FY 2008

Introduction

Good morning. Thanks for joining us. This morning, we’ll report the results for the fourth quarter of fiscal ’08, we’ll review the ’08 year-end results, and we’ll describe for you what we think is likely to happen in our fiscal ’09. 

Before we get into the normal report, though, I’d like to do a quick review of our credit situation. You may remember that in March we increased the size of our revolver by $150 million to $750 million and in June we sold $200 million worth of high-yield debt at 7¼%. As we finished fiscal year ’08, we had drawn down only $265 million on our revolver, so we have $485 million available. We also had $87 million in cash. The revolver is provided by a syndicate of banks. The major participants are rock solid – they’re HSBC, M&T Bank, Bank of America and J.P. Morgan. In addition, our fourth quarter cash flow was positive and John Scannell will describe those results, in more detail, in a few minutes. Now, back to fiscal ’08.

FY '08 Total Year

Fiscal ’08 was another great year for our Company. Sales of $1.9 billion were up 22%. Net earnings of $119.1 million and earnings per share at $2.75 were both up 18%. We achieved these results while continuing to make substantial investments in R&D, particularly in the Aircraft business. R&D for the year was just under $110 million, or 5.8% of sales. Historically, our R&D expenditures have run closer to 4% of sales. For the year, Aircraft R&D was just over $67 million and we spent almost half of that on the 787. Our SG&A expense, $295 million, was up 17% compared to our 22% sales increase. Interest was up $8 million to just under $38 million, driven by our acquisition activity over the year. All-in-all these cost increases were overwhelmed by an $80 million increase in gross profit, of which $18.1 million came to the bottom line.

Q4 Results

In terms of earnings, the fourth quarter came out right where we had predicted, although we achieved the result in a somewhat different fashion than we had expected. Sales were stronger than forecast, margins a little lower, and we got some help from a low tax rate. Sales for the quarter were $491 million, up 19%. Net earnings of $31.7 million generated earnings per share of $.73, an 18% increase over last year.

FY '09 Guidance

I presume that most of you have seen this morning’s press release in which we revised our guidance for fiscal ’09. Ninety days ago, we projected ’09 sales in a range around $2.1 billion and we predicted net earnings in a range between $134 million and $140 million, and earnings per share between $3.08 and $3.20. Since our last call, we’ve done a new forecast and we now have a somewhat different view as to what the next 11 months are going to be like. I’ll describe our forecast in more detail as I go through the segments, but in total we’re now projecting sales at just over $2 billion plus or minus about $20 million, and earnings per share in a tighter range around $3.08. We’re forecasting a range of $3.03 to $3.13. The midpoint, $3.08, would be a 12% increase over ’08. I recognize that some of you have a more pessimistic outlook based on general economic conditions. I’d ask you to stick with me as I move through our segments. I think you’ll find that the majority of our ‘09 sales will be unaffected by the “recession.”

Now to the segments.

Aircraft Q4 '08

Total Aircraft sales of $176.3 million were up 10%. All of the increase was on the military side. Revenue on the F-35 development program of $22 million was up over $4 million. The increase was evenly split between work done in our Company and that done by our program partners.

Revenue on the V-22 was over $11 million in the quarter, an increase of almost $5 million from the production rate of a year ago.

Military aftermarket had a very strong quarter at $39 million. Sales were almost $6 million higher than the same quarter last year. Part of the increase was the shipment of $2 million worth of test equipment. The rest was increased overhaul activity on the F-18, the C-5A, and the V-22, and strong parts sales to the depots. In total, military aircraft sales for the quarter were $105.3 million, up 20% from a year ago.

On the commercial side, the only category showing much of an increase in the quarter was our Business Jet product line, mostly having to do with increased production on the Hawker 4000 and the Challenger 300. Sales to Boeing Commercial were down to a total of $19.8 million, and our aftermarket sales of $22.3 million were down 14% from the same quarter a year ago. The fourth quarter of last year, though, had strong sales of initial provisioning spares for Business Jets, which didn’t repeat this year. Aftermarket sales associated with commercial transports were down about 11% from a year ago. Total commercial aircraft sales were $71 million for the quarter.

Aircraft '08 Total Year

Aircraft sales for the year were $673 million, an increase of $86 million or 15% from fiscal ’07. As in the most recent quarter, the majority of the increase was on the military side. The F-35 development program generated sales of just under $102 million for the year, up almost $37 million. V-22 revenues were up $12 million to a total of $37 million, and our aftermarket revenue, dominated by overhaul activity on the F-18, the C-5A, the F-15 and the F-16, totaled $129 million, an increase of almost $20 million.

On the commercial side, sales of $271 million were up 4% from last year. The increase was all in the Business Jet category driven by increased production on the Hawker 4000, the Challenger 300, and the start-up of a job that we’ve been calling an unannounced platform. At a recent NBAA show, Gulfstream announced the platform and it’s the G250. We’ve been working on this platform for over a year. We’re supplying the flight control computer, flight control actuators and the high lift system. We’ve generated revenue on that program of just over $14 million in ’08.

The commercial aftermarket for the whole year came in at just over $89 million, a 6% decline from the year previous. We should point out, though, that that change reflects fluctuation in aftermarket on Business Jets. The commercial transport aftermarket for all of ’08 was actually up from the ’07 level.

Aircraft Forecast FY '09

Ninety days ago, we had forecasted the low end of ’09 Aircraft sales at $690 million. We now think that they are likely to be lower, but only by about $10 million.

Looking at our military book of business, there are only small changes in production rates on F-18, F-15, F-16, the V-22, and the Blackhawk. These programs form the production base for our military Aircraft sales. Our F-35 development program in fiscal ’08 came in at $102 million. There’s still a lot of work left on this program, particularly on the carrier version, and we are forecasting F-35 revenues of $96 million, about $6 million lower. On the other hand, our military aftermarket revenues are strong. We have a lot of work already under contract. It’s on platforms like the F-18, the C-5A, the V-22, the F-15, and F-16. We’re anticipating an increase in aftermarket revenues from $129 million to $141 million. In total, military Aircraft sales should actually be up by about $5 million to $407 million.

On the commercial side, we’re now forecasting ’09 sales of $273 million, up only slightly from ’08. This forecast is lower than what we described 90 days ago and the difference all has to do with the strike at Boeing. We believe that the strike will likely result in a delay of about six weeks on both the production programs and on the 787. The impact in ’09 will be about $10 million. So in total, our revenues to Boeing Commercial will actually be down from $76 million in ’08 to $72 million in ’09. On the other hand, our revenues to Airbus will increase from $20 to $27 million, partly the result of increased shipments on brake system manifolds for the A380. Our Business Jet product line is projected to be up $2.5 million from ’08. We’re projecting steady revenues for Gulfstream. Gulfstream represents about 1/3 of our Business Jet sales. On the Challenger 300, we’re looking for a slight increase to about $18 million. Bombardier insists that work on the Challenger 300 is solid. They’ve seen very little customer shuffling of either orders or deliveries. They’ve actually talked about increasing the production rate. Most of the rest of our business is with Hawker Beechcraft – the biggest portion on the Hawker 4000. Once again, we have the orders in place. Hawker insists that they have the backlog and that on this aircraft, there’s been very little in the way of customer schedule changes. They have, we think, seen some weakness on the Premier and we’re showing a decline in sales on the Premier. You put all that together with some other miscellaneous sales in the Business Jet product line and the total is $65 million, up slightly from the $63 million of fiscal ’08.

The other big question in the commercial aircraft business is the aftermarket. We’re now forecasting the ’09 aftermarket at $80 million, down 10% from fiscal ’08 and, incidentally, down 10% from the run rate of the fourth quarter of ‘08, which came in at $22.3 million. We know that the airlines have taken some aircraft out of service, but we, like everybody else, insist that the airplanes they removed have very little of our content. We’re also aware of the expected decline in passenger seat miles, which may be reflected in aftermarket activity, and so we’ve forecasted sales lower than the current run rate. So when we put it altogether, commercial sales are forecasted at $273 million and total Aircraft at $680 million, up only $7 million from ’08.

Aircraft Margins

A few weeks ago, a fund manager, who’d been studying our financials, asked why we don’t talk about Aircraft operating margins pre-R&D because if we did, it would be clear that the decline in Aircraft margins in the last couple of years has mostly to do with the very high level of R&D. Aircraft operating income before R&D expense as a percent of sales for the year ’08 and in the fourth quarter, for that matter, ran about 18%, which is reasonably consistent with historical levels. However, given the level of R&D during ’08, the operating margins came in at 8.2% for the year. In the fourth quarter, margins came in at 7.6%. We took some additional reserves on the F-35 leading edge flap actuation, a fixed-price development contract, and on the Boeing production work. For ’09, we are expecting that our Aircraft R&D expenditures will be down somewhat and therefore our margins for the year will come in at about 8.4%.

Space and Defense Q4 '08

Space and Defense had another very good quarter. Sales of $62.4 million were up 35%. In a quick summary, the growth is driven by the Constellation program and our two recent acquisitions. We have a number of cost plus development contracts on the Constellation program, most of which relate to the Ares Crew Launch Vehicle. Sales on Constellation in the quarter were $6.5 million, up from $1.6 million from a year ago.

Our recent acquisition of CSA Engineering, a company specializing in vibration suppression and shock isolation, provided $3.6 million in revenue in the quarter. In addition to generating sales, our new colleagues at CSA demonstrated their ability to provide crucial solutions to valued customers. A few weeks ago, the NASA staff responsible for the Ares Launch Vehicle visited East Aurora. They presented an analysis that described a very serious vibration problem on the vehicle, and in short order, the technical staff from CSA outlined the solutions. A few days later, NASA announced that this very serious problem had been solved and the development program could go forward.

Our other major acquisition, QuickSet International, produces revenues that show up in two categories. During the quarter, QuickSet received additional orders for pan and tilt mechanisms used on the Driver Vision Enhancer System and during the quarter delivered $4.7 million worth of that product. We categorize that as Defense Controls and that program provided the growth in that category. In addition to that, QuickSet delivered $3.1 million of product which we categorize as Homeland Security.

Our legacy business in satellites, launch vehicles, and strategic and tactical missiles provided the solid revenue base at just under $30 million in the quarter

Space and Defense FY '08

The pattern for the year ’08 in Space and Defense was very much like the fourth quarter. Sales were up a remarkable 37% to $253 million. The legacy business was fairly stable generating over 40% of that total. The Constellation programs provided $22 million in sales growth. In the Defense Controls business, almost $33 million in revenue on the Driver Vision Enhancer System drove Defense Controls sales to just under $82 million, an increase of $20 million over last year. The CSA acquisition, which came late in the year, produced $6 million in sales. So, like the fourth quarter, a solid base of legacy business, growth in the Constellation programs, and the new acquisitions made for a stellar year

Space and Defense Forecast FY '09

I don’t think that you would expect our Space and Defense sales to be influenced much by the onset of a recession, and our latest forecast reflects that. We’re currently forecasting for ’09 $276 million, an increase of $22 million or 9% over what we just achieved in ’08. Once again, the legacy products in satellites, launch vehicles, strategic and tactical missiles, provide a solid base of about $120 million in sales, up $13 million from 2008. Here the increase is in controls, already on order, for commercial satellites and in increased production of fin controls for the Hellfire missile to replenish the inventory used up in the Mideast.

The Constellation program at $24 million will continue at the same level as 2008.

Our Defense Controls product line will actually decline $13 million to $69 million. This all has to do with the Driver Vision Enhancer program at QuickSet. In ’08, we ultimately delivered $33 million worth of pan-and-tilt mechanisms for the Driver Vision Enhancer program. We knew that that program would be smaller in ’09 and that that would be our sales challenge. We have received additional orders so that Driver Vision Enhancer in ’09 should be about $18 million, hence the decline in Defense Controls. On the other hand, we’re looking for an $8 million increase in the Homeland Security market to a total of almost $26 million. 

Our naval applications will increase from $7 million to $12 million and that’s mostly work on the Virginia class submarine. And, our recent acquisition of CSA will generate sales of $20 million in ’09 because we’ll own the company for the entire year instead of only one quarter. That will be an increase of $14 million. When you put all that together, the forecast adds to $276 million, a $22 million increase. As I said a minute ago, I don’t think we have to worry about either the recession or the election with respect to the ’09 revenues in Space and Defense.

Space and Defense Margins

Margins in the quarter of 9.6% were heavily influenced by the relatively large component of cost plus work. Nevertheless, margins for the year of 11.6% compares well with last year’s 13.1% since last year was helped substantially by the wrap-up of some long-running Space Shuttle contracts. The 11.6% for ’08 compares very nicely to the long-term history in Space and Defense. For ’09, we’re projecting only a slight moderation to 11.2%.

