full fiscal year, our free cash flow was $112 million, or 83% of net earnings conversion ratio.

There are a couple other cash flow items that I think are also worthy of some mention. First, during Q4, we received a rather substantial payment, $34 million, from Boeing, largely related to last quarter's Scope Change Negotiations and the 787 high lift hardware. And to the recent celebratory commencement of Boeing's 787 delivery to its launch customer ANA in Japan. Offsetting the shot in the arm receipt, we decided to accelerate into September 2011, $30 million of fiscal 2012 pension contributions for our Domestic Defined Benefit Plan.

As a result, our fiscal 2011 domestic D.B. planned contributions totaled $60 million. Turning now to some of our financial ratios. Our year-end net debt, as a percentage of total capitalization, was 33.9%, compared to 36.8% a year ago. Our leverage ratio is now at 1.92 times, and we currently have $555 million of unused capacity on our $900 million revolver, that terms out in 2016. We feel we're in very solid financial shape to weather any economic storms, and just as importantly, to take advantage of acquisition opportunities as they arise.

Customer advances in loss reserves decreased from the prior quarter by $6 million, and $3 million respectively, as work performed on our contracts resulted in a modest net reduction of those obligations. Our capital expenditures increased to $31 million in the quarter, reflecting the construction of our new building in Wolverhampton UK. That was in our forecast previously. Depreciation and amortization totaled $25 million in the quarter.

And for the year, our CapEx came in at $84 million, while our GNA was $96 million. Regarding pensions, I've already mentioned that we took advantage of an opportunity to accelerate into September 2011, $30 million of Domestic D.B. planned contributions, that were otherwise planned for 2012. And that was done largely because of the timing of the going cash that came in.

Additionally, the under funded status of our pension plans, relative to last year, has widened as you might expect, as a result of the recent volatility in the equity markets and the seemingly endless decline in long-term interest rates. The discount rate that we used at year end to value our domestic obligation was 4.75%, compared to 5.75% a year ago. The combination of the lower asset values at Septembers click of the camera, and the lower discount rates, had the effect of increasing the under funded status of our US employees retirement plan to $190 million, compared to $144 million a year ago.

And this is despite the acceleration of contributions in September. All of this is appropriately reflected at our balance sheets at the end of the year. We're now forecasting our global D.B. plan expense in fiscal 2012 to be $35 million, compared to the $32 million expense we recorded in 2011.

While our global defined benefit pension plan contributions will decline to about 8 million in fiscal year 2011 and that compared with $69 million of contributions in 2011. As we look out to fiscal year 2012, we're still forecasting our free cash flow to come in around $110 million. Our CapEx in fiscal 2012 will be $105 million and depreciation and amortization, are forecasted to be $106 million, all in fiscal year 2012. Our effective tax rate in the fourth quarter was low, 22.2%, down from last year's 27.4%.

Largely due to an improved outlook on the utilization of a net operating loss, tax net operating loss at one of our foreign subsidiaries. For the year, our tax rate was 26.0%, compared to last year's 27.7%. And we're now forecasting fiscal year 2012's effective tax rate to be up around 30.3%, due primarily to lower foreign tax credits, associated with changes in legislation in the US that were passed about a year ago.

So in summary, we've reported some excellent 2011 results. Sales were up 10% to a record $2.33 billion. Organic growth on sales was 9%. EPS was up 25% to a record $2.95.

We're looking forward to 2012 with a great deal of optimism and the belief that we are positioned on the right strategic programs in Defense, excited about the wave of commercial aircraft production activity. Although we're weary about the possibility there could be an Industrial slowdown, yet we're confident that our diversity will again allow us to successfully manage through with respectable results.

Finally, we believe our solid financial position will allow us to capitalize on complimentary strategic acquisition opportunities. So with that, I'll turn it back to Bob and John for any Q&A.

(Operator Instructions). Our first question today comes from the line of Kevin Ciabattoni from KeyBanc Capital Markets. Please go ahead.

Good morning, guys. Congrats on the nice quarter.

Thank you.

Thank you. So just looking quickly at the components margins there, there's a $2 million one timer in there.

Yes.

So even after that they're still down maybe in the 12.5% range. Can you give us a little color on what else happen there had in the quarter and then how you're looking at those for next year to get back up to that 15% level.

Yes. I think in the quarter end, it was really just an unfortunate set of mix issues in that particular quarter. If you look over the year, it was kind of in the mid 14's, next year we're forecasting 15. The Defense business that we've been doing over the last few years was nice, solid business.

We had mature programs. We've seen this shift more over to Industrial stuff. It's newer products. That's depressed margins a little bit.

We think next year at 15% is a very solid performance. It's a little bit lower than a couple of the years where we had very strong Defense. It's in line with what the business has done historically.

I think also that I point out, if it were not for the write-off in the fourth quarter, the year would have been like 15.5%. I think our 15% projection for 2012 is pretty conservative.

Okay. Thanks. And looking at the Boeing revenues in the quarter, they were essentially flat, down a little bit it looked like. Can you give us any detail on that? And it looks like they're set to grow pretty well next year and Airbus grew pretty substantially in the quarter. Just wondering what the disparity between the two was there?

Well, in the quarter, actually the production programs, other than the 787 year-over-year were actually up in the quarter. And the slight reduction in sales to Boeing reflects the fact that our revenue on the 787 in this quarter was slightly lower than it was in the same quarter a year ago. And this all, we're recording sales on the basis of long-term contract accounting.

And this all has to do with the amount of effort, material and labor incurred in the quarter and we're comfortably ahead of the current Boeing production rates. So although Boeing is in the process of slowly increasing or very slowly ramping up their production rate, we're kind of coasting along because we're at a rate slightly ahead of them already.

Okay. That's helpful. And then one last one. NASA, looks like you guys have baked in some pretty good growth next year. Is that all pretty much SLS driven?

Yes.

Yes.

Okay. Great. Thanks.

That's all I had.

Thank you.

And we do have a question from the line of Eric Hugel from Stephens Inc. Please go ahead.

Good morning, guys. Good quarter.

Thank you.

Can you talk about your 9% growth expectation for commercial after market. How much of that is sort of initial sparing on the 787 versus, underlying market growth?

let's see. We have that number. Yes. It's a bit over half of it. A little bit over half of the growth.

Okay. Can you talk about, I haven't seen it in a while. I sort of seem to remember you guys had some pretty nice exposure, both dollar wise and I think and margin wise on the Euro fighter. And, you know, things I've been reading, there are considers of cutting production on that. Where would that impact and what are you hearing about that?

Well we do have, through our Components Group, participation on the Euro fighter. As a matter of fact, it was a fairly substantial program in 2011. We deliver a number of fiber optic components used in the flight control systems. And as it turns out, the deliveries on our orders were all completed in 2011 and we have little or nothing of Euro fighter in our forecast for 2012. And it is in addition to the slowdown in activity in the Middle East that John mentioned.

It is the reason that our military aircraft revenues in the components group are projected down in 2012. So I would put it this way. If there is another trench of production in the Euro fighter, that will be a positive for us. We don't have any of it in our forecast.

Okay. Can you also update us on, you sort of talked about, maybe a little more detail on Medical in terms of sort of the ramp up in the Costa Rican facility and how sort of certification is progressing through the FDA on some of these new pumps and maybe again a little more detail on thousand things are ramping up with the turnover from (inaudible).

So our Costa Rica facility is fully up and running. I visited there had about a month ago. It is producing 1 million administration sets a month. It took us longer and cost us more than we anticipated.

That was some of the difficulties that we had last year and through the early part of this year. We're comfortable that that's doing well. And from a cost perspective, it's coming in where we had hoped. Hopefully as we look to the future, it will continue to provide benefit for us. It also provides a lot of flexibility.

As we had some recall issues, moving the different types of products that changes in the mix, having our own in-house facility allowed to us change mix quickly and respond to customer demand. So it has additional benefits in terms of flexibility, versus the outside supply chain we had previously. On the sales channel side, the agreement is behind us. That would be a slow process.

We have put a combination of direct sales and non exclusive distribution in place. And there is a handover going on. But it will be hard at the initial objective there is to maintain the present customer base and then gradually grow it as we move into the future. We'll have to see how that plays out over the next year or so.

So we're confident that we can pick up the present customer base with our own folks focused on selling the product, we can do better in the long term, than having a distribution agreement with a company with a company that has many other products in there kit bag, so I think that would be where we're anticipating kind of flat sales for next year, as we change over that channel. And then on the development side, the development really has been, it's an FDA hurdle more than an internal development issue. And we anticipate, based on what we've seen and based on what we've seen other companies do, that it's a 12-month process to get anything through the FDA at this stage.

We had hoped to do what I call a similar type of product. There was an accelerated process that the FDA allowed up until a year, two years ago, where if you had a derivation of products, you could accelerate that through their certification process. And that avenue essentially went to waste. So that put us back at square one. We think it will probably take us all of fiscal 2012 to get the products that we have ready for certifications through that process. So for next fiscal 2012, we're not forecasting any growth from new products we think that will start in to come in fiscal 2013.

Okay. And lastly, Don, what's your share count expectation for next year with the shares bought back?

Yeah. We've got shares that we're forecasting next year to be $45.8 million.

Thanks, guys.

Okay. Thank you.

And if there are any additional questions at this time, please press star then one on your touch-tone telephone. We have a question from the line of Cai von Rumohr with Cowen and Company. Please go ahead.

Yes. Thank you. Good quarter.

Hi, Cai.

Thanks, Cai.

Could you give us a little more color on R&D, where was aircraft R&D in the quarter and kind of what are your plans for R&D, aircraft and other for the full-year fiscal 2012.

Yes. For the quarter, R&D was $15.9 million, which this is aircraft. Which brings the year end to $56.2 million. We're carrying a forecast of aircraft R&D for fiscal 2012 at $60 million and the increase has all to do with increased activity on the A-350. Then as I think you know, I think fiscal 2012 is likely to be the peak year for expenditures on the A350. Our total R&D budget at the moment for fiscal 2012 is just under $119 million. We are forecasting increased activity in our Industrial business, a little bit in the Space and Defense and the Components group.

Okay. And your cash flow, you accelerated $30 million of pension expense, which isn't there. Refresh my memory. Was your cash flow guidance before, was it $90 million or $110 million?

For 2012?

Right. Right.

It was $110 million last quarter. We had forecasted $110 million. And we're leaving it at the $110 million.

Right. How come? Why don't it out of the $30 million?

Well, we also received that shot in the arm from Boeing as well.

You'd assume that was going to be next year?

Basically yes.

Okay. Great.

What happened is the Boeing payment showed up in 2011, so we took the opportunity to basically apply that to our 2012 pension.

Got it. Okay. Very good. And then, you know, you mentioned that it kind of looks like from 20,000 feet that, you know, you took Military numbers down in a couple of areas. You left Medical flat, although to my recollection, the fourth quarter normally is a seasonally light period for Medical.

So, you know, you mentioned that Medical is maybe conservative. If you could just talk, Bob, if you stand from 20,000 feet, maybe the three or four areas in fiscal 2012 that have the most opportunity. And then on the risk side, given that we're all a little worried about the economy slowing, the areas that have the greatest risk and what you're doing to mitigate that.

Well, I think in terms of opportunity, I think the variability in the aircraft business is likely to be in the after market. I think in the Military aircraft after market, we have relatively conservative forecasts for the aircraft business, particularly the Military aircraft business. There is opportunity in Space and Defense. We have forecasted increases in the NASA business.

We have what we think is a realistic, but hopefully conservative forecast with respect to Driver's Vision Enhancer. There's much less of that in 2012 than there has been in 2011. And those orders come. They're fairly unpredictable.

They come on an erratic basis and they're quick, hurry-up delivery orders. We think we've been conservative in our forecast in the Industrial business. We're not anticipating a global industrial recession. But other than that, setting that aside, we think we've been conservative there. We could do better in the wind business.

Components group will, the potential pick up could be in the Marine part of the business. Probably, depending to some degree on what happens to the price of oil. Then we're hopeful that we've been quite conservative in Medical Devices. I mean if you simply take the results of the fourth quarter and multiplied by four, I think that will tell you that our forecast for fiscal 2012 for Medical Devices is conservative.

If you look at the downside, what could go wrong, I think that the, you know, the downside could be that the situation in Europe ultimately will result in some degree of a recession, probably not as bad as 2009. But as I said in my opening remarks, it's as if we are living in a parallel universe. I mean, if you read the papers, the US economy is weak. The Europe is in the midst of a financial crisis.

If you were looking at the world simply by focusing on our order book, you wouldn't see any of that. Our incoming orders in Europe for Industrial products are exceeding our current shipment rates. And our customers seem to be optimistic. So, you know, I think we have a strong hand to play in fiscal 2012. I think we're in good shape.

Terrific. Thank you very much.

(Operator Instructions)

Before we quit, perhaps I should make one correction. We were talking about the Euro fighter. I mentioned that we have nothing in our forecast for the Components group for the Euro fighter. We actually do have some sales of flight controls for Euro fighter that will come out of our Aircraft group through the aquisition we made in Wolverhampton. So I want to correct what I said. But that forecast is on the basis of orders that are already in place.

And it looks like we have a question from the line of Gregory.

Hi, Greg. Hi there. Nice quarter. Just one question really relative to the Military situation. I mean your expectations next year, just overall are slightly up, as I heard, right?

Well, I think up considerably. Yes.

Just talk a little bit about, you know, some of the programs you mentioned, particularly the J.S.F. I'd be curious about your sense of that next year, versus looking out a little further. You might have some good insights there.

The Joint Strike Fighter, in fiscal 2011, our revenues on the Joint Strike Fighter were $76 million. We're forecasting a substantial increase in fiscal 2012 to a little over $100 million and the forecasted increase is primarily in the production program. And deliveries, production deliveries on the F-35 are in a relatively low rate. We're in the production level for 2012 is only about 31 aircraft.

