FY 2009

Introduction

Good morning. Thanks for joining us. This morning, we’ll report on the second quarter of fiscal ’09 and we’ll describe in more detail the guidance we provided two weeks ago on April 9th. As 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. 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 9th. 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 we described two weeks ago, can relax now. I’ll provide a little more detail on our situation, but there is no more bad news. There isn’t another shoe to drop.

On to the quarter results.

Second quarter earnings came in at $23.7 million or $.55 a share, right in the middle of the range that we were expecting. Earnings per share were down 17% from a year ago. Sales for the quarter of $453 million were down 3% from last year, but the decline was all in exchange rates. On a constant currency basis, sales were flat. Cost of sales were 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 expense of $68.8 million was down 6%. Interest at $9.4 million was up ever so slightly. In other income, we had a gain mostly reflecting our ownership in LTiREEnergy. Our tax rate at 35.1% was a little bit higher than last year and the result was net earnings of $23.7 million or 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 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.

Now let me go to the segments.

Aircraft Q2 '09

Total Aircraft sales were $162 million, exactly the same as last year’s second quarter. This 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 were $107 million, up $9 million from a year ago. There were some volume changes in our OEM programs. F-18 sales were up 16% to $9.4 million; V-22 sales were 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 on our part. We’re winding down our development programs. Our partners are still pushing to complete theirs.

The big increase in military aircraft sales was in the aftermarket. A part of that change was an increase in sales of Tactical Air Navigation equipment (TACAN). This is a product line that came to us in 1998 in our acquisition of Raytheon’s Montek division. We’ve always included TACAN sales in military aftermarket since what we acquired was an aftermarket product. Over the last eighteen months we’ve updated our design and we’re now selling new TACAN systems on an OEM basis. With the acquisition of Fernau Avionics, we intend to combine those TACAN sales with Fernau and make air navigation equipment a product line focus for us.

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 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 over $10 million from a year ago. We saw in this quarter some of the sales reductions we talked about in our conference call a couple of weeks ago.

Our sales on the Boeing 7-Series production airplanes of $8.1 million were down over $5 million from last year – a reduction of 39%. We’ve slowed down our production activity on 787 and our sales in the quarter were $2.3 million, less than half of last year’s revenue. Airbus sales at just under $6 million, on the other hand, were up 24% from last year. This increase is partly the buildup on the A380 on which we sell some brake system components, but also Airbus places orders somewhat erratically.

Our business jet sales, at $13.1 million, were actually up 2% from last year, but we are anticipating declines over the balance of this year in our revenues to Gulfstream, Bombardier, and Hawker Beechcraft.

The other big change in our commercial revenues was a $3.6 million decline in the aftermarket. The aftermarket came in at $18.8 million, down 16% from a year ago. Our revised aftermarket forecast of $77 million presumes that the next two quarters will maintain the second quarter level, in which case we would finish the year down 14%.

I mentioned our acquisition of Fernau Avionics Ltd. We completed this acquisition in early March. Fenau 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”. In the one month that we’ve owned Fernau in this quarter, sales were $1.9 million. For seven months of the year ’09 we expect that 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. Adding these sales to the Fernau forecast takes Nav Aids to $28 million for the year.

Aircraft '09

Two weeks ago we revised our guidance for the year. We changed the military aircraft forecast from $420 million to $409 million, the commercial forecast from $260 million to $225 million and those new numbers taken together with $17 million worth of revenue from the Fernau acquisition add to a total of $651 million. The sales results in the second quarter line up quite well with that forecast. On a year-to-date basis the F-18 is a little more than half way to the $33 million we had forecasted. V-22 is exactly halfway to the $38.4 million that we forecasted. The F-35, at just under $56 million, is running ahead of our forecast which is now $101 million but we expect that the workload will moderate over the next two 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 had 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 will slip into 2010.

