Moog Inc (MOG.B) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Moog first-quarter earnings call for 2012. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. (Operator Instructions).

As a reminder, today's call is being recorded. And with that being said, I will turn the conference over to Ms. 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 January 27, 2012, our most recent Form 8- filed on January 27, 2012, 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. Bob?

Good morning. Thanks for joining us. We began these quarterly conference calls at the end of our fiscal 2000. At that time, our Company sales were $644 million, and in that year we made about $25 million in net earnings, and our market cap was about $250 million.

Over the years since then, I have had the opportunity to describe our quarterly results 45 times. One might think that after the first 20 or 30 times, it would have become a bit of a chore to prepare the quarterly conference calls. But for me it has always been an interesting challenge to describe the progress of our Company.

We have a great story, but sometimes it's not easy to tell because we are a Company with so many facets. At any rate, I want to thank you all for your interest and your support. I know that at least one of you has been with us since we began these calls, and we particularly appreciate your interest, your support and your perseverance.

I am very enthusiastic about our new leadership team. I know that John Scannell and Don Fishback will do a great job and will work particularly hard to describe for you what is going on in our Company. I expect that as we move into the future the Moog story will only get better.

So here's John.

Thanks, Bob. It is a real privilege to be taking over these calls from Bob. It's a very impressive track record he's had over the last two decades, and we hope over the next decade that the new team will be able to report strong growth and increasing shareholder value just as Bob has done over the last decade.

Hence, fiscal 2012 first quarter is the first step on that journey.

So before I get into the details of our results, let me start with some macro headlines and how they impact our business and address four topics -- the defense budget, the European debt crisis, a slowdown in China and the US economic recovery.

Starting with the defense budget, the die is cast for fiscal 2012, and we have already seen the results of the reduction in OCO funding, particularly in our Components group. But apart from this, fiscal 2012 seem solid.

What happens over the next few months with budget proposal and healthy frustration rightfully is still unknown, but we are optimistic that we are on several key programs that will continue to be well-funded.

We have been planning for a multiyear ramp-up in our defense business, driven by the F-35. The budget reductions may temper that ramp, but we are cautiously optimistic that we will still see growth.

Turning to the European debt crisis, the crisis has yet to have a measurable impact on our business. The availability of credit in Central Europe and in particular Germany could have a negative impact on our machine building customers, but we have not seen this date. Two significant drivers of our customers business are the European auto industry and the demand from emerging economies. And so far, both of these seem to be holding up well.

Turning to Asia, the recent slowdown of manufacturing and activity in China has received some press. Over the last quarter, we have seen some slower growth in China, but there is often a seasonal effect in advance of the Chinese New Year. So we would have to wait for another month or two to see how things turn out.

In addition, many economists forecast that the Chinese government may take steps to boost internal demands.

Finally, the US economy seems to be on a slow but steady recovery path. In general, this is a positive effect for us, reflected in our medical markets and in our general industrial automation sales. It's early days in the recovery, and the pace is very muted, but we are seeing some encouraging signs in our business.

So now back to the quarter. Turning from the macro to the micro, we are off to a great start for fiscal 2012. First-quarter sales were strong, and earnings per share came in $0.07 ahead of what we had planned.

Four of our five segments had both sales and profit growth. Sales in the quarter of $601 million were up 8% on last year, net earnings were up 9%, and earnings per share were 10% higher than a year ago.

Taking a look at the P&L, our gross margin was slightly better on the higher sales, R&D was up $6 million in the quarter as we finished up the 747-8 certification program. SG&A at 16% was up marginally as a percentage of sales from last year. Interest expense was down from last year, driven by lower interest rates. Our tax rate in the quarter of 31.3% was up from 27% 12 months ago, and our first quarter last year we had some tax credits which did not recur this year.

This quarter we had a slightly lower share count as a result of our share repurchase activity in 2011. The overall result was net earnings of $36 million, a 6.1% net margin and earnings per share of $0.80.

For fiscal 2012, 90 days ago we communicated our plan for fiscal 2012. Our plan was to start relatively slowly and then see sequential improvements in earnings as we moved through the quarters. Today we're keeping our profit forecast unchanged, despite the strong first quarter, but moderating our sales forecast slightly.

Some of the earnings strength in the first quarter came from work we had originally planned for Q2. So our second quarter is apt to be somewhat softer than our last forecast.

