Moog Inc (MOG.A) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Moog Second Quarter Fiscal 2007 Earnings Conference Call.

[OPERATOR INSTRUCTIONS.]

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ann Luhr. Please go ahead.

Good morning.

Before we begin, we call your attention to 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 of today's date, our most recent Form 10-Q filed on February 8, 2007, and in certain of our other public filings with the SEC.

Bob?

Morning, everybody. Thanks for joining us. We'll report this morning on results for our second quarter of '07, and we'll update our guidance for the year.

I'm about to describe another very strong quarter. Sales of $385 million were up 19% from the year previous. Net earnings, $24.5 million, up 14%. Earnings per share at $0.57 were up 8% compared to a very strong quarter a year ago, you may remember, included an earnings pickup from the Comanche termination. You may also remember that we issued some additional shares in the early part of '06, and so our average share count is now 43.1 million shares compared to 40.7 million a year ago.

14% increase in net earnings was achieved in spite of the fact that R&D expense in the quarter of $25.7 million was up almost $10 million from the year previous. R&D in this quarter was 6.7% of sales. This is an all-time high for us, and reflects the substantial R&D investment the Company is making in the 787. The sizable sales increase and a slight improvement in gross margin performance provided $24.6 million increase in gross profit, and that covered the increased R&D expense, normal growth in SG&A, and a slight increase in interest. Our tax rate at 32.4% was actually up slightly from a year ago.

Performance was strong in all of our segments. Sales were up across the board. In Aircraft, margins are influenced by the heavy R&D spend. Margins in Space and Defense and Industrial were up nicely, and the Components group continued its strong performance. Taken all together, it was another very solid quarter.

Now, we'll go to the segments.

Aircraft, Q2. Total sales in our Aircraft business were up an impressive 14% to $146 million. Our overall sales level and the balance between military and commercial sales are very much influenced by our two major development programs, the F-35 and the 787.

In the military business, our production programs, F-18, F-15, V-22, Blackhawk and others are fairly stable, but Military Aircraft sales declined in the quarter by $4 million because the F-35 revenues were down by $6.9 million. In the quarter, Military Aircraft revenues were just over $76 million and, of that, F-35 was $13.8 million.

As you know, the CTOL airplane flew in the middle of December. It's flown a number of times since, and all our equipment has performed flawlessly. Every quarter I remind you that our F-35 sales include not only revenue from work done in our company, but also work done in our partner companies, Parker, Ham-Sundstrand, Curtiss Wright.

In this quarter, a little over half of the revenue was generated at Moog, and this has been the pattern throughout the program. Given the work left to be done on the STOVL and the Navy airplane, we're expecting that F-35 revenues will actually increase over the next two quarters into the $16 to $17 million range.

Aftermarket in military aircraft business increased by a little over $1 million to $26.8 million for the quarter, an increase of $2.5 million over the most recent quarter, but substantially less than the pace we experienced in the last half of fiscal '06.

The big increase in Aircraft sales in this quarter was in the Commercial side. Commercial aircraft sales were up 47% to $69.3 million. Every major category was up. OEM equipment on the Boeing 7 Series aircraft up 47% to over $15 million in the quarter. In addition, we received our first production order for 787 equipment. Our revenue on that program was $8.3 million in the quarter. So, our total for OEM equipment sales to Boeing were $23.5 million compared to $10.4 million a year ago.

Sales to Airbus were up 8% to a little over $5 million. Business jet revenues of $12 million were up over 90% from a year ago, reflecting the move into production of the Hawker Horizon and the Challenger 300.

Commercial aftermarket revenues of $23.1 million were up 8% from a year ago. This is the highest commercial aftermarket revenue level that we've seen in many quarters.

Three weeks ago, we announced that we've been selected to provide the lateral control electronics on the 747-8. This is a new application on the 47. It is flight control electronics for the aileron and the spoilers. This will be the first time that our company will deliver flight control electronics to Boeing for a commercial transport.