In all our previous forecasts of military aftermarket, we had included $10.8 million for the TACAN navigational aids which we would now like to report together with the Fernau acquisition. So after incorporating that change, the military aftermarket forecast would be $123 million. Year to date, our military aftermarket sales – not including the TACAN products – total just under $63 million, so with two more $30 million quarters, we expect to achieve our revised military aftermarket forecast. The entire military aircraft forecast is now $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’re forecasting the 7-series production at $36 million and the 787 at about $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 had reduced our forecast by only $4 million to $55 million. That change was based on slightly reduced activity at Gulfstream and Hawker Beechcraft. In just the last two weeks we’ve had some schedule changes which suggest that that forecast is still $5 million too high, and so we’ll change it to $50 million.

We reduced our commercial aftermarket forecast by only $3 million to $77 million, suggesting that the decline from last year, instead of 10%, would be more like 14%. If the next two quarters maintain the level of the second quarter, we’re probably OK with that forecast. In total then, with the $5 million reduction in business jets, we’d come in at $220 million for commercial aircraft.

When we add the $28 million forecast for Nav Aids, which I just outlined, the Aircraft total for ’09 will be $646 million.

Aircraft Margins

In the guidance we had projected at the end of the first quarter, we had forecasted Aircraft margins for the year at 9.3%. The second quarter came in at 9%, and 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’ll revise our projection to 8.8% reflecting our current performance.

Space and Defense Q2 '09

Space and Defense had a very strong quarter. Sales were 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 toward the end of calendar year ’07, we got a very large order for Driver Vision Enhancer systems that were going on the MRAP vehicles. In the second quarter of ’08, we delivered 5,000 systems generating $17.6 million in sales. In the second quarter of ’09, the quarter we’re talking about, sales on this program were $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, an acquisition we completed in the third quarter of ’08. Other than CSA, our basic product line grew by $9 million or about 17%. Where did that occur? Sales of controls on satellites both military and commercial at $16.7 million were up 17%. Sales of satellite launch vehicles, strategic and tactical missiles, and missile defense totaled $14.1 million up 18% from a year ago.

In our Defense Controls product line, sales other than Driver Vision Enhancer went from $10 million to $16.9 million. In the U.S., we’re putting more and more equipment on the Stryker Mobile Gun system. I mentioned last quarter a big new job in Europe for Krauss Maffei Wegman on a platform called the FLW100. 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 totaled just over $7 million for the quarter and were about the same as a year ago.

One product line that actually did encounter a serious slow down was the NASA Constellation program. Sales of $3.4 million were about half of what they were a year ago. For the last few months, NASA, without a new administrator, has been moving very slowly on commitments for the design of the Orion Crew Vehicle. As a result, our sales activity on cost plus programs has slowed down but we expect the work will come later in the year.

In total though, taking the Driver Vision Enhancer impact into account, sales of $68.3 million in the quarter were down 3% from a year ago.

Space and Defense '09

Two weeks ago, we moderated our Space and Defense forecast from $281 million to $271 million in part in recognition of the slow down on the Constellation programs. We think the $271 million forecast is solid. We forecasted the satellite business at $59 million for the year and we’re already at $32 million. The rest of the legacy business in launch vehicles, missiles, and missile defense is 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 at $13 or $14 million and that seems likely even without an additional order for Driver Vision Enhancer.

We’re expecting some acceleration in the work on the NASA program which will get us back to $5 million quarters instead of $3.4 million, and we’re hopeful that that will happen. So, in total, we’re comfortable that the $271 million forecast in Space and Defense is achievable.

Space and Defense Margins

Margins in the quarter of 14.4% compare favorably with the 13% achieved a year ago, and, last year, the 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 heady territory for this segment. This is a business that’s generally not characterized by long-running production programs and it often has an important cost plus component which is lower margin business. The fixed price part of the business is often quite risky because we’re often implementing genuinely cutting-edge technology. With all that in mind, we’re not counting on the continuation of 14% margins. We’re projecting that margins in the last half of the year could get closer to 10% which would bring us to an average for the year of 13.3%.

Industrial Systems Q2 '09

Industrial sales in the quarter, at $105 million, were down 20% from a year ago. In the quarter, part of the decline was the currency effect and 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 and also the trend in incoming orders. On that basis we developed a revised forecast for our Industrial Systems Segment and reduced our sales projection for the year by $45 million. This morning we’ll describe in a little more detail what is going on in our Industrial business.

I’ll begin with what historically has been our largest Industrial product line - controls for plastics making machinery. Sales in the quarter of $8.2 million were down 59% from a year ago. On a year to date basis sales are down 48%. As I mentioned in our call two weeks ago, our incoming order rate in the second quarter was down 77% from last year. Historically, over 60% of our plastics business has been in Europe. Business there is very slow. Our major European customers export their equipment all over the world and they are all on reduced work hours. There are European companies that have closed manufacturing sites, and some, which have depended on the automotive and white-goods industry, are struggling financially. In Asia the situation is equally grim. Our incoming orders were 20% of our shipments in the quarter and 11% of last years order rate. In light of this situation, our sales forecast for the year is now at $28 million. On a year to date basis we’re already over $20 million.

The situation in the metal forming industry is similar. Many of our customers sell equipment into the auto and construction industries. Sales in the quarter of $7.6 million were down 45% from a year ago. On a year to date basis, we’re down 36% from last year. Metal forming is primarily a European business and our second quarter order rate was down 60% from a year ago. Our forecast for metal forming for the year is $25 million. Year to date we’re already at $16 million.

Over the last three years we’ve enjoyed very strong growth in gauge controls for steel mills, primarily as a result of the development of the steel industry in China. We’re 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 100 million tons of capacity, mostly the elimination of inefficient mills. Our business at the moment is mostly spares and overhauls. In the quarter our steel industry sales didn’t look too bad. At $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’ve reduced our forecast for the year to $31 million. We’re 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 were down 17% from a year ago. However, last year was a year of remarkable growth. Sales in ’08 were up 56% to $75 million. We now have a very clear picture of requirements for ’09 from our major customers (CAE, Flight Safety, and Rockwell Collins) and we‘re forecasting sales for the year of $58 million, which is down from ’08 but 20% higher than ’07. Year to date sales are $33 million.

There actually are some positives in the industrial market. Thankfully, the power generation market is holding up very well for us. Sales of $15.6 million in the quarter were up 32% from a year ago. Year to date, at $29.1 million, we’re up 28%. We expect that sales in the next two quarters will be at about the same level and beyond that we expect to add about $70 million in sales of LTi pitch control systems and Insensys blade condition monitoring systems. So we’re expecting power generation for the year to come in at $129 million.

The test equipment business is also holding up well. Sales in the quarter of $8.9 million were up 16% from a year ago. Year to date at $16.8 million we’re about even with last year. The business is rather evenly split between Europe and Asia with only about 12% in the U.S. We have backlog and visibility which supports a $35 million forecast for the year.

In total, we’re now forecasting sales 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’re looking at sales of our legacy products for the last half of about $185 million, down $30 million from what we’ve 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 were 10.4%, down from the excellent 14% that 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 100% of sales but the margin impact of the LTi additional sales will be partly offset by purchase accounting adjustments. As a result, we’re expecting that we’ll achieve margins for the year of 7.1% and that’s before a restructuring expense. We’ve mentioned restructuring of $15 million pre-tax and the majority of that will fall in the Industrial business over the next two quarters.

Components Group Q2 '09

Sales for the Components Group at $84.5 million were almost exactly the same as last year’s second quarter. In real terms, the Group experienced growth of 4%, which was offset by changes in exchange rates. The Components Group makes some sales in sterling and some are in Canadian dollars. Within this same sales total, there were some big swings. Total sales of aircraft and space and defense products were up 16% to $50.4 million. Marine product sales at $11.1 million were almost the same as last year. Sales of medical products were down 15% to $12.8 million and industrial products at $10.2 million were down 29% from a year ago.

The pattern for aircraft products in the Components Group is similar to what we’re experiencing in our Aircraft Controls segment. Military aircraft sales were up 35% in the quarter to $25.9 million. The biggest increase was in the Guardian program at $6.2 million in the quarter. Guardian sales were up 62% from a year ago. We also had increases in a variety of military aircraft programs that are in the $1 to $2 million range. These include a number of Raytheon programs including the Advanced Technology FLIR program, the Multi-Spectral Targeting System, and 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. On most of these military programs our principal products are slip rings a product area in which we offer leading edge technology.

Our commercial aircraft products, which are primarily electromechanical components used in avionics instrumentation, declined in the quarter by 18% to a total of $6.1 million. This trend is 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 were up 10% to $18.4 million. In this quarter the growth was not in our bread and butter vehicle programs; the Abrams, the Bradley, and the Stryker. The growth was in a variety of components sold for use in space vehicles and in ground based radar.

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

On the other hand sales of medical equipment were down 15% in the quarter to $12.8 million. Our sales to Respironics were down 15% to $7.6 million. We are actually delivering higher 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.

The revenues in industrial products of $10.2 million were down 29% from a year ago. We’ve seen a 10% decline in sales of slip rings used in closed circuit TV surveillance systems but much more of the decline is in equipment we refer to as industrial automation. This is a full range of components used on all sorts of industrial equipment and our experience seems to reflect the general malaise in the industrial equipment industries.

Components Group '09

Two weeks ago we changed our forecast for the Components Group to $330 million, a reduction of $13 million, mostly in industrial products. Based on the results of the second quarter we seem to be on track to achieve that forecast. It’s possible that we could see further weakening in the industrial market but there is also the potential of somewhat stronger sales in military aircraft and in medical equipment.

Components Group 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, which seems like a pretty safe bet for the Components Group.

Medical Devices Q2 '09

Results for the Medical Devices segment for this last quarter were certainly a mixed picture. There were some real positives. Sales at $34 million were up 50% from a year ago. Of the $11 million increase, $6.7 million was revenue on the recently acquired companies. Nevertheless, sales of $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 at $10.7 million were up 30% from a year ago. Sales of administration sets at $9.7 million were up 24%. In terms of sales the only bad news was in sensors and hand pieces. Sales of $3.3 million were down 31% from a year ago. I mentioned last quarter that our customers for hand pieces were rebalancing their inventory and that product line seems to have recovered. On the other hand, you may remember that we sell ultrasonic sensors that detect air bubbles in infusion pumps so that when bubbles are present the pump is shut down. We supply these sensors to many of our competitors some of whom are not delivering pumps at the moment so they’re not buying sensors. The sensors business is down 58% from a year ago.

One other bright spot in the quarter was the performance of the two recent acquisitions. They both met our expectations in terms of the sales levels they produced. AITECS had sales of $1.6 million and Ethox did $5.1 million.

The dark side of the picture in Medical Devices is the financial performance. With $34 million in sales in the quarter, our operating profit was slightly negative -- $77,000 to be precise. Here’s the situation. The acquisitions are in their early days and purchase accounting adjustments of $1.1 million not only offset their operating profit contributions, they actually drove them negative. So in this quarter, on $6.7 million in sales from the two recent 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. That shortfall has two major components.

Last quarter, we described a software problem we’ve encountered in the controls on our enteral feeding pumps. I characterized this as a very subtle problem. We believe that it is triggered very infrequently by the 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 that we need to correct on units that have been delivered and last quarter we established a reserve of $800,000 to take care of that problem. There are 110,000 of these pumps in the field. Of that number, 77,000 are in Europe. In developing our initial reserve estimate we presumed that the pumps in Europe would have their software upgraded when they were returned to a service center once every two years for calibration. We presumed that we could upgrade the software as part of that routine service. It turns out though, that the European authorities 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. The result is an additional expense estimated at $1.2 million. So we’ve booked that additional reserve in this quarter. We will have spent $2 million fixing this software problem. When we got into the Medical Devices business we were counting on the fact that our ability to design and develop reliable products, an ability that we demonstrate on a regular basis in our aerospace and industrial businesses, would avoid this kind of problem. But as I mentioned this software issue pre-dates our association with ZEVEX. So it reminds us of what we knew going in - that technical problems on equipment in the field can turn out to be expensive.

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

Medical Devices '09

In terms of sales, we’d like to change our forecast to $124.5 million. This forecast presumes a continuation of pump sales at about the level of Q2. We’re anticipating some growth in administration sets and a recovery in the sales of sensors. We’re currently forecasting that AITECS will provide $4.9 million in sales for the year and Ethox will be at $19.3 million. All that, taken together with about $9 million of other associated equipment, gets to $124.5 million.

In terms of margins, we are anticipating returning to profitability but its modest profitability. We’re 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’re in the midst of an expensive 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 believe that these problems can be solved and that this business still offers the potential we envisioned. It will take some more time and more effort to achieve it. But we’ll get there.

Summary of Guidance for Fiscal '09

In summary, we’re now projecting for ’09 sales of $1.841 billion, which is $9 million less than we projected two weeks ago. The changes we’ve made in the forecast are reductions of $5 million in business jets and $4 million in Medical Devices.

We believe that we can achieve operating margins of 10.2%. This would 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 in restructuring expenses over the next two quarters and 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 should be bracketing that forecast with plus or minus $.20 a share.

Looking at the segments in more detail we’re now projecting Aircraft sales at $646 million with operating margins of 8.8%, Space and Defense at $271 million in sales with operating profits of 13.3%, Industrial sales of $470 million with operating profits of 7.1%, Components Group sales of $330 million with operating profits of 17.5%, and Medical Devices sales of $124.5 million and operating profits of 2.7%. All those projections support the forecast of $1.841 billion in sales and operating margins of 10.2%.

Prospects for 2010

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

In Space and Defense we’re anticipating stability in the legacy products of 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 and our current forecast anticipates that the combination of LTi and Insensys will add, at a minimum, $150 million of additional sales in 2010. We’re anticipating that wind energy sales in 2010 will be in the neighborhood of $220 million. 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 close to $600 million in Industrial sales and with stronger margins.

The Components Group has been a solid performer since we’ve owned them. We expect that the 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, but also 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 administration 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 comment on the Defense Budget. In short, what the administration proposed would work well for us. We like the support for the F-35. The F-22 is not important for us. Removing the vehicle portion of FCS eliminates a program we’d won, but continued dependence on the current inventory of military vehicles will be good for our aftermarket and upgrade business. We’d be happy if Congress would pass it as is.

Here’s John.

Thanks Bob. Good Morning.

I will follow my usual format, starting with a look at our cash flow for the quarter. I will then discuss our tax rate and note some additional items of interest from the balance sheet. I will talk about our credit situation and in particular address our covenant head room, a topic which is receiving much interest. I have a good news report on goodwill impairment and will finish with our cash flow forecast for the remainder of the fiscal year.

Cash Flow, Taxes, Credit and Goodwill

Free cash flow this quarter was negative $4 million. Year to date we are positive $8 million. Net debt increased by $137 million, the result of our 5 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 totaled $9 million and our cash tax payments were $6 million.

Our tax rate in the quarter was a relatively high 35.1%. You will remember that in the first quarter that 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.

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%.

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 3.5x. 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 2.7x. Based on our revised guidance for fiscal 2009, we anticipate remaining comfortably within our leverage covenant.

Goodwill impairment 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 months. The good news is that our review has concluded that we have no Goodwill impairment issues to worry about.

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 2 quarters, making us positive $8 million for the year. The difference is driven by a 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 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 our forecasted tax rate up to 27.2%, driven by lower forecasted earnings in our foreign subsidiaries.