Moog Inc (MOG.B) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Moog first quarter FY 2008 earnings call. (OPERATOR INSTRUCTIONS). As a reminder, the conference is being recorded. The conference will be available for replay after 1.30 PM today and going through February 25 of 2008 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering access code 907682.

I would now like to turn the conference over to Ann Luhr. Please go ahead, ma'am.

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 filed on November 27, 2007, and in certain of our other public filings with the SEC.

We have provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have the document, a copy of today's financial presentation is available on our Investor Relations home page and webcast page at www.Moog.com.

Good morning. Thank you all for joining us. This morning we will report on the first quarter of '08 and we will update our guidance for the year. We had a very good start for '08. Sales of $446 million, up 25%. Net earnings $27.7 million, up 15%, and earnings per share of $0.64, up 14%.

Sales growth of about $90 million includes almost $33 million in revenue from recent acquisitions. As you know, purchase accounting has a result that acquisitions don't produce much in the way of earnings in their first year. Excluding the acquisitions, our sales growth was about 16%, only slightly faster than the 15% growth in net earnings.

If you look at our P&L, our gross margin was down slightly as a percent of sales, reflecting the normal shifts in the mix of business. R&D, $24.1 million, up only 8%. SG&A up about 26%, in line with the sales growth and reflecting the added SG&A expenses in the companies that we recently acquired. Our interest expense was up $4 million, mostly the result of borrowing to complete the acquisitions. All in all though net earnings of 27.7%, a very good start for the year.

Let me go to the segments. Aircraft, quarter one. Sales were $159.6 million, up 22%. Sales is up both military and commercial. Military aircraft sales $90.8 million were up 14%, an $11 million increase. About $5 million was increased revenue on the F-35 Joint Strike Fighter. F-35 in this quarter was over $23 million. We have entered into a period of increased workload as we complete the design and development on the short takeoff version of the F-35 and the carrier version.

We will look at our production programs, F-18, V-22, Black Hawk, those three programs generated $19 million in sales, a $5 million increase from last year. Military aftermarket of $26.8 million, was up over $2.5 million from last year's first quarter. The commercial side, sales of $68.8 million, up 34%. A big increase in OEM sales to Boeing driven by a $5.5 million increase in revenues on the 787. Revenues in business jet doubled to almost $16 million. Revenues are up with every one of our business jet customers, but they are driven primarily by the Hawker 4000 and the Challenger 300.

Commercial aftermarket at $21.4 million was up only slightly from last year. However, last year's first quarter included an unusually high complement of initial provisioning spares for business jet customers.

I probably shouldn't leave our commercial airplane productline without a brief status report on the 787. In the quarter we spent $9.4 million in R&D, down from $12 million in the most recent quarter and down $1 million from the first quarter of '07. Our R&D spending on the 787 has begun to come down. All of our equipment is ready to fly. We do have a couple of issues that arose out of safety and flight testing on the control for the horizontal stabilizer actuator, but nothing that would delay a first flight.

We are now in qualification test on all the hardware. And we, like all of Boeing's other suppliers, are waiting to learn what our production schedule should be for the next year or two, and when we are likely to be paid.

We have done a lot of work on the program. We have delivered a lot of hardware. Our receivable balance stands at about $25 million. As you probably know, Boeing's contract terms on the 787 delay first payment until they deliver the first aircraft. However, we have the impression that since they have now delayed that delivery by about nine months, that they have been negotiating payment terms with their tier 1 suppliers. And we of course hope to be become part of that negotiation once they have sorted out their delivery schedule and are available to discuss money matters.

Based on the results of the first quarter we think aircraft sales for the next three quarters will probably bring us pretty close to our original forecast for the year of $651 million. We expect some acceleration in the military aftermarket. We hope to see higher sales in the commercial aftermarket. In prior years the commercial aftermarket strengthened as the year goes on.

There are two big programs though on which our revenue forecast could change. We have in $75 million for the year for the F-35. The first quarter at $23 million would suggest that that might be light. On the other hand, we won't be surprised if our customer reschedules some of the activity for this year in order to live within program funding constraints. Then on the 787, we have a forecast for the year of $25 million. And that of course will depend on the production schedule, and that is the schedule that Boeing is likely to change.

When it is all done, our sales could be affected by changing requirements on either or both of those programs. On the other hand, neither of them are major contributors at this stage to our profitability.

Aircraft margins. Seeing profitability, are aircraft margins for the quarter were 9.5%, down from 10.2% in the first quarter of last year. In our plan for the year we were anticipating aircraft margins would improve, but in this first quarter we had strong revenue growth on the Joint Strike Fighter and the 787, neither of which as I just said, are strong contributors to profitability. Aftermarket content in the quarter was relatively modest. R&D expenditures in aircraft, although they are down on the 787, in total were actually up slightly.

In addition to 787, we have R&D efforts underway on the 747-8. That is the Lateral Control Electronics. We're doing a demo on an electric actuator for Airbus, and we actually have begun work already on the Airbus A350.

There is one other thing. We normally associate foreign exchange issues with our industrial productline. In that business, the industrial business, strong euros and strong yen increase our sales and earnings. Our aircraft business though, as you know I think, we produce a lot in the Philippines. Half our costs there are in Philippine pesos, and the peso has also strengthened against the dollar. Strengthened by 20% over the last 12 months, and this does not help our aircraft margins.

On the other hand, stronger aftermarket revenue in subsequent quarters and slightly improved profitability on production programs we think will bring us closer to our margin objective, but for the year we are now moderating our margin forecast to 10%.

Space and Defense Q1. Fortune continues to smile on our Space and Defense segment. Sales $57.3 million, up 31% from last year. As you will see in a minute, much of the sales growth, much but not all, came through our acquisition of QuickSet International.

Looked at by market, the biggest increase was in Defense Controls. Sales were up by $5.9 million to over $20 million in that category. You may remember that we had a big sales increase in Defense Controls last year because of Marines light armored vehicle. That program came to an end and we were predicting a decline in Defense Controls sales. However, the QuickSet acquisition has products that fit in that category, and those sales turned an expected decline into an increase. I will be a little more specific about that in a minute.

The other category sales continue to be strong in satellites and spacecraft, a 40% increase to $14.3 million, a resurgence in commercial satellites and stepped-up activity on a broad range of programs in spacecraft mechanisms.

The Constellation program is the shuttle replacement. We have begun work on the Aries I, the crew launch vehicle, and on Orion, the crew exploration vehicle. Revenue in the quarter $3.5 million. We have been forecasting $20 million in revenue on these two programs for the year, but they're taking shape a little more slowly than anticipated so we will moderate that forecast a little.

The rest of our Space and Defense segment, which includes launch vehicles, strategic missiles, missile defense, tactical missiles all generated about $15.9 million in sales in the quarter. This book of business is fairly stable, except for the decline in revenues on the Legacy Space Shuttle program. That program, as you know, is winding to a close.

Homeland Defense. At $3.5 million, our Homeland Defense market is beginning to take off. But the big news in Homeland Defense was our acquisition of QuickSet. We closed this acquisition in September. We had been exploring opportunities in Homeland Defense for some time. We have identified some product opportunities, including actuators used in vehicle barriers, and a really interesting gizmo, an acoustic tailing device. You'll hear more about those products in the future.

Our strategic interests also led us to precision pan and tilts mechanisms used in border surveillance and in critical infrastructure protection. We began to develop our own product, and of course, we discovered that the company with the strongest established position was QuickSet International. After a 2.5 year courtship, we completed the acquisition as I said in September. When we did, we had projected that QuickSet would add $32 million in revenue to our Space and Defense segment in '08. Based on what has happened in the first quarter, we are now able to report that QuickSet revenues, which were $10.7 million in the first quarter, will add not $32 million, but $47 million to this segment, Space and Defense, and also $4 million to our Industrial segment.

Shortly after the acquisition, the Company started receiving orders for a system that is called the Driver Vision Enhancer. This is a pan and tilt mechanism used on front-line U.S. Army tactical and combat vehicles. The system carries an infrared camera, and provides night vision that allows military vehicles to drive at night. Over the last couple of months QuickSet has received orders for over 7,000 of these units. Most will be used on the Army's MRAP vehicles. The systems currently on order will all be delivered in fiscal '08, and will generate revenue of about $24 million.

When we acquired QuickSet we thought of it as a Homeland Defense productline, but clearly this product used on military vehicles is more appropriately Defense Controls, and as a result of this new business we now expect that our Defense Controls product category will increase from $62 million last year to $83 million this year.

For the year we had forecasted Space and Defense sales at $228 million. The increased QuickSet sales will offset slightly lower revenue, as I mentioned, on the Constellation and a few other small reductions in missile programs, we are now forecasting Space and Defense for the year at $243 million, a 31% increase over last year.

Margins. First quarter Space and Defense margins, 11.7%, down slightly from 12.3 last year. We had been projecting margin performance for the year of 11%. The increased volume generated by the new QuickSet program will improve margins, and we are now looking for Space and Defense margins 12% for the year.

Industrial systems, first quarter. Our Industrial segment maintained its momentum, delivered another excellent quarter. Sales $122.7 million, up 20%. About 75% of our Industrial revenues are generated outside the U.S., and as you know strong foreign currencies result in increased industrial sales. In this quarter 39% of the revenue increase is related to currency effects. Nevertheless, real growth was 12%, which I think is remarkable growth rate for Industrial product sales.

As you know, in our Industrial division -- in our Industrial business we direct our energies to a number of focus markets. In this particular quarter the most dramatic growth was in control for equipment used in steel mills. Sales increased by 52% to $13.5 million.

In previous conference calls I have related this extraordinary growth in the steel business to the development of the industry in China. We are now seeing though the upgrading of steel mills on every continent. It seems that as China continues to make more steel, many of the other steel producing countries are determined to make better steel.

Simulators. Our simulator business continues to build. Sales in the quarter $15.2 million, up 42%. The majority of the revenue in electric motion platforms sold to CAE and FlightSafety for flight training simulators. A vibrant business these days and we are optimistic that it will continue.

$11.5 million of sales in the metal-forming business were the highest they have ever been, particularly strong in Europe, but one-third of the $3 million increase in the quarter occurred in Asia.

Controls for injection and blow molding continue to be our largest market. Excellent growth in the quarter, 17% to a total of $18.6 billion -- million. The business particular strong in Asia. Turbine control sales of $10.9 million, up only 7% from last year. But the incoming order rate would suggest that this business will strengthen over the balance of the year.

In our last conference call we presented our '08 industrial forecast as a range centered around $493 million. We were using a euro at that time of about $1.38. The euro has been consistently stronger than that, and although there are some forecast suggesting the dollar will strengthen, we now think we should update our forecast using a euro of about $1.45. That leads to a forecast centered around $506 million.

One might expect that stronger currencies, foreign currencies, would also produce higher profits, and to some extent they will. On the other hand, some of our Industrial product is built in the Philippines, and therefore experiences the cost pressures that I described in the Aircraft segment.

Margins. Margins in Industrial were a strong 14.6% for the quarter, up from 13.2 last year. For the year we had been projecting margins at 13.2, continuing last year's performance. It now appears we can be more aggressive so we are projecting margins of 13.7% for the entire year.

Components Group. Our Components Group juggernaut continues to steam ahead. Sales of $79.6 million, up 16%. Sales up in every market area. We sold $26 million in aircraft products, up 12% from a year ago. Two of the major growth programs are also now the largest programs. First is the Guardian program for Northrop Grumman. Guardian is a system designed to protect military and commercial aircraft from shoulder fired missiles. Sales in the quarter were over $2 million.

The the other major new program is the Multi-Spectral Targeting System built by Raytheon for use on the Predator UAV. During this quarterly we also shipped $1.5 million worth of fiber-optic components for use on the Euro Fighter. And we continue to ship a variety of product used on Black Hawk, the helicopter, and then the Avionics suites of commercial aircraft.

Sales of component products used in Space and Defense increased by 12% in the quarter, $16 million. The largest program is the Commander's Independent Viewer for the Bradley. In the quarter we also had a big shipment finishing up deliveries of fiber-optic modems for the Egyptian Army. The biggest sales increase though in Space and Defense was in the aftermarket, primarily delivery of spears for equipment used in the Mid East.

The Marine market continued strong, sales $8.4 million, up 29%. The increase primarily shipped slip rings used on undersea robots and FPSOs, which are floating production storage and offloading vessels, used in oil exploration and production. This quarter also includes sales of about $500,000 from our new acquisition of the company Prizm.

Medical equipment sales increase was primarily increased quantities from motors shipped to Respironics for sleep apnea equipment. Sales to Respironics increased by $1 million to over $8 million, making up two-thirds of our sales volume in our medical equipment business. The rest of this product category are slip rings used in CT scan machines, a variety of customers but primarily Philips Medical. Incidentally you may be aware that during the quarter Respironics was acquired by Philips Medical and for a very handsome price.

Industrial component sales $15.8 million, up a healthy 28%. Of the $3 million increase the majority represents the inclusion of revenues from the recent acquisitions of Thermal Control Products and Techtron.

Our forecast of sales for the year '08 used to be $321 million before the Prizm acquisition. It should add $5 million. So we are now projecting $326 million, a 15% increase over last year.

Component margins. First quarter 18.6%, almost as high as last year's 19.2, and considerably above last year's average of 15.7%. We have had this experience before where the Components Group's profitability is very strong in the first quarter. In part that is because the first quarter is a strong aftermarket quarter, beginning of the government fiscal year, and funds at the depots become available to cover pent-up demand. For the moment, we're going to stick with our 15% -- 15.7% margin projection for the year for the Components Group.

Medical Devices, quarter one. This segment got off to a strong start in quarter one. Sales $27.2 million, up 16% from the most recent quarter, not from a year ago. Comparison to first quarter of '07 doesn't mean much since the ZEVEX products were not part of our Company at that time, and they now generate two-thirds of our revenue.

Our sales volume in pumps improved nicely. The increase was 17% over last quarter or $1.7 million. It occurred primarily in the Curlin productline. We've gotten squared away with our major distributor, B. Braun, and sales of Curlin pumps in the quarter were much improved over the previous two quarters. Sales of administration sets were also up nicely, up 8% to $7.5 million.

The balance of our sales in the quarter, the balance was $7.7 million, is to sensors, support equipment for pumps and surgical handpieces. Sales increased in all these productlines. The most dramatic was in handpieces used in cataract surgery.

Our plan for the Medical Devices for the year, revenue of just under $102 million. Given the results of the first quarter, that plan anticipates three more quarters at just under $25 million. We have now had one year's experience with seasonality in this business so we think that is still a good forecast.

Margins. We achieved margins in the quarter of 13.2%, pretty close to the 14.5 we had rejected for the year. We are expecting that some of our cost reduction initiatives will improve margins over the balance of the year. So we are now projecting some improvement, and we now hope to end the year at 14%.

Now let me summarize the guidance. The revisions I have just described, we have increased our sales forecast in Space and Defense by $15 million, industrial Controls by $13 million, and the Components Group by $5 million. We are now projecting sales in a range centered around $1.828 billion. If we achieve that sales level, it will be a 17% increase over '07.

In view of the cost pressures we are experiencing in aircraft, we are revising our aircraft margin projection to 10%. On the other hand increased volume in Space and Defense will result in higher margins there, 12%. Stronger foreign currencies will boost margins in Industrial to 13.7%. And Medical Devices, like aircraft, we are reflecting recent experience, revising margin projection to 14%.

All in all, though should result in operating profit of $229 million. We are now looking for net earnings the range centered around $117.7 million, which would produce earnings per share of $2.71, an increase over last year of 16%. We expect our earnings per share will build over the quarters. We are projecting $0.66 in quarter two, and then $0.68 and $0.73.

It is at this point in our conference call for many, many years that I have turned the call over to Bob Banta to comment on cash flow and our capital structure. I'm sure most of you are aware that Bob has recently retired, and so this morning that part of our presentation will be made by our new CFO, John Scannell.

With just the smallest hint of an Irish accent, John will be describing a cash flow situation that has changed somewhat from what we presented 90 days ago. Since that time we have won the opportunity to provide primary flight control actuation for the A350, a job that is almost on the scale of what we were doing -- what we're doing on the 787, although on a slower schedule.

In addition, we have a couple of smaller programs which we're not allowed to describe in detail. These new opportunities and the accelerating sales growth in the rest of our business will result in somewhat greater working capital requirements and an increase in capital expenditure. And then there is the mystery of when Boeing will pay us for the work on the 787.

Now here is John.

Good morning. I will cover the following areas in my remarks. First I will speak to cash flow in the first quarter, then I will provide an updated cash flow forecast for all of fiscal '08. I will follow this with some remarks about our tax rate, and finished with some additional items of interest on the balance sheet.

Q1 cash flow. In the first quarter net debt increased by $43 million. $12 million of this increase is related to the acquisition of Prizm. Free cash flow was negative $29 million dollars. Cash flow from operations was negative $4 million. This compares with a positive cash flow from operations of $23 million in the first quarter of fiscal '07. The swing from twelve months ago is driven by an increase in receivables and a reduction in customer advances. Receivables growth was a result of the 25% growth in sales year-on-year and our ongoing work on the 787 and payment terms on certain business jet programs.

Capital expenditures in the first quarter totals $25 million, compared with depreciation and amortization of $15 million. We continue to invest in facilities and test equipment related to our current and projected growth. Interest payments in the quarter totaled $7 million, and our tax payments were $8 million.

Fiscal '08 cash flow forecast. In our last conference call we forecast cash flow from operations for fiscal '08 of $120 million. We are now projecting $90 million. The reduction is mostly a result of the growth in working capital associated with the additional sales we are forecasting. We had projected capital expenditure of $70 million for the year. We are now increasing this to $85 million. The robust growth in our four businesses, combined with the projected production rates on the 787, A350, and in our business jet productline continues to acquire investments in capacity expansion. Depreciation and amortization for the year will be approximately $62 million.

We listened carefully to the recent Boeing call on the 787 schedule push out. Our present slightly positive projection of free cash flow at $5 million continues to assume that we will be paid for our work on the 787 before the end of our fiscal year.

Taxes. Our effective tax rate in the first quarter was 34.8%. That is up slightly from a year ago. During this most recent quarter we completed our FIN 48 implementation review. In the course of this review we identified some tax exposures related to our operations in China, and increased our tax liabilities by $1.2 million in this quarter. In future quarters we are projecting some tax benefits associated with foreign tax credits and R&D credits to give us an effective rate of 31.5% for the year.