In addition, we have seen some significant shifts in exchange rates over the last 90 days.

As a result, the translation of our foreign sales would be lower than we had planned. But we do not expect a discernible change in our profitability from currency movements.

We're also starting to see some signs of slower growth in our Industrial businesses in Asia, so we want to be a little cautious in our outlook for those markets. Putting these factors together, we are moderating our sales forecast for the year by $37 million down to $2.48 billion. We are seeing a slight uptick in margins in our Space and Defense group and in the Components group, so net earnings should be unchanged at $152 million and earnings per share of $3.31 are also in line with our last forecast.

Before I jump into the segments, let me give you a heads-up about our format this quarter, which we've changed slightly from last year. Within a couple of our segments, we've rearranged some of the markets into categories which we think will help our investors to understand better how our businesses work. We hope these changes will provide you with additional insight into the macro forces affecting our business. These changes are reflected in the supplementary data we published this morning, which will help the listener follow along with the text. I will explain the individual changes as we move through segments, starting with Aircraft.

In our Aircraft segment, we had a very strong sales quarter with healthy increases in both military and commercial OEM. Our aftermarket in both categories was close to last year. For the year, we are lowering our forecast slightly to reflect our latest thinking in some particular programs.

In order to simplify our presentation, we will no longer split out Navigational Aids, instead incorporating it into the military and commercial numbers as appropriate. Our year-over-year comparisons include this change for both Q1 fiscal 2011 and Q1 fiscal 2012.

Aircraft Q1, in the first quarter, total aircraft sales were up 18% to $231 million, military OEM sales surged 29% driven by strong SMS sales on the Japanese F-15, Korean T-50 and Indian Light Combat Aircraft. These were surprisingly strong in the quarter, and we had been expecting them later in the year.

The F-35 program was also up as production continues to increase. We had $6 million more in sales in that program than a year ago.

The military aftermarket was up 4% from last year. Fiscal 2011 was a record year for our military aftermarket, and we are off to a good start for this year to at least match that record.

Turning to commercial in the quarter, it's a similar story. Commercial OEM sales surged 26% with strength in all categories. Boeing and Airbus were both strong with double-digit increases from last year. The business jet market had a very strong quarter, up 57% from last year. We are seeing the general recovery in this market, and also sales are benefiting from the production startup of the G650 at Gulfstream.

The commercial aircraft was down marginally in the quarter. We booked $26 million in sales, about in line with the average of the last five quarters. Over the longer term, increased use of the fleet will result in higher aftermarket sales, but quarter to quarter our sales tend to fluctuate.

Aircraft for fiscal 2012, for the year we have reduced our sales forecast by $18 million. We are now forecasting military sales about $8 million lower than our last forecast, spread out over a variety of programs.

On the commercial side, we believe sales at Boeing will be somewhat lower based on what we've seen in the first quarter. We are also adjusting our commercial aftermarket forecast down $2 million to reflect the run rate of the first quarter. Overall, our new sales forecast of $927 million is still up $76 million from fiscal 2011.

Margins. Margins in the quarter were 10.7%, up from 10.3% last year. Higher sales on the FMS programs we've mentioned resulted in additional operating profit.

We are on a multiyear journey of margin expansion in the Aircraft group, but it is a slow process. On our future growth platforms, we are either in the preproduction stage -- for example, on the A350 and the G650 -- or in the relatively early stages of full production -- for example, on the 787 and F-35. In both these phases, manufactured units tend to be expensed, and hence margins tend to be compressed.

Over the coming years, as these programs mature and volumes ramp up, we are confident we'll see some nice margin expansion.

For the fiscal year, we are maintaining our margin forecast at 11%.

Turning now to Space and Defense. Sales in the quarter were down 8% from year ago with the difference being the DVE program. Excluding the DVE program, sales in the quarter were actually up 6% from a year ago. For the full year, we are increasing our sales forecasts to incorporate the sales of our recent acquisition of Bradford Engineering in the Netherlands.

We are regrouping the sales in this segment into three major markets to line up with our internal organization -- space, defense and security and surveillance. For reference, the space market include satellites, launch vehicles and NASA. The defense market includes missiles and defense controls or military vehicles. And the security and surveillance market includes traditional security applications, as well as the DVE application.