Historically, this is the kind of equipment that's been the purview of the flight control computer companies, BAE Systems and Honeywell. Neither of these companies have a well-developed actuator capability and, on the other hand, our major actuator competitors don't have demonstrated flight control electronics capability. So, we regard this selection on the 747-8 as an important milestone in our strategic positioning as a supplier of complete flight control systems from the flight control computer on through to the actuation, which moves the surfaces.

Aircraft margins. Margins of 10% remained at the low level of the most recent quarter. We know that many of you have been expecting that our Aircraft R&D would trend down as we near the completion of the development on the 787. In this quarter, however, total Aircraft R&D of $15.5 million was actually up $2.1 million from the most recent quarter, and up almost $7 million from a year ago. R&D on the 787 was $11.3 million, up from $10.4 million last quarter. We do think that the effort on the 787 has peaked in that we have completed qual hardware, flight test hardware, and have begun qualification testing.

In addition to the very high R&D, there is one other impact on Aircraft margin performance that s notable. Sales are up in large part because of the $8 million in revenues on the 87. We're in the very early stages of production on that program, and it shouldn't surprise any of you that cost levels on the early hardware are substantially higher than they will be over the life of the program. So, there isn't typical margin contribution on those incremental sales.

Aircraft guidance for the rest of '07. Given the strength of the Boeing business and our strong start on the 87, we're increasing our sales projection for Aircraft by $9 million to a new total of $557 million. We're actually taking the commercial forecast up $13 million, including a $3 million increase in the aftermarket, but we're moderating our aftermarket forecast on the military side, so our military sales projection is now $318 million.

We are projecting an improvement in Aircraft margins for the balance of the year to a level over 12%, so we'll finish the year with average Aircraft margins of 11.2%.

Our Space and Defense Segment had the best quarter in its history. Sales of $47.2 million were up 21% from the year previous. The Defense Controls part of the business was up $8.3 million, a 95% increase to a new total of $17 million. The drivers for this increase were controls for the Marines' Light-Armored Vehicle, up $3.4 million, and the beginning of revenue recognition on Future Combat Systems.

We had a 39% increase in revenue in the satellite and space vehicle business. New total is $13.7 million. The increase reflects continuing improvement in the commercial satellite business and increased acceptance of our Spacecraft Mechanisms product line for a variety of military satellite and scientific programs. Our Space Shuttle Refurbishment Program is now complete but had a strong finishing quarter, up about $1 million from a year ago.

Our totals in Strategic Missile and Missile Defense increased about $700,000 to almost $6 million. The major driver, increased shipments on the EKV Ground-Based Interceptor.

On the other hand, revenues were down almost $2 million in commercial launch vehicles. There's relatively little activity on Atlas, Centaur, Delta. In addition, our tactical missile shipments were down $3 million to a total of $4.5 million. VT1 is complete. We've finished our FMS order for Maverick. The major production programs left are Hellfire, TOW and Tactical Tomahawk. One new program that's beginning to generate sizeable revenues is the NLOS Tactical Missile.

Last but not least, our new initiative in Naval applications increased by 16% to almost $2 million.

We are expecting that the strength in Commercial Satellite, Scientific Space business will persist through the balance of the year, so we're increasing that sales forecast from $41 million to $47 million. Also, we're a little more bullish about revenue generation in Future Combat Systems. Those changes, with some offsets in Launch Vehicles and Missile Defense, have the result that our Space and Defense forecast is now $180 million, up from $175 million last time. The year will be a 22% increase over last year's sales level.

Margins in Space and Defense. This is the other remarkable aspect of the Space and Defense performance in this quarter. Margins were15.1%. This compares to 12.1% in last year's second quarter. We haven't seen 15% margins in this product line in many years and, incidentally, we don't expect to repeat that performance every quarter. But, given our position year-to-date, we're now feeling confident that margins for the year will finish up in the neighborhood of 13.1%, up from the 9% level last year.

Industrial Q2. Our Industrial segment also had the best quarter in its history. Sales of $111 million were up 15%. I'm sure that you all realize that we benefit from strong foreign currencies and, in the quarter, the currency impact was about $5 million relative to a year ago. Nevertheless, our organic growth of $8.7 million represents an increase of over 9%. Sales were up substantially in almost all our major markets.

In our largest market, controls for plastics machinery, sales were up 23% to over $19 million. The increase reflects strong growth in Europe and the recovery of our plastics sales in Asia. In Europe, each of our top ten customers saw sales increases. In Asia, we have the recovery in our market in Taiwan and the initiation of deliveries to a new Korean manufacturer of injection-molding machines.

Motion simulators were our second largest product line in the quarter. Sales of over $13 million were up 35%, reflecting strong demand from both Flight Safety and CAE.

Our fastest-growing product line, though, was in metal-forming presses. Sales of $10 million are up 50% from a year ago. The growth is primarily in Europe, where the demand for improved controls on all kinds of presses is driving this growth pattern.

The market for controls on power-generating turbines has been strong for the last six quarters. In the first quarter of '06, sales moved from the $8 million level to between $10 and $11 million. This quarter, sales of just over $10 million were down slightly from a year ago, still in that range. The strength in power-gen is in Asia, and principally with customers in China and Japan. The story is similar in the steel mill business, wherein we provide gauge controls. We have customers both in Asia and Europe, but demand for their equipment is coming from China. Sales in the quarter were $8 million, up 22%.

Last quarter we talked about some delays and cancellations in our test equipment business. The result was a sales level of $9.2 million in this quarter, a slight reduction from a year ago. We believe that test equipment sales will recover in the next two quarters and will be showing increases by year's end.

Last quarter we reduced our guidance for sales in the Industrial Aftermarket and, just after we did that, we had a very strong sales quarter. Sales were up 9% to over $10 million.

And in spite of that, we think that we'll leave our forecast for the aftermarket at the revised level. But, given the strength in the simulator market, metal-forming, gauge controls for steel mills, we're now revising our overall industrial forecast back up to the range of $415 to $435 million, with the mid-point at $425 million.

Margins. Industrial margins for the quarter were a very strong 13.3%. We're clearly benefiting from a very favorable product mix. And although the mix can shift somewhat in quarters to come, we now feel comfortable in projecting industrial margin to 13.3%, and that we'll finish the year at that number, up from our '06 performance of 11.8%.

Components Group, Q2. Our Components Group continues its stellar performance. Sales up 18% to $69.4 million, improvement in every one of our major markets. Biggest dollar increase was in the aircraft business, $5 million increase, 27% to a total of $23.5 million. In the Components Group, aircraft sales are widely distributed over a number of programs. The largest in the quarter was the Blackhawk. Sales of $1.9 million were up from less than a million a year ago. Next biggest program is the Boeing CH-47, in which we supply cockpit displays and actuators.

Rockwell Collins is a major customer, and buys over $1 million a quarter in motors and resolvers to be used in their avionics products.

Space and Defense sales in components were up 9% this quarter, a little over $13 million. The biggest program at $2.6 million is the commander's independent viewer for the Bradley. We continue to deliver fiber-optic modems to the Egyptian Army. Sales in the quarter to the Egyptians were just over $1 million.

The biggest percentage increase in sales was in the Marine market, 46% increase to $6.6 million. This is a big increase over the same quarter a year ago, but a level quite comparable to what's been achieved in the last three quarters. So, there has been a step increase in sales volume from a year ago, but it has leveled off. The Marine market is greatly influenced by oil prospecting and production and, ultimately, the price of oil.

Component sales in the Medical market resumed a pattern of increase. Sales of $14.4 million were up 15% from a year ago. And once again, the unit volume of motor sales to Respironics has increased.

Sales of slip rings to CT Scan manufacturers, just over $4 million, up only slightly from a year ago. Sales in this category seems to have leveled off for the time being.

Industrial sales in the Components Group, just under $12 million, are up 5% from a year ago. The biggest increase is the start-up of deliveries of slip rings and motors to a company called Engineered Machine Products, company which supplies pumps and fans for diesel engines on mobile equipment.