Industrial Systems Q4 '08

The recession that everyone is now talking about had not found our Industrial business by the fourth quarter. Total sales of $136.3 million for the quarter were up 23%. In the quarter, we were still getting a boost from foreign exchange, but even without that, sales were up 17%. Revenue was up in every major product category, but was particularly strong in motion simulators, in metal-forming and steel-making equipment.

During the quarter, our revenue in the simulation market increased 62% to $21.5 million driven by very strong sales to CAE in Canada, Flight Safety in the US, and a number of smaller customers spread around continental Europe.

Sales of equipment on metal forming machines and presses were up 30% in the quarter to over $12 million. The strength in this business is predominately in central Europe where a number of press manufacturers have selected our controls.

Steel mill equipment sales were up 29% in the quarter to over $13 million. As we’ve said in previous quarters, this is a combination of demand for controls on new and refurbished steel mills in China, and on upgraded mills in Europe, many of which are meeting the demand for higher grade steel generated by the Chinese auto industry.

Industrial Systems FY '08

These same three markets – motion simulators, metal-forming presses, and steel-mill equipment also led the charge for the entire fiscal year with growth percentages ranging from 33% to 56%. In addition to the markets I’ve just mentioned, we experienced 10% growth in plastics to a total of $77.5 million and 16% growth in power generation to just under $50 million. For the year, our entire Industrial Systems product line generated sales of $532 million, an increase of 22% from the year previous.

Industrial Systems Forecast FY '09

Ninety days ago, we were forecasting Industrial Systems sales for ’09 in a range centered around $653 million, which would have been a 23% sales increase over what we’ve just reported for ’08. During the quarter, we have redone that forecast. We’re now projecting a midpoint in sales of $575 million, still an 8% increase over ’08. Our new forecast does include $11 million in revenue from the acquisition of Berkeley Process Controls Inc. So on a comparable basis, we’ve reduced our sales forecast by almost $90 million. Half of the change is in different exchange rates. Our new forecast is based on a Euro at $1.35. Ninety days ago, we were forecasting based on $1.52.

One might ask, if we’re heading into a recession, why are we forecasting any kind of a sales increase? The answer all has to do with the acquisition of LTi REEnergy in the power generation market. We’re forecasting power generation at $102 million in ’09, up from $50 million in ’08, and $46 million of that change is revenue we expect to consolidate when we complete the acquisition of the remaining 60% of LTi REEnergy. That will occur in June of ’09. Excluding LTi, our legacy power generation business for the year is forecast at $56 million. Forty million dollars of that will come from Asia, both Japan and China, and it’s driven by the infrastructure development in China. We know there’s talk of slower growth in China, but we don’t believe it will influence infrastructure development in the near term.

We’re forecasting that our ’09 revenues, in metal forming at $52 million, and in the test equipment business at $38 million, will be comparable to ’08. Once again, this is a reflection of increased activity, but at lower exchange rates. In plastics controls, we are likely to be affected. Our products are used on machines which produce bottles that contain all sorts of liquids and the packaging industry is likely to be affected. We control machines that are used in automobile production of injection-molded dashboards and blow-molded fuel tanks. Our products go into machines that pound out compact disc and DVDs. Ultimately, a recession in the US and in Europe will slow down sales of that sort of equipment and demands for our product. The decline that we’ve predicted for plastic controls for fiscal ’09 is about 7%.

In the motion simulator business, in steel equipment, and most of our other product lines, we’re anticipating a dollar sales decline in the 4 to 10% range

So, based on the kind of thinking I’ve just described, we’re now forecasting Industrial sales in the range of $575 million plus or minus $20 million. As I said, the midpoint would represent an 8% increase over what we’ve just reported in fiscal ’08

Industrial Margins

Margins for the quarter of 12.3% were about the same as the fourth quarter of last year. The Industrial Systems Segment finished the year at 13.8%, up somewhat from last year’s 13.2%. We had been predicting margins of a little over 14%, so we came in a little light for the year. For fiscal ’09, we’ll project a continuation of what we achieved in fiscal ’08 or 13.8%.