First-quarter results. Sales in the quarter were $88 million. The space market was very strong in the quarter, up over 30% or almost $10 million from last year. NASA programs contributed over half of this increase. But we also saw nice gains in launch vehicles and in our satellite programs. NASA pushed through a lot of work in the final months of calendar 2011 as budgets were still in flux and funding for approved programs was consumed.

As we look to the future, we are seeing a shift in NASA's financial model, which will change the outlook for the remainder of the year. But more on that in a minute.

Turning to the defense market, we had $4 million lower sales in the quarter. As part of our missiles work, you may remember that last year we had strong sales on a stores management program in the first quarter. This program was much smaller this year. The remainder of our missile business, however, was strong, and our military vehicle business was down only marginally from last year.

Finally, in our security and surveillance market, we had $11 million lower sales. We now include the DVE program in this market, and sales in that program were down $12 million from last year. So that was the change.

For fiscal 2012, Space and Defense for the year, Bradford Engineering should add $10 million in sales in our space market. Bradford is a supplier of space components based in the Netherlands and will provide us a base to expand our space business in Europe.

We are also changing the sales mix within the space market. We are decreasing our NASA forecast by $14 million, while increasing our forecast for other launch vehicles by a corresponding amount. We have learned that NASA is adopting a new approach to their work. Their spending is now based on available budget, rather than driven by a fixed schedule to get a new launch system as a service. As a result, we think some of the work we've been planning for fiscal 2012 will move out into the following years.

On the positive side, we have identified some new opportunities on other launch vehicles, and we believe this work will compensate for the NASA shortfall.

In the other markets, defense and security and surveillance we were leaving our forecast unchanged from 90 days ago. Putting it all together, we are now forecasting fiscal 2012 sales of $384 million.

Space and Defense margins. Margins in the quarter of 14.4% were strong, but down from 16.5% record quarter we had last year. Lower sales on the DVE program and our stores management application accounted for the difference. Given the strong showing in this year's fourth quarter, we are increasing our margin forecast for the full year from 11.7% to 12.2%.

Turning now to Industrial Systems. Sales in the quarter were up 10% from last year. All our markets were healthy with particular strength in our US business. For the rest of the year, we are moderating our forecast a little to account for changes in exchange rates, as well as some slower growth in our Chinese business.

Similar to our Space and Defense group, we are providing a new grouping for our Industrial System sales. We believe this perspective will help our investors to understand better the major drivers in our business. We are presenting the business in three major markets -- industrial automation, energy, and test and simulation. Industrial automation includes our traditional machine builder markets such as plastics, metal forming, heavy industry, as well as a range of niche applications where we supply automation components and aftermarket services.

Energy includes our winds business, as well as components used on power generation equipment and sales into the oil and gas market.

Test and simulation, as the name suggests, includes our sales of aero and autotest systems, as well as our sales for flight training simulators.

Industrial Systems Q1. Sales in the quarter were $158 million, up $14 million from last year. Sales in industrial automation were up 8% from a year ago. 60% of our industrial automation business is in Europe, and sales there remain strong. We've enjoyed 10 quarters of sequential growth in this market, and we are now seeing a leveling in demand.

Turning to China, we are seeing some slower growth as companies conserved cash ahead of the Chinese New Year. Whether this is just seasonal behavior or a long-term slowing remains to be seen.

In the energy market, our wind business was up about $1.5 million, and our oil and gas business was also up about $1.5 million this quarter. Wind in China was actually up in the quarter.

Finally, the test and simulation market, we had a very strong quarter. Our test business was up $2 million as a result of our work on the Indian automotive test facilities, and our simulation business was also up nicely by over $4 million as demand for full flight simulators remains very healthy.

Industrial Systems fiscal 2012. For the year, we are moderating our forecast by $30 million. Looking forward, the change in exchange rates relative to the US dollar over the last 90 days results in the translation impact of about $20 million for fiscal 2012.

In addition, we cannot predict how the slower growth in Asia we saw in the first quarter may play out over the remainder of the year. So to be conservative, we are reducing our industrial automation forecast by a further $10 million. The net result is a new forecast of $650 million for all of fiscal 2012.

Industrial systems margins. Margins in the quarter were 10% in line with last year, while margins for the year are predicted to be 10.5% on our higher sales, up from 10% last year and in line with our last forecast.

Now to the Components group. We had another solid quarter in our Components business with sales up 2% from last year. As in previous quarters, the strength was in the nondefense markets with defense continuing to weaken, albeit only marginally compared with last year. As we look to the last year rest of the year, we are not anticipating much change from our last forecast.

