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Moog Inc. F2Q09 (Qtr End 3/28/09) Earnings Call Transcript

April 24, 2009 | about: MOG.A

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Moog Inc. (MOG.A)

F2Q09 (Qtr End 3/28/09) Earnings Call

April 24, 2009 10:00 am ET

Executives

Ann Marie Luhr – Investor Relations

Robert T. Brady – Chairman, President & Chief Executive Officer

John R. Scannell – Vice President & Chief Financial Officer

Donald R. Fishback – Vice President – Finance

Analysts

Cai von Rumohr – Cowen & Co.

Tyler Hojo – Sidoti & Company

Michael Ciamoli – Boenning & Scattergood

J B Groh – D. A. Davidson & Co.

Eric Hugel – Stephens Inc.

Chip Rewey – Cramer Rosenthal McGlynn, LLC

Elizabeth Parrella – Merrill Lynch

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Moog second quarter fiscal year 2009 earnings call. Now 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 today's call is being recorded and your hosting speaker, Ann Luhr. Please go ahead.

Ann Marie Luhr

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 April 24, 2009, our most recent Form 8-K filed on April 24, 2009, 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?

Robert T. Brady

Thanks Ann. Good morning. Thank you all for joining us. This morning we will report on the second quarter of ’09 and we will describe in more detail the guidance that we provided two weeks ago on April 9. Many of you know it’s our practice at the end of each quarter to conduct a thorough review of major programs and product lines, in terms of technical performance, contract performance, and profitability. Having completed that exercise I’m happy to report that the quarter came in about where we expected and we’re able to confirm the guidance that we provided on April 9.

We've made a small change in our sales forecast for business jets to reflect some recent schedule changes and we've toned down medical sales somewhat, but there won’t be any noticeable effect on overall profitability. So, those of you who are adjusted to the numbers that we described two weeks ago you can relax now I’ll provide a little more detail on the situation, but there is no more bad news, there isn't another shoe to drop. Onto the quarter results, second quarter earnings came in at $23.7 million, $0.55 a share, right in the middle of the range that we were expecting and projecting two weeks ago.

Earnings per share were down 17% from a year ago. Sales for the quarter $453 million were down 3% from last year and the decline was all in exchange rates. On a constant currency basis, sales were actually flat. Cost of sales 70% instead of last year's 68%, as a result our gross profit was down 9% or about $14 million. R&D at $24.2 million was down 7%, SG&A $68.8 million down 6%. Interest at $9.4 million up ever so slightly. In other income, we had a gain mostly reflecting our minority ownership of LTiREEnergy. Tax rate 35.1%, a little bit higher than last year and the result net earnings $23.7 million, 5.2% of sales.

If you compare our net earnings this quarter with the $28.6 million we made in Q2 last year, the difference has all to do with the industrial sales that are $25.7 million lower resulting in a $7.4 million reduction in industrial operating profit and a $4.8 million reduction in net earnings were it not for the global industrial recession our earnings would have been about the same as last year. I will go to the segments. Aircraft Q2 ’09 total Aircraft sales $162 million, exactly the same as last year's second quarter. The outcome though was the result of a 9% increase in military sales, a 16% decline in commercial sales and the addition of $1.9 million in sales from our recent acquisition of Fernau Avionics Limited.

Military aircraft sales for the quarter $107 million, up $9 million from a year ago. There were some volume changes in OEM programs, F-18 sales up 16% to $9.4 million, V-22 up 20% to $8.9 million. On the other hand revenue on the F-35 was down $2.2 million from a year ago. The change in F-35 revenue has mostly to do with reduced activity in the development program on our part. We're winding down our development programs, our partners seem to be still pushing to complete theirs.

The big increase in military aircraft sales was in aftermarket, a part of that change was an increase in sales of Tactical Air Navigation equipment we call TACAN. This is a product line that came to us in 1998 in our acquisition on Raytheon's Montek division. We have always included TACAN sales in military aftermarket since what we acquired back then was an aftermarket product. Over the last 18 months, we have updated our design and we are now selling new TACAN systems on an OEM basis.

And with the acquisition of Fernau Avionics, we intend now to combine those TACAN sales with Fernau and make air navigation equipment a product line focus. Setting aside the TACAN sales, the military aftermarket came in this quarter at $35.8 million, up $7.3 million from a year ago. The major military aftermarket programs for us are the overhaul of the F-18 leading edge actuators, overhaul of flight controls for the C-5 and repair work on V-22 Swashplate actuators.

Commercial aircraft sales of $53 million were down $10 million from a year ago. We saw in this quarter some of the sales reductions we talked about in the conference call, a couple of weeks ago. Sales in the Boeing 7-Series production airplanes, $8.1 million were down over $5 million from last year, a reduction of 39%. We slowed down our production activity on the 87 (sic) [787] and our sales in the quarter were $2.3 million less than half of last year's revenue. Airbus sales were just under $6 million, on the other hand were up 24% from last year. The increase is partly the buildup on the A380 on which we sell some brake system components, but also Airbus places orders in a somewhat erratic fashion.

Business jet sales $13.1 million in the quarter were actually up 2% from last year, but we are anticipating declines in the near future and revenues to Gulfstream, Bombardier and Hawker Beechcraft. The other big change in our commercial aircraft revenues was a $3.6 million decline in the aftermarket. Aftermarket came in at $18.8 million, down 16%. Our revised aftermarket forecast of $77 million presumes that the next two quarters will maintain the second quarter level, in which case we finish the year down 14%. I mentioned a minute ago, our acquisition of Fernau Avionics, we completed the acquisition in early March. Fernau is a leading supplier of ground-based air navigation systems for military, naval and civil aviation.