Components Group Q4 '08

Once again the Components Group had an excellent quarter. Sales of almost $90 million were up 23% from a year ago. The biggest increase in both dollar volume and percentages was in the marine business where sales were up 72% to $13.8 million. The increase is in sales of slip rings and fiber optic rotary joints for use on undersea robots, which the industry calls ROVs or Remote Operating Vehicles. The $5.8 million sales increase does include $1.7 million of revenue generated by the Prizm acquisition. Prizm, as you may recall, is a company that makes multiplexers used in the marine market.

Marine wasn’t the only business that was up smartly in the quarter. Aircraft sales at $28.3 million were up 18%. The biggest increase was on the Guardian program, which produced sales of $4.5 million in the quarter, up from just over a million last year. Guardian is the system built by Northrop Grumman to protect military aircraft from shoulder-fired missiles. The other major program increase was on the Multi-Spectral Targeting System. This is a Raytheon target acquisition system used on the Predator unmanned air vehicle. Program sales were over $1.3 million, an increase of 48%.

I should also mention that the Lockheed Longbow Radar program came back to life and generated over $700,000 in sales.

The space and defense part of the Components product line increased by 31% to $17.9 million. Increased sales were the result of continuing activity on the Bradley Fighting Vehicle, the Abrams Tank, and the Stryker Mobile Gun System, supplemented by increased shipments on the multi-media slip ring for a variety of applications on the Army’s Future Combat System.

Sales in the medical product line were up 8% to $14.6 million. The increase was in sales of slip rings to Philips Medical for CT Scan machines. Sales of motor blower assemblies for Respironics’ sleep apnea equipment were down slightly in the quarter. Unit volume has increased, but we’ve reduced unit prices in line with our continuing cost reduction efforts.

In our industrial products, sales were up 12% in the quarter to a total of $15.2 million. The increase was primarily the result of the Techtron acquisition. The Techtron product line is slip rings for closed circuit TV.

Components Group FY '08

The fourth quarter for the Components Group that I just described was like a microcosm for the year. Sales for the year of $341 million were up 20%. Sales were up in every product category.

In the aircraft business, our products are used to power and control all sorts of electro-optic devices including FLIR systems, targeting systems and radar. Major growth for the year was provided by the Northrop Grumman Guardian System and Raytheon’s Multi-Spectral Targeting System. Our electronic components are also used in avionic systems produced by Rockwell, Honeywell, Boeing and Lockheed. Helicopter deicing is another important slip ring application and we’re a supplier on most military helicopters. The most significant single program is the Blackhawk. Sales of aircraft products for the year at $110.3 million were up 15%. Of that sales total, 24% was aftermarket revenue and it was actually down slightly from the year previous.

The space and defense category for the Components Group is dominated by products that are used to take power and control into the rotating turret on military vehicles and to power the tank driver’s viewing system. The primary platforms are the Abrams, the Bradley, and the Stryker. Other space and defense applications include electric motors and components on missile control systems and solar array drive assemblies for space vehicles. Sales in the space and defense category of $66.4 million were up 24% from last year. Of this total, only 12% represents aftermarket revenues.

Sales of products used in the marine industry had a fantastic year. Revenues of $46.4 million were up 53%. The product line includes slip rings (large, small and very large), fiber-optic rotary joints, and the electronic multiplexers that direct the signal traffic. Most of these products are designed and built in a company in Halifax that was part of the Kaydon acquisition. In the 12 months before the acquisition, this company was doing $13 million in business. This year they did over $40 million. Product line sales have been supplemented by the acquisition of the Prizm line of multiplexers, which generated just over $5 million in sales for the year.

Our medical products category has been dominated in recent years by electric motor and blower assemblies sold to Respironics and slip rings sold to various CT Scan manufacturers, but primarily Philips. Sales this year were up 8% to just under $57 million. The growth in the year was primarily in the CT Scan market.

Our industrial business grew by a little over $10 million or 21% to a new total of $60.8 million. But the growth was primarily the acquisition of Thermal Control Products, a manufacturer of motor-blower assemblies and Techtron, a competitor in the CCTV slip ring business.

Components Group Forecast FY '09

Our forecast for the Components Group for FY’09 is $367 million, an increase of 7½%. We made our last major acquisition in our fiscal ’05. So, the Kaydon companies were part of our Components Group in fiscal ’06. Our organic growth in the two fiscal years since then has been over 15% - more than double what we’re projecting as the growth rate for fiscal ’09. In thinking about the recession’s potential impact on our Components Group, I would first consider that 83% of the sales of the Components Group go into aircraft, space and defense, marine, and medical. The revenues from the marine business may be influenced by the declining price of oil, but other than that, we don’t think these markets will be much affected. In the aircraft business, we’re forecasting $126 million, an increase of $16 million, which is the result of increasing production rates on two programs, the Guardian System for Northrop Grumman and the Multi-Spectral Targeting System for Raytheon. These are firm contracts with delivery schedules that are not likely to change. We’re actually forecasting a modest decline in our avionics business as some of our older, electromechanical cockpit displays have phased out of production.

Component sales in the space and defense market are forecasted at $74 million, up $8 million from the year previous. The biggest part of the increase is actually a new program. It’s a slip ring sold to the company, Kongsberg, for use on a remote weapons system platform. Kongsberg has won the opportunity to supply 6,500 remotely-operated weapon stations to the U.S. Army for a variety of vehicles. We are currently being qualified to support those deliveries. The rest of the sales increase in this category reflects small production rate increases on products used on the Bradley, the Stryker and in the Future Combat Systems. We also have a new order for fiber-optic modems, a product sold to the Egyptian Army for secure communications in the combat area.

We’re forecasting the marine business at $48 million in ’09, up only $2 million from last year. We’re actually forecasting a decline in sales of equipment used on undersea robots, but we have a strong order book in the very large and expensive slip rings used on floating storage, production and offloading system platforms. These systems go for anywhere from $800,000 to $2 million and we have a backlog that will support $14 million in sales.

We’re forecasting medical products at $56 million in ’09, down $1 million from last year, once again reflecting lower pricing to Respironics in line with our continuing cost-reduction efforts. The CT Scan business is expected to be stable.

In that 17% of our revenue that we call industrial, about 25% is in slip rings used in closed circuit TV systems. We projected those sales flat. The only growth we’re projecting is in the wind energy market. Our industrial automation category is a very broad portfolio of products that are used in factory automation, diesel pumps and fans, material handling, robotics, and packaging. This part of our business grew 46% last year, but mostly the result of acquisitions. We have projected stability, but no growth for ’09. This is one part of our forecast where we may be vulnerable, but it’s $40 million worth of business and 2% of our Company’s overall total sales. So, a little erosion in this product line could very well be picked up elsewhere, and in any event wouldn’t kill us.

Components Group Margins

The Components Group fourth quarter margins were a very healthy 17.9%, up from 14.7% last year. This fourth quarter result allowed us to finish the year at 17.8%, up from 15.7% a year ago. We recognize that margin performance in the Components Group is very much a function of product mix. Therefore, we believe we should be somewhat conservative in projecting the future, so we’re using fiscal ’09 margins of 16.5%.

Medical Devices Q4 '08

Quarter four in the Medical Devices Segment was a reasonable quarter. It was not quite as good as quarter three, but a lot better than quarter two. Sales of $25.9 million were up 11% from a year ago. So, that’s good. On the other hand, operating profit of $2.1 million was down $700,000 from $2.8 million of a year ago. It was also about $700,000 lower than expected on that sales volume. The shortfall is all related to increased cost including increased prices on material, and on purchased components. We did have some unusual scrap costs in the quarter as a result of improvements made to the design of our product.

Total pump sales of $9.5 million were actually down a little from a year ago, although the difference was all in the enteral feeding pumps. Sales of IV pumps at $3.6 million were actually up $1.3 million or 58% from a year ago.
Sales of administration sets at $10.3 million were up 48% from a year ago. This is the pattern that we expect. As time goes by and we deliver more pumps, the installed base increases and there should be increased consumption of administration sets.

Sales of sensors and hand pieces at $5.5 million were up 88% from a year ago. This continues the pattern that began last quarter. The growth drivers are ultrasonic hand pieces used in cataract surgery. Both AMO and Bausch & Lomb have embraced our product.

Medical Devices FY '08

This is our third year in the history of the Medical Devices Segment. We started in ’06 with the acquisition of the Curlin IV infusion pump product line and the McKinley disposable pumps. Our sales in that year were only $13 million. Last year, we added ZEVEX enteral pumps and generated sales of $68 million. For ’08, we finished the year with sales of $103.4 million. 

Pump sales were $38.2 million. Administration sets just under $35 million. We sold $21 million worth of sensors and hand pieces and $9.3 million of other associated equipment. Our operating profit for the year was $9.1 million or 8.8%. This is a little less than our most recent projection of 9.2%, but it’s in the ballpark. We know we have a lot of work to do to broaden our product offering, rationalize our production operation, and improve our channels of distribution, but we’re in the market and we’re getting educated and we still believe that there’s great potential for this new business.

Medical Devices Forecast '09

We have not changed our forecast for this Segment for ’09. We’re still expecting that it will be a year of continued development. We’re anticipating the introduction of some important new products and the development of some new customer relationships. We’re forecasting 14% growth in sales to $118 million.
The introduction of a new IV pump products will generate an important increase in IV pump sales, however, our unit volume in enteral pumps was unusually high in ’08 because our European customer, Numico, was replacing their installed base with our pump and that’s now complete. We also had an unusual 5,000 pump order from Abbott that won’t repeat. So, we’re expecting a reduction in volume in enteral pumps in ’09. The net effect will be an increase in pump sales from $38 million to just under $42 million.
We are forecasting 30% growth in the sale of administration sets to over $45 million. This growth is, of course, made possible by the increase in our installed base of both IV and enteral feeding pumps.
We’re forecasting only modest growth in sensors and hand pieces and in other associated equipment.
We’re anticipating margin improvement in our Medical Devices business. We’re projecting operating profit for the year ’09 of $13.5 million, up from $9.1 million this year. Margins, therefore, will come in at 11.4%.

Summary of Guidance for Fiscal '09

Our revised forecast for fiscal ’09 projects a sales range around a midpoint of $2.015 billion. Of that total, Aircraft sales are projected at $680 million. Military aircraft represents 60% of that total and we believe that we’re on platforms that will be strongly supported for the foreseeable future including the F-18, the V-22, the Blackhawk helicopter, and the F-35. We also believe that the military aftermarket will be strong. On the commercial side, Boeing and Airbus have the backlog to carry them for years. Our Business Jet platforms - the Gulfstream aircraft, the Challenger 300 and the Hawker 4000 - seem to be solid. The concern could be the commercial aircraft aftermarket, but our forecast anticipates a reduction comparable to what we saw after 9/11.

Our Space & Defense Segment sales are forecast at $276 million and we believe that this Segment forecast is solid and may even have upside potential in Driver Vision Enhancers and in the Constellation program. The total of the Aircraft and Space & Defense Segments is almost a billion dollars. In addition, our Components Group forecast of $367 million includes $200 million of sales on aircraft, and space and defense products. We’ve projected modest increases in these categories based on the Guardian program, the Multi-Spectral Targeting System and activity related to the Abrams, the Bradley and the Stryker. In addition, the Components Group forecast projects $48 million on marine applications and $56 million to customers producing medical devices. So, of the Components Group forecast of $367 million, over $300 million is solid in markets that are not likely to be affected by a recession.

Our Medical Devices forecast of $118 million is focused primarily on outpatient clinical care and the need there will continue regardless of economic conditions.

So, that brings me to our Industrial forecast of $575 million. Our Industrial business is not a catalog component business depending on general economic conditions. We are a supplier of customized, high-performance system solutions for selected markets. You’re familiar with these markets. Given the LTi acquisition, power generation will be the biggest Industrial market. This is the energy business. Our product line of motion bases used in flight training simulators now ranks right next to plastics controls as our second biggest market. We believe that the demand for pilots and pilot training will also be independent of general economic conditions. The market for gauge controls in steel mills is driven by the industrial development in China. It may slow down a little, but it’s not going to stop. As I said a few minutes ago, I think that over the long haul, the markets for plastics controls would ultimately be affected by a long recession as would metal-forming equipment and presses. We believe that in these markets and in other of the markets important to us, we’ve put together a reasonable and reasonably conservative forecast. As a result, we believe that the $2 billion sales forecast, we’ve described, is achievable.

On that basis, we’re projecting midpoint operating margins at 12%, which will produce operating profit of $241 million, net earnings of $133.6 million, and earnings per share of $3.08, a 12% increase. If we’re on that trajectory, the quarters will likely be $.72, $.76, $.79, and $.81. If we come in at the low end of our sales range, just under $2 billion, we would expect earnings per share of $3.03, still a 10%, or double-digit increase over ’08.