Last year our Components group did total sales of $238 million. Given the diversity in products and markets in this segment, sales forecasting is perhaps more art than science. We began the year projecting a 9% increase and a forecast of $258 million. After the first quarter, we increased our projection for the year to $266 million and, given the very strong performance in the second quarter and what we're experiencing in incoming orders, we're now moving our forecast for the year to $274 million, which will be a 15% increase over the year previous.

Margins in the Components group. Last year, the Components group had very strong margins in the first quarter, and then in the second quarter they settled down to 14.1%. That pattern has repeated again in this year. In the first quarter of '07 we had blowout margins of 19.2%, and the second quarter has come in at a more normal 14.2%. So, apparently there's a pattern here. Last year we finished the year with margins of 15.5%, and we now think that that's a reasonable projection for the end of '07 as well.

Medical Devices. The big news in the Medical Devices segment is that, on March 16th, we closed on the acquisition of Zevex International. Zevex is a Salt Lake City-based manufacturer of infusion pumps used primarily in enteral nutrition. This acquisition continues to broaden our product offering in infusion pumps.

Zevex does have additional product lines, among them optical sensors used to detect the presence of air bubbles and prevent them from moving from the pump to the patient. The company also makes a system that looks like a beer cooler, but it's used to transport kidneys that are going to be transplanted. It uses the company's infusion pumping technology to extend the life of the kidney while it's being transported. Zevex also makes a line of hand pieces used in cataract surgery.

We only owned Zevex for two weeks of this quarter but, as is the case in most companies, the last two weeks of the quarter are the strongest shipping period. Zevex generated $2.4 million in sales in those two weeks, and an operating profit of over $450,000, or 19% of sales. Purchase accounting adjustments reduced that profit contribution to $150,000. We expect for the balance of the year Zevex will generate sales of around $23 million, and that subsequent purchase accounting adjustments will, for the most part, offset the operating profit earned in the back half of the year.

Turning to the Curlin product line, sales of $9.3 million were down from $11 million in the last quarter. We're learning about the seasonality in this business. We had been advised that the December-ending quarter was a strong sales period, the March-ending quarter would not be that strong, and life has turned out that way.

Pump sales of $5.2 million in the quarter were down from $6.7 million in the previous quarter. On the other hand, sales of admin sets of $3.1 million were at the same level. In addition, Curlin had sales of about $1 million of other accessories and equipment.

Operating profit on the Curlin product line was $1 million, about 11% after $800,000 of intangible amortization. This margin performance is down substantially from the previous quarter's 19.5%, and the difference is, of course, the lost gross margin on the lower pump sales.

We also incurred costs of about $160,000 in consulting fees, moving expenses and expedite charges, all in the interest of incorporating the McKinley products in our production operation in Huntington Beach and ensuring that the disciplines in those processes would produce a consistently reliable product.

On a year-to-date basis then, sales for the new Medical Segment were $22.7 million. And we believe that, with the addition of the Zevex product line, sales for '07 will end up at $65 million. We're now projecting operating profit of the combined entity of $9.8 million, or 15% of sales. This operating profit will be achieved after over $6 million in intangible amortization and purchase accounting adjustments.

So, now let me summarize the changes we've made in our guidance for '07.

Given the strength in the commercial Aircraft business, we've moved our Aircraft forecast from $548 million to $557 million. We had been projecting Aircraft margins at 11.9%. The experience of the first two quarters and the adjustments we've made, we've moved that projection for the year to 11.2%.

Given the strength in the commercial satellite market, some of our scientific applications, we've moved Space and Defense forecast from $175 million to $180 million. And given the tremendous performance we're seeing in margins, we've moved our margin expectations for the year from 9.5% up to 13.1%.

All our industrial markets seem to be cooking, so we've moved the midpoint of that forecast to $425 million, up from $411 at our last projection. In addition, improved margin performance suggests an increase in our year-end projection to 13.3%, up from 12.8%.

Continued strength in the Components group incoming order book suggests an increase in the year forecast from $266 million to $274 million. On the other hand, more normal margin performance suggests a year-end at 15.5%, down from the 16.7% we projected a quarter ago. Medical Devices total sales, including Zevex, will be up to $65 million. We're looking for an increase in operating profits from the $8 million we'd projected last quarter to a new total of $9.8 million. The arithmetic works out to margins of 15% for the year.