But it's up substantially from the level of 2011. So I think there will be a lot in the Press reflecting the argument over production of the F-35. But I think that argument will be about the longer term production base and the total number of aircraft that are going to be produced, particularly over the next ten years, you know, because the Deficit Commission is looking over a ten-year period. We have forecasted we think relatively conservatively over the next few years, the production rate.

We get it up to about 54aircraft a year in 2014, for instance. And I believe that there's no question that I will likely be produced quantities not as big as was originally forecasted, due to the fact that the Lockheed production facility in Ft. Worth is already tooled and facilities to build about 200 aircraft a year. But I think that the actual production rate on the aircraft will probably exceed what we currently have in our forecast. So we're quite comfortable with what we forecasted for the F-35.

Okay. Okay. On a long-term basis, you're still seeing positive. And there still feels like in the medical devices, the (inaudible) situation, that is kind of behind us. But there's still more to go there. You're being conservative on the sale side of that, relative to keeping the customers and getting things together for a better push in fiscal 2013, is that the idea?

Exactly. Yes. Well described, Greg.

Okay. All right. Thank you very much.

You bet.

And we have a question from the line of Julie Yates from Credit Suisse. Please go ahead.

Good morning. Nice quarter, guys.

Thanks, Julie.

Can you update us on the opportunities in the oil and gas markets. In the past, you've talked about that as a significant opportunity going forward so how is the outlook there for fiscal year 2012..

When we talk about oil and gas, the oil and gas is in our Industrial business, Julie. What we've been doing is, we've been steadily developing new sets of products with the major companies like (inaudible) these are the oil field services companies. The focus in that business is on high reliability type products. And we've been extending our footprint in that.

Just to give you a little bit more specifics on that. It's one of the markets of many that are in our Industrial business. Grows from about 14, 15 in 2011 to $20 million next year. So it's, you know, it's another nice market. It's got some nice growth. And that really is share and scope growth at those major customers.

Okay. Good. And then just one follow-up for Don. On the FY tax rate of 30.3%, does that assume that the R&D tax credit is extended at the end of the year?

Is extended at the end of the year?

Yes.

I believe it does, yes.

Okay. Great. Thank you.

Thanks.

And we have a follow-up question from Eric Hugel with Stephens Inc. Please go ahead.

Yes. On the Euro fighter, so you talked about you have some product to deliver out of Wolverhampton, but nothing out of Components. Is this just sort of a timing issue or is there a market share thing going on here, or is the stuff you supply out of the Component groups sole sourced or they built aircraft, or did you lose share?

No. It's a timing. The components group delivers components to companies that build those components into a larger subsystem. And so our delivery on the components is, you know, the delivery is earlier in the cycle than our flight control deliveries.

Okay. Fair enough. You know, with regards to wind, who are your major European OEMs that you supply to?

Biggest one is Repar. Repar is our biggest customer in Europe. Then there's a range of other OEMs in Europe. We supply some product for KIMESA Siemens, essentially we supply some products to most of the European OEMs. The biggest one is Repar.

Okay. Fair enough. And, you know, with regards to the 737, I know it's not a big mover for you guys. One of the things Spirit said yesterday on their quarter, they were up already at the end of the quarter at a 35 production rate. Are you guys sort of seeing that push through also earlier than expected?

I don't know that it's earlier than expected. But, you know, we're at a monthly basis of about the same, about 35.

Okay. Great. Thanks a lot, guys.

Thank you.

And we do have a question from the line of Chris McDonald with Kennedy Capital. Please go ahead.

Good morning. Thanks for taking my questions.

You bet.

The power generation market in Industrial, got pretty good growth built in for the year. Forgive me if you touched on this in your prepared remarks. Can you put a little color around the where you are seeing the strength in Power Gen going into next year?

So Power Gen is a cycle that is driven by a couple of things. You know, if you think back six, eight years, there's that crisis in California. You saw a big need for power. That then dropped off. What's happened more recently is that there is again a need for more power.

It's gas and steam turbines. We provide products on gas and steam turbines. So that's driving some of the growth. It's just the energy requirements of the markets. And the other thing that's happening is, the fallout in Japan from the earthquake, they've taken a lot of nuclear stuff offline.

That's driving a need for gas and steam turbines. And there seems to be a general shift away from nuclear, you've all seen that a bit in Europe. And that should further strengthen that market as we look to the future. But just to give you some numbers. You know, this market in 2009 it was a strong market, this didn't go through the same cycle as the other markets.

It was pretty strong. It was $54 million. Then in 2010, when we saw recovery in every other industrial market, this drops to $45 million. The year we just finished it went back up to 54 and we're seeing an increase next we're to 62. Which is nice. It adds to the diversity and gives us some smoothing.

Okay. Great. Thanks. Thanks a lot. Nice results.

And it does appear at this time there are no further questions on the phone lines. Please continue.

Okay. Thank you, Brad. Thank you, folks, for coming and listening. We'll talk again 90 days if not before.

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