Given our view of our ’09 prospects, our Board considers our stock at its current price an irresistible investment. At a meeting yesterday, the Board authorized management to buy from the market up to a million shares of our stock. The Board expects that this investment will be in addition to not an alternative to our continuing acquisition campaign.

Now for a little more detail on our cash flow, our tax rate, and our pension expense, here’s John Scannell.

Good Morning.

I’ll begin with a discussion of our foreign currency exposure and follow that with my usual review of cash flow, both in the quarter and for the year. I will then address our pension situation – a topic receiving a lot of press at the moment. I will talk about our tax rate and some additional items from the balance sheet. I will finish with some additional guidance for ’09.

Foreign Currency, Cash Flow, Taxes and Pension

Given the recent strengthening of the US dollar, I would like to provide some perspective on our foreign currency exposure. About 1/3 of our revenues are denominated in currencies other than the US dollar. We are exposed to both translation and transaction risks but our business involves extensive intercompany transactions which create a natural operational hedge. Let me illustrate the point with our updated guidance. Bob mentioned that our new sales forecast for ’09 is down by about $90 million in our industrial business and half of that is due to currency effects. When we work through all the translation and transaction impacts of this $45 million reduction in sales, the impact on the bottom line is negligible.

Free cash flow in the quarter was positive $29 million, helping to reduce our Net debt by $20 million. Cash flow from Operations was $52 million, the strongest quarter in the year. Working capital was down $3 million in the quarter as inventories and receivables moderated from previous quarters in line with the sales change from Q3 to Q4.

Capital expenditures were $23 million in Q4 while Depreciation and Amortization was $17 million. Interest payments totaled $9 million and our cash tax payments were $17 million. In addition, we contributed $8 million to our pension plans worldwide.

For the year, our Free Cash Flow was positive $16 million, a significant improvement over our negative free cash flow of $72 million in fiscal ’07. Fiscal ’07 saw the big ramp up in working capital as we geared up to support new aircraft programs. Capital expenditures totaled $92 million this year, down from $97 million last year. Depreciation and amortization at $63 million was up $11 million over ’07. Our overall growth in working capital for the year was just under 16% compared with our sales growth of 22%.

Our tax rate in the quarter was an unusually low 18.6%. In this quarter we saw the benefit of reduced state and local tax levels in both the US and Germany. For all of fiscal ’08 our tax rate came at 29.1%.

Pension expense in fiscal ’09 will be $15 million, down from $20 million in ’08. While our asset values decreased this year our convention of smoothing market fluctuations over 5-years cushioned the impact. In addition, the discount rate used to measure the projected benefit obligation increased from 6.25% to 7.25%. On the measurement date, the fair value of our US qualified plan assets was $336 million. Our projected benefit obligation was $328 million so we were over-funded on our measurement date.

However, with asset values at depressed levels, we believe now is the time to put money into the market. We have therefore elected to increase our contributions to our US qualified plan in ’09 to $6 million per quarter. Previously we had anticipated only starting this increased contributions rate in Q4 ’09 so the increase over the year represents an additional $18 million cash investment.

Our non-cash stock compensation expense in the quarter was $900,000. Contract reserves increased by $4 million over the prior quarter, associated primarily with our commercial aircraft book of business. At the end of September, our Net Debt to Total Capitalization stood at 37%, down from 37.8% at the end of fiscal ’07.

Forecast for Fiscal '09

We believe that we’ll continue to see improvements in our cash generation in fiscal ’09. Capital Expenditure should be close to our ’08 level with depreciation and amortization $6 million higher at $70 million. As mentioned earlier, we are planning for increased pension contributions which, after tax, will reduce our previous forecast for free cash flow by $11 million. Putting it all together, we are now forecasting $44 million in free cash flow for the year.

Interest expense for fiscal ’09 is budgeted at $39 million, very close to our fiscal ’08 result. We anticipate that the increased cost of our high yield debt will be compensated by reduced borrowings and a slightly lower rate on our revolving line of credit than we had planned. Stock compensation expense is estimated at $6 million.

For fiscal ’09 we are projecting a tax rate of 25.3%. This is lower than we had forecasted last quarter, helped by the reinstatement of the R&D tax credit for both ’08 and ’09 as enacted in the TARP legislation, as well as higher foreign tax credits.