So, when we put it all together, we're now projecting total sales of $1.5 billion plus or minus about $10 million. We're projecting total operating profit of 13%. We are now hoping to generate net earnings of just over $100 million, which will be a milestone, and a range of earnings per share from $2.28 to $2.36 with a midpoint of $2.32, an 18% increase over the year previous. To reach the $2.32, we will need two quarters only slightly better than the one we just reported. We're projecting Q3 at $0.58 and Q4 at $0.61.

Now, I'll turn you to Bob Banta.

Thanks, Bob, and good morning, everyone.

Our surge in sales consumed some working capital in the quarter. Cash flow from operations amounted to only $3 million in this second quarter. That compares to $23 million of cash flow generated in Q1.

Some details. Total receivables increased by $33 million from the levels of 90 days ago, or they increased by $26 million without the Zevex receivables, which we acquired late March. Total inventories increased $23 million in 90 days, or by $16 million without Zevex inventories. These working capital components, net of Zevex, are each up by 7.5% and 5%, respectively, in the three months time period.

Interestingly, sales increased by 7.5% in the last 90-day period. Also, as Bob pointed out, sales are up 19% compared to a year ago. The sum of accounts receivable and inventories without Zevex are up by 21% from the year-ago levels. So, in a relative sense, our working capital ratios we think are quite steady.

Our revenue growth does require working capital. We've now updated our cash flow outlook for all of '07. It's as follows. We now estimate cash flow from operations will be about $96 million. That would be up 25% from the $77 million we achieved in all of '06.

On to capital expenditures. Capital expenditures were $28 million in the second quarter, while depreciation and amortization was $12.3 million. Our first half capital expenditures at $53 million were very high as we get ready for the 787 production ramp-up. We spent $12.1 million on tooling and test rigs for the 787 in the first half. That particular spending requirement has peaked, and will drop off by $9 million in the second half.

On the other hand, we're still completing and equipping the expansion of our facilities, particularly in the Philippines, where the 787 Boeing hardware will be largely manufactured. We think spending in the second half will be about $20 million in each quarter, and therefore, for the whole year about $93 million. As we take a very preliminary look at '08, we believe capital expenditures will drop notably from the elevated levels we're experiencing this year.

Contributions to our U.S. defined benefit pension plan amounted to $3 million in the quarter, and which equaled our expense in the quarter. Stock option expense, a non-cash item, was $600,000 in the quarter, and is now $2.2 million in the first half.

We incurred $84 million in additional borrowings under our bank revolver to fund the purchase of the Zevex common shares late in March.

That's all I have for you in the way of balance sheet or cash information. And now, [Tom], we'd like to kick it over to an open Q&A session.

[OPERATOR INSTRUCTIONS.]

Cai von Rumohr with Cowen & Company.

Where do we expect R&D for the year, and how much do we expect the 787 to be?

Where do we expect R&D for the year? We now have R&D for the year up at $88 million, and year-to-date on the 787, we're a little over $21.7 million. We don't expect that it will continue at that level. I think we have another $15 million or so in the projection. But, what it will turn out to be will depend on what work needs to be done. And I'm sure you can appreciate, we're not very far through qualification testing. It's a sporty schedule that we're on. And we shouldn't all be surprised if, as we go through qual testing, that we encounter issues that will require some additional work.

OK. These numbers seem higher. Do you have any kind of major issues that things are much more difficult? Because I would expect that that number would start to come down a little bit more than this.

Every quarter we learn a little more about what work needs to be done, and if the qual testing goes easily and there aren't any issues to be dealt with, then the numbers may turn out to be a little lower.

But, it is a little bit of a guessing game, Cai. I mean, we can put together a budget, but whatever work needs to be done will get done whether it's in budget or out. So, we'll see. We've allowed for the kind of numbers I described on the forecast, and we'll see where it comes out.