These systems transmit signals that are used to calculate bearing and range information to aid pilot navigation. They're generally referred to as "Navigation Aids or Nav Aids" if you're in the business. In the one-month that we’ve owned Fernau sales were $1.9 million. For seven months of the year '09 we expect Fernau will generate $17 million plus in sales. The TACAN products that were part of our Montek acquisition are a perfect complement to the Fernau business. Sales of those products were $4.5 million in the quarter and our forecast for the year is $10.8 million. So, adding these sales to the Fernau forecast takes the Nav Aids product line to $28 million for the year.

So, Aircraft '09. Two weeks ago we revised our guidance for the year, we changed the military aircraft forecast from $420 million to $409 million, commercial forecast from $260 million to $225 million and those new numbers taken together were $17 million worth of revenue from Fernau add to a total of $651 million. The results in the second quarter line up pretty well with that forecast. On a year-to-date basis, F-18 is a little more than halfway to the $33 million we forecasted, V-22 is exactly halfway to the $38.4 million. F-35 at just under $56 million year-to-date is running ahead of our forecast for the year, which is now $101 million. But we expect that the workload will moderate over the next couple of quarters as the development program continues to wind down.

In military aircraft, the major change that we had made to our earlier forecast was in the aftermarket, we have reduced military aftermarket sales by $7 million. We had very strong sales in quarter two, in part because we had a substantial inventory of F-18 leading edge transmissions that had been returned by the Navy for overhaul. Our concern going forward is that the Navy will not be able to keep up with that rate of return and therefore some of the F-18 overhaul work we anticipate will slip into 2010.

In all our previous forecast of military aftermarket, we had included the $10.8 million for the TACAN Nav Aids, which we would now like to report together with the Fernau acquisition. So, after incorporating that change, military aftermarket forecast would be $123 million. Year-to-date military aftermarket sales not including TACAN totalled just under $63 million. So, we need two more $30 million quarters, and we expect to achieve our revised military aftermarket forecast. So, the entire military aircraft forecast is now at $398 million.

In commercial aircraft we made a big change two weeks ago. We reduced our sales to Boeing Commercial from $66 million to $47 million. We are forecasting the 7-Series production at $36 million and the 787 at about a $11 million. Our results through the first half are close to 50% of the new total. We’ve also reduced our production forecast for Airbus from $27 million to $23 million and we’re on track for that number as well. In business jets, we have reduced our forecast two weeks ago by only $4 million to $55 million. That change based on slightly reduced activity at Gulfstream and Hawker Beechcraft and in just the last two weeks we've had some schedule changes, which suggest that forecast is still $5 million too high. So, we'll change it to $50 million.

We reduced our commercial aircraft aftermarket forecast by only $3 million to $77 million, suggesting that the decline from last year instead of 10% would be more like 14%. The next two quarters maintain the level of the second quarter we will be okay with that forecast. In total then with the $5 million reduction in biz jets we would come in at $220 million for commercial aircraft for the year. At the $28 million forecast for Nav Aids, which I just mentioned, the Aircraft total for '09 would now be $646 million.

Aircraft margins, in the guidance we projected at the end of our first quarter we had forecasted Aircraft margins for the year at 9.3%, second quarter came in at 9%. So, we’re at 8.6% on a year-to-date basis, two more quarters at 9% would produce an average of 8.8% for the year. So, we would like to revise our projection to 8.8% and would then reflect our current performance.

Space and Defense, Q2. A very strong quarter, sales just over $68 million with margins of 14.4%. Comparison with the same quarter a year ago or even with the most recent quarter is overwhelmingly influenced by the impact of the Driver Vision Enhancer program at Quickset. You may remember that towards the end of calendar '07, we got a very large order for Driver Vision Enhancer systems going on the MRAP vehicles. And in the second quarter of '08 we delivered 5,000 systems generated $17.6 million in sales.

In the second quarter of '09 the quarter we’re talking about sales on this program were only $1.5 million. If we look at the businesses other than the Driver Vision Enhancer program, sales went from $52.5 million to almost $67 million. Of that $14 million increase, $5.3 million was the addition of CSA Engineering, acquisition we completed in the third quarter of '08. Other than CSA, our basic product line grew by $9 million or 17%, where did that occur, sales of controls and satellites, military and commercial $16.7 million were up 17%.

Sales on satellite launch vehicles, strategic and tactical missiles, and missile defense that total was $14.1 million, up 18% from a year ago. In Defense Controls, other than the Driver Vision Enhancer, sales went from $10 million to $16.9 million. In the U.S. we are putting more and more equipment on the Stryker Mobile Gun system. I mentioned last quarter a big new job in Europe for Krauss Maffei Wegmann on a platform called the FLW100. And we continue to provide gun turret equipment for the CV9035 and we're continuing the upgrade of the Tenix M113 system in Australia.

Our Homeland Security and Naval Systems product lines totalled just over $7 million in the quarter about the same as a year-ago. One product line that actually did encounter a serious slowdown was the NASA Constellation Program. Sales of $3.4 million were about half of what they were a year-ago. The last few months NASA without a new administrator has been moving very slowly on commitments for the design of the Orion Crew Vehicle. And as a result our sales activity and cost plus programs have slowed down, but we do expect that those decision will get made and the work will come later in the year. In total though, taking the Driver Vision Enhancer impact into account, sales for the quarter $68.3 million were down 3%.

Space and Defense in ’09, two weeks ago we moderated Space and Defense forecast from $281 million to $271 million in part in recognition to the slowdown in the Constellation Program, we think the $271 million forecast is solid, satellite business at $59 million for the year we are already at $32 million. The rest of the legacy business in launch vehicles, missiles, missile defense, forecasted also at $59 million and we think we’re all right with that number. Defense Controls is forecasted at $73 million, we need two more quarters of $13 million or $14 million and that seems likely even without an additional order for Driver Vision Enhancer.

We are expecting some acceleration in the work on the NASA programs should get us back to $5 million quarters instead of $3.4 million and we’re hopeful that that will happen. So, in total we are comfortable that the $271 million in Space and Defense is achievable. Margins, Space and Defense. Margins in the quarter of 14.4%, compare favorably with 13% a year ago and last year those numbers were helped by the big Driver Vision Enhancer order. Those of you who have followed our Space and Defense business over the years will recognize that these double-digit margins are kind of heady territory for this segment.

This is a business that's generally not characterized by long-running production programs. It often has an important cost plus component, which is the lower margin business, the fixed price part of the business is often quite risky, because we are often implementing genuinely cutting edge technology. With all that in mind, we are not counting on a continuation of 14% margins. We are projecting margins in the last half of the year it could get closer to 10%, which would bring us to an average for the year of 13.3%.

Industrial Systems, Q2, sales in the quarter a $105 million, down 20%. In the quarter, part of the decline was the currency effect in constant currencies the sales decline was 14%. Two weeks ago when we revised our guidance for '09, we reported continued weakness in four major Industrial product lines. At that time we knew our sales numbers for the first two quarters of course and we knew the trend in incoming orders and on that basis, we developed a revised forecast for Industrial Systems and reduced our sales projection for the year by $45 million.

This morning we'll describe in a little more detail what's going on in our Industrial business. I will begin with what historically has been our largest product line, controls for plastics making machinery. Sales in the quarter $8.2 million, down 59% from a year ago. Year-to-date sales are down 48%. As I mentioned in the call two weeks ago, our incoming order rate in the second quarter was down 77% from last year. Historically, over 60% of this business has been in Europe and business there is very slow. Our major European customers export their equipment all over the world and they're all on reduced work hours.

Our European companies that have closed manufacturing sites and some, which are dependent on automotive and white-goods industry are struggling financially. In Asia, the situation in this market is equally grim, our incoming orders were 20% of our shipments in the quarter and a 11% of last years order rate. In light of this situation, our sales forecast for plastics for the year is now $28 million, year-to-date we are already at $20 million. Situation in metal forming is similar many of our customers sell equipment into the auto and construction industries. Sales in the quarter $7.6 million down 45% from a year ago.

Year-to-date were down 36%, metal forming is primarily a European business and our second quarter order rate was down 60% from a year-ago. So, our forecast for metal forming for the year is now $25 million, year-to-date we are already at $16 million. Over the last three years, we have enjoyed very strong growth in gauge controls for steel mills, primarily as a result of development of the steel industry in China. We are told that in '09 China is expecting to produce 460 million tons of steel down from 500 million tons last year. Beyond that, it's expected that there will be a reduction of a 100 million tons of capacity mostly the elimination of inefficient mills. Our business there at the moment is mostly spares and overhauls.

In the quarter, our steel industry sales didn't look too bad $9.3 million, sales were down only 2%. However, incoming orders in the quarter were down 37% from a year ago. And on that basis we have reduced our forecast for the year to $31 million and we are already at $18 million. The last major market that appears to be in decline is the simulator business. Sales in the quarter of $14.3 million down 17% from a year ago however, last year was a year of remarkable growth.

Sales in ’08 in the simulator business were up 56% to $75 million. This year we now have a very clear picture of the requirements from our major customers and they include CAE, Flight Safety and Rockwell Collins and we are forecasting on that basis sales for the year of $58 million, which is down from ’08, but it’s 20% higher than ’07. Year-to-date sales are $33 million. There actually are some positives in the industrial market. Thankfully, power generation is holding up very well for us. Sales of $15.6 million in the quarter up 32%, year-to-date at $29.1 million were up 28% and we expect that sales in the next two quarters will be at about the same level and beyond that we expect to add $70 million in sales of LTi pitch control systems and Insensys blade condition monitoring systems.

So, with the addition of that $70 million, we are expecting power gen for the year to come in at a $129 million. Test equipment business is also holding up well, sales in the quarter $8.9 million up 16%. Year-to-date were at $16.8 million about even with last year, this is a business that's spread rather evenly between Europe and Asia only about 12% of it is in the U.S. and we have backlog and visibility, which supports a $35 million forecast.

In total, we're now forecasting sales for the Industrial segment for the year of $470 million, as I mentioned about $70 million of that will come as a result of the LTi and Insensys acquisitions. So, we are looking at sales of our legacy products for the last half at about $185 million down $30 million from what we achieved in the first half. We believe that this forecast takes into account the weakness I've described in some of our major markets.

Industrial Margins. Margins in the quarter at 10.4%, down from the excellent 14% we enjoyed a year-ago, when sales were 25% higher. We’re anticipating that reduced sales of our core business in the second half of the year will adversely affect margins. In June we’ll complete the acquisition of LTi, once we own LTi outright we’ll consolidate a 100% of the sales, but the margin impact of the LTi additional sales will be partly offset by purchase accounting adjustments. As a result, we are expecting that we’ll achieve margins for the year of 7.1% and that’s before the restructuring expense. We've mentioned restructuring of $15 million pre-tax, the majority of that will fall in the Industrial business over the next two quarters.

Components Group, Q2. Sales of $84.5 million almost exactly the same as last year's second quarter in real terms there was actually 4% growth, offset by changes in exchange rates. Our Components Group makes some sales in sterling and some in Canadian dollars. Within the same total though, there were some big swings, sales of aircraft, Space and Defense products were up 16% to $50.4 million. Marine product sales at a $11.1 million, were almost the same as last year. Sales of medical products were down 15% to $12.8 million and industrial at $10.2 million were down 29%. The pattern for aircraft products in the Components Group is similar to what we are experiencing in our aircraft control segment, military aircraft sales up 35% in the quarter to $25.9 million, the biggest increase in the Guardian program $6.2 million in the quarter. Guardian sales up 62% from a year ago.

We also had increases in a variety of military aircraft programs that are in the $1 million to $2 million range, they include a number of Raytheon programs, the Advanced Technology FLIR program, the Multi-Spectral Targeting System, the LAMPS program. In addition, sales were up on the Sniper Advanced Technology Pod at Lockheed Martin and on a number of products for the company FLIR, for use on the predator unmanned air vehicle. Most of these military programs, our principal products are slip rings, a product area in which we offer leading edge technology.

On the other hand our commercial aircraft products, primarily electromechanical components used in avionics instrumentation, declined in the quarter by 18% to a total of $6.1 million. The trend not unexpected many of our instrumentation products are on older aircraft that are phasing out of production. Sales of Space and Defense products in the Components Group up 10% to $18.4 million. In this quarter the growth was not in our bread and butter vehicle programs; the Abrams, Bradley, and Stryker. The growth was in a variety of components sold for use in space vehicles and in ground-based radar.

In the marine market, as you know, we provide products for Remote Operating Vehicles, which are undersea robots, and Floating Production Storage and Offloading vessels. These are primarily used in offshore oil exploration and production. As the price of oil went sky high last year, our sales increased dramatically, you know, oil prices are now back to more normal levels, but I’m pleased to report that our sales are holding level. At a $11.1 million sales were about the same as a year ago and up slightly from the most recent quarter.

On the other hand sales of medical equipment down 15% to $12.8 million. Our sales to Respironics in dollars were down 15% to $7.6 million. We are actually delivering higher unit quantities to Respironics, but of a product with a lower price. Sales in the CT scan market were down 5% to just under $4 million. Revenues in industrial products, $10.2 million down 29%. We’ve seen a 10% decline in sales of slip rings used in closed circuit TV, but much more of the decline is in equipment we refer to as industrial automation.

The full range of components used on all sorts of industrial equipment and here our experience seems to reflect the general malaise in the industrial equipment industry. For '09, the year '09, two weeks ago we changed our forecast for the Components Group to $330 million, a reduction of $13 million, mostly in industrial products. Results of the second quarter we seem to be on track to achieve that forecast. It’s possible we could see further weakening in the industrial market, just as likely that there will be somewhat stronger sales in military aircraft and in medical equipment.

Components margins. Margins in quarter two came in at 17.8%, up from 17.3% a year ago. First quarter margins were slightly higher. On a year-to-date basis we’re at 18.1%. We are currently projecting an average of 17.5% for the year and that seems a pretty safe bet for the Components Group.

Medical Devices, Q2. Results in our Medical Devices segments for the last quarter were a mixed picture. There were some real positives. Sales at $34 million up 50% from a year ago. Of the $11 million increase, $6.7 million was revenue on the recently acquired companies. Nevertheless, sales of the remaining $27.3 million in our base business were up 20% from a year-ago and a very strong recovery from the $20 million sales level of last quarter.

Sales of pumps $10.7 million up 30% from a year ago. Admin sets at $9.7 million up 24%. In terms of sales the only bad news was in sensors and hand pieces. Sales $3.3 million down 31%. I mentioned last quarter that our customers for hands pieces were rebalancing their inventory that product line seems to have recovered all right. On the other hand, you may remember that we sell ultrasonic sensors that detect air bubbles in infusion pumps so when the bubbles are present the pump shut down. We supply these sensors to many of our infusion pump competitors, some of whom are not delivering pumps at the moment and so they’re not buying sensors. So, the sensor business is down 58% from a year ago.

There is one other bright spot in the quarter the performance of the two recent acquisitions. They both met our expectations in terms of sales. AITECS had sales of $1.6 million, Ethox $5.1 million. The dark side of the picture in Medical Devices is the financial performance. With $34 million of sales in the quarter, our operating profit was slightly negative, $77,000 to be precise. Here is the situation. The acquisitions are in their early days and purchase accounting adjustments in the quarter are $1.1 million, not only offset their operating profit contribution, they actually drove them negative. So, in the quarter, around $6.7 million in sales from the acquisitions, the operating profit effect was actually a negative $423,000.

Nevertheless, on $27 million in sales of pumps, sets, sensors, and hand pieces, we should have expected to make something in the neighborhood of $3 million and we only made $346,000. The shortfall has two major components.

Last quarter, we described a software problem we encountered in the controls on our enteral feeding pumps. I characterized this as a very subtle problem. We believe its triggered very infrequently by different rates at which electronic components power up when the pump is turned on. The problem software was developed a long time before we acquired the ZEVEX product line. Nevertheless, it’s a problem we need to correct on units that have been delivered. Last quarter, we established a reserve of 800k to take care of that problem. There are 110,000 of these pumps in the field 77,000 are in Europe.

In developing our initial reserve estimate, we presume that the pumps in Europe would have their software upgraded and when they return to a service center once every two years for calibration, this is a normal practice. We presume that we could upgrade the software as part of the routine service. Turns out though that the European authorities have decided that the software update has to occur faster than that and so the pumps have to be recalled and updated independent of the normal service.

There are a lot of pumps. The result is an additional expense estimated at $1.2 million. So, we booked that additional reserve in the quarter and when we are done, we will have spent $2 million fixing the software problem. When we got into the Medical Devices business, we were counting on the fact that our company's ability to design and develop reliable products, an ability that we demonstrate on a regular basis in our aerospace and industrial business would avoid this kind of problem. But as I mentioned this issue, predates our association with ZEVEX, but it does remind us of what we do going into this business, technical problems on equipment in the field can turn out to be very expensive.

The rest of our cost problem has to do with price variance on purchased material and particularly admin sets. We have contracts with suppliers that also predate our acquisitions that provide the suppliers with the opportunity for price increases based on increased material cost. They have this opportunity to change prices every quarter and the effect has been a very substantial narrowing of our margins particularly on admin sets. A long-term solution of this problem is the development of our own production facility for admin sets. That facility is under construction and will be online hopefully in time for a substantial benefit in 2010.

So, Medical Devices for the year '09. In terms of sales, we want to change our forecast to $124.5 million. The forecast presumes a continuation of pump sales at about the level of Q2 some growth in admin sets and a recovery in the sales of sensors. We are currently forecasting AITECS at $4.9 million sales for the year and Ethox at $19.3 million. All that taken together was about $9 million of associated equipment gets us to $124.5 million. In terms of margins we are anticipating return to profitability, but its modest profitability. We're now projecting $3.3 million for the year or about 2.7%.

Clearly this is turning out to be a tough year in the Medical Devices segment we had weak sales in the first quarter, we are in midst of an extensive field update and our product cost picture has worsened. When we decided to enter this market, we chose to begin with acquisitions to accelerate our entry. This approach has not been without its problems, but we still believe that these problems can be solved and that this business still offers the potential we originally envisioned, it's going to take some more time and some more effort to achieve it, but we will get there.

In summary, we are now projecting for '09, sales of $1.841 billion, only $9 million less than what we talked about two weeks ago, the change in the forecast a reduction of $5 million in business jets and $4 million in Medical Devices. We believe we can achieve operating margins overall of 10.2%, which should produce operating profit of $188 million, which before restructuring would then produce net earnings of just over $94 million or about $2.20 a share. However, we still anticipate incurring $15 million pretax in restructuring expenses over the next couple of quarters that will reduce net earnings to $83.5 million or about $1.95 a share and we suggest that there is enough uncertainty in our projections that the market ought to be bracketing our forecast with plus or minus $0.20.

Looking at the segments in more detail, we’re projecting Aircraft at $646 million, margin of 8.8%, Space and Defense at $271 million, margins of 13.3%. Industrial at $470 million, operating margins of 7.1%, Components Group at $330 million, profits of 17.5%, and Medical Devices sales of $124.5 million, operating profits of 2.7%. All those projections support the forecast I have just described.

A moment on 2010, we are still not ready to provide a precise forecast for 2010, but I can reiterate some of the things we said a couple of weeks ago. In the Aircraft business, we’re anticipating that increased production of the V-22, increased aftermarket revenue will offset a decline in revenues in the Joint Strike Fighter development program as that program winds down and we start slowly into low rate initial production. Also, we are anticipating margin improvement in Aircraft as a result of reduced R&D and the fact that a smaller percentage of our sales will be on cost plus contracts.

In Space and Defense, we’re anticipating stability in the legacy products, controls for satellites, launch vehicles, missiles and missile defense. We’re expecting a build-up in the level of work on the NASA programs and we’re hopeful that defense controls will benefit from another Driver Vision Enhancer order as part of a program called “family of systems”. We’re hoping to maintain margins at the level that we expect to achieve in ’08.

We’re predicting that the Industrial business will continue at the level of the last half of fiscal ’09, but with improved margins as a result of the restructuring that has already begun and will continue over the next few months. The most important impact, and let me be clear about this, is that the LTi acquisition will be complete in June of ’09. Our current forecast anticipates that the combination of LTi and Insensys will add, at a minimum a $150 million of additional sales in 2010. So, we’re anticipating that wind energy sales in 2010 will be in the neighborhood of $220 million that would compare with $70 million in '09. If the rest of our Industrial business then maintains the level we anticipate over the next six months, and we add the $220 million in wind energy, we should wind up in 2010 close to $600 million in Industrial sales and with stronger margins than this year.

The Components Group has been a solid performer since we’ve owned them. We expect a very strong position we have in slip rings will generate sales increases in 2010 and we hope to be able to maintain the margin performance we’ve enjoyed in recent years. And last but not least, we are expecting sales growth in Medical Devices provided in part by the recent acquisitions, a substantial improvement in margins. Hopefully, we’ll have a year that doesn’t have a $2 million recall and does have the benefit of our own production facility for admin sets for at least part of the year. All-in-all, we are anticipating an improvement in 2010, independent of any recovery in the global industrial economy.

Before I turn you over to John, who will talk about a number of subjects, let me make a quick comment on the Defense Budget. In short, what the administration proposed would work well for us. We like to support for the F-35. The F-22 is not important for us. Removing the vehicle portion of Future Combat Systems eliminates a program that we had won, but continued dependence on the current inventory of military vehicles will be good for our aftermarket and upgrade businesses. We will be happy if Congress would just pass the administration proposal as is. John?

John R. Scannell

Thanks Bob. Good morning. I will follow with my usual format starting with a look at our cash flow for the quarter. I will then discuss our tax rate and some additional items of interest from the balance sheet. I will speak to our credit situation and in particular address our covenant headroom, the topic which is receiving much interest at the moment. A good news to report on goodwill impairments and we will finish with the cash flow forecast for the remainder of the fiscal year.

Q2 cash flow. Free cash flow this quarter was negative $4 million. Year-to-date we’re positive $8 million. Net debt increased by $137 million, the result of our five acquisitions in the quarter. Cash flow from operations was $18 million. Working capital, excluding cash increased $33 million over the quarter, driven by our recent acquisitions and the timing of receipts on various long-term contracts. Capital expenditures were $23 million while depreciation and amortization was $18 million. Interest payments totalled $9 million and our cash tax payments were $6 million.

Taxes. Our tax rate in the quarter was a relatively high 35.1%. You will remember that in the first quarter, we had the benefit of a couple of one-time effects. Our second quarter tax rate is a reflection of a more normal rate, coupled with our anticipation of moderating future earnings in lower tax jurisdictions for the remainder of the year. Some other items, our non-cash equity-based compensation expense in the quarter was $1 million. Contract reserves dropped by $1.8 million over the prior quarter as we completed work on various contracts. At the end of March our net debt-to-total capitalization stood at 42%.

Now let me talk to the credit situation. At the end of March, we had $384 million of unused capacity on our credit facilities and over $68 million in cash on hand. So, from a credit availability point of view, we are in good shape. The other question folks are asking is in relation to our covenants. The most important covenant at present is the maximum leverage ratio under our senior revolving facility. This covenant states that our net debt over an adjusted EBITDA must be less than 3.5 times. The adjusted EBITDA allows us to add back non-cash expenses and also includes the 12-month trailing pro forma EBITDA from acquisitions. At the end of March, we stood at just under 2.7 times and based on our revised guidance for fiscal '09, we anticipate remaining comfortably within this leverage covenant.

Goodwill impairment. This is a topic, which is getting a lot of attention in the present climate. In this quarter, we performed a review of our goodwill. This was triggered by the significant drop in our stock price over the last three to four months. The good news is that our review has concluded that we have no goodwill impairment issues to worry about. Finally, fiscal '09 forecast. Given the reduction in our earnings guidance, we are revising our free cash flow forecast for the year. Last quarter we projected $44 million of free cash flow for fiscal 2009. We now believe we will be break-even for the last two quarters, making us positive $8 million for the year. The difference from the previous forecast is driven by the reduction in our forecasted net income of $37 million, which includes anticipated restructuring costs of about $15 million.

As we look out to fiscal 2010, we believe our cash flow will improve as capital expenditures moderate and cash flow improvement initiatives start to bear fruit. We are keeping our forecast for capital expenditures for this year unchanged at $95 million. Depreciation and amortization will be higher at $77 million as a result of our recent acquisitions, while interest expense will be $38 million. Finally, we are inching up our forecasted tax rate to 27.2%, driven by lower forecasted earnings in our foreign subsidiaries.

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

Robert T. Brady

Kevin, I am ready for questions.

Question-and-Answer Session

Operator

Yes. (Operator Instructions). And first question is from the line of Cai von Rumohr of Cowen. Please go ahead.

Cai von Rumohr –Cowen & Co.

Yes. Thanks so much. Bob you had mentioned $15 million in restructuring, can you be a little bit more specific in terms of how that spreads among your businesses how much of that will be cash outlay and the expected savings you expect to enjoy in 2010?

Robert T. Brady

Yeah. Let me take the easy parts first. We expect that the $15 million will be almost all-cash it will primarily fall in our Industrial segment it mostly has to do with staffing adjustments in Europe and Asia. And our Industrial business in the U.S., which is heavily in the simulator business, which as I mentioned is down somewhat. We have been able to redeploy a number of people and move them to our Space and Defense operation, because we are very busy there. So, we don't expect that we are going to have a staffing adjustment in the U.S., but we do expect that it will occur in other places around the world, we have already made an announcement in Germany and there will be others to come. So, as to the timing, the arrangements for staff reductions in countries other than the U.S. have their own complexities. And as a result the timing is difficult to predict. So, I cant tell you that we expect that the $15 million will show up in the third and fourth quarter and it probably won’t be half-and-half, but we are unable to predict just how much will occur in the third quarter and how much in the fourth. With respect to the savings, the savings will be substantial. I am just inclined to quote a number, at the end of third quarter, we will as is our practice we will provide our guidance for next year in terms of sales and earnings and that guidance will take the benefit and at this stage of the game I just assume not describe a number for how much we’re going to save those kinds of numbers get divided by somebody's guess and turned into a number of people and that triggers rumor mills that are unnecessary and incorrect, and I just assume not go there, if you don’t mind.

Cai von Rumohr –Cowen & Co.

Can I ask you though, but I mean it sounds like most of the restructuring is basically going to be reduction in force?

Robert T. Brady

As I mentioned Cai I think I mentioned if you set aside the Industrial acquisitions that will occur this year. Our Industrial business, a business in which we are primarily a manufacturing company, and a business in which we employ a couple of thousand people or at least we did at the start of the year, that business is down over 25%. Now, as I mentioned in the call couple of weeks ago, we’ve had the opportunity we had maintained a staff of contract people that we were able to reduce rather easily and we’ve also in our European and Asian companies gone to reduced hours, but given the order rate of the last quarter, the second quarter and our projection for the rest of our year, we need to reshape that part of our company to deal with the level of activity that we’re now experiencing.

Cai von Rumohr –Cowen & Co.

Right. And John, you had mentioned the CapEx is flat this year, why haven't you paired that, what do you expect to pair it for next year and could you be a little more specific in terms of the cost initiatives, what are you doing to try to get inventory receivables in the better lines and what are your targets?

John R. Scannell

On the CapEx Cai, we’ve had a forecast of $95 million for the last I think three or four quarters, we haven't changed it. And the reason for that is its driven mostly by additions of buildings, that have long, that have been put in place 12, 18 months ago we about a year ago, year and a half ago with all of our facilities doing very, very well there were several building projects that were initiated and they are being closed out over the course of the next two quarters. It was also the ramp up in capacity in preparing for a stronger commercial book of business and most of that equipment is on 12 to 18 month lead times, so the stuff, the equipment that’s already on order is coming in. Now, we have slowed it all down over the last six to nine months, but that doesn't work its way through until the start of next year. So, next year we would see a moderating the buildings that are finishing out at this quarter and the next two quarters that won’t recur next year, so we would anticipate that both from a buildings perspective plus the capital build-up perspective, we see a steady significant reduction next year. I think next quarter we will probably come out with a more specific number so again, Bob I don't want to quote a specific number right now, but I think we would see a significant moderation next year. In terms of cash flow improvement projects I would say it’s across the board Cai, its in receivables, its inventories and payables. I would say though, we found it the particularly the working capital side to be more stubborn in terms of seeing the benefits short-term than we had hoped. And perhaps some corner on that, I think what first of all there has been significant short-term changes in the orders or the forecasted orders that we have seen from our customers. As Bob mentioned even in the last two weeks, we reduced our forecast for the biz jets by $5 million and that's based on revised production forecast levels from our customers. So, that has been changing fairly quickly, now you pass that through to the other side from us to our suppliers, our vendors. And typically they're smaller companies that we have, it's more difficult to just turnoff the incoming inventories, we are working to do that. We are also coming up a period of a year ago, where we were in a scarcity mode and there was a lot of orders placed to make sure that we had sufficient materials on hand to meet a ramp up in various programs, but also because of the fact that there was lead times we are going out. In hindsight, we over ordered at the time, we didn't think that. So, slowing that down particularly with our vendor base, which typically as smaller companies that can't turn it off as quickly as our customers tend to turn it off on those, as meant that we have continued to see working capital either increase or not come down as quickly as we had hoped. But as I say initiatives across the board working all of those issues to try and reduce that as we move forward.

Cai von Rumohr –Cowen & Co.

And where were your payables and customer advances at the end of the quarter?

John R. Scannell

Customer advances were down marginally I mean and payables were also down marginally in the quarter. The customer advances were down about a $1.5 million and I think payables were down $4 million or $5 million, but I can give you the specific numbers later.

Cai von Rumohr –Cowen & Co.

Can I ask a question I mean, why if, your DSOs are going up and people are paying you more slowly, are you paying down your receivables, why aren’t you doing the same thing with your suppliers that others are doing with you?

John R. Scannell

Well, we are trying to, by I would say on the receivable sides, a lot of it is timing there is, because of the long-term contracts that we have there are timing effects that you see and from one quarter to the next you will get a significant spike in one direction or the other and it's tough to draw a trend through one quarter. So, some of that and we’ve done a review of the receivables and the inventories, inventories of unbilled receivables tend to be in the same bucket. A lot of that is timing issues from one quarter to the next.

Robert T. Brady

I wouldn’t say Cai though that it's not practical for companies at our level to treat our suppliers the way we are treated by our customers. I will give you an example of what I mean, a few years ago when it was fashionable many of our customers insisted on reducing what they called reorder lead time to lead times last that are substantially less in terms of months than what the real lead time is if you take into account the lead time for material and then fabrication and assembly and test, which puts us in the circumstance where we have to forecast requirement so that we have the material on hand and are able to support their schedules. And as John mentioned many of our suppliers are relatively smaller companies and you can't jerk them around the way we are jerked around by some of our customers, your favorite companies.

Cai von Rumohr –Cowen & Co.

Okay. Thank you very much guys.

Operator

Your next question is from the line of Tyler Hojo. Please go ahead sir.

Tyler Hojo – Sidoti & Company

Hey good morning everybody. Just on the debt balance I appreciate the kind of prepared remark discussion, but could you maybe just talk about your comfort level with the 42% debt level debt-to-net cap. And, if you’re kind of looking for additional acquisitions here or the focus is going to be more on de-leveraging?

John R. Scannell

Well acquisitions, the timing of acquisitions is not very predictable, I mean many of the acquisitions that we’ve completed over the years have had gestation periods of a year or two years, and the fact that we’ve acquired so many companies in the last few months does not mean that that acquisition rate is typical or going to be maintained, more particularly I can tell you that we don't have that many acquisitions that appear to be likely to complete in the near future. There are still acquisition possibilities, but there aren’t that many that are close to completion. So, I don’t think there is going to be that demand, with respect to the debt level generally the acquisitions that that we make are in effect bankable, I mean the EBITDA contribution that they provide will support the additional debt that's required to complete. So, although debt-to-cap may move up a little bit, in terms of debt-to-EBITDA the ratio generally doesn't change as a result of the acquisitions. 42% debt-to-cap, we are not particularly uncomfortable with that, we’ve lived in the past with debt levels at that level or slightly higher.

Tyler Hojo – Sidoti & Company

Okay, that's helpful. And just a classification here, you mentioned $1.2 million in reserves in the medical segment, was that incremental to the $800,000 in Q1?

John R. Scannell

Yeah, I have tried to make that clear when I said that. So, when we are done this little escapade is going to cost us $2 million to make a small upgrade in the software that's part of the control for a 110,000 enteral pumps that are in the field.

Tyler Hojo – Sidoti & Company

Okay, perfect. And then just lastly, if you could maybe, if there are any, if you could point out any potential opportunities coming out of the stimulus?

John R. Scannell

I’m hopeful that a year from now we’ll be able to look back and recognize where the stimulus packages actually stimulated, perhaps the stimulus package will provide continued support for the development of wind turbine farms, but other than that and the potential support for some items in the defense budget, I am unable to identify particular facets of the stimulus package that are going to have much influence on our company it seems to be a lot of the stimulus money is going to be devoted to keeping in place an employed government employees who are already in place and building roads and bridges and we aren’t in the roads and bridges business.

Tyler Hojo – Sidoti & Company

Thank you very much.

John R. Scannell

Thank you.

Operator

Your next question is from the line of Michael Ciamoli, Boenning. Please go ahead.

Michael Ciamoli – Boenning & Scattergood

Hey guys. Thanks for taking the call. I guess, do you have, can you disclose it looks like your backlog was up and it always seems to be a sequentially or a seasonally stronger quarter. Can you give us the backlog breakdown by segment?

Donald R. Fishback

We can’t we typically will disclose it in the 10-Q.

Robert T. Brady

Okay, yeah. Before, this is Don Fishback. Before Don doe that though, let me make a quick speech that I generally make. Our backlog particularly because of the aerospace business, aerospace and defense business is often influenced by the receipt or not of orders that are relatively large and come in chunks. As a result I’ve cautioned people against trying to draw conclusions from the movement of our backlog. We go to a lot of trouble to try to forecast sales, and we've provided for you a rather detailed sales forecast. And I would certainly discourage anybody from trying to divine from our backlog movement that something else is going on other than what we forecast, so it's just really hard to do.

Michael Ciamoli – Boenning & Scattergood

That's fair. I was actually I mean it looks like the bookings were pretty strong and I mean considering in this environment, I would have thought the book-to-bill would have maybe dipped below one. So, I didn't know if there were any, particular orders you could point to where you're seeing real signs, you did say the Space and Defense was a sign of strength, maybe if you could elaborate a little bit on that?

Robert T. Brady

Yeah. Don. What.

Donald R. Fishback

Why don't I read them out real quick?

Michael Ciamoli – Boenning & Scattergood

Sure.

Donald R. Fishback

So, in aircraft it's $405 million backlog at the end of March. Space and Defense is a $164 million. Industrial Controls is $134 million and that's where you're going to see the biggest drop, which shouldn't be a surprise. Components Group was a $194 million, and Medical Devices is $16 million.

Michael Ciamoli – Boenning & Scattergood

Okay.

Donald R. Fishback

The patterns are pretty much descriptive of what the tone of call is.

Michael Ciamoli – Boenning & Scattergood

Okay. That’s helpful. And then just shifting gears, I know you talked a little bit about NASA about the Constellation Program. How do you think the, I guess the decision to hold off the shuttle retirement I mean, they have talked about less funding for Constellation and I mean it, you're obviously seeing the reduced funding now, do you have any input on how that impacts the program longer term here?

Robert T. Brady

Well I hope that it won't, we design here at Moog hardware that’s out on the existing shuttle system, the orbiter and the solid rocket boosters in the mid to late 70s. And we were certain that that hardware would be flying right into the middle 80s. Nobody at the time that equipment was designed envisioned that it would be flying in 30 years and it scares the hell lot of me, every time they launch a 30-year old shuttle system. So, we are hopeful that that, this extending the shuttle program doesn't develop a lot of attraction and the replacement, the Constellation system gets accelerated. There is this problem that you got an army of folks supporting the shuttle at the moment and if there is going to be a three or four year break, what the hell are those folks going to do waiting around for the Aries and Orion to get deployed. So, there is that problem, but we are hopeful that the shuttle launches won't be extended and that the Constellation won't be delayed. I think the delay at the moment really does come relate to the fact that there is not, there has not been a shuttle administrator in place, you may think well why would the shuttle administrator have much influence over the design of the space capsule. I think going back in history folks at NASA will tell you that Mike Griffin had a lot of influence over the design of the space capsule and I think that NASA is waiting for the new appointee, they have an opportunity to take a look at what they are doing and get comfortable with this before they continue. So, I think that's what going on and hopefully once all of that gets sorted out. We’ll go back to the hurry-up program that we're working on a year ago.

Michael Ciamoli – Boenning & Scattergood

Okay, that's helpful. And then last question I had just with obviously the auto industry is a mess. I would imagine GM's plan to sort of furlough some other factories for nine-weeks this summer. That already included in your guidance does that change anything on your Industrial outlook or potentially create more weakness that had been on for scene?

Robert T. Brady

I hope that we’ve already seen that.

Michael Ciamoli – Boenning & Scattergood

Okay.

Robert T. Brady

As I try to suggest I think the dramatic drop in incoming order rate for big, for controls that go in big equipment that we experienced in the second quarter is reflective of the fact that most auto companies have just stopped buying anything. And so I am hopeful that what happens with GM and Chrysler over the next few months really isn't going to have much more detrimental impact than we are already experiencing, because we are basically I think projecting of future that anticipates that the auto companies aren’t going to buying any equipment.

Michael Ciamoli – Boenning & Scattergood

Right. Okay. Fair enough. Well thank you for the color.

Robert T. Brady

You bet.

Operator

Your next question is from the line of J B Groh of D. A. Davidson. Please go ahead.

J B Groh – D. A. Davidson & Co.

Good morning guys.

Robert T. Brady

Hey J.B.

John R. Scannell

Good morning.

J B Groh – D. A. Davidson & Co.

I had a question on the Industrial Systems margin guidance that you gave that’s pretty restructuring correct of the 15 million?

Robert T. Brady

Yeah.

J B Groh – D. A. Davidson & Co.

Okay. So, if my math is correct, given what you did kind of in the first half that looks like you got to be at around 4.5% for last half of the year?

Robert T. Brady

Yeah. And we are kind of guessing at that.

J B Groh – D. A. Davidson & Co.

Okay.

Robert T. Brady

But, we think that that's a conservative estimate, it could be better than that.

J B Groh – D. A. Davidson & Co.

Okay, okay. And then again we’re not certain on as to how that breaks up between the two quarters?

Robert T. Brady

No.

J B Groh – D. A. Davidson & Co.

How about on the Driver Vision Enhancement, any opportunities for that MRAP-ATV vehicle that's going to be bid here shortly?

Robert T. Brady

No, there is a huge opportunity I think and it’s a program called the "family of systems" and it's a potential big buy for Driver Vision Enhancer systems that will go on a wide variety of vehicles. And it supposed to big numbers and it’s still a competition DRS and BAE and other companies are involved and hasn’t completed yet. And it’s not clear that it’s going to selection at the prime level will be made in this fiscal year. It’s possible, but we’re hopeful that we’ll see business in that program in 2010.

J B Groh – D. A. Davidson & Co.

Okay. And then one of the things I noticed, corporate expense was down a little bit versus the first quarter, is that just a reflection of business levels and some cost controls there, which we look at as a new kind of run rate?

Robert T. Brady

Well.

J B Groh – D. A. Davidson & Co.

You did down about $1 million from first quarter to second quarter?

Donald R. Fishback

Well that’s the equity-based compensation.

J B Groh – D. A. Davidson & Co.

Okay, okay.

John R. Scannell

In our first quarter.

Robert T. Brady

Yeah. We like everybody else, thanks to the decision some years back to expense options, we like everybody else are booking expenses for options that are currently under water.

J B Groh – D. A. Davidson & Co.

Fun. Okay, thank you.

Robert T. Brady

But these are pretend expenses that of course will never be unbooked.

J B Groh – D. A. Davidson & Co.

Thanks for your time.

Operator

Your next question is from the line of Eric Hugel, Stephens Inc. Please go ahead.