Moog Inc (MOG.A) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Moog's Fourth Quarter 2006 and Year-End Earnings Conference Call. At this time all lines are in a listen-only mode. Later, there will be a question-and-answer session and instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, today's conference is being recorded.

At this time then, I'd like to turn the conference over to Ms. Ann Luhr. Please go ahead.

Good morning. Before we begin, we call to your attention the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties and other factors is contained in our news release with today's date, our most recent form 10-Q filed August 10, 2006 and in certain of our other public filings with the SEC. Bob?

Good morning everyone. Thanks for joining us. This morning we will report results for our fourth quarter fiscal '06, the total fiscal '06 year-end results and we'll update our guidance for the balance of '07.

First, let me focus on the total year for '06. This was a great year for the Company. Sales of 1.3 billion were up 24% from last year, net earnings 81 million, 6.2% of sales, up 26% over last year's 65 million. You'll recall that we issued some equity in the early part of '06. As a result, our earnings per share of $1.97 represent a 20% increase over last year's $1.64. If we'd been expensing stock options last year, the increase would be 23%.

Financial performance was achieved in spite of a $25 million increase in R&D expense, to a total of 69 million or 5.3% of sales. Included in that amount was 31 million spent on the new Boeing 787, an investment which we believe will pay off handsomely in years to come.

In addition to financial performance, this was a year characterized by a number of technical accomplishments, success in some important, new programs and the start of our new medical segment. So now, let me turn to Q4.

Fourth quarter was a strong finish for the year. Sales, 341 million, were up 21%, a $60 million increase from last year. The strong sales allowed us to overcome some program cost increases in some purchase accounting expenses and still achieve 21.8 million in net profit or $0.51 per share. On a per share basis, that's a 16% increase over last year.

Now to the segments, aircraft, I'll start with Q4. Aircraft had a big finish for '06. Total aircraft sales in the quarter were up 16% to 143 million. Military sales were up 13% and commercial up 21%. Military sales of 90 million were up 11 million from the year-ago and the biggest increases were in sales of equipment to our Japanese licensees on the F-15 and the Seahawk, on the V22 Tilt Rotor and in the after-market. After-market sales were up 2 million to a new total of just under 31 million for the quarter.

This was another big quarter for the F-35, the joint strike fighter program. Sales at 19.6 million, an $800,000 increase from the fourth quarter of last year. Of that total, 9.5 million were a little under 50%, was work done in our Company and the rest was work done by our partners. The increase in workload was all in our Company. As the program moves toward first light, we've taken a stronger leadership role in where the work falls on our shoulders.

Last quarter, I described problems that had cropped up on the Airbus A400. 400M cargo aircraft, we'd increased our lost reserve at that time, in recognition of a redesign required by low-temperature performance and electromagnetic interference. In this quarter, we've added another $500,000 to that reserve for the anticipated costs of a number of smaller issues having to do with more expensive analysis work and continued support of integration testing. In addition, since we're on the eve of qualification testing on hardware that involves new technology, we've updated our evaluation of the technical risks and the associated cost exposure. As a result, we've increased our program cost estimate by an additional 1.2 million.

On the commercial side, sales in the fourth quarter were up 9 million from a year ago to a new total of 52.5 million. Sales increased across the board. OEM sales to Boeing were up 2 million to 12 million. Airbus sales up 1 million to almost 5 million. Our business jet product line up 2 million to 9 million and the commercial after-market was up 3 million to a new total of just under 22 million.

So for the aircraft segment, for the year in total, the whole of fiscal '06, military aircraft sales were up 34 million to 331 million. There were some big drivers for the increase. The first, the F-35 finished the year at 76.7 million, up 15 million from a year ago and most of that increase was work done in our Company. The Moog activity generated over 40 million or 52% of total F-35 sales; the rest being effort invoice by our partners.

Another big driver for the year was an $18 million increase in after-market sales to a new total of 112 million. The most noticeable after-market increase was in spares, repairs and overhaul for the Black Hawk [node allocation] by the activity in the Mid East. [The runner] puts and takes on our portfolio of military aircraft programs but the major ones, the F-18 and the V-22 were fairly stable year to year.

For the year '06, commercial aircraft sales were up 42 million or 27%; the new total 197 million. Clearly, this market has recovered. The drivers were a $10 million increase in OEM equipment to Boeing, $8 million in our business jet product line and a $19 million increase in the commercial after-market. Commercial after-market for the year was just shy of 84 million.

