FY 2010

Industrial Margins

When thinking about the current state of our Industrial business, it’s important to remember that in fiscal 2008 our Industrial Systems segment, with margins of 13.8%, generated more profit than any of our other segments.  Fiscal 2009 though, was a tough year for profitability in the industrial business.  In the fourth quarter of ’09, industrial margins before restructuring were 7% and after restructuring 5.5%.  For all of last year, industrial margins were 6.8% after restructuring.  In this first quarter, margins were 8.5% before restructuring and the restructuring charge of $400K had minimal effect.  Anticipating that there is still some restructuring expense to go, we are now projecting Industrial margins for the year at 8.6%.  In our prior guidance for 2010 we had been projecting Industrial for the year at 7.4% after restructuring.  

Components Group Q1 2010

Components Group sales in the quarter of $84.9 million were up 4% or $3.4 million from a year ago.  The increase is all in the aircraft and defense businesses.  The drivers in the aircraft business are deliveries of fiber optic controls used on the Euro-Fighter, a modest increase in deliveries on the Northrop Grumman Guardian system and much increased activity on de-icing systems for the Black Hawk helicopter and the V-22 tilt rotor aircraft.  We believe that much of the equipment used on de-icing of the Black Hawk is related to the conflict in the Middle East.  The defense business growth driver is a new contract with Kongsburg to provide a slip ring system on the CROWS system.  CROWS is “Common Remotely Operated Weapons Station.”  This quarter we delivered almost $2 million worth of equipment on this new program.

Once we leave military aircraft and defense, the sales comparisons for the Components group go the other way.  Sales of our marine products, which are primarily slip rings and fiber optic rotary joints used in undersea vehicles, are down 30%.  As we’ve said in the past the demand for this equipment seems to track the price of oil and we seem to be feeling the effects of the retreat from the peak that was generated in fiscal ’08 when oil was over $100 a barrel.  

Sales in the medical market are also down.  It would appear that sales of sleep apnea equipment at Respironics and sales of CT scan machines are subject to recessionary pressures.  We are selling to Respironics a low cost, lower priced motor blower assembly, but the unit volume is also down from a year ago.  Similarly, our sales of slip rings to manufacturers of CT scan machines are at about the same level as a year ago.

Sales in the quarter of components used in industrial equipment were down 8% from a year ago, but at about the same level as last quarter and that quarter was an improvement over the previous two quarters.  We have real excitement in our industrial products in the Components Group in that we’ve won a very large order for slip rings used on wind turbines by Sinovel, the largest manufacturer of wind turbines in China.  That contract provided sales in the quarter of almost $2 million.  That’s about the same level as the previous quarter, but a year ago Sinovel was not even a customer.

We’re cautiously optimistic about prospects for the Components Group in 2010.  We are looking for sales increases over the next three quarters in aircraft products and in the medical market where we have new opportunities in the CT scan business.  Our industrial sales should also see an increase simply as a result of the continued volume of slip rings delivered to Sinovel for wind turbines.  Our marine business is expected to maintain about the same level as the first quarter.  We anticipate reductions in our space and defense controls business, primarily related to armored vehicles.

Components Group Margins

In the quarter the Components Group operating margins were 14.3%.  This is the most profitable segment of our Company.  The 14.3% however, does not compare well to the 18.4% in the first quarter of 2009, but it is an improvement over the 12.3% earned in quarter four of ‘09.  Components Group margins have always been strong, but as the mix shifts more towards military aircraft and defense products and away from industrial products and particularly marine products, the average operating margins moderate some.  That’s what we’re experiencing in 2010.  We are expecting, however, that there will be some improvement over the balance of the year and we’re now projecting margins for the year of 15.1%, very close to the 15.3% of our previous guidance.