MOG.A (MOG.A) Q1 2009 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Moog first quarter FY 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ann Luhr. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release of today's date, our most recent Form 10-K filed on November 25, 2008, and in certain of our other public filings with the SEC. We have provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations home page and webcast page at www.moog.com. Bob?

Good morning, everybody. Thanks for joining us. This morning we will report the first quarter of ’09 and will update again our guidance for the year. 2.5 weeks ago at our annual meeting we suggested that when we got the books closed on the first quarter that will probably come in between $0.65 and $0.70 a share. As it turned out, we are at the top of that range. First quarter earnings $30.3 million produced earnings per share of $0.70, up 9% from the $0.64 for the first quarter of ’08. Sales for the quarter $446 million, we are actually $300,000 lower than the same quarter a year ago. On a constant currency basis, sales were actually up by 3%. But because of the dollar strengthen against the euro, our euro sales translated into fewer dollars. Cost of sales higher than last year. R&D expense at $25.1 million, $1 million higher than last year. But we have lower SG&A expense, lower interest, and we had other income produced by our 40% ownership LTi REEnergy. All these puts and takes together with a very low 16.8% tax rate, produced net earnings of $30.3 million and $0.70. John will discuss the tax rate in a few minutes. Now let me go to the segments. Aircraft sales $163 million, just a little ahead of last year’s $160 million. The small increase was the net of a big increase on the military side of 16% to $106 million and a similar reduction in the commercial side of $58 million. The big increases in military sales came in three programs and in the after-market. Sales for the quarter at F-35 were $31.4 million, up 36% from last year. Activity in our company was up from last year only because we’ve started work on the Elma [ph] contract. Our partners, on the other hand, seem to have stepped up their efforts in order to bring their development contracts to completion. Secondly, we’ve started shipments on a substantial new order for flight controls on the Indian Light Combat Aircraft. Sales in the quarter $4.6 million, up from $1.4 million last year. In addition, increased production rate on the V-22 Tilt Rotor generated a 40% increase in sales to just over $10 million. And lastly, we are pleased to report that the military after-market is picking up like we had anticipated. Sales in the quarter $29.8 million were up 11% a year ago. On the commercial side, the decline in sales shouldn’t be a surprise to anyone. This was the quarter that included the Boeing strike. Our sales of equipment on the Boeing 7-series production aircraft at $8.3 million, little more than half our sales level of last year. In addition, sales on the 787 were also down in the quarter. So the total for Boeing commercial was $12.6 million, down 38%. The sales of Airbus $5.2 million. We are actually up 6% from a year ago. Our Business Jet product line also showed a decline. Sales $13 million were down 18%, mostly having to do with the reduced level of shipments on the Hawker 4000. Although the company of Hawker Beechcraft insists that they are maintain their delivery schedule of this airplane, we’ve already delivered more hardware than they were able to use. So our effort has slowed down. The good news in the commercial aircraft business is that our after-market revenue at $21.1 million was almost the same as a year ago, the decrease 1%. If you remember, in our forecast for the year we are projecting a 10% decline in the after-market. So we now have one quarter’s worth of data that suggests that there may be an upside in that part of our business. Our previous forecast for aircraft in fiscal ’09 was a total $680 million, up ever so slightly from $673 million in ’08. We’re maintaining that forecast for total aircraft sales. There is a bit of a shift, then that military sales will be up $13 million to offset a comparable decline in the commercial side. The increase is primarily in the F-35 and the new order we have on the F-2 Japanese fighter aircraft. The decline on the commercial side is simply a slightly greater impact of the strike at Boeing. In our initial forecast, we presume there would be a two-month slowdown where it seems that the real effect is going to be three months since it’s taking Boeing an additional month to get back up to production rate. In addition, I mentioned our reduced level of effort on the Hawker 4000. Aircraft margins. Margins in the quarter were relatively low 8.3%, down from 9.5% that we achieved in the first quarter of last year. But they were about where we have forecasted for this year. There is reason for optimism though in terms of aircraft margins. This quarter we achieved the 8.3% in spite of the fact that during the quarter we increased our loss reserve on the A400M, that’s the Airbus military cargo aircraft, by over $1.5 million. This isn’t the first time that we’ve increased our estimate on this program. But this is a pretty substantial change. On the other hand, we are now 85% complete. So hopefully this is the last major change to this EAC. It comes about as a result of redesigns triggered by test failures in the safety of flight and qualification test, and in addition we’ve encountered some of what we refer to as scope creep, wherein in the interest of being judged a responsive supplier, we performed some work, provided some service for the customer that was not part of our original scope of work. We do, however, believe that our performance on the A400M has been helpful in our successes and competitions on the A350. With respect to margins, the positive is that margins should improve in aircraft for the balance of the year and we are increasing our margin forecast for the year from 8.4% to 9.3%. Space and Defense. Our Space and Defense segment had the best quarter in its history. Sales up 24% to $71.4 million, and there is even better news on the margins. But let me stick with sales for a minute. Sales of what I’ve come to refer to as our legacy product line in Space and Defense that includes controls for satellites, launch vehicles, missiles and missile defense. Sales for legacy products were $29.4 million, up 14% from a year ago. The constellation program was that the shuttle replacement at $4.1 million were up 19%, but the biggest sales increase in the quarter was in defense controls. Sales of $28 million, up 39%, primarily the result of one more big order at QuickSet for Driver’s Vision Enhancers. Sales of that product in this quarter were over $14 million. The other important defense control programs include our (inaudible) system for the Stryker, Servo Motor Controller we are supplying for Future Combat Systems, and in Europe we’re supplying electronic controls for the Hagglunds’ CV9035, and we’ve begun delivering electric drives to Krauss-Maffei Wegmann for the FLW 100 and 200. In Australia, we’ve begun an upgrade on the Tenix M-113 armored personnel carrier. So there are a lot of programs in defense controls. You may remember that in the third quarter of ’08 we acquired a California company, CSA Engineering, a specialist in vibration, suppression and shock isolation, a company primarily focused on space vehicles and the rockets that launch them. CSA had sales in the quarter of $3.8 million. Our Homeland Security product line produced $3.1 million in sales for the quarter, a business that we expect to accelerate as the year goes by. Lastly, in the quarter we did $1.5 million in naval applications, and we expect that product line to grow to $3 million to $4 million a quarter before this year is up. In this quarter we were delivering turbine actuators for the CVN-78. We were working on development programs for the Office of Naval Research and also delivering our standard equipment on submarines. The good news is that in the quarter we booked $30 million worth of orders for equipment and seven Virginia-class submarines to be delivered over the next five years. This reflects the fact that in 2012 and 2013, the Virginia-class will start delivering two subs a year instead of one. At the annual meeting we suggested that our earlier ’09 forecast for Space and Defense $275 million would be up to $281 million, and we are maintaining that forecast. We