Margins, margins for the quarter in aircraft were a relatively strong 13.2%. The growth in after-market sales offset the high level of R&D, 787 R&D expense reached a new peak of 10.6 million. For the year, the margin story is very much the same. Aircraft margins finished at 12.6, down from 14.1 a year ago, however, during the year, R&D in our aircraft group was close to 40 million and of that, as I mentioned, 31 million with the 787.

Last year, total aircraft R&D was just over 21 million. So all in all, we're very pleased with the margin performance of the aircraft group in a year of very heavy R&D expense.

'07, aircraft for '07, we're reaffirming our '07 sales forecast, projecting total sales of 548 million which will be an increase of 4% over this year. The increase will all be on the commercial side. Commercials sales, we've forecasted up 30 million in '07 to 227 million, driven by a $17 million increase in OEM sales to Boeing, including the initial revenues on the 87 and an $8 million increase in business jet sales.

At the moment, we're projecting a modest increase in the after-market. We're forecasting after-market sales in '07 of 86 million which would be a continuation of the average level we've seen in the last three quarters. On the other hand, military aircraft sales will actually be down about 10 million in '07, to a total of 321. The decrease, the result of lower revenues on the F-35, projecting F-35 sales about 66 million, the development program winds down and we prepare for production.

Other than that, in total, the military aircraft business is fairly stable. There are small reductions in a number of OEM programs off by an 8% increase in the after-market to a new level of 121 million. We're projecting margins in the aircraft business of 11.9%, a slight reduction from what we achieved in '06. Although R&D expense was very high in '06, we anticipate that we'll maintain that level in '07. As I said 90 days ago, we're budgeting on the basis that there will be more work on 787 derivatives and on an all-new A350XWB.

In addition, our aircraft product mix will be shifting in '07. The growth areas are mostly commercial OEM which, as you know, is not the most profitable part of our aircraft business. All that said, our aircraft business, at the projected margin level, will still be the major provider of operating profit for the whole of Moog, Incorporated.

Space and defense, first, Q4. Space and defense at another sales quarter--sales were up 7% to almost 36 million. Revenue increase in two areas: sales of propulsion controls and mechanisms for satellites and space vehicles were up a couple million to just over 11 million. This represents a slight uptick in commercial satellite business. The bigger increase though was in defense controls.

Sales were up 4 million to a total of 11. The drivers were the marines' light armored vehicle in the U.S. and the CV9030 programs in Europe. The rest of the space and defense business was actually down in the quarter. Launch vehicles practically took the quarter off with sales of less than a million. Strategic missiles and missile defense, taken together, were down 5.5 million--down from 5.5 million to 3.6 and the tactical missile business was down from 7 million to 5.4. So in the quarter, the real strength was in defense controls.

Space and defense for the total of '06 overall, the segment made real progress. Sales were up 15%, increase of almost 20 million to a total of 148. Five million-dollar increase in propulsion controls and mechanisms for satellites to a total of 44 million but the big increase, as in the quarter, was in defense controls, a $10 million increase to just under 35 million. And the big new programs were the Light Armored Vehicle and the Striker Mobile Gun System. Also, we're seeing increased spares activity for other [Moog] military vehicle programs we've fielded in recent years.

Launch vehicle business for the year was down a couple million. Strategic missiles and missile defense were pretty stable, totaling 19 million. And for the year '06, the tactical missile business was up 5 million to a total of 27, largely a result of foreign military deliveries of Maverick and the resumed production of the [Tole] missile. Margins and space and defense continued to improve. It made 8.9% in the quarter which brought the year-end at 9%, up from 8.6% last year.

How about '07? As in the aircraft segment, we're reaffirming our guidance for space and defense in '07, projecting another 15% sales increase to a total of 170 million. The big story in '07 will be even faster growth in defense controls. We're projecting a $26 million increase in this category to a total of 61 million. It'll be a big year for deliveries on the Light Armored Vehicle and for the new development work that we've won, together with Curtis-Wright, on future combat systems.

You may remember, a couple of quarters ago, on this call, we announced that we were part of a team led by Curtis, won a contract to development [several] motor controllers for use on the future combat system's common chasse. This is a $32 million development program and we and Curtis are splitting it, 50/50.

In '07, the launch vehicle business forecasted to benefit from 4 million worth of new work on the space shuttle replacement programs, both the crew exploration vehicle and the crew launch vehicle. We're forecasting a $3 million increase in equipment we supply for naval applications and those are all the upside. The offset, however, will be a reduction in tactical missile business. In 3T1, vertical launch ASROC and Maverick are all finished up. So with Tomahawk continuing at the current level, but the result will be a $14 million reduction in this category to only 14 million.

As I said, 90 days ago, in spite of this mix chain from some bread-and-butter old programs to newer development programs, we still hope to hold margins at 9% and as the newer products mature, we're optimistic that, in the long term, profitability in this segment will improve.

