Good Morning –

Thanks for coming. For most of the last few years, I’ve begun my remarks by rejoicing that our sales are up, our earnings are up and our stock price is up. In reporting on fiscal ’99, I am certainly able to say that our sales were up and our earnings were up. But our stock price is no longer following the trend in sales, earnings and earnings per share. It seems to me that, in the annual meeting of shareholders, the disengagement between the company’s record and the value of our shares is a subject that ought to be discussed. So, this morning I’ll review our record and describe the situation of the Company as seen from the inside. I’ll discuss the techniques we’re using for developing and strengthening the Company, and particularly our acquisition program. I’ve asked Bob Maskrey to describe for you, in some detail, fiscal ‘99’s major acquisition and how it fits into the long-term plan. I’ll then come back to discuss our prospects for the future and, I hope, persuade you that the recent decline in our stock price underestimates the Company’s potential, both in the near term and the long term.

So, first a review of the record. If you look at the period since ‘94, sales have grown from $307 million to $630 million, an average growth rate of 16% per year, and last year was 17%. Earnings in ‘94 were $4.7 million, if we add back a major non-recurring item. Last year earnings were $24.4 million, for an average growth rate of 40%, last year 27%. Over the years, the number of our shares has changed, but in ’94, earnings per share were 60 cents, last year they were $2.70, for an average growth rate of 35%, last year 19%.

I think that most objective observers would agree that it’s a pretty respectable record, particularly for an industrial company whose name does not include dot-com. Nevertheless, as this chart displays, our A stock price pretty well tracked the growth in earnings per share from ’94 till late ’98, and then, in late ’98, the lines began to diverge. Now we know that the market price depends on the value that buyers are willing to pay and we don’t know for certain what was on their minds in mid '98, but we can theorize that, by that time, we had become clearly identified as an aerospace stock. About 2/3 of our revenues come from the aerospace sector, and our analytical coverage was done by aerospace analysts. During ’98, Boeing, the largest of U. S. aerospace company, was having real operational problems. Boeing was losing money as they approached what some people call the "peak of the cycle". About that time, the entire aerospace sector began to fall out of favor. We can, therefore, speculate that some of our investors (perhaps some who purchased the stock in our equity offering in early ’98) decided that it was time to move on. As calendar year ’99 progressed, the aerospace sector moved farther and farther out of favor as one company after another, including the other industry giants Lockheed and Raytheon, surprised the market with disappointing results and drastically reduced expectations.

Two weeks ago, just before we reported on our first quarter, the best first quarter in Company history, with double-digit growth in earnings per share, our A stock price at $24 per share was less than 9 times the trailing 12 months earnings per share. At that time, as we reported out the quarter, we cautioned analysts and investors that, based on a shortfall in orders in the quarter, we anticipated somewhat slower growth in sales and earnings for the rest of the year. But what we described is, we think, a temporary phenomenon.

Now, what about the Company’s overall situation? Well, in my opinion, our Company is in really good shape. In terms of market position, market share and prospects for the future, never in our history have we been stronger. As such, it’s particularly incongruous that our share price is as low as it is. Let me tell you some of the reasons why I think we’re in such good shape.

It’s important, first of all, to reflect on the fact that our Company strength is not only the portfolio of current-day products but also our ability to develop and produce products. As we all know, the Company was founded on the development of the servovalve, a device that was difficult to design and almost impossible to make. Over the years, we have continued that tradition. We design in response to customer requirements for products that are difficult to design and almost impossible to make, and products that are desirable because they provide extraordinary performance in motion control. That’s why they’re used to control aircraft in flight, to launch and position satellites and to control some of the highest performance manufacturing machinery used all around the world. Now, this capability doesn’t leave us without competition, but we have relatively few competitors - typically one, two or three in each specialty area. But for many years our Company has competed very effectively. As a result, today our market position is much stronger in most of our product areas than it’s ever been in the past. In Military Aircraft, for instance, since we demonstrated the ultimate in technological credentials in the system that we built for the B-2, no one in the industry questions our technology leadership. We have major product positions on the F-18 and the V-22, the growth programs of the near future, and we have the industry’s dominant position on the Joint Strike Fighter which promises to be the most important military aircraft project in the first half of the 21st Century.

In the commercial aircraft arena, we are the largest supplier of flight control actuation for the Boeing Company, the world’s largest manufacturer of commercial airplanes. Two weeks ago, a couple of us went to Boeing to be presented a Supplier of the Year Award for the category of Systems and Equipment which, incidentally, is the Purchasing Department’s category for companies whose products are difficult to design and almost impossible to make. We can all, on occasion, be cynical about the difficulties of the Boeing Company and the trends in their competition with Airbus, but it is a fact that Boeing is the dominant manufacturer of the commercial airplanes we all fly on and that Boeing relies on our Company to manufacture all of their servovalves and more of their flight control actuation than all of their other suppliers taken together.

These days the growth area in the aircraft business is regional aircraft and business jets. A few years ago, we took our first serious initiative in this field when we did the flight controls for the Cessna X. But, even after that, this wasn’t an area which our Company emphasized until our recent acquisition of Raytheon Montek. In a couple of minutes, Bob Maskrey will describe for you how that acquisition changed our position in this growth part of the aircraft industry.

Those of you who know the history of our Company know that the earliest application of Bill Moog’s servovalve was in the missile business. We’re still in the missile businesses but today there aren’t that many missiles being made. However, the technology developed, is the technology that launches commercial telecommunication satellites and positions them in space. This technology led us to our participation on the current generation of launch vehicles, the Titan IV, the Delta IV, the Atlas III and Araine 5. It also led us to the Space Program and applications all over the Space Shuttle which is still a workhorse as a space launch vehicle. Generally, our products move rocket motor nozzles and steer the launch vehicles as they carry communication satellites into orbit. Once on orbit, satellites are more precisely positioned through attitude control systems which include a number of our components. In the last couple years, we’ve been selected to provide Xenon regulators for use on the standard Hughes satellite buses. We’ve signed long-term agreements to provide thruster valves and isolation valves for Matra Marconi’s Eurostar Satellite Bus. We’ve signed an agreement to provide propulsion system manifolds for the Lockheed A2100 Standard Satellite Bus. Our market position in the satellite and launch vehicle business has never been stronger and, eventually, that will pay off.

1 2 3 4 5