Components Q1. Sales in the quarter were $88 million, up $2 million from last year. Within our A&D markets, which include Aircraft and Space and Defense, 80% of the business is related to defense spending. This includes military aircraft, military space applications and military vehicles. The other 20% is commercial, split two-thirds commercial aircrafts and one-third commercial space.

Total A&D sales in the quarter were $45 million, down 8% from a year ago. The drop was all military related, continuing the pattern we've now seen over the last year. Military aircraft sales were down 16%, and defense controls were down 8%. As we've explained in the past, a range of upgrade programs associated with field operations have wound down over the last year to two years.

Putting this trend in perspective, our military aircraft business peaked six quarters ago at $35 million in Q3 fiscal 2010 and has dropped to $23 million in this quarter. Our defense controls business peaked nine quarters ago at $20 million in Q4 fiscal 2009 and was down to $10 million or half this quarter.

We are, however, optimistic that we're starting to see a leveling in our defense business, at least for the remainder of fiscal 2012, and indeed, Q1 this year was actually up marginally from Q4 last year.

The non-A&D markets were up 15% in the quarter. The strength came in the Medical market and in our Industrial market. Our Medical markets continue to improve as the economy continues to recover. Our Industrial business benefited from the additional sales from our Animatics acquisition, which we completed in the third quarter of last year.

Our marine business was up marginally from last year and continues to show strength in bookings and is on track for a very strong year.

For fiscal 2012, for the year we are staying with our sales forecast of 90 days ago of $372 million. We are adjusting the mix slightly within our defense portfolio based on some individual program movements but nothing of note.

Margins. Margins in the quarter were a very healthy 17%. We enjoy the favorable mix, and costs came in slightly under plan. Based on the strong first quarter, we are adjusting our margin forecast for the full year to 15.5%.

Finally, Medical Devices. Our Medical business continues to make progress with good sales and another profitable quarter. The story this quarter is steady as she goes. The business is performing to plan, and there were no hiccups in the quarter. For the year, we are anticipating the same story -- steady sales and consistent albeit moderate profitability.

In the first quarter, sales were $35 million, up 7% from last year. Pump sales were up 14% with the strength coming from our international sales, primarily in Europe. In the US, sales of our IV pumps were down from a year ago as we work to build up our internal sales channel to replace the B. Braun network. We have our network in place and have completed all of the product training. However, given the sales leadtime associated with new pump sales, we think it will take another couple of quarters before the full impact of the new team will show up on the sales line.

Sales of administration sets were up marginally in the quarter, although down from the last three quarters. Quarterly sales of administration sets are a function of the installed base of pumps in the field, but also the inventory planning of intermediate players in the sales channel. Sales had been running a little ahead of what we had expected for the last few quarters, and this quarter reverted to a more normal level.

The remainder of the medical business was about flat with last year.

For the year we are forecasting sales of $145 million, no change from 90 days ago.

Medical margins. This quarter we had an operating profit of just under $2 million or 4.6% of sales. This is above the average of the second half of fiscal 2011 and in line with our plans. For the year, we're not changing our margin forecast from 90 days ago. We are forecasting margins for the year will be 3.4%.

So, in summary, putting it all together, we are now forecasting fiscal 2012 sales of $2.48 billion, down $37 million from last -- from our forecast last quarter. Sales in Aircraft would be $18 million lower, although still up $76 million from fiscal 2011. Sales in Industrial will also be lower by $30 million, reflecting the translation effect of foreign sales and some weakening of demand in Asia. Sales in Space and Defense will be up $10 million as a result of the Bradford acquisition, and sales in the other two groups haven't changed from 90 days ago.

Operating margins should be up slightly to 11.3%, so we are keeping our earnings forecast constant. Earnings per share of $3.31 are unchanged from 90 days ago.

Q1 has been a strong start to the year, but some of the gains, as we mentioned, reflect some business we had planned in Q2. We are now forecasting quarterly earnings of $0.73 in Q2, $0.85 in Q3, and $0.93 in Q4.

Now let me pass it to Don, who will provide some color on our cash flow and balance sheets.

Thanks, John, and good morning, everybody. Our net debt increased by $12 million during our first fiscal quarter of 2012 to $624 million, while our free cash flow was a positive $8 million. The $20 million difference relates mostