Moog Inc (MOG.B) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Moog first quarter earnings teleconference call. At this time, all participants are in a listen-only mode. Later we will have a question and answer session and I'll give you instructions at that time.

Should you require assistance during this call, simply press zero then star and an operator will come onto your line to assist you. As a reminder, this conference is being recorded. For a digitized replay -- if you wish replay information -- please stay on the line at the conclusion of the call.

I would now like to turn the call over to our first speaker, . 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-K dated September 16th, 2002 and certain of our other public filings with the SEC. And now here's Bob Brady, Moog's Chairman and CEO, with our first quarter earnings.

Good morning. Thanks for joining us. Today we're reporting results for the first quarter of '03 and we'll also discuss the trends that are developing in our business. We'll fine tune our guidance for the balance of fiscal '03.

The first quarter of '03 was another very solid quarter. Sales of 180 million were up a little from 174 million a year ago. And there were something interesting mix shifts that I'll describe.

Earnings were on target at 9.8 million and that profit margin improved to 5.4 percent. Earnings per share, 64 cents, were up 10 percent from a year ago.

You may remember that we sold 2 million shares in the middle of last year's first quarter. And because of the averaging of shares outstanding in that quarter last year, we had fewer shares outstanding than we have this year.

As a result, our 10 percent earnings per share increase this year relates to a 19 percent increase in net earnings. A sizeable increase and a relatively small sales increase. It came about because R&D was lower, interest was a lot lower as percent of sales this year than last, and our tax rate is also low.

The biggest change is in interest. In last year's first quarter we 7.2 million or 4.2 percent of sales. This year we're down to 5.4 million, three percent of sales.

Now let me go to our segments. Aircraft sales for the quarter -- 93 million -- were up eight percent or $7 million. Of that increase, almost all of it -- 6.5 million -- came in military aircraft and all because of the start up of the Joint Strike Fighter. That program by itself increased sales in the quarter by almost $9 million.

We also saw a sizeable increase, about 3 million in revenues in the V-22. That increase, though, was offset by lower shipments this year than last on the F-18. This is kind of an anomaly. Last year we had a booming first quarter on the F-18 and shipped about a third of our year's revenue in one quarter.

Although we're expecting a 10 percent increase for the year in the military after market, we didn't see any of that in the first quarter. And we think this has all to do with the timing of order placement. We expect to get caught up before year end.

Our revenues of 41.6 million in the commercial aircraft business were substantially better than we anticipated. After market revenues on commercial were over $15 million, four million higher than last year's first quarter and almost $3 million higher than we forecasted as the average run rate for this year. The strength in the after market is, in part, a reflection of the fact that more than half of our after market revenues come from foreign airlines and the Europeans and Asians are in much better shape than the U.S. carriers. This increase offset a $4 million decline in OEM revenues to Boeing. We shipped, in the quarter, 12.8 million to Boeing commercial, which itself is a couple million better than our forecasted run rate for the year.

Revenues on business jets increased by 1.6 million to almost seven million, more than offsetting a million-dollar reduction in airbus sales. All in all, commercial airplane revenues for the quarter were up by 600K and well above our forecasted run rate for the year. Whether or not the sales in shipment level will persist through the balance of this year remains to be seen, but at this point, it seems that our forecast in the commercial area is a pretty conservative one.

Margin performance in aircraft was also very strong. Margins for the quarter were 19 percent. They were up substantially from the first quarter of last year, close to the high level achieved in the most recent quarter and a lot better than we'd forecasted for the average for the year. We had forecasted 16.4 percent in aircraft and simply adding the positive variance in the first quarter, would take that average to 17 percent for the year. So we're - seem to be in very good shape in the aircraft segment.

Space - as was the case in last year's first - as last year's fourth quarter, our good fortunes in the aircraft business were somewhat offset by the performance in our space and missile segment. Last year, in the first quarter, we did 29-and-a-half million in this segment and our forecast for this fiscal year anticipated reduced volume in the space part of our business. We just finished work on our space station crew return vehicle and, in the tactical business we had finished the and we know we're in a production year in . So we expected revenues of about 24-and-a-half. We actually have sales of 23.1 million in the quarter.