Before I leave space and defense though, I would add this one thought: there is some potential upside. Our revenues in missile defense include the [FAVs] program, EKV ground-based interceptor and the ground-based mid-course defense system. All these programs have totaled about 6 million a year. As you may know, the U.S. has rather quietly deployed a missile defense system. There have been a number of successful tests that don't get much attention in the press. Given the emerging nuclear threats, North Korea and Iran, some of our allies are showing increased interest in deploying our missile defense system and it's not inconceivable that these initiatives could generate some business maybe in '08 and potentially, even in '07.

On to industrial, industrial fourth quarter, sales came in at 94.4 million, an 18% increase, up 14 million from the same quarter a year ago. Our FCS and Flo-Tork acquisitions have become increasingly integrated into our industrial operation, so it's harder to estimate sales generated simply by these acquisitions. In a rough way, though, we can say that about 10 million sales in the quarter were the result of acquisitions and without them, our organic growth would have been in the neighborhood of 12%.

Step[unintelligible] plastics, sales were up in every one of our major markets. Plastics, at just under 15 million, was down 1 million. We continue to experience a relatively weak European market for controls on injection-molding machines used in the production of optical discs. The Japanese company, Sumitomo, seems to be winning the major market share of this business and Sumitomo uses electric controls with their own manufacturer.

On a more positive note though, turbine controls business was up almost 40%. The power gen. market seems to be doing well all around the globe, particularly in China. China market is also driving up sales gage controls for steel mills, an increase quarter over quarter of 39% to a total of 7 million.

Simulator business was up in the quarter 23% to 10 million. Test equipment sales of complete systems, as well as components surged by 43% to a new high of 9.6. Sales of controls on metal-forming machines continue to be our fastest-growing area, an increase of 46% to a level of just under 8 million, and after-market sales in the quarter grew a respectable 7%.

For the total of '06 and the year-to-year comparison, industrial sales of 381 million were up 21%, up 66 million from a year ago. Of the increase, about 39 million would be attributable to recent acquisitions for organic growth of 27 million would have been about 9%. As was the case in the fourth quarter, plastics controls was the only of our major product lines that did not increase in the year. Sales in that category of 62 million were down about 5%. On the other hand, turbine controls were up 30%. Gage controls for steel mills were also up 30%. Simulator business more than doubled to nearly 41 million, as did sales for the test equipment market at 38 million. Controls for metal-forming machines increased 15% to almost 29 million and the after-market grew slowly but steadily about 5%. It finished at just under 38 million.

Margins in industrial, fourth quarter margins, 10.4% were up smartly from 7.5% a year ago. We've been experiencing comparable quarter-over-quarter margin improvement all year long and so industrial finished the year at 11.8%, up from 8.6 a year ago. For '07, we're forecasting industrial sales in the range between 412 and 432. The mid point, 422, would be an 11% increase over '06. We're looking for a slight recovery in our plastics business based on some new product introductions in the Asian market. We're hoping to achieve a level of about 71 million in plastics next year.

Turbine controls and steel mills, we think will stabilize, as will the simulator business. We're looking for an uptick in metal-forming to about 32 million and the test equipment to about 52 million, and a more substantial increase to our after-market to a level of about 43 million. We're projecting continued margin improvement. We're hoping to see industrial margins of 12.5% for the '07 year. If we're successful in this, it'll be the best industrial margin performance in many years.

Components group, Q4. Our components group continues on its roll. Sales of 61.6 million were up 39% from a year ago. Since we own the Kaydon companies for nine weeks of last year's fourth growth, segregating sales growth relative to that acquisition is not particularly meaningful, even if it were easy for us to do it. The major portion of that acquisition, Electro-Tec has been thoroughly integrated into our slip rings operating in Blacksburg, so we're no longer able to sort out which are shipments from the Kaydon companies and which from the legacy Moog company.

Aircraft product sales in the components group were up 37% at 22 million, continue to be the largest product line in the components group. About 30% of that total is after-market. The largest single program continues to be Black Hawk at 1.6 million, including both the OEM production and robust after-market activity. Northrop's Guardian System, a large aircraft infrared countermeasure system, generated about 1 million in sales for the quarter. This is an anti-missile defense system used on the C-17, C-130 and the MH53 helicopter. We delivered about $800,000-worth of slip rings for use on the flare system for the F-18 and a similar amount for Raytheon on the multi-spectral target acquisition system used on the Predator of the Black Hawk.

