It’s now clear that there is a recovery underway in the worldwide industrial hydraulics industry and we’re seeing that in the sales increases in suppliers of more conventional hydraulics equipment, like Parker and Eaton. In a similar fashion, our sales through distribution are growing nicely - up 29% in the quarter to a total of $7.6 million. In addition, our aftermarket sales were up 11% to a total of about $8 million.

There is one other phenomenon worth noting in our Industrial business. All of our military services seem to have developed a serious near-term interest in updating their capabilities in flight training simulation. The Army, for instance, has recognized that their simulators at Fort Rucker are 20 years old and that their capability to simulate aircraft performance does not match up with today’s aircraft. The hydraulic equipment that they’ve been using is either near end of life or in need of refurbishment, and electronic upgrades are difficult because of the age of the equipment. The result of all this is a new Army initiative called Flight School XXI, a flight school for the 21st century, and the Army plans to spend $1 billion on simulation over the next 20 years.

In anticipation of renewed interest in flight training, and in recognition of the preference in many quarters for electric simulation, we made a major effort over the last three years to develop electric motion systems capable of achieving the very high fidelity which, up to now, could only be achieved by hydraulic systems. As a result, we’ve been able to win orders totaling $12 million so far this year for simulators that will be delivered to FlightSafetyand a company called NLX, for a combination of both electric and hydraulic motion systems which will be used in Flight School XXI and in upgrades of simulators for the C-17, the TH-57, the Black Hawk, the P-3 and the B-52. In addition, we’ve identified another $20 million worth of simulator opportunities before the military will be satisfactorily re-equipped. The effect of all this on upcoming shipments is that our sales level of about $3 million a quarter in motion simulators should easily be maintained and will likely increase somewhat.

Since our total incoming orders are increasing along with shipments, we’re optimistic that the unit volume of sales that we’re currently achieving will persist. We are seeing some strengthening of the dollar, though, and over the next two quarters, we may have a slightly smaller sales impact from foreign exchange. Nevertheless, we are now increasing our projection for Industrial sales from $296 million for the year to $307 million.

We had predicted margin improvement as Industrial sales increased and that’s what we’re experiencing. Margins for the quarter were 10.2%, up from 7.4% a year ago, and 8.5% just in the last quarter. We’re hoping that this margin performance can continue for the balance of the year, in which case we’d finish the year at 9.8%, compared with the 8.6% we had previously been forecasting. This difference, incidentally, is almost twice the magnitude as the shortfall we’re experiencing in the Space segment.

Components Group - Q2’04

This is our second quarterly report on the new Components Group. Sales were $32.9 million, up from $31.1 million in the previous quarter. The previous quarter, however, included a one-week shutdown and, therefore, the run rate for the first half would achieve total sales of $130 million for the year.

Last quarter, we updated our forecast for the year to about $135 million and suggested that the cost structure would allow us to achieve our earnings targets. We still believe that we can achieve our earnings targets even if sales come in at the current level of $130 million.

Components Group sales for the quarter were made up of roughly equal parts - aircraft and industrial - $15.5 million and $15.1 million, respectively, with the adder of $2.3 million of space and missiles business. This is a more heavily industrial mix than we had originally anticipated and it’s consistent with what we experienced in the first quarter.

Once, again, the largest account, by a wide margin, was Respironics at $4.6 million, up from $4.1 million in the first quarter. Respironics uses our motors to power a small blower which provides air flow in sleep apnea machines.