Most of our programs were pretty close to plan, but shipments were very light in tactical missiles and in the commercial satellite business. We think the weakness in these areas will probably persist through the balance of the year and, on that basis, we're revising our projection for the space and missile segment from 98 million for the year down to 94 million. I guess, by now, everyone who follows this industry recognizes that very few commercial satellite orders were announcing in all of 2002. As a result, the satellite manufacturing business around the globe is characterized today by soft singing and slow walking. At the moment, we have a real shortage of orders and it's a remarkably weak picture.

I persist however, in the belief that there'll come a time not too far down the line when the military will recognize an increased need for bandwidth and the activity in military satellites will take up more of the slack that's developed on the commercial side.

In the tactical missile component of our business, you might expect that activity would be up on the eve of what appears to be an armed conflict. However, we've come to understand that our military fights wars out of inventory and ironically our sales in tactical missiles in this quarter were less than 40 percent of what they were a year ago. If we do enter a conflict, though, and a lot of hardware's consumed, we could expect that that inventory will be replenished somewhere down the line, probably at a time when we're no longer at war.

Our margins in the space segment are at five point seven percent, substantially lower than the 13 percent we enjoyed in last year's first quarter when this was a $29 and a half million business.

For the year we had targeted margins of seven and a half percent and given what occurred in the first quarter, we now think that six percent is a more realistic forecast.

The one bright spot in this segment is in the collection of programs associated with national missile defense. We have a number of programs connected with national missile defense and our revenues on all of these in total were up three million in the quarter and offset some of the decline in the tactical missile business.

Industrial segment, our industrial business had a quarter that I'd consider somewhat promising. Sales are 63.4 million. They were up nine percent, or five point four million from a year ago. A large component of that increase was the change in exchange rates. The euro's a lot stronger today than it was a year ago, and that accounted for about three million of the five point three million dollar increase.

On the other hand, it wasn't the entire increase, and we actually do have areas of the business, which are improving.

Combat controls were up by more than three million from last year, a little ahead of the level we've been projecting. Controls on plastics machines, projection molding, molding were strong in the quarter.

The turbine controls business, on the other hand, was slightly worse than we anticipated. Put it all together, our industrial business seems to be about holding its own. We're looking for increased revenues in the next quarter based on relatively strong incoming orders in this quarter.

While we think we should adjust our forecast for the year, last time we had forecasted 268 million for industrial, and we think 264 million is more realistic. The markdown is a result of two particular situations. One of our customers, a maker of carpet tufting machines, is experiencing a somewhat slower wrap-up on sales of a new machine that we had in our forecast. And therefore we have to moderate our expectations for the year on our product.

Also, we're seeing order activity of what we call heavy industry. This is equipment used on steel mills, aluminum mills; it's in large part a retrofit business. And it's running noticeably below our forecasted levels.

Margins in industrial for the quarter were unusually low at four point four percent. In the most recent quarter we were at five point six percent and we targeted seven and a half for the year. In this quarter, though, we did incur about 800,000 in expenses to make a factory move. We moved our recently acquired pump business in Nuremburg, Germany out of a box facility and into one of our own.

This is a one-time expense. We were expecting it. But it did have the impact of knocking our margins down from a level of last quarter to the 4.4 percent. We continue to be optimistic that actions that we've already put in place will, as the year progresses and as our volumes improves, move our margin performance up to the 7.5 percent that we projected for the year.

On balance, our industrial picture is better than it might have been. So, in summary, as I said in the beginning, this turns out to be a good solid quarter. Made so by the fact that our military aircraft business continues to carry the load. This quarter, the military aircraft business got some help from the commercial aftermarket increase and given that performance in aircraft and our prospects in this business for the future, we're confident that our targets for the year with respect to earnings can be met in spite of the circumstances that are influencing our space business, our missile business and in spite of a relatively slow recovery in industrial.

Now let me turn you over to Bob Banta who will discuss cash flows in the quarter and outline some possible changes to our capital structure. Bob.

Thanks Bob, and good morning everyone. Let's go over some details first. Depreciation and amortization was 6.8 million in this quarter compared to 6.4 in last year's first quarter.

Cap acts were eight million compared to 7.9 million last year. And then more importantly, total debt net of cash balances is 12.7 million was 296. That's down about 4.5 million from our year-end levels 90 days ago. Considering that we paid six million in November for our semi-annual interest payment on a senior subordinated notes, we had a very good quarter.

We're actually ahead of plan and we started the year, then, with a sizeable step towards our goal of debt reduction in the neighborhood of 17 to 20 million in all of '03. Now, I'd like to share some of our thoughts about changing our debt structure later this year.

As you may know, as of May 1 our 10 percent senior subordinated notes will be callable at par. And given the much lower levels of bank priced credit facilities, they're usually a function of LIBOR, we've entered into negotiations to expand and extend our bank credit maturities. What we'd like to do is be in a position to fund early redemption at par of these 10 percent and costly high yield bonds.

We would expect to complete this rearrangement process with our banks early in March. After that, if we issue a formal call notice, interest savings in the last five months of '03 will be offset by the write off of the original and remaining bond issuance costs as well as legal fees for the new bank facility.

We'll also likely enter into a that convert floating priced bank money to fixed rates. All this means, we won't have much going to the bottom of the cycle here. The will be somewhat above current LIBOR rates. And the upshot is that we don't see much change to our bottom line model and guidance for '03 as a result of this debt arrangement. Our guidance remains at 2.75 a share for '03.

However, looking in a preliminary way at '04, the redemption of our 10 percent notes using bank money would provide pretax savings -- interest savings -- of somewhere between $5 and $7 million. That's a lot of cash to be saved and it would be a nice down payment towards continued earnings growth in '04.

Of course, it's too early to be talking too much about '04. We've only got one quarter of '03. And as is our customer, we'll provide next year's detailed outlook during our third quarter conference. That will be at the end of July. We'll also issue a definitive announcement about a bond call later this year when the new money is all lined up.

So, Susan, maybe we could go to Q&A.

Jim, could we have questions, please?

Absolutely. Ladies and gentlemen, if you wish to ask a question, please depress the one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. We do ask for the sake of sound clarity, if you're using a speaker phone, please pickup your handset before you speak.

Our first question comes from at CSFB. Please go ahead.

Good morning, guys.

Hi, .

A couple of questions. Just the commercial aerospace after market. Can you kind of slice and dice that a little bit more just in terms of where the strength was? I know you talked a little bit about the international market. But was there any unusual items going through this quarter that may not flow through -- through the rest of the year?

Well, yes. Over the last three quarters, I think, we've had a little bit of activity in, you know, returns of spares from some of the airlines as they, you know, sort of crunch down on their cash. And that is not happening anymore.

We did have a rather sizeable spares order from Qantus. And it wasn't the whole of the $4 million increase, but it was a help. And that's why it is that, you know, we're not at this stage of the game jumping to the idea that we'll be running at $15 million a quarter in the commercial aircraft revenue.

On the other hand, I think just in general, the general level of activity seemed to be, you know, quite normal and an improvement from the levels that we'd been seeing in the post 9/11 quarters of last year.

OK. Switch it over to business jet side of things. It looks like you had a good quarter there. Can you just refresh our memory? I think you are on some new programs that are ramping up. Can you just kind of give us an update?

Yes. There are actually three new programs. The most mature of them is the Raytheon Premier. We have a spoiler system on that airplane. And the revenues were up a couple of $300,000. At the rate we're currently delivering, the Premier is -- it's about a $4 million a year program and it's running at about that rate.

The next one in terms of maturity is the Hawker Horizon. Activity in - on that aircraft was up compared to a year ago by about a million bucks. And we're expecting to do almost seven million this year on the Horizon and we're running pretty close to that rate at the moment. And the last one is the Bombardier Continental. The Continental is still in development, but it's a big development contract. Our revenues were just under three million, up a million three from - I guess, a million two was more correct from the quarter a year ago. Now, we don't expect that we're going to be doing three million a quarter on that program. Our projection for the year is comparable to the Hawker. It's a little less than seven million. But taken all together, our business jet portfolio on which we did about 21 million in '02, this year should be up to 25 or 26 million.

OK. Great. One more question if I may. Joint strike fighter revenues for the year that you're expecting - say what those are. Have those - have those changed much over the last quarter or so and what were they last year?

From - we think we're pretty much on target. Last year, for the year, we did 11 million. This year we're targeting 40 million and I think we're doing pretty well. The first quarter was nine million. Now, these are pretty big numbers and I'd ask you to keep in mind the fact that we have a couple of partners - and and on the high-lift stuff, . And if you take last year's 11 million, six million of that revenue was the passthrough of efforts on the part of our partners. But, contractually, the contract is with us. And on a contractual basis, they are, in effect, subcontractors. So their efforts and their billing comes to us and gets passed through on that basis.

So I think we're on target for the 40 million. You know, it could be a little more. It could be a little less. Good solid quarter. And I should take the opportunity to say we've - we're in a series of design reviews and they're going extremely well. And the program is - we're real happy with our performance and that of our partners and so is Lockheed and the joint program office. Which is really remarkable, given the fact that we're on a scheduled what I describe as a Chinese fire drill. I mean it is really a rush-rush schedule.

All right. OK. Thank you very much.

The next question comes from the line of Cai von Rumohr at SG Cowen.

Cai?

Good job, guys. Help me understand why the aircraft margins were quite as good as they were when most of the increase, at least in the military side, is in development work that one would think would not be as profitable.

That is a very good question, . We're just - the joint strike fighter - that program is less profitable than the rest of the book of business on average, but it's just pretty much across the board. Everything, all the production programs, are going pretty well. We had a big quarter on the V-22. That helped.

And because every loose engineer in our company has been assigned to the Joint Strike Fighter, our R&D expenditures in the quarter for this product line were way down.

And so the profitability in the aircraft business - as you know, both our engineering and administrative staff is pretty much fundable between both the commercial and the military side. And when both of them are, you know, are having good quarter in terms of revenues, we have nice leverage and it comes through as improved margins.

Are you going to ask the next question, will it continue?

Well, I mean you've told us more or less, you know, I guess you had very good commercial, you know the mix was probably richer on the commercial after market side than it might be.

Yes.

For the ...

I think that is the point. I don't - I think we had a really surprisingly strong first quarter in the commercial after market.

So presumably the commercial margin, you know, were aware the margins were super, and they're not going to be as good 'cause obviously you make much less.

Yes.

But, I mean, you did have - it's presumably you don't make a fortune on the continental R&D.

That's right. But think in terms of, you know, for the quarter we're four million dollars over our plan for the commercial after market. Think about the implications of that with respect to margins.

Good point. What - maybe I missed it, but did you update us on the revenue targets for commercial and military aircraft?

No, we didn't. We think we ought to leave them where they are. You know, actually our revenues in the quarter were about where we anticipated, maybe a little bit light because the - although the commercial aircraft revenues were up, the military aircraft after market is back loaded in the back end of the year. And so ...

Refresh my memory. I've got 249 and 145 respectively to get us the 394. Is that more or less what you guys are looking for?

That's exactly what we're looking for.

I'm a little confused. You did 41 five and obviously we had, you know, some extra plusses, but kind of ...

Well I think the 41 five in commercial aircraft I think we were over the run rate on Boeing commercial ...

Right.

... by a substantial margin and that I think will in fact tail off.

Right.

And then the question is what the hell happens to the after market? We had the after market targeted at 50 million for the year. If we had four quarters like the first quarter it'd be 60 million.

I mean kind of when you do the model, you get the sense when you're ...

Yes.

... they look particularly, suspiciously light. So I would assume, even though we have a pretty awful market backdrop, that's a number that might have some upside.

It's possible but we're not ready to put it on the line just yet. We're not willing to count those chickens yet, guys.

You did particularly well on interest expense, you know, the debt was down somewhat. What have - was that, you know, kind of bank rate because you were down 800,000 from the September quarter? Why was that down as much, and with your comments about, you know, kind of calling the high yields, what should we look for for interest expense for the year?

This is Bob Banta. Let's see, on the first part of the question, keep in mind that last year was about half way through the quarter that we received the proceeds of the equity offerings. So that paid down debt and so...

I'm just talking versus the fourth quarter. I mean, you know, ...

Oh. I'm sorry. From the fourth quarter it's just a general level of interest rates coming down, one. Two, we had some that we had entered into earlier as rates were declining, too early. But those have matured. These are 18 months, 24 months . Some went off the books, so that dropped interest rates a little.

And also we had very good cash flow in the fourth quarter. If you remember last conference call I think it was about 30 million for the quarter. That didn't happen on the beginning day of the first quarter but came more towards the tail end, so we were running lower levels of debt all through this first quarter as well as reducing it a little bit near the end of the quarter.

So lower rates, a lot of money swapped out at higher rates. This is compared to the fourth quarter, and this much lower levels of debt on average.

Did you have any profits from closing out and what should we think of, you know, as a range for interest expense for the year?

We didn't have any profits or losses on that, because we matched these with our actual borrowing. So it's all in the interest expenses. As far as the year goes, we're still modeling 22 million because, one, we haven't pulled the trigger on this .

Secondly, as I said earlier, it's going to be offset with exactly how far down the yield curve we go. You know, you can - if you didn't you could go to one and a fraction on the base LIBOR rate but that would be a little frivolous having all of our debt floating.

So we'll move out on the yield curve and, of course, when we get, you know, when we move towards the spring exactly where the rates will be. So we're sticking with this number of 22 million in combination with the debt issuance costs, the original debt issuance costs. That write off.

I think, Cai, 90 days now we'll be a lot clearer what our circumstances are going to be. What our interest expense will be for the year.

Someone else go. Terrific quarter guys.

Thank you.

Thank you.

Our next question comes from the line of at McDonald Investments. Go ahead.

Hi. Good morning.

Hi .

My first question is on the R&D line. I wanted to get a sense of expectations going forward, you know, that came in considerably lighter than my expectations. Is four percent of sales kind of a good run rate, or does it kind of drift back up going forward?

I think the arithmetic that we're currently using, comes out at four one or 4.2.

OK.

That may be a little conservative. We'll see.

Meaning it could be a little bit higher than that?

No. It could be that it could be a little bit lower.

Oh. OK. As far as the turbine market, you said that came in a little big light. Are you adjusting your full year forecast? Or is the expectation you catch some of that up later in the year?

Well, it was not all that noticeably lighter. I mean, it was a little bit of a disappointment, but we're forecasting for the year 27.5 to 28 million. If we annualize the first quarter, it would be 26 or 27. The first quarter is influenced by the fact it ends with a batch of holidays. And that does influence our shipments both in the U.S. and more particularly out of our European companies.

So, we're not -- on the basis of the first quarter we're not yet tinkering with the forecast for turbines. The changes that we've made in the industrial forecast, as I mentioned, have more to do with carpet turfing machinery and what's going on in the steel mills and aluminum mills. Or more particularly what's not going on.

But turbines will be in the ballpark, we think, still.

OK. And then finally, on the Joint Strike Fighter expectations for fiscal '03. What's the expectation for the amount of pass through on that 40 million?

Well, I think the ratio of last year -- wherein the pass through is between half and two thirds -- is probably a reasonable expectation. On the contract for the primaries, which is the biggest of the contracts, our original arrangement with Parker anticipated a 50/50 split with Parker and then there was another 15 or 20 percent of the job that would go to . Ham Sundstrand.

What's actually happening is we're shouldering a little more of the workload than was originally envisioned. We're doing more of the systems engineering and the program management has turned out to be a larger task mostly because of the acceleration of the schedule.

And man oh man! I mean, it's a real challenge. There was a design review here in Buffalo last week. I think there were 150 participants. Design reviews on this program are held in hotel ballrooms. It's somewhere between 100 and 150 people in attendance. And that's a degree of management oversight and review that we've never seen before.

So, we've got a platoon of program managers working the job. And as a result, at least to date, our participation in the program is more than the 35 or so percent than we might have anticipated originally. How that all gets sorted out going forward is still a subject of discussion among the team partners.

OK. Back to the R&D real quick. If you look at kind of the four and a half percent as a percentage of sales last year versus maybe a 4.1 or 4.2 -- is the reduction, I guess of the percentage of sales purely a function of where your engineers are spending their time? Or have there been some scale backs in certain R&D functions?

Well, both things work together in our company, fortunately. One of the sort of curious aspects of our business and its technology is that when, for instance, when the industrial business is running relatively light and there's relatively little demand for product development effort on the industrial side, we are actually able to shift design and development troops from the industrial business to the aircraft business. It's high performance in both places.

And so what - we're in the fortunate circumstance that, as we're in the midst of this rapid buildup of effort on the joint strike fighter in the aircraft business, the activity level in both industrial and space is down from previous years. And so we've been able to shift those folks. So what you're seeing is, in the overall picture, is the fact that more of - not only is it that more of the aircraft engineering folks are direct charging, as opposed to working on company-funded R&D, direct charging the joint strike fighter, but actually, some of the staff that were formerly charging R&D in the industrial and space product lines have been shifted into the - into the aircraft effort.

OK. Great. Thanks for the explanation.

OK.

Next question comes from the line of at Merrill Lynch. Please go ahead.

Hi, Sue.

Hey, good morning, guys. Good quarter.

Thanks.

I just have some minor questions. What was cash from operations in the quarter?

Yes. On the cash flow statement - 13.3 million. Cash - net cash provided by operating activities. I think that's the line item you're looking for.

OK. Great. And what expected build rates are you using for Boeing and Airbus for fiscal '03?

Boeing - we're now at 279. And I can run through them for you.

Is this calendar year or your fiscal year?

This is our fiscal year.

OK.

And it's, starting from the bottom, the 717 - 12, 168, 18, 15, 27 and 39. And that - we're pretty much ordered up through the year. What I mean to say is - it's - those are the rates - the extent that Boeing orders perfectly balanced aircraft compliments of hardware, which they don't exactly - that's - those are the ship set numbers that we actually have on order from Boeing. So, for us it's not so much a, you know, a predicting what they're going to order. It's reporting what we have on order, which, except for inventory juggling and balancing that they may be doing at Boeing, you know, sort of reflects their ongoing build rate.

But they do, on occasion, do some inventory juggling - maybe balancing. Sometimes it seems like unbalancing.

OK.

So with respect to your first question, cash flow 13.3 million, let me just perfectly convenience. A year ago in the first quarter it was eight point seven. You can go back and look at the Qs, but I'd just like to frame it. That 13 three is up nicely in terms of the direction that I commented upon earlier.

OK.

Your other question about AirBus, we're a lot less definitive with respect to AirBus build rates. Most of our business with AirBus is valve sales to a number of other AirBus actuator suppliers, mostly the Goodrich Companies. And they order valves by the part number and, you know, it looks like it's roughly 300 aircraft a year. It looks like it's at that rate. It's not a lot different than it was. It's down a little bit from what it was last year.

And the other portion is the and that's about the same as last year.

OK. Great. OK. And just following up on Adam's question on the after market, when you said if you guys look beyond your own markets and step back and wanted to make a general characterization about the airlines. Is there any buying trends that you are seeing that, although they aren't put into your - or built into your forecast for this year, but could possibly, you know, result in a rosier environment than you're thinking about currently?

Well, I'm not sure I understand the question, but let me try. We haven't seen any significant alteration in their buying habits, at least to the best of my knowledge. It does seem that they, you know, they, even the U.S. carriers, have run themselves out of inventory. So, you know, they send stuff for repair and overhaul because they need it. And they act like they need it.

There's quick turn-around is still, you know, the most important consideration. There - we wonder if there won't be a tendency towards out sourcing on their part. Some of the airlines that do their own repair and overhaul. And so our sales folks and our product line managers in that area have had conversations with various airlines on the prospect of our doing more of their work. That their out sourcing may allow them to thin out their staff a little bit and save themselves some money.

So far, you know, we don't have any important news on that front. But at least there are airlines that are willing to talk about that possibility now and a couple of years ago they weren't interested in talking about it.

Have you guys done any internal analysis on, at least for the U.S. markets, what potential opportunity that could be in terms of sales?

Not really.

OK.

And actually there's probably as much or more interest in that in Europe than there is in the U.S. The U.S. - I don't know if I should say this, the U.S. airlines - the U.S. carriers seem to focused on other issues. They don't seem to be thinking about changing the way they do business. At least with - as far as we can see, with respect to the aftermarket.

OK. That's kind of helpful.

I have this - everyone in the field, perhaps many on the phone, write about the number of parked aircraft or at least one of their close associates does out in the deserts there and so on. Of course, what an airline parks first are the older planes on which, arguably, we don't have as much hardware as on some of the newer models.

And the second pieces might be so, well, so what. You know, somebody parks a relatively new 757. Let's say one of the bankrupt carriers in this country. I'm not so sure that one should use that data so quickly to just say, well, that's a potential then for someone to cannibalize and take a spare Moog actuator off it and put it on one that's still flying.

Because those airlines and others that are troubled parking aircraft, you know, the lessor or the lender of those aircraft will have a security interest in that plane. Probably - certainly with the ones in bankruptcy making all the moves possible to say, hey, don't touch that airline. I want a complete and ready to go airline when and if the market turns so that I can just sell a new plane on the used market, or a relatively new plan.

So, I think that along with the fact that we're more than half in overseas carriers is why we don't see this fall off at a pace by which particularly the U.S. air traffic miles are down. I just don't think lessors - the pieces I'm trying to put forward, are really stripping these things that heavily. They've got to be able to get a whole plane.

Nobody wants a plane that can't fly because it doesn't have a Moog actuator on it.

OK. Great. One last question and I'll turn it over to someone else. Can you talk about the acquisition environment at all? Are you seeing a lot of activity or a lot of properties coming on the market?

I wouldn't say that. I think in the aerospace business we're not seeing a lot of companies come on the market. We, I guess thinking back a few months ago our view was there were companies that were being offered for sale at prices that reflected the way things use to be as opposed to the way they are.

And that seems to have faded. We see some opportunities in the industrial side and I would expect given what's going on in the satellite business there will be opportunities there as well. Because we're certainly in a lull in that market. Anybody that got in it a few years ago banking on and must be really hurting at the moment.

But I wouldn't just characterize the acquisition environment as relatively slow. You folks know better than we do. We're only focused on the kind of companies that are in our product and technology space.

All right. I'll leave it at that. Thanks guys. Great quarter.

Thank you.

And the next question, we go back to Cai von Rumohr. Go ahead.

I noticed your contract - your provision for contract loss reserves was up around 1.3 million. What's that about?

During the quarter, Cai, our folks over in the U.K. picked up a job where there's going to be some up-front development costs. And so we took that charge in the quarter.

And how big was that charge? I mean, what area was that charge?

Just as you said. About 1.3 or 1.4 million pretax.

What sector was that in?

It's an aircraft job. But the customer -- the contract with the customer doesn't allow us to identify it.

But so, the aircraft margins, which look good, actually are understated. Is that correct? I mean, or were there some other positive ...

... Where you were headed with that comment, Cai, and as Bob said earlier, you know, it would be nice if the rest of the year prevailed the way it's been in the last couple of quarters. But it's a bit early to get that far out.

This is somewhat of a risk business where you never know. And you know, we would not expect to have another charge like that next quarter, but this is an opportunity we wanted and down the road, why, the production area will in a few years probably be nicely profitable. But up-front we've taken the charge for the costs to do the development.

OK. Were there any offsetting pluses like, you know, kind of reimbursement of jet development or anything like that, that would have been, you know, one might categorize as sort of, you know, adjustments or?

No. Not in the quarter.

No. Not in the quarter. Just a nice mix on everything.

You mentioned the strength in plastics. The weakness in turbine, which is not your most profitable business. Can you give us some metrics on what in a constant currency the book to bill was? And where the backlog for industrial -- and where the backlog for industrial would be at the end of the quarter?

Well, I'll talk about book to bill while Bob's digging out the backlog number. For the whole of our industrial business, the book to bill was slightly positive if you ignore the -- if you're not dealing in constant currencies.

If you were in constant currency, the book to bill would have been a little short of 100 percent. But I would put it this way -- it's close enough. And particularly given the activity in the December ending quarter. I think it's -- I think it was a relatively positive sign.

You know, I think I've said this in the annual report. In our industrial business we've, you know, over the last few quarters we've come to regard the statement, it ain't getting worse, as a real positive sign. And with respect to the order input in the first quarter, it didn't get any worse.

And given the benefit of the stronger Euro, it was actually positive. And you can discount the stronger Euro if you want to, but it's going to influence the sales that we report and our earnings. So the stronger Euro is actually a benefit for us.

OK. Thank you.

Well, anyway, the backlog at the end of the first quarter was 68.2 or three million - 68.3, I guess, is rounded, probably. This is just the industrial.

Thank you.

OK.

And our next question comes from the line of Sue Keckmer. Go ahead. Keckmer - excuse me. Go ahead. Your line's open.

Just had a follow-up question on V-22. There is some press reports back in December, talking about potential international variance for that lift requirement. And I was wondering if you guys had any comment on that and what role you would play, if any, on those programs.

We heard about that at the time. Was this the notion that s ...

Yes.

... could be used in place of the V-22?

Correct.

No, we actually don't know anything about that. We have some equipment on the , but it's in no way comparable to the - to the book of business we have on the V-22. So if that were to happen, it wouldn't be anything like an even trade for us. On the other hand, I regard the as hardly any more suitable a replacement for the V-22 than any other helicopter. I mean, it's just a more recently designed helicopter, but it's a helicopter nevertheless. I haven't heard anything about that since. So, my - I don't mean to put the Irish curse on the program, but it - everything I've heard from the test activity at is the program's going remarkably well. And so, I think - I continue to believe that, absent some really serious misadventure in the program, the V-22 will continue to steam along.

Perhaps, I probably could tell the story - about a week ago, some of our fellows reported that went up the river and flew in one of things not too recently.

has gone there. 's been there. You know, all the naysayers have been to and been subjected to a compelling sales pitch. The program manager, Colonel is a - is an impressive and persuasive program manager.

OK. I appreciate your thoughts. Thanks.

OK.

Our next question comes from the line of at Smith Barney. Go ahead. Go ahead. Your line is open, sir. Mr. ?

I already looked for .

Actually, I did see a , but I don't think .

I think ...

OK. I closed his line. I don't believe he had a question or didn't - he didn't realize ...

I think he bumped his - by mistake.

OK. OK. There's no one else in queue at this time. We can pause just a couple of seconds here to make certain we've all the questions. Please press one if you do have a question. And no one is queuing up, sir. It appears there are no further questions.

OK, folks. Well, thank you very much for coming and listening and we'll talk again in 90 days, if not before.

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