will have stronger sales in defense controls in part to results of the big first quarter and the Driver Vision Enhancer, also the strength in some of our other defense control programs offset by a somewhat slower start in Homeland Security. Space and Defense margins. The Space and Defense segment was off the chart in margin performance this quarter. Margin is $13.6 million or 19% of sales. We had some very nice in-the-program profit pickups in our legacy product lines. Some example, we’re very near the end of the refurbishment program, equipment that we originally delivered 30 years ago for Minuteman III. In addition, the dramatic increase in volume in defense controls and particularly the Driver’s Vision Enhancer provides a short-term step-up in profitability. Clearly the strong performance of the first quarter results based on defense margins for the year, we do expect the next three quarters will settle down in a more typical 11.5%. So we’ll finish the year at about 13.4%. Industrial Systems, quarter one. In the middle of last year, when I thought that the financial problems in the US were confined to real estate market, home construction and banks loaded down with mortgage-backed securities, I remarked on a few occasions that our company will just assume to sit this recession out. If others wanted to have a recession they could go right ahead, but we preferred not to participate. As recently as the fourth quarter of fiscal ’08, I was able to say that the recession everyone was talking about had not found our Industrial business. You may remember our Industrial sales in the fourth quarter were up 23% from the year previous. Well, apparently I should not have taunted the recession gods because we now have the opportunity to join the rest of the world. The global recession has found our company, in particular our Industrial business. Industrial sales in the quarter of $110 million were down 10% from the year previous. Some of the reduction is related to foreign exchange. On a constant currency basis, our sales were still down 6%. With the exception of power generation and motion simulation, sales were down in all of our major industrial markets. The biggest decline was in the largest market controls for plastics. Sales $11.9 million, down 36%, reflecting, we think, reduced demand for our type of machinery in the auto industry and then packaging of consumer goods. Next biggest decline was in controls for steel mill. I mentioned in our annual meeting that the steel business in Asia has slammed to a halt. That’s affected not only the Chinese steel mills but also the European manufacturers of steel mill equipment. Sales in the quarter $8.8 million, down 35%. Sales of controls for metal forming equipment also affected by the auto industry, particularly in Japan. Sales $8.7 million, down 25%. Only two bright spots; the market for power generation and motion simulators. In power gen, sales of $13.5 million were up 23%, reflecting a consisting demand for our controls in Europe, Asia and in the Americas. Sales for gas turbines and steam turbines in Japan were particularly strong. Our simulator business up in the quarter compared to a year ago. Sales $19.1 million, up 26%. However, we are expecting moderation in simulator sales over the balance of the year, the result of re-allocation of capital in the flight training simulator companies and their customers. Perhaps the biggest question in our company for ’09 is the sales forecast for our Industrial Systems segment. Earlier in the year we had a forecast of $575 million, up from $532 million in ’08. The annual meeting 2.5 weeks ago we reported that that forecast was weakening. On that day I projected $559 million. Our industrial management team has spent the last couple of weeks reconsidering activity in all major markets, and we now believe that in many of our product lines we should simply be forecasting a continuation of the sales level that we experienced in the first quarter. Exceptions include power gen where our order input is brisk, and in power generation in the last four months of this year we’ll have the impact of completing our acquisition of LTi. Also in the test equipment business we have a backlog that we think we’ll increase sales from the first quarter level and allow us to achieve sales comparable to ’08. Also we have the addition of the Berkeley products acquisition, but we are anticipating the slowdown I mentioned in the simulation business. Put it all together, our current Industrial sales forecast is $514 million, down from our forecast late last fall of $575 million and the $532 million we did last year. The $532 million of last year, however, was with the euro of $1.52, not the $1.32 that we’re currently working with. On a constant currency basis, we are still up ever so slightly from last year. Margins. Industrial margins in the quarter 10.5%, down from the very strong 14.6% a year ago. These margins though were achieved in the phase of the 10% sales reduction I described. Our October forecast had modeled [ph] 13.8% in Industrial margins for the year, but we now feel it’s prudent to project a continuation of the 10.5% we achieved in the first quarter. So that’s what we will use for the balance of the year. Components Group. In past reports I’ve referred to our Components Group as a juggernaut. Quarter-after-quarter this segment produced double-digit sales growth and very strong margins. In this quarter of ’09, the margins are still strong, but sales at $81.5 million were up only 2%. The Components Group 56% of revenues are generated in the aerospace and defense markets, and those revenues were actually up 9%. Aircraft products of $28.2 million were up 10% from a year ago. And the biggest growth program is the Guardian System. This is the Northrop Grumman System that protects aircraft from shoulder fire missiles. Sales in the quarter of $5.1 million of that program were double what they were last year. In addition, sales on the Raytheon Multi-Spectral Targeting System at $1.5 million were up from last year as were sales on the Lockheed Arrowhead missile and the sniper targeting pod. Sales of space and defense products of the Components Group were up 9%, driven by shipments of slip rings and associated equipment and the M1A1 tank and the Stryker Mobile Gun System. In the marine product, you may remember our products – in the marine market, you may remember that our products are used primarily in remote operating vehicles which are undersea robots and in floating production storage and offloading vessels. These end products are primarily used in offshore oil exploration and production. So as the price of oil skyrocketed, our sales increased dramatically. As you know, oil prices are now back to normal levels, but our sales of marine products continued to grow in the quarter. Sales of $10.5 million were up 14%. We have a strong backlog. Incoming orders were strong in the quarter. So we’re still hopeful that we will meet our target of $47 million for the year. Sales of medical equipment in Components Group at $13 million were up only 3% from last year. Sales of motor blower assemblies for Respironics at $9 million were up 12%, but slip rings to our various CAT scan customers declined, offsetting the growth of Respironics. We are told that hospitals are delaying their acquisition of capital items like CAT scan equipment and that smaller clinics are having trouble gathering the needed financing. Our revenues in Industrial products of the Components Group $12.2 million, down 23%, and this is where the recession seems to have hit the Components Group. A modest decline in sales of slip rings used in closed circuit TV, much more of a decline 27% in equipment that we described as industrial automation, which includes a full range of industrial components used on everything from Ford trucks to semiconductor production equipment. The general pattern in the industrial market seems to be reduced order input and slower shipments. As said in the previous of these reports that forecasting for the Components Group is more than science. In this segment, there are relatively few big dollar long-running programs like the Guardian System and much of our forecasting is based on trends and order input. In previous years, we’ve always underestimated what sales turn out to be. We think we should be cautious this year. Our October guidance was $367 million, up 8%. But over the last few months we’ve experienced slower sales in the CAT scan market and in all of our