This number, as I recall, if we go back to fiscal 2005, was $5 million for the 87. It looks like we're on our way to $37 million this year. Presumably with this number coming off, does the R&D number go down sharply next year? Because it looks like, even if you increase the spending kind of on all other stuff, that this R&D number would go down in '08. Is that a fair assessment?

Yes. We maybe need to straighten out the historical numbers you mentioned a little bit, but we expect that, for the Aircraft group and for the company, the R&D expenditures will come down in '08.

OK. And you mentioned that you were at break-even on the 78s. Were you at break-even on the 87, or were you kind of in the red as you came down that learning curve?

You're talking about sales in the quarter?

Yes, yes, exactly.

Let me put it this way, Cai. The sales in the quarter did not contribute in a positive sense to earnings.

OK. And it looks like the CapEx is up from $75 million was the number, I thought. So, has the CapEx number moved up?

Yes. I think with respect to CapEx, we're becoming a little more realistic about what needs to be done in the balance of this year, not only in the Aircraft business but in some other parts of our business. The company is running along at 19% sales increases, and it's not all in the Aircraft business. And we have substantial demands for both facilities and equipment in other parts of our business.

So, during the quarter we did a rather thorough reassessment of what we think we're going to do for the balance of the year, review of the commitments that we've made. And so, in line with that, we have increased our projection for CapEx for the year.

OK, and a last one. How much of this extra R&D and the initial 787 losses have resulted from engineering changes from the mother Boeing that you will be able to recover in contract negotiations?

I would describe it this way. As you know, I'm reluctant to talk in terms of precise ship set pricing. But, what has happened since we started the 787 is that there has been considerable additional functionality incorporated in the actuation system. And as a result of that, the R&D effort has been a larger effort. The hardware will be substantially more complex, and the ship set price will be substantially different from what we initially bid.

You put all those factors together, and the model turns out to have the same economic characteristics. So, said a little more succinctly, it turned out to be a bigger job, more complex hardware, higher price, bigger R&D and, to some degree, larger capital investment.

The capital investment, of course, is also influenced by the projected production rate. We were relatively conservative at the outset in our expectations for the ongoing production rate. We were not anticipating that Boeing would get to 10 or 12 a month as quickly as they're going to.

But, I would not describe it as changes. Oftentimes when we talk about or complain about changes that customers make to the requirements, there's the suggestion that these are things that weren't thought of or mistakes made on the part of the customer. I would not characterize what's going on here in that fashion. I'd characterize it that architectural decisions were made that moved more functionality into the system that we're providing as opposed to functionality that might have been provided either in the flight control computer system or in the structure.

Robert Stallard with Banc of America.

Bob -- I'm not sure which one, but one of you -- I was wondering if you could touch on foreign exchange. Given the weakness in the U.S. dollar at the moment, I was wondering if you could review how Moog is exposed on a transaction and translational basis to foreign currency.

Bob will answer the question, but I hurry to say that I regard our company as a play on the strong euro.

We're getting some impact there through the first half, I think, and you could measure this not so much from the beginning of the first half, but what was in our plan for the year, where we had the expectation of maybe the Euro would average 125. So, in the second quarter it averaged 131, so we're getting a little bang for the buck there. And this is all in our Industrial sales, or nearly all. And of course, some of those sales are over in Asia, where you have the yen factor, which hasn't done much.

But, the substantial part of our revenue increase is real growth, no matter which quarter or what period you take it. It's not as much of a currency factor as you might expect. But, having a stronger euro, for example, just puts a little extra gas in the tank so to speak. But, we could give you that precisely if it's really of interest to you, but it's not the lion's part of the story.

From a transactional point of view, the first quarter we got dinged a little bit, but second quarter was neutral to slightly positive, so that's leveled out.

Rob, we did mention, when talking about Industrial in quarter two, that of the sales increase in quarter two, about $5 million of it was related to currency, and organic growth was close to 9.

Yes, just trying to get a feel of the exposure for the rest of the year and into 2008, if there was -- from what Bob was saying, maybe it looks like it's a couple of cents if the euro continues to strengthen, as you would say.

Moving on, you've mentioned in prior quarters some problems on a specific business jet OEM program. Can you give us an update on the status of that?

It's all settled down. We managed to get through a quarter without anything worth talking about. The programs on which we had been experiencing problems are moving into production. I wouldn't say everything's perfect, but there are no problems of any significant magnitude that would require any additions to our loss reserves in this quarter.

OK. And just finally, you've been seeing some good success building up your medical portfolio. Have you seen any of your competitors in this area start to respond to this?

No. I think we're still a pretty small player in this business. I'm not sure that the competitors that are the major players in the space that we've moved into are paying much attention to us.

Ron Epstein with Merrill Lynch.

Couple more questions I guess on the medical business. When we think about a long-term kind of trend, margin for that business, how should we think about that?

Well, Ron, as you know, we have described this initiative as a bit of an adventure. Our fundamental belief is that margins can be pretty good in this business, and what we've talked about is ongoing operating margins in the neighborhood of 20%, and that's still our expectation.

Now, we had one clean quarter with Curlin in the first quarter of this fiscal year that came in at about that level even after the intangible amortization. This quarter gets impacted by what we think is the seasonal volume dip, and it seems that the December-ending quarter is a fairly strong quarter. We've been advised that the March-ending quarter would not be that strong. The June-ending quarter is supposed to be stronger, and then the September-ending quarter weak again. So, we'll see how that roller coaster goes.

Over the year, we're hoping that, once we get clear of purchase accounting adjustments on new acquisitions, that we'll be looking for something like 20%.

OK. and then just switching back to aerospace, could you give us just an update and some color on how the A400M is going?

Our A400M is doing fine. Over the years we've been involved in that program, we had made some changes. We had increased loss reserves on a couple of different occasions for a couple of different reasons. But, for the time being, the program has stabilized, and we're now getting ready for it to go into production.

And then just one last one, the M&A question. How does the M&A pipeline look for you guys? And if you can give us any feel there, how are valuations, that sort of thing?

Yes. the M&A pipeline continues. I don't know if robust is the right word. As you know, we're interested in M&A opportunities in all of our different lines of business, and there continue to be opportunities. I think in general, seller expectations in terms of pricing have increased, and most notably in the aircraft business. I think all of us are waiting to see if the pattern that GE and Esterline established in their recent acquisitions, if that pattern is going to persist in the aircraft market.

But, there continue to be opportunities. We don't see a big change up or down.

J.B. Groh with D.A. Davidson.

I had some more questions on this R&D. I mean, you're giving us a roughly $37 million total for 787 in the year. Could you kind of give us a clue as to how that order of magnitude on how that declined in '08? And since you're going to be doing something with the 747-8, obviously there's going to be some R&D associated with that. And how does that play into kind of an R&D forecast for 2008?

Well, we aren't ready to project our '08 numbers.

Well, is it going to be going down by half?

We simply have not pieced together an R&D projection for '08. The 747-8, from an R&D perspective, will be a very much smaller job. It isn't anything in the order of magnitude of the 787. It's important strategically for our company to be able to demonstrate the ability to design and deliver and to be accepted, established at Boeing Commercial as a supplier of flight control electronics. It's a major strategic step. But, in terms of order of magnitude, this is 10% or 15% of the size of the job we have on the 787. So, it's not going to be an R&D expenditure that we'll be talking about quarter after quarter.

Yes. So, in other words, 787 goes down drastically, and you have pretty marginal increase from this new program, even though the scope is much greater?

But there will be other opportunities in the Aircraft business. I over the last few quarters have talked about what I thought might happen on the A350, and I think when we first started talking about the A350, my expectation was that Airbus would not put out a large package of actuation applications altogether like Boeing did on the 787, that they'd probably carve up the flight control actuation system in two or three or more chunks and select different suppliers likely for each of those.

It's now beginning to look that Airbus may be thinking a little more in the fashion that Boeing was thinking in. Maybe there will be a larger opportunity on the A350 than we had anticipated six months ago. Of course, we might not win it, so there's uncertainty with respect to what the level of R&D is going to be. I think no matter what happens, though, it is most likely that our R&D expenditures in '08 will be substantially less than the $88 million than we're projecting this year.