Other items. Our non-cash stock compensation expense in the quarter was $1.6 million. Loss reserves declined by $1.4 million over the quarter, reflecting the transition of business jet programs from development into production. At the end of December our net debt to total capitalization stood at 39%. Thank you.

With that, can we go Q&A please?

(OPERATOR INSTRUCTIONS). Cai von Rumohr, Cowen.

John Scannell, nice start off, John. Good quarter. Tell us a little bit more about the Philippines and the 20% is a pretty big swing. Were any of those production programs in the red? Were there any reserves established? And approximately how much dollar volume are we talking about being impacted by the swing in the peso?

We will have to think about the dollar volume. Let me first do it in productline terms. Much of our commercial aircraft productline is fabricated and assembled and tested in the Philippines. When I say much of our commercial aircraft, I should actually say commercial transport. Some of the business jet productline is product there, but not all, at least not yet. A portion of our Industrial productline is product there.

The peso -- our peso costs on an annual basis are in the neighborhood of $30 million. So when the peso jumps by 20%, that means on an annual basis those segments that are involved are going to absorb something in the neighborhood of what appear to be $6 million of increased cost. I think about $4 million of that will impact the aircraft business over the course of the year. It is about that magnitude.

Now historically, as most of you know I think, we have been in the Philippines since 1983. And over that 25 year period, the inflation in pesos has been offset by a more or less regular devaluation. And we are -- I'm waiting for a correction in this situation. What we need is a little more instability in the Philippines and another devaluation of the peso.

Over the years the inflation we have experienced in the Philippines in dollar terms has been substantially less than the inflation in pesos. But at the moment the dollar is weakening against the peso like it is weakening against almost every other currency.

Just to refresh, the difference between this plan and the one at the end of the fourth quarter the impact of the peso is $6 million? And then do you have any plans to hedge against the peso or is the idea you think they're going to devalue so it is not worth it?

In the forecast, the prior forecast, the guidance we provided before that had -- where we were anticipating aircraft margins of 11 or 11.3, has taken into account some of the increased cost related to the strength of the peso, but we are, let's say, in this forecast being a little more realistic about it. In terms of hedging, we're not skilled at hedging and I don't know that you can hedge far enough in advance economically enough for it to make that much sense.

If you look out a couple of years, and the projections for the peso to the dollar all seem to be pretty flat at somewhere around the 40 to 41 range. It came down from about 49 pesos to the dollar at the end of December of '06. I think the hedging we probably -- in hindsight we should have done it about a year ago. But I guess our sense is the peso, we are hopeful to see that it would appreciate any more against the dollar. And as I said, the forward looking projections suggest that it would stay flat.

I would hasten to point out though that in spite of the strengthened peso, we continue to believe that our production facility in the Philippines, for the kind of hardware we build there, is the most cost-effective production operation on the planet.

Right. But if I just look at your numbers you are taking a point -- 100 bips out of the margin, which as you say, would be a little lover $6 million. Was the entirety of this all absorbed in the difference of the plan?

No, there are some other revisions in anticipated profitability. It is not simply this one effect. We've gone through a review of profitability on all major programs.

Then just one last one because I am sure others will want to ask questions. But as I look at Industrial, I think you had mentioned that steel plants were up to $13.5 million, which is a very handsome increase. And yet your plan for the year looks like you have it at $39 million, which would assume that would fall off a cliff. Is that being conservative or is there evidence that in fact it will fall off a cliff?

If you tracked our predictions with respect to controls for steel mills over the last couple of years, I think you would see this pattern. We forecast conservatively, and we are consistently surprised by the robust order activity in this business. As I mentioned in the prepared remarks, what we're seeing is not -- we used to think of this growth in the demand for controls for steel mill equipment to be primarily related to the development of new steel production in China. And in the last few months we have come to appreciate the fact that some of this equipment we're delivering isn't winding up in China. It is going into retrofitting mills, and particularly in Europe.

As the man on the scene reports it, it seems that the Chinese, as I said, are making more and more steel and everybody else wants to make better steel and shift their production into the higher grades, all of which generate some business for us. But to your point, it is very difficult for us to predict what that market is going to do some six months in advance, so our tendency is to be on the conservative side.

Is the plan -- you get $13.5 million, but you must know what you're going to ship in the next quarter, because the average of the rest of the year would work out to about $8.5 million, something like that. So we assume it kicks off in the next quarter or just -- do you have any visibility that it will come off in the second quarter versus the first?

I think the projection for the next quarter is a slight reduction. It is really the -- this isn't the kind of equipment that for the most part is ordered with leadtimes of 8 to 12 weeks. You get beyond three months, we don't have much visibility into what the order rate will be.

Terrific. I will let someone else go. Thanks again, and terrific quarter.

J.B. Groh, D.A. Davidson.

A question on medical, when I look at the change in margin from last year I'm guessing we attribute that to the growth in pumps versus sets. Is the margin different there?

You are comparing the first quarter of '07?

Yes.

The first quarter of '07 was a superduper quarter. First of all, it did not include the ZEVEX productline, because we hadn't acquired ZEVEX yet. It was a very strong quarter in terms of Curlin pump sales, largely the result of a big order from one of these -- not exactly a distributor but one of these buying groups. So we had a great quarter, nice profitability. The ZEVEX productline when we brought it, although we think it is a great buy and a great company and it has a great future, does not generate the kind of profitability that we had experienced on the Curlin productline in that quarter.

Now you have followed us. You know that we're hoping that this productline, when we finally get it rolling, will get closer to 20% operating margins of 14 or 15%. But at the moment I think that the quarter we just had was a big improvement. It was particularly an improvement in sales of IV pumps. The Curlin productline, the revenue levels got up to -- quite a bit -- they were quite a bit better than what they were in the previous two quarters.

Thanks. I remember that now. But it does seem like you're being fairly conservative on the revenue front there. Is that --?

There is seasonality in this business. I think our second and third quarters last year were down from our first quarter -- first quarter of our fiscal year. So I hope it is conservative. But I think the pattern last year was not consistent. Sales were not consistent quarter to quarter.

Then in Aircraft Controls I think you explained some of the performance this quarter, and obviously as you ramp up OEM you're not going to have the same margins as when we're at low production rates. But would you say that the opportunities with the 787 and now with the A350 having a more package orientation to the bids, does that give you more margin opportunity or the same?

The same as the business has been in the past?

I don't want to go back -- there are periods where you almost had a 20% margin in Aircraft Controls, so I don't want to pin you to that.

Back in the days when we had the really high margins, it was the balance of the business was heavier on the military side than the commercial side. The strength in the commercial airplane, particularly commercial transport business, as that grows as a percentage of the total aircraft business, the margins will contract slightly.

The commercial business is in general not as profitable as the military business. This comes about because on original equipment, the fundamental transactions for suppliers to Boeing and Airbus is you try to recover your costs on the delivery of original equipment, and make your money in the aftermarket. Everybody understands that is the way this business is structured.

The initial -- the early years of the 87 and the A350, when we were delivering only original equipment won't be particularly helpful from a margin point of view until we start delivering initial provisioning spares. Which is, that begins when the airlines that are buying the airplanes have enough airplanes that they want to build a spares complement.

I think the margins in the aircraft business will improve from the level that we are seeing currently. We're still in the aircraft business investing heavily in R&D, which depresses margins. I think they will improve as the years go by. I think it will be sometime before we get to the 17 or 18% that we enjoyed in the past.

Yes, I wouldn't expect that for a while. Could you do me a favor and give those R&D numbers on 787 again?

Yes.

By the way, thanks for the slides, it makes life much, much easier.

You're welcome. That is a Don Fishback, Ann Luhr initiative. 787, $9.4 million in the first quarter of this year compared to $12 million in the fourth quarter of '07, and $10.4 million in the first quarter of '07.

Thank you very much.

Incidentally, we hope it is going to turn out that the R&D expenditures on the 787 are going to be declining rather dramatically over the next three quarters. We're not intending to spend at this rate for the rest of this year on the 787.

Eric Hugel, Stephens.

Just a couple of questions. Just to follow-up on your R&D question with regard to 787 coming down dramatically. Would we expect to see a corresponding pick up in these other A350 and 787, so overall R&D is going to be flattish?

We are now projecting R&D for the Company flat for the year. We're predicting aircraft R&D will come down. It was $65 million in '07, and we are expecting that that will come down to about $55 million in '08. But we have somewhat increased R&D budgets for our other segments, particularly the international -- the Industrial segment. We are intending to wind up with about the same level for the Company, about $103 million. But within the Aircraft segment we are hoping that R&D will be $8.7, which was $9.4 million in the first quarter. We're hoping that we spend only about that amount in the next three quarters. So we're hoping the 787 will come down to less than $19 million, but we're building on the 747-8 and we're starting the A350.

The QuickSet acquisition that you talked, it seems like a real homerun here. You gave us some visibility in terms of the top line. Can you talk about once you burn through purchase accounting -- when you look at that relative to Space and Defense Controls, the margins is it better? How should we think about that?

Don will detail for you the purchase accounting. But you're quite right. I think the QuickSet -- the timing of the QuickSet acquisition turns out to have been very fortunate. Now the company had been working on this Driver Vision Enhancement order. They have been working at this for sometime. It didn't just drop in out of the blue. But the timing of when the order would fall and the deliveries at a time we made the acquisition was not all that clear. Shortly after we completed the deal the orders finally broke in substantial quantities.

In a rough way I would say that had that not occurred, the purchase accounting adjustments would probably have offset the operating profit contribution of the acquisition. I think because of this increased volume the QuickSet acquisition will actually make a positive contribution to the Space and Defense earnings, hence the improvement that we are projecting in the margins in that segment.

I think Bob is right. This is Don. The timing of that order -- Bob's right -- had come in a couple of days before the financials. And our amortization would have been most likely significantly different.

But to give you the numbers, the amortization that we recorded in the first quarter on QuickSet was about $1.1 million. And we have a little bit of amortization in the fourth quarter, about $300,000 last quarter since we bought it in the middle of September, the business. The amortization I am talking about is not only the amortization of intangibles, but also the write-off of some of the stepups in the inventory in the backlog value. Going forward we're looking at for the full year of '08 the amortization for the whole entire QuickSet book of business would be about $2.2 million. So it is forecasted to ramp down over the next couple of quarters.

Do you think that maybe these orders shook loose because you guys acquired them and sort of the customers felt maybe more comfortable?

We would love to take credit for it, but actually I don't think -- I think it was just -- I don't think that was a factor. I think this was -- the customer is BRS. And I think what triggered the order or decisions made at the Army with respect to the MRAP vehicle and their direction to BRS to get on with it.

Can you address maybe -- I know it is sort of a limited part of your business, but it is definitely something that people are interested in -- giving what is going on on a global basis. I guess more specific to your Industrial operations. And not sure, given the visibility that you have, this is maybe the greatest thing. But any signs out there from the OEMs that you supply to that they are getting nervous about their markets slowing down in terms of this whole sort of global slowdown sort of mania that is going on?

It is an interesting question. As we went through with a review of our Industrial productline, the results for this quarter incoming order rate, you would -- having completed that review, you would have no clue that anybody is talking about recession, economic difficulty.

I think to some degree, or maybe in total, that has to do with the fact that our Industrial business is focused on 8 or 10 specific market areas. As you know. That that is controls for plastics machines, turban controls, simulators, specialized test equipment, equipment for steel mills. And those particular market -- you think about simulators, the flight training simulator business is very strong and it isn't dependent on home-building and the subprime mortgage market.

I think we are in the situation that the businesses that are important for our continued health, welfare and sales growth are businesses that are not likely to be much influenced by the recessionary pressures, if they exist. We don't see it. I should say we haven't seen it yet.

You mentioned Respironics getting acquired by Philips. Is that a potential risk or an opportunity? How do you see that?

Of course we don't know. We have an extraordinary relationship with Respironics. I have described that in the past. Respironics as a company was a real believer in strategic sourcing, and working with suppliers in a partnership fashion. It is a profitable productline. They know that it is profitable for us. Our engineering team worked together with their engineering team to develop the next generation of product. They have had their manufacturing people in our factories helping us reorganize the flow of work to reduce the cost.

They have recently spent a substantial amount of capital money, their money, to automate the production of the motor blower assembly for the product that is now -- the new product that is now in production. An extraordinary relationship.

Now will the Philips ownership change that? We of course don't know. We're hopeful that what will happen is that the Philips organization will take the cue from the success that Respironics has had. I think the current leadership of Respironics has taken over this sector of the Philips organization. So there is the possibility that we will have more opportunity because of the Respironics relationship with the rest of the Philips organization. That is the potential positive.

On the other hand, there is the potential that Respironics will begin to behave differently, because Philips folks don't have quite the same commitment to strategic sourcing. We will just have to wait and see.

My last question, Bob, will deal with your favorite talking topic, B. Braun. You said that you went through and you did some kind of strategic sort of review of -- can you give a little more color on it? And just get us comfortable with how you get comfortable after all the issues in the past with what is going on there.

There have been -- let me drop back for just a minute. The B. Braun unit volume sales in the third and fourth quarter of last year were substantially short of their own forecast and a real disappointment to us. That led to some rather intense discussions between the leadership of our Medical Devices segment and the leadership of the B. Braun sales organization. It appears that that has all been very productive. The organizations are now aligned.

And the reason that we should believe that is that the pump sales coming through B. Braun in the first quarter of this year were a hell of a lot better than they had been in the previous two quarters. It is not just that, okay, the folks have gotten together and talked, they are actually -- B. Braun has delivered a much stronger quarter in pump sales. We are optimistic that we're going to be back to where we hoped to be when we made the Curlin acquisition, and we will have a productive partnership with the B. Braun sales organization.

Cai von Rumohr, Cowen.

The aircraft are indeed, just a quick follow-up. (inaudible) get to my model. What was the aircraft R&D in that first quarter for the whole sector?