industrial products. So at this point we’re changing our forecast for the year to $343 million, very close to what we achieved last year. Aircraft products will be up, as will space and defense. Marine products about the same level as ’08, but we’re forecasting a modest decline in medical and industrial equipment. Components Group margins. The good news in the Components Group is that although the sales had slowed, margins are holding up nicely. Margins of 18.4% for the quarter compare well with 18.6% last year and 17.8% for the whole of last year. Given this performance in the quarter, we’re increasing our margin projections for the Components Group for the year ’09 to 17.8%, like what we achieved last year. Medical Devices. Those of you who follow us closely may remember that our Medical Devices segment got off to a very strong start in ’08, last year. First quarter last year sales were up 16%, volume was up in pumps, admin sets, sensors, and surgical hand pieces. We theorized last year that one of the positive factors was the tendency in hospitals to use up their capital budget at year-end and buy things like infusion pumps. Margins of 13.2% were also pretty good. By comparison, the first quarter of fiscal ’09 was a train wreck. Total sales of $20 million were down 26% from a year ago. Pumps at $5.9 million were half of what they were last year. Sensors, hand pieces and other associated equipment were down a third. The only great spot was sales of admin sets, which at $9 million were up 20%. As said at the annual meeting, when we entered the market for medical devices a few years ago, we were mindful that healthcare was the one industry that had grown consistently over the previous decade. We were also making the presumption that the market for medical devices if it wasn’t recession proof, it needs [ph] to be recession resistant. This quarter seems to put the light of that notion. We do believe though the low level orders for IV and enteral pumps reflects the fact that hospitals and outpatient clinics were conserving capital. Maybe it reflects the inability to access capital or the reluctance to pay the increased cost. At the moment we believe that we’re experiencing a deferring of purchases in order activity. In the first three weeks of January our order activity suggests that the second quarter will be back to a more normal level. In the first quarter, though, sales of admin sets although up from last year failed to meet our budget. Normally we deliver admin sets with the new pump deliveries. And as I said a minute ago, we sold half as many pumps as planned. In our sensor product line, we supply ultrasonic sensors to other manufacturers of infusion pumps. And so our shortfall in order intake apparently reflects an overall decline in that quarter in the infusion pump market. As you know, we have a product line of hand pieces used in cataract surgery, we have two principal customers, and they both describe an effort in that quarter to rebalance our inventory. So in terms of revenue, the first quarter of ’09 was a cold shower. We are expecting that the second quarter will be much better, and that expectation is based on the trend in orders for pumps. What we hope will be a growing demand for admin sets and the resumption of deliveries of hand pieces. Margins. The bad news with respect to revenues is clearly reflected in their operating profit performance. We actually incurred an operating loss in the quarter of $2.2 million. The loss comes about because the 26% sales reduction results in a much larger reduction of the gross margin level, because a portion of our factory overhead in fixed. In addition, we encountered one other problem in the quarter. We need to update the software in our enteral feeding pumps. We have discovered a very subtle software problem, very subtle even by aerospace standards. We believe that it’s triggered very infrequently by different rates at which electronic components power up when the pump is turned on. In exists in software that was developed long before we acquired ZEVEX. Nevertheless it’s a potential problem that we will correct on units that have already been delivered. And we’ve established a reserve of $800,000 to take care of that problem. So, what about the future? We are encouraged by the recovery of the business so far in January. We’ve had extensive conversation with folks in the medical community that the moment we are convinced that the results of the first quarter aren’t likely to continue for the year. So at the moment, we are forecasting recovery in our pump business and with the benefit of new product introductions, which will occur in the last half of the year, we’re projecting sales for the year of just under $105 million before we factor in our two most recent acquisitions. And I’ll talk more about those in just a minute. Based on a recovery in sales to the forecasted level, we think we can get back to operating profit of about $3 million a quarter, and taking into account the loss in the first quarter, we’d then finish the year at about $6.6 million. Now let me comment on the acquisitions. You remember that we entered the market for medical devices in ’06 with the acquisition of Curlin Medical. Our strategic thrust has been a focus on infusion therapy. We thought we’d use the technology capability of our company, our ability to produce a reliable product to become the preferred supplier of infusion pumps and the associated admin sets. We started with acquisitions so we could accelerate our entry into the market. Over the last three years we’ve learned a lot. We learned first of all that we need a broader product line. Secondly, the production of disposable admin sets is a very important element in making this business profitable. And the two recent acquisitions address these two requirements. On December 30th of ’08, we acquired a company named AITECS, a producer of syringe pumps, a product that we did not have. Syringe pumps are used for very precise infusion of highly concentrated medication. For instance, they are what’s used in neonatal intensive care units. AITECS, the company is located in Lithuania. We believe the pump is world-class in design and it will complement our current pump product line. We can use the AITECS distribution network in Europe to expand sales of our current products, and we can bring the AITECS syringe pump to the US. So that acquisition is another step in developing a broader infusion pump product line with broader market access. Our most recent acquisition occurred just last Friday. We acquired Ethox International, a Buffalo-based manufacturer of disposable medical products. This company produces its own proprietary medical products, is also engaged in contract manufacturing disposables for many of the industry’s leading medical device companies. The company also provides microbiology, toxicology and sterilization services as the full complement of FDA approved production facilities for disposables as well as a complete sterilization capability. And currently our company outsources sterilization of all our disposable products. We expect that over the balance of this fiscal year and a combination of these acquisitions will add about $24 million in sales to $1.1 million, an operating profit after the normal purchase accounting expenses. So taking all together, we are now forecasting our Medical Devices sales for the year of $128.5 million and projecting operating profit of $7.7 million. So let me summarize the guidance. We are now forecasting total sales of $1.947 billion. Our earlier guidance for the year was $2.015 billion. And since that time we’ve maintained our forecast for Aircraft and for Space and Defense. Our sales forecast for Medical Devices is actually up $10 million as a result of the acquisitions. But given what appears to be happening in the industrial markets, we’ve reduced our industrial forecast and the industrial portion of our Components Group. Given our projections for our segment operating profits, we believe that we can achieve margins for the company in total of 11.5% or $224 million, and that will generate $120.5 million in net earnings or $2.80 a share. So in spite of what’s going on in the medical market and in spite of our recent experience in Medical Devices, we are still forecasting ’09 earnings slightly above what we achieved in ’08, and we believe that achieving sales and earnings that exceed ’08 by any amount will be a real accomplishment in the current economic conditions. And now to John Scannell.