Space and defense sales in the components group at 9.6 million were up 35%. [Unintelligible] program is an upgrade on the Bradley fighting vehicle on which we supply a number of components for the commander's independent viewer, slip ring for the [unintelligible] and motor's use of target acquisition.

In the quarter, sales in the marine market tripled from 2 million a year ago to over 6 million in this fourth quarter. The marine sales are generally--are greatly influenced by the deep-ocean oil prospecting and production that's going on. These efforts generate demand for slip rings used in remotely-operated vehicles. It's an underwater robot and also floating platform storage facility.

Sales of components for use in medical applications were up quarter over quarter by 16% to almost 12 million. We saw a modest increase in the shipment of motors to Respironics for sleep apnea equipment but a more dramatic increase in [slip rings] for CAT scan machines. Industrial sales of the components [grew to a] remarkable 36% to just over 12 million. These sales represent a wide variety of products used in a broad range of markets when the fastest growing is commercial slip rings for closed-circuit TV surveillance systems.

For the total year '06, '06 was a fantastic year for the components group. Sales were up 81 million or 52% to 238 million. Our components group was established, you may remember, at the beginning of our fiscal '04 when we acquired the [Litton] poly-scientific division in Northrop Grumman. It was $130 million-business at that time. Over the three-year period since then, sales have grown by 108 million, about half of which is attributable to the acquisition of the Kaydon companies.

In fiscal '06, aircraft sales were up 28% to 78 million, about three quarters are military and the rest commercial. Space and defense was up 19 million or 84% to a total of 43 million, most of the growth in military vehicles. Sales in the marine market, primarily the focal product line, added 23 million. Medical equipment was up 30% to 47 million and industrial sales were up 38% to 46 million. Margins in the components group were very strong. In the quarter, margins were 13.5%, up from 12.3% in the fourth quarter of last year. For the year, margins came in at a remarkable 15.5%, up from 13.5% a year ago.

Our '07 forecast for the components group, 258 million, will be a 9% increase over fiscal '06. Given the recent growth pattern, this may seem to you like a conservative estimate and perhaps it is, however, we believe that sales growth in our military aircraft and defense-controlled products have been largely influenced by the conflict in the Mid East. And it may be that the current level is a continuing level and not one that's going to grow at last year's rate. And we feel the same way about the marine products. They've been driven to the '06 level by the resurgent interest in energy exploration and it may be that although the current level will be sustained, that it won't grown in '07. With respect to components used in medical devices and industrial systems, we're projecting growth rates that reflect our long-term pattern, as opposed to the 3+% increases in fiscal '06.

All in all, we consider our '07 forecast for components to be an achievable one. Our original guidance and our margins for the components group was 16.4% but given the performance of the last quarter, we think it's sensible to moderate that projection and project '07 at 15.6%, the same level we achieved in '06.

Medical devices, fourth quarter '06. You'll recall that we announced toward the end of our fourth quarter, the acquisition of two disposable pump product lines from McKinley to complement our Curlin products. During the quarter, we transferred the production of the McKinley products from their former location in Denver to our Curlin plant in Huntington Beach. Our fourth quarter sales for medical devices came in at 6.4 million, including about one month's sales for the new products. This compares to third quarter sales of 6.6 million and our original forecast for the quarter of 6.5 million. On a year-to-date basis, which really just began in the middle of our fiscal year, sales in medical devices group were 13 million, about what we were targeting.

Pump sales during the quarter came in at 4.1 million, the same as our third quarter level. We experienced the summer slowdown for pump sales that we were expecting but lower Curlin pump sales were offset by the new McKinley product sales of about $500,000. Sales of administration sets though were surprisingly soft in the quarter at 1.1 million. We learned that B. Braun, our major distributor in the U.S., had gotten overstocked on administration sets and as a result, our sales were 800,000 below what we'd forecasted. The impact of this sales shortfall was also a big whack on operating profit since administration sets are the more profitable part of our medical devices product line.

So operating profit for the fourth quarter was breakeven, compared to a $200,000 loss of the third quarter and our forecasted profit for the quarter of 700,000. Our fourth quarter operating profit was affected by the lower-than-forecasted administration set sales, some moving costs related with the McKinley product line and a slightly unfavorable pump product mix. Purchase accounting adjustments in the quarter totaled 1.3 million. For the year, operating profit for medical devices was a loss of 200,000, including purchase accounting adjustments of 3.9 million.

So what we've learned in the fourth quarter really doesn't alter our outlook on '07. We expect that the McKinley products will add about 7 million to '07 sales and then in total, our new medical devices segment will generate sales of about 40 million and operating profit of about 8 million or about 20% of sales. After inclusion of continuing-purchasing accounting adjustments estimated at 3.4 million for the year '07.

So now let me summarize our guidance for '07. Sales have changed only slightly from our previous guidance to include the 7 million of the McKinley products. We have moderated margin slightly in the components group. In total, we're now forecasting sales at 1.438 billion, plus or minus about 10 million. If we achieve the mid-range forecast, it will represent a sales increase of 10%. We're forecasting operating profit of about 181 million or 12.6% of sales, projecting a continuation high R&D expense in aircraft and an increase in R&D for the Company as a whole. Selling an admin expense will be up, in proportion to sales and interest will be about the same as this year. We're forecasting net earnings in the range of 94.4 million to 97.7 million. Middle of the range, 96.1 million, will be an 18% increase. Since we sold shares in the early part of '06, our average share count will creep up by 4% and on a per-share basis, the mid point of our range, 2.25 will be a 14% increase over the $1.97 we just achieved in '06.

We expect that this will be our 13th consecutive year of positive growth in earnings per share and over that period, our compound growth rate has been 18%. We'll stick with the same quarterly forecast that we provided 90 days ago, $0.51 in the first quarter, $0.55 in the second, and then $0.58 and $0.61.

And now, after all those numbers, I'll turn you over to Bob Banta for some more numbers.

The good news continues. Cash flow from operations was 47 million in the fourth quarter. Now that's up substantially from only 4 million in Q3. That's just 90 days ago. We collected a fair amount of receivables in the $18 million contribution to our U.S.-defined pension plan in '03, got us caught up for fiscal '06, so that we didn't make any in this fourth quarter.

Regarding that U.S. pension plan, we ended '06 with planned assets in the U.S. of over 310 million or just about 310 million, versus an accumulated benefit obligation, ABO, of 301 million. That's the first time we've been in a surplus position in many years.

We're still estimating making about 30 million of contributions in '07, however, we'll monitor this plan for a possible reduction in such contributions. And then that'll depend largely on where discount rates might be as we get to the end of our fiscal '07.

Capital expenditures totaled 23.9 million in this last quarter with depreciation amounting to 9.4 million and amortization amounting to 2.8 million. Pre-cash flow then amounted to 23 million. That's just about 100% of the net earnings of that we generated for this fourth quarter.

Cash taxes paid in the quarter were 9.6 million. Reserves for estimated contract losses stood at 15.1 million and that's compared to 13.5 million 90 days ago. Bob, outlined some of the changes in those reserves, particularly, the A400, a few minutes ago.

And the reaffirmed guidance for '07 that Bob outlined, we've lowered by $500,000 our estimated interest expense to 22 million for '07. And that's based on the reduction in our margin over Libor and reduced commitment fees on the bank credit facility that we detailed in our press release a few days ago, on October 26.

So with that, we'll go to Q&A.

Thank you very much. [OPERATOR INSTRUCTIONS]

And our first question this morning comes from the line of Cai von Rumohr with Cowen & Company. Please, go ahead.

Yes, good quarter, guys.

Thank you.

R&D was a little bit higher. I thought it had peaked on the 787. Could you tell us--maybe I missed it but you said R&D would be up--approximately where do you expect R&D to be for the year in '07 and how much of that would be the 87 and where is the other increase coming from?

We didn't specify a number for '07 in the text--

Seventy-six.

--however, we do--our forecast is about 76 million for '07, up from 69 million this year. In the aircraft group, we have projected R&D to continue at roughly the same level and we talked about this before. This is a little bit of a guessing game and it depends on what the impact will be for us of the 787 derivatives. Perhaps a little bit of what happens in qualification testing of the hardware that we're delivering for the original 787 base design, but also we've planned to have capability available if Airbus actually pulls the trigger on a A350.

The other increase though, the rest of our business is we have some important efforts under way. The biggest of them in our industrial business and it's the design of a new multi-access electronic controller for application in a variety of different industrial machine applications. So we are, as I say, projecting an increase in R&D '07 over '06 of about $6 million.

Now, there is the possibility in the aircraft business that if the A350 continues to slide or if the picture changes on the 787, that things could be a little different but my hunch is that there'll be plenty of opportunities in the aircraft business for our Company to invest our R&D resources.

Okay, could you tell us--you'd mentioned that the 787 was 31 million. It was 10.6 in the final quarter. What are you budgeting for the 787 in 2007, and how are you doing, technically? Are you on schedule? You on budget?

I can answer the second question. We're doing--we're on schedule. It is a real horserace with a couple of the designs that were in the requirements developed late in the game but at this stage in the game, we still believe that we'll be able to support the schedule that will support first [flight].

Technically, we're doing fine. The hardware is through development tests and into qualification is performing just dandy. For '07, I don't have the number and--the 787 number in my head though we'll have to get back to you on that.

Okay and the contract reserves looks like they went up 1.5 million. Was that all the 400M or was there any--

[Well], the big change was in the 400M.

Okay. Were there any--you mentioned some of the other adjustments. How much were the moving costs and medical?

Not too substantial. It's a combination of moving and services and was in the--somewhere between $100,000 and $200,000.

Terrific, I'll let someone else go. Thanks, again.

Okay, Cai.

Thank you and we have a question then from the line of Alex Hamilton with the Benchmark Group. Please--or Company--excuse me. Please, go ahead.

Hi.

Hi, good morning. Cai did a very good job of asking the questions--

He always does.

He always does but to add--

I always say that I wish I knew all of the answers to all of the questions that Cai can ask.

As we all do. Just to add to that, there's rumblings and probably an obvious conclusion that 787 production does increase--

Excuse me. There's rumblings that the 787 what?

Production line is going to increase as they know it.

I heard a clip, just this morning, that there had been an announcement but I can't find the announcement. Have you--

Yeah, I haven't seen the announcement confirmed. But I mean, we think somewhere along the line that they're going to do that. What would that mean to the--you've obviously increased your forecast for R&D. Does that mean that your R&D, if that were the case, is probably going to go up or are you going to get a quicker return on your money or a little bit of both or--

I think what they're talking about, in terms of production rate, is the ultimate production rate and I think we're talking about the year 2010 or thereabouts. And I think the question is, is it going to be 100 a year or 120 a year or some other number?

I don't think that decision will have any influence on our R&D expenditures. I think the higher the rate, the better it is for us in the out years. As everyone knows, in this business, you quote prices to Boeing which are fixed for a considerable period independent of quantity or production rate. So the higher the rate is, the better it is for us, presumably the hardware costs decline somewhat and the price is fixed. So we're cheering the increase in production rate but it's not--I think the--it could influence our revenues in '09 but I don't think it's going to be any sooner than that.

Great, thank you very much.

Thanks and our next question comes from the line of Ron Epstein with Merrill Lynch. Please, go ahead.

Hey, Ron.

Hey, good morning, guys. On A400M, can you give us a little more color? What's going on there?

There isn't anything dramatic to point at. It's kind of a lot of--accumulation of a lot of little things and I guess I could say that, as you know, this is the first actuator design job or a set of actuator design jobs that we've done for Airbus. Historically, our Company has principally been a supplier of Servo valves, the [good-wrench] companies that build all the actuators. There's one exception to that, an actuator on the A330 that we--that came to us in the Allied single acquisition. But this is kind of our first go-around with Airbus and as I mentioned in prepared remarks, there's--we have increased our cost estimate on the program in recognition of a continuing level of analysis that seems to be required and an increased support of integration testing and recognizing that there is new technology involved in the program, we've done a careful evaluation of what's the probability of failure in qualification testing of some of the elements and what could the associated cost implications be? And it's that--and it's on the basis of that kind of analysis that we've increased our estimates to complete.

So we think in the--said simply, we're far enough into the program to know the customer and the hardware better and as a result, we think the cost to complete the design and development is going to be higher than we had originally estimated. This is not an altogether unusual occurrence, in our experience.

Sure.

We rarely overestimate at the front end.

Sure. Sure. Now if that program were to experience some--I guess from a financial [unintelligible] perspective, if that program were to experience delays from the current schedule, how do we think about what impact that would have on Moog?

I don't think it'd be too noticeable. We have a commitment from Airbus on recovery of the originally-estimated non-recurring, which is to say, if the total quantity of aircraft isn't purchased, we get reimbursed. There could be the sort of impact that we had in this quarter but I don't think there's going to be anything--I don't think the fate of the A400M is going to be a particularly big deal for our Company.

And then, I just wanted--

The whole point of--I shouldn't say the whole point but the most important thing about our participation in the A400M is that we're working on that program for the same flight control engineering staff that designs their commercial airplanes. And one could look at this little outing on the A400M as a largely paid for introduction for what's it like to do business with Airbus? And we think that the more experience we have, as a result of that, the better off we'll be in subsequent competitions, the A350 and perhaps and more importantly, the replacement for the A320.

Okay. Okay and maybe just a follow-on question related to Airbus. Just kind of a, I guess, a big-picture question. One of the things we've heard from some suppliers on A380--which you guys are not. Is that right?

We have a very minor participation in the A380, the brake system.

That as Airbus moves forward on A350, that some suppliers may be, I guess, may be a little reticent about taking much exposure on that next airplane because of exposure they maybe already have on A380. Do you have any thoughts on that? I mean, I guess what I'm trying to ask is do you think Airbus is going to have maybe a little more of a problem than usual getting suppliers to take risks on A350 if a subset of suppliers has already burned a bit on A380?

This is just an opinion but--

Sure.

--but I think it's amazing how short our memories are and it's probably more likely that some of the folks that have been burned on A380 will look at the A350 as their opportunity to get well again. I wouldn't--I think Airbus will find an active and interested supplier community for the A350. I think they, themselves, may shift some of their emphasis and some of their preferences. I think that--I don't know that the delays in the program are related to the supplier community but I think Airbus had had some experiences that they're less than completely satisfied with.

Okay, interesting. Interesting. Thank you.

Thanks and our next question comes from the line of Robert Stallard with Banc of America. Please go ahead.

Good morning, guys.

Hey, Rob.

Bob, on the commercial space after-market, looking at the very recent history, have you seen any change in trajectory in that business?

As I mentioned, our last three quarters have averaged about 21.5 million and they've been pretty consistent, so it kind of looks to me like, based on that data, that we've sort of achieved a level and I don't see a continuing growth trajectory, at least in our numbers.

Okay, so you're seeing it sort of steadying off?

Yeah, it went way the hell up. I mean, for the year, our commercial after-market in '05 was 65 million. This year, it was 84 million. So you know, one could extrapolate that curve and go to--get the real big numbers. On the other hand, we were at just under 22 million in this quarter but we were at 21.4 million two quarters ago and the growth over that period does not reflect the year-to-year growth.

So as always, we've tried to be at our--we've built into our forecast what we hope is a relatively conservative forecast and I hope that a year from now, we'll be talking about another big increase but I think it would be unwise to extrapolate from 65 to 84, so we'll see.

Yep and just as a follow-up, with regards to 2007, how are you seeing your capital deployment plan panning out? Are you seeing a potential acquisition [rather]?

Potential acquisitions for '07?

Yeah.

We're always in the market. We think there are opportunities. There's nothing that we're ready to announce. We recently done a--redone our debt financing. Prices, as you know, are very high. It seems to us that every seller has a romantic notion of the value of the property they're selling. So I just--I think I--you just can't--can't predict what's going to happen but we're interested, we're active and we're ready.

Okay, thank you very much.

Thanks and we have a question now from the line of Eric Hugel with Stephens. Please, go ahead.

Hey, good morning, guys.

Hey, Eric.

Hey, can you sort of go back to the A350? You sort of mentioned that sort of with the program, the A350 but you said, more importantly, as a sort of a way to get on the A320. And I guess, following up a little bit on somebody else's questions and sort of hinting at no one really expects the A350 to be a real stellar performer in there because it's so late to market. When you sort of bid, as you said that you would for that aircraft, I mean, are you going to be bidding that program as sort of a standalone economic case or as an introduction to the get-onto-the-A320 replacement?

We'll bid it as a standalone case. We'll bid it based on the economics that we think are realistic for that airplane. I would not though be so pessimistic about the A350. I think, clearly, it's late to market but these airplane products have very long life cycles and 20 years from now, we may have a hard time remembering what happened in the first few years of the 787 and A350. So--and I think, in spite of the A380 programs or maybe partly as a result of what's gone in, in that program, Airbus may very well do a better job on the A350.

Everybody in the business, in our business, flight controls for commercial airplanes, thinks, in one way or another, that they're trying to prepare themselves for the 737, A320 replacements because that's where the volume is. But as an example, we did not pursue the flight controls on the A380 at all. Our participation on the A380 is a relatively minor participation on the brake system with Messier. We didn't pursue the flight controls because we were not convinced that the production rate was realistic, and still aren't. I mean, if they were--Airbus was suggesting to suppliers that the economics should be based on the presumption that they're going to build 48 aircraft a year on a continuing basis and we did not find that a--we couldn't accept that as a practical premise and so we literally no-bid the program.

Can you talk about--your tax rate was a bit lower than expected in the quarter. Was there any sort of one-time boost that you got there and what would you expect it to be, going forward?

Hi, Eric. [It's Bob Banta.] Well, let's see, going forward, our guidance for '07 uses a 32.3% rate which is the same as what we used 90 days ago when we came out with the '07 guidance. This fourth quarter, though we were quite a bit below that and then it seems there were about ten different items as we trued up the accounts where we had been conservative--too high on a liability or too light on a deferred tax asset and as we trued up those accounts, to some extent, that's a function of, so where are the earnings really coming out? And they're all--there really are a long, laundry-list of things and different entities around the globe. It's probably a bit unusual but at least we've been conservative throughout the year and we had to pick it up in this fourth quarter.