Aircraft R&D in the quarter, $15.2 million.

So really aircraft R&D was down sequentially 140 bips. And it looks like it is going to be -- you've got 150 bips coming. So was most of -- so now we are at a relatively steady-state with the peso because it is not one of the currencies, until now, that I have been tracking very closely. This peso looks like it should be steady from here on out, and so what happens to the margins in that sector is really going to be a result of mix and what is happening to R&D?

Exactly.

Terrific. That is it. I will probably ask the rest off-line. Thanks a lot.

(OPERATOR INSTRUCTIONS). Steve McNeil, Jennison.

Can you just bridge again for us this 130 basis point delta on aircraft margin for the full year compared to your old assumption? I think you said there is some piece of it that is related to the peso, $4 million I think? That is, call it, 60 basis points. Can you -- first of all, is that assumption correct? Then secondly can you piece together that other 70 basis points?

Actually, it is not easy to do. Let me try to explain where these numbers come from. There is on a quarter by quarter basis we go through with the operations a rather thorough review of prospective program sales and profitability on each major program. So the revisions that we have made to the aircraft margins are really the product of that effort.

What you are really seeing in the change that we have made is the impact of the additional -- I should say the additional impact of the Philippine peso. But more importantly, the mix of business and the profitability on the entire range of programs.

I guess one could say it is a review based on the current achieved profitability and a considered projection of what is going to happen for the rest of the year. It is not -- I can't point to two or three things that are the cause that has this effect. There are a lot more variables in the equation.

So is it safe to say 60 basis points of that is from the peso though?

Yes, I think that is about right.

Then we have 70 basis points mix/profit on the these programs?

Yes.

On the Space and Defense, that 100 basis point increase, I think you were saying that is mostly QuickSet related, correct?

Yes. The increased volume there and also the impact of that increased volume on the profitability of that company. This was a company that in the year -- the twelve months prior to our acquisition -- let's see, let me put it differently. In calendar year '07 this was a company that was doing about $27 million worth of business. We have now said that in our fiscal year '08, which is three months of calendar '07 and nine months of calendar '08, that business is going to change from $27 million to $51 million.

As happens in those circumstances, it is tough to build the overhead fast enough to avoid making the company, at least temporarily, considerably more profitable. The remarkable thing is that the operation folks who run the operations in that company have been able to develop their supply chain so that they can actually support that increased volume.

Just back on the Driver Vision Enhancer, do you expect further orders or is this 7000 kind of it?

We expect that there will be more. I don't know how many more. And I don't know what the timing will be. There are many more MRAP vehicles than what we have orders for. And the system is used on vehicles other than the MRAP vehicle. We don't have visibility into what the Army's plans are for deploying this system on the entire range of equipment. Let me put it this way, I will be surprised if there aren't additional orders, but I don't know that they will come soon enough to affect this fiscal year.

Are they outfitting all the MRAPs with type of equipment they are making --?

There are more MRAPs on order than we have orders for this system. At least at the moment the Army has not decided to order one of these systems for every MRAP. Will they eventually? They may. It is a system that can be retrofitted. It is basically an infrared camera in a pan and tilt mechanism that is mounted on the hood of the vehicle sort of just in front of the windshield. And it allows the driver to drive at night and in dust storms, not depending on the day visibility.

I think the other thing is that the number of MRAPs that they're going to build keeps bouncing around quite a lot as well. Numbers keep going up and down so there's uncertainty in that side as well.

Just shifting gears for one last question. Can you bridge the gap on the 50 basis point delta in your expectations for margins in medical -- what that reduction was attributable to?

It has mostly to do with the experience that we've had in the first quarter. We have slightly higher personnel expense than we had originally budgeted. And we had a redesign of one of the administration's set products that was going to provide a rather substantial cost reduction. And as that new product was introduced it was not well received by the customers. So there is a redesign of the redesign in work, which will have the effect that the benefit of the lower cost on that product will be delayed until later in the year.

Is this a business that hits that 20% bogey by '09 or maybe '10?

I hope so.

'09? You hope '09 or you hope '10?

I hope both. This is a business that we are just developing. I probably should not have shot my mouth off over these previous conference calls about 20%. For a business that we're just getting into the kind of margins we are experiencing aren't all that bad, 13,14%, not bad.

But our intention over the long-term is that this will be a more profitable business. We believe that that is possible because there isn't the same kind of either competitive or cost pressure in this marketplace that there is in some of the other markets we're in.

You have no more questions in queue. Please continue.

Thank you all very much for coming and listening. We will talk next time.

Thank you. Ladies and gentlemen, this conference will be available for replay after 1.30 PM today until February 25 of 2008. You may access the Executive Playback Service at anytime by dialing 1-800-475-6701, entering access code 907682. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.