OK. And of that $10 million incremental versus roughly $10 million incremental from last year, what percentage of that was in the aircraft controls area?

We can get back to him. I don't know that offhand.

I don't have a precise percentage in front of me. I would say most of it.

Most of it, OK.

And we'll get back to you with a precise number.

And then, on the backlog, when I look at the backlog, what's the length of that backlog? When we see these massive numbers of orders at 70 ...

Hold on a minute. The backlog numbers we report are all backlog sales over the next 12 months, so we're not including four years of backlog (inaudible).

OK, 12 months.

Eric Hugel with Stephens, Incorporated.

Can we follow up a little on the A350, the bid and proposal work? Can you sort of talk about timing as to when you would think that you would start really actively seeing those costs?

Well, we have a small team at work in Europe at the moment. Their expense shows up as bid and proposal. And we expect over the next quarter or so that we'll continue to support on that basis, maybe sometime between June and September, Airbus will make a selection, and we'll really go to work. But, I don't expect that there's going to be substantial R&D expense in this year. There could be some in the fourth quarter, but I'll be surprised if it happens quickly enough that it'll be a really substantial number in this year. The question is what is it going to be in next year.

Right. From a strategic standpoint, I guess you talked about you had initially thought it was going to be broken up into several different segments. And now you're thinking maybe it could go as a large package or a much larger chunk.

Do you think from a strategic standpoint that is an advantage or a disadvantage for you?

Well, whether it's good or bad depends on what kind of economics we're able to put together. We'd be happy with a job a third of the size of what we have in the 747 if the numbers were right. We are probably advantaged somewhat by having -- if they put together a big package, because we have just demonstrated that we have the capability to handle a package of that size, and Airbus may worry about that with respect to some of our competitors.

And secondly, depending on the architecture of the system, there oftentimes is the opportunity to introduce commonality among component elements across a number of different designs if it's all being done by one supplier as opposed to three or four different suppliers, each employing their own conventions, their own preferences.

You don't think that, by Airbus going down the route of we're going to have one guy doing this whole thing, they're more likely to select the guy that they know the best, i.e. their current supplier? You don't think that's the case?

No, I don't think that. We're just speculating as to what they're likely to do. I think in the end they're likely to keep two or three suppliers in the game. What Boeing did in terms of the actuation on the 787 was actually kind of a surprising thing to put that big a system in the hands of one supplier. I mean, it's great for us, but think about it from the point of view of our competitors.

I mean with respect to flight control actuation, they're literally on the sidelines with respect to the 787, and it now appears that it's going to be a hell of a program.

Which I guess makes them more desperate to win the A350?

Could be. Everybody was pretty desperate to win the 787. But, it could be that the A350 competition will be more desperate. We don't have to be desperate about it. I mean, we'd like to participate, but we aren't -- desperate is a good word. We aren't desperate.

Alex Hamilton from Benchmark.

Is there any color you could add to the backlog? In other words, is there a geographical exposure that you have to the backlog or a particular segment exposure that you have to the backlog? Is a third of it industrials? Is it more European exposed? Can you talk about that for a minute?

Well, first I'd like to make my backlog speech, and it goes like this. we provided a projection as to what we think our sales are going to be over the next couple of quarters. At the end of the next quarter, we'll provide a projection for what we think our sales are going to be over the year ending 15 months later.

My suggestion is that you folks ought to take our backlog reporting with a grain of salt. You should not, in my opinion, try to second-guess our sales projections by divining that something else is happening as a result of the movements in the backlog. So, I don't know why in the hell anybody pays any attention to our backlog. If we weren't providing sales projection, I could understand that you'd be trying to figure out from the backlog what was going to happen to our sales of the future. But, we are providing sales projections.

All that having been said, of $685 million, close to $300 million is in the Aircraft business, about two-thirds Military and one-third Commercial. And the balance of the backlog is spread pretty evenly between Space, Industrial and the Components group.

[OPERATOR INSTRUCTIONS.]

There are no other questions at this time.

OK. Thanks, [Tom]. Thank you all for coming. We'll see you next time, if not in Paris.

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