So it was an altogether, it probably benefited a little over $1.3 million but nonetheless, we're happy to have it and maybe we'll get a break similarly when we get to the end of '07. We'll see.

Was there anything in the--the corporate [another] line was a little bit higher than expected. It usually tails off in the fourth quarter. Was there anything sort of special in there or sort of just small that sort of accumulated?

I think it was pretty miscellaneous. I'm going to find my sheet here but spread among a large variety of things, nothing that stands out.

All right and my last question, just wanted to follow up on your ever-troubled business jet programs [unintelligible] horizon. Sort of progress? Sort of how are things going with those programs?

Hey, we got through a quarter without jacking up any loss reserves on the business jets. No, we're feeling--we're coming close to the end of the development program, that is and they're going into production and revenues are going up and we think that there's light at the end of the tunnel. Raytheon may be pretty close to certification on the ocular horizon and [challengers] 300 seems to be doing okay. Gulf Stream programs are going okay, so I think that chapter is pretty close to over.

And my last one--maybe we could take if offline [unintelligible]--but I guess, looking at the equity account from this quarter to last quarter, I know you issued some equity for the McKinley acquisition but it was a rather large step up, even excluding that, about $60 million. Is there anything sort of adjustments in there into--that hit the equity account?

[This is Bob Banta.] I think it has a lot to do with the FAS-87 pension--

Okay, it's the pension?

--numbers that came in from the actuary. Jen Walter who's manager of our financial reporting is an expert in this fine art. You want to detail some of that?

As Bob had mentioned earlier, we are in a surplus position of our ABO versus our fair value of our assets and our U.S. plan. So previously, last year, we had an additional minimum pension liability that we had sitting in our equity. For that U.S. plan, we were able to remove that [net], so a large chunk of the changes that you're seeing in equity.

Great, thanks a lot, guys.

I'll bet you guessed that answer, didn't you?

Somewhat.

It wasn't too much for you. I think it's pretty exotic stuff, the way these pension actuaries can influence your account.

Thanks, a lot, guys.

[Good.]

Thank you and we are showing a follow-up question from the line of Cai von Rumohr with Cowen & Company. Please, go ahead.

Yes, you mentioned that the admin set sales were down in the fourth quarter because of inventory overstocking at Braun. Could you comment on, as you kind of have looked into that, what was the reason for the overstocking and how does their inventory situation look today? So what does that imply for the [first] quarter?

I'll jump to the end. I think that--we think that they're not overstocked at the moment and therefore, there shouldn't be a continuing effect. A suspicious person might wonder if there wasn't a little channel stuffing on the part of the previous owner but we don't think so. The folks who are working this business think that it may be that the ordering of that--of the administration set, as opposed to the pumps, has not been a particularly scientific process on the part of the B. Braun organization. And at least at the moment, our opinion is that it's just happen stance. It does, however, make the point that since the margins in that part of the business are good, that volatility in the administration set sales can have a noticeable influence on the resulting financials. So going forward, I guess we'll have to be careful and conservative about what we're forecasting, in terms of administration set sales.

Okay and you gave us, for the fourth quarter, the split between pumps and admin sets. Could you give us that number for 2007?

I can. Don't know that I want to. Well, I think of the $40 million, about 25 million of it is forecasted to be pumps, about 11 million, just under 11 million administration sets and then there's some other sales, lock boxes, and sort of ancillary equipment that goes with principally, the Curlin product line.

That's terrific and the last one, you just did the McKinley acquisition. This is a new area for you. Where are you, in terms of your thoughts about M&A? Is there something that you're continuing to look, want to digest, new product strategy, is that part of the [outlook] here or--

I'd describe us as continuing to look but pretty close to the--you know there are some other properties that we're acquainted with that we're considering but we're pretty close to digesting. If we don't--if one of the opportunities that we're already acquainted with doesn't materialize, we'll probably take a breather for a while until we get the current business--get better acquainted with it.

Okay, terrific. Thank you very much.

Okay.

Thanks and at this time, I'm showing no further questions in queue.

Thank you all very much for coming and listening. We'll see you next time.

Great and thank you. And ladies and gentlemen, this conference will be available for replay starting today, Tuesday, November 07, 2006 at 12:30 p.m. Eastern time and it will be available through Tuesday, November 21 at midnight, Eastern time. And you may access the AT&T executive playback service by dialing 1-800-475-6701 and then enter the access code of 846119. That number, once again, 1-800-475-6701 and again, enter the access code of 846119. And that does conclude our conference for today. Thanks for your participation and for using AT&T's executive teleconference. You may now disconnect.