Thanks Bob. Good morning. I’ll start as usual with a discussion of our cash flow in the quarter, including an update on our recently announced share repurchase program. I’d follow this with some remarks about our unusually low tax rate in the quarter and note some additional items of interest in the balance sheet. I’d then speak to our credit situation and finish with our guidance for the remainder of the fiscal year. Q1 cash flow. This quarter continued a recent trend of generating positive free cash flow. We came in at positive $12 million for the quarter. Net debt increased by $10 million driven by the acquisition of Berkeley Controls early in the quarter for $14 million and our expenditure of $7 million on our share repurchase program. Over the course of the quarter we purchased just over 200,000 shares. Cash flow from operations was $33 million. Working capital net of cash increased $6 million in the last three months. Capital expenditures came in at $20 million, while depreciation and amortization was $17 million. Interest payments totaled $11 million and our cash tax payments were $4 million. Taxes. Our tax rate in the quarter was a very low 16.8% with the benefit of two unusual items this quarter. First, under the top legislation, the R&D tax credit for 2008 and 2009 was reinstated. In this quarter we enjoyed the full catch-up for 2008, a benefit of $1.5 million. In addition, in Q1 we decided to issue a dividend from our Japanese company. This dividend allows us to repatriate $31 million of cash back to the US to pay down our bank loans. The average tax rate we have paid in Japan over the years is higher than our rate in the US. So the dividend resulted in a foreign tax credit of $4.8 million in the quarter. Some other items. Our non-cash stock compensation expense in the quarter was $2.6 million. Contract reserves increased by $1.3 million over the prior quarter driven primarily by the increase in our A400M loss reserve. At the end of December, our net debt-to-total-capitalization stood at 37.2%. Our credit situation. Reviewing the credit situation at the end of the quarter, we had $478 million of unused capacity on our credit facilities and over $118 million in cash on hand. At the completion of our two recent acquisitions in January for $36 million, we still have available credit capacity of $560 million. Our first credit agreement up for renewal is our US senior revolver and that’s not until 2013. We believe our access to committed long-term funds positions us well in the current economic times. Fiscal ’09 forecast. While maintaining our forecast for free cash flow for the year at positive $44 million with capital expenditures of about $95 million, as a result of our recent acquisitions, depreciation and amortization will be up slightly from our previous forecast to $73 million. For 2009, capital expenditures continue to run significantly ahead of depreciation and amortization. In 2007 and ’08, the 787 program was the key contributor to our increased investment in capital. In 2009, the 787 capital investment would slow down, but the initial test equipment for the A350 program will start to pick up. As we mentioned before, our capital investment cycle typical needs production by 12 to 24 months. We estimate interest expense for the year at $38 million. Finally, we are forecasting that our tax rate for the year will come in at 26.6%. The one-time gains we enjoyed in the first quarter counterbalance by lower earnings in our foreign subsidiaries in the later quarters where we enjoy lower tax rates. Now, let me pass it back to Bob to lead the Q&A discussion.

Mary, questions?

(Operator instructions) And our first question comes from the line of Cai von Rumohr with Cowen. Please go ahead. Cai von Rumohr – Cowen: Yes, thank you very much. Bob, obviously, things changed quite a lot. When we look at your revised estimates for plastics and for steel and for metal forming, it looks like they are implying that their sales rate in the next three quarters will be higher than the first quarter. Why are you making that assumption given the big fall-off we had in the first quarter?

They are pretty much a continuation of the shipment level in the first quarter and they are reflecting our order input. So we don’t think we’re pushing – at least at the moment, we don’t think we are pushing in our forecast for those categories.

The one other piece, Cai, that might have a bearing is that we think there’s a significant inventory reduction in the fourth quarter that – so if you kind of go back to a normalized production rate, we think that there might be a small step-up in some of those markets. But as Bob said, I think we’re remaining very conservative. Cai von Rumohr – Cowen: So your feeling is that part of the big drop sequentially in those markets was inventory reduction at your customers?

It was inventory reduction and so much of – since a lot of the business is done in Europe, the December-ending quarter is typically the weakest quarter of the year, even in robust circumstances, because so much of Europe takes August and part of September off. They don’t place orders, and deliveries are kind of weak. But it’s – as I say, I think what we’re projecting for those categories is pretty much the fourth quarter annualized. It’s not a big reach. Cai von Rumohr – Cowen: Okay. And then power gen, you’ve got 118 for the year. What do you – refresh my memory, what do the LTi – is that still going to add 46 million –?

No, actually that’s doing better. And so the 118 includes 64 million now for LTi. Cai von Rumohr – Cowen: Got it. Okay. So you – basically you don’t have the huge sequential ramp, you have this just enormous ramp in the third and the fourth quarter?

Yes, it will be – one month in June we’ll complete the transaction, the acquisition early in June. So we’ll basically have four months. Cai von Rumohr – Cowen: Got it, got it.

But that company is currently running at about that rate. It’s currently running at about 180 million per year, 60 million over four months. Cai von Rumohr – Cowen: Wow, okay. And if we turn to R&D, your R&D was down sequentially, but still up as a percent of sales. Where do you see it for the year? And is there any opportunity to kind of see any stretch-ups among your customers?

Well, for the year we’re still carrying the 110 for the year, which would suggest that the next three quarters are going to average a level higher than the first quarter. We have the impact of a couple of acquisitions, which will have some influence. But I think we’ll have to see how it goes. We’re starting to spend on the A350 in the aircraft business. There are projects in our industrial product line that could be candidate for a slowdown. But we have a little flexibility we think in the R&D spend for the rest of the year. Cai von Rumohr – Cowen: Okay. And you mentioned your tax rate. It looks like it averages a little over 29% for the rest of the year. Is it going to be basically straight line of that level?

Pretty much there are some small ups and downs, but about 30% average over the last three quarters, Cai. Cai von Rumohr – Cowen: Okay, terrific. Great. I’ll let someone else go. Thanks so much.

Okay, Cai.

Thank you. And then our next question comes from the line of JB Groh with D.A. Davidson. Please go ahead. JB Groh – D.A. Davidson: Hi, good morning, guys.

Hi, JB. JB Groh – D.A. Davidson: Hey. On the Medical Device, you probably don’t want to get into too much detail, but how should we be thinking about the profitability on, say, pumps versus sets? I mean, I would guess that the set business is pretty profitable relative to the pumps. Is that a safe way to look at it?

Yes, it’s more profitable. The sets are more profitable than the pumps. It does depend on what the – the profitability of the pumps depends on what the mix is. And both in IV and enteral pumps, some are more profitable than others depending on the particular customer and volume arrangements. But in general, profitability – it’s not quite as dramatic as the after-market OEM in the aerospace – in the aircraft business, but it’s – sets are more profitable. JB Groh – D.A. Davidson: But in looking at the two acquisitions you did similar sort of profile?

Well, if I understand your question, we are the – I think the AITECS acquisition, it’s a nicely profitable company. The market is in Europe. And actually some of the market is in Russia and countries that were formally part of the Soviet Union. And the company, as I say, is nicely profitable and it has kind of the same balance as the other pump companies we have. There is a disposable admin set portion of the product line. In the Ethox acquisition, the majority of those products are disposables. And so we think there is the potential for improved profitability there. JB Groh – D.A. Davidson: Just brings the whole group up a little bit?

I hope. JB Groh – D.A. Davidson: You hope? Okay. And Bob, maybe you could talk about your appetite for acquisitions and what you’re seeing in multiples, that kind of thing, just given the weakness in the overall public markets. Have you seen any softness in asking multiples in the deals that kind of come across your desk?

It’s a mix picture. I think in the aerospace and aircraft business I think you could say that some of the sellers are still carrying notions that may have been appropriate a year ago. On the other hand, some of the acquisitions that we have made and are looking at are in other markets and we’re dealing with owners, some of whom have more realistic expectations. The last acquisition, Ethox, was acquisition basically the company was owned by a private equity group and they had decided to cash out and their expectations were quite reasonable. So – I wouldn’t say that in any pervasive way that the entire collection of sellers across industry groups have gotten adjusted to current market conditions, not quite yet. JB Groh – D.A. Davidson: Okay, thanks for your time.

You bet.

Thank you. And our next question comes from the line of Eric Hugel with Stephens. Please go ahead. Eric Hugel – Stephens: Hey, good morning, guys.

Hey, Eric, good morning. Eric Hugel – Stephens: Hey, I was just looking back I guess at the prior guidance, specifically in the Industrial business, looking at the plastics. I guess the guidance before was about 72 million and now you drop it to about 48 million.

Yes. Eric Hugel – Stephens: And you talked about sort of the main driver, the order rates coming. Can you sort of walk us through other different levels of visibility in terms of the order rates as you go through sort of the major areas of the business? I mean, do you have three months, six months? What kind of visibility do you have in terms of lead times?

The kind of industrial products that are used in plastics, in metal forming, in heavy industry, these are not long lead time products. And so the visibility is more like 8 to 12 weeks. We do have what I would regard as strong customer relations, and one might hope that you could get your customers to tell you what they intended to do or what they thought they were going to do over the next three to six months. And I can tell you from experience that their projections are often not very accurate. So, for instance, three or four months ago, as you pointed out, we were rolling along thinking that the plastics business was going to be at a level, which on a constant currency basis would probably be the same or maybe a little bit stronger than ’08. And it’s not turning out that way at all. And it’s interesting talking to the people who were operate – our people who were operating in that market what they reported is that customers are still talking about placing orders, they are still talking about new projects, but it’s one of the phrases as it’s likely hit the pause button. Yes, we are still going to do all the things we’ve talked about, but not right now. And it does seem all around the world that the emphasis is in conservation of capital. If there is any way that companies can avoid committing, that’s what they are doing. Work industry levels down, don’t spend any money if you don’t have to, and it may be either worry about the availability of capital or there would be sticker shock if you go to the market, what the hell is the interest rate going to be now compared to what you had paid the last time. So it does appear that the situation with respect to the availability in cost of capital is having an impact. How long customers can delay? How long they will delay is anybody’s – that’s the question. Eric Hugel – Stephens: All right. With regards to the medical, the pump side of the business, you have various different product lines. You have McKinley, the Curlin that I guess get distributed over different – through different means. Have you seen different sort of sales patterns across the different product lines, or they really is sort of one doing okay, the other one just doing horribly or sort of is it more spread out?

The disposable pump sales have been relatively weak for a few months. The December quarter – the December-ending quarter was a real disappointment in the infusion pump business. As you may remember in that business, we rely on the B. Braun sales organization, B. Braun sales network. And the results of the quarter would suggest that that organization took about half the quarter off. On the other hand, as I mentioned, there is a show of strength in the first couple or three weeks of January. So at least at the moment, we are thinking that perhaps the order input and delivery pumps, the situation in the first quarter was kind of an anomalous situation. Eric Hugel – Stephens: Okay. Thanks a lot, guys. I’ll get back in the queue.

You bet.

Thank you. And our next question comes from the line of Ronald Epstein with Merrill Lynch. Please go ahead.

Hi, Ron. Ronald Epstein – Merrill Lynch: Hi, good morning, guys. How are you?

Good morning. Ronald Epstein – Merrill Lynch: Just another – I guess another question on the medical division.

Hey, Ron, are you still with Merrill Lynch? Ronald Epstein – Merrill Lynch: We are Bank of America Securities Merrill Lynch. That’s our title. That’s really –

So hanging on to that name? Ronald Epstein – Merrill Lynch: So – yes, that’s what – that’s what they tell us.

Okay. Ronald Epstein – Merrill Lynch: Medical. I mean, has that gone rougher than you thought it would? And if it has, why? I mean, what about that end market is really different than what you guys have dealt with before?

Yes, it has gone rougher than we thought it would. If you go all the way back to the beginning, our acquisition of the Curlin product line in ’06, the sales levels at that time in retrospect seemed to be influenced considerably by the Baxter recall that was occurring at that time. And in terms of unit volume of that product line, ’06 was the peak, ’07 eased down, and we’re still trying to figure out what the ongoing consumption level ought to be. Also the disposable pumps that was supposed to be the fastest growing product line – market area in disposable pumps, and that has it developed quite that fashion. On the other hand, the enteral feeding pumps, the ZEVEX acquisition up until this most recent quarter exceeded all expectations in terms of unit volume, sales volume, everything about it. One thing that is turning out as we expected is, as I mentioned earlier, this is kind of a razorblade business, and a lot of the economics depends on the administration sets. And that does seem to be holding through. And even in this very first quarter that we had, the administration set sales were up, and we are focusing our efforts in rationalizing our production on the production of administration sets. So, as I said in the prepared remarks, I think we learned that a broader product line – even in the pump business, more different types of pumps, a broader product line is better than the narrow product line and the real emphasis on disposables is a real positive. And other than that, one can say that evidence our results in the first quarter profitability is very much a function of sales volume, unit volume and overall revenue. So we need to continue to work the distribution channels to establish a sales level that’s profitable. I mean, clearly in the first quarter we had a 20 million – a business that’s prepared to do $25 million to $28 million in sales that generated $20 million in revenue, and that combination doesn’t work. Ronald Epstein – Merrill Lynch: Sure. If we switch gears maybe to commercial aerospace, 787, how is that development going for you guys? And then what’s your sense, broadly speaking, and how the program is going now?

Our development is – for all (inaudible) complete. So the hardware developed were long since through safety of flight, were through qualification testing with the exception of long-running endurance testing on a couple of items. So we are not part of the holdup. We are ready to deliver. We are in the – I guess I could say the awkward circumstance that we have put in place facilities to be delivering equipment at rates that Boeing was projecting a year or year-and-a-half ago. I mean, if you look at their current schedule compared to the schedule of a year ago, I mean it’s an unbelievable difference. And I think the vendor – the supplier community is certainly – were having to be patient waiting for Boeing to get their production up to the rate that we’ve been prepared for, for sometime. I mean, it’s a real disappointment. What I’m trying to say is this. It would have been – if Boeing was going to be 18 months late on their four-year launch to delivery schedule, it would have been a lot better for suppliers like ourselves if that reality had been recognized a long time ago before we committed ourselves to equipment and facilities to support a production rate, which has not materialized, it is now not going to materialize for a couple of years. Ronald Epstein – Merrill Lynch: Sure. Is this [ph] your sense broadly speaking of programs kind of going in the right direction there or –?

I think – you know, given enough time it will get squared away and they will get all the problems fixed. And in the long-term – ten years from now, everyone would have forgotten the difficulty of getting it started. But that certainly has done an awkward couple of years. Ronald Epstein – Merrill Lynch: Sure, sure. Thanks for the thoughts, Bob.

Thank you. We have a follow-up from the line of Eric Hugel with Stephens. Please go ahead. Eric Hugel – Stephens: Hey, Bob. On Boeing production, I guess I was looking at – I guess this quarter was down $6.6 million. You talked about the strike impacting that. I think everyone pretty much expected that. But if you go for the full year, you are down about $11.5 million for the year. Are you expecting – I mean, what are you sort of expecting in terms of rates, or second quarter going to continue to be impacted by sort of the residual of the strike? Or how should we think about that? When does the strike impact sort of roll off and sort of what kind of production rates are you going to be building to post that?

I think the production rates – we think they are going to return to normal so that over the next three quarters, it should be pretty even.

Yes. I think if you take the average of the last three quarters, it’s the same as the average of the four quarters in ’08 – just more or less.

It depends a little on how they order. And the reason we’re less than completely certain about the future is that in scheduling and what they have done in adjusting their schedule is rather than change the schedule and existing orders, existing releases. What they have done is that they have canceled orders and are establishing new orders. And maybe this approach works better in their MRP system or something. But it leaves us less than completely clear on what the production rates are going to be for the balance of the year. Eric Hugel – Stephens: All right, great. Thanks a lot, guys.

Thank you. And we have follow-up question from Cai von Rumohr with Cowen. Please go ahead. Cai von Rumohr – Cowen: Yes, thank you very much. Could you tell us what were the 787 R&D in the first quarter and aircraft R&D in the first quarter?

787 in the first quarter was $7.2 million. Cai von Rumohr – Cowen: Okay.

Aircraft R&D in total $15.3 million. Cai von Rumohr – Cowen: Okay. And where do those respective numbers – you know, what are you assuming for the year on those respective numbers?

For the year, we are still carrying the 787 and 18 million. It means it’s got to decelerate. And our total for the year, we’re forecasting about 57 million for aircraft. Cai von Rumohr – Cowen: Okay. Which would say that – so you have a pretty big – I mean, that would assume a pretty big build as we go here in terms of where we’re going to be on the non-aerospace R&D.

Yes, that’s quite right. Cai von Rumohr – Cowen: I mean, like, from 10 million to, I don’t know, 14 million, 15 million, so what is driving that build in the other R&D? And are there any thoughts or considerations to kind of pair [ph] that back?

It’s – what’s driving is some plans that we have in primarily the Industrial and Space and Defense parts of the business. And at the moment, we’re planning on the expenditures that I’ve just described. If you said, might it be possible between now and year-end to pair that back, the answer is yes, it would be possible. We have not decided to do that yet and maybe we won’t. I mean, I think what we’ve planned to do is what we want to do. And if we can do that and generate the $120 million, $2.80 a share, I think that would be a sensible plan. But if your question is, if things get tougher as the year goes out, do you have the flexibility to make some adjustments in your R&D spend, I think there is still time to do that. Cai von Rumohr – Cowen: Thank you. That was the question. And then, you pour up [ph] 6 million in stock in the quarter. What is your plan in terms of share repurchase kind of given this changed economic climate?

We’re sort of playing it by year. We haven’t committed ourselves to a regular buying plan. And we’re not sure that – we took advantage – the Board has authorized the share repurchase. We bought some shares mostly in November and we may come back into the market, but we do have a lot of acquisition opportunities we think. And so we’re a little bit ambivalent, I guess that’s the way I’d put it, as to just how much more money we want to invest in the share repurchase program. Cai von Rumohr – Cowen: Okay. And the last one, could you give us – you’ve kind of told us where you expect the year to be in terms of sales, EPS and cash flow. Could you give us some guidance in terms of how the next couple of quarters are going to roll out?

Our expectation is that the quarters will be – the pattern will be a little bit like last year. I think last year’s second quarter was in the neighborhood of $0.66, something like that. Then they went $0.70, $0.73, like that. And I think it will probably turn out that way. Cai von Rumohr – Cowen: Okay. And then (inaudible) you remain cash positive on a free cash flow basis in each of the next three quarters?

That’s our objective. That’s what we think. Cai von Rumohr – Cowen: Terrific. Thank you.

Thank you.

And we have no more questions in queue at this time.

Okay. I guess it’s lunchtime. Thank you all for coming and listening, and we’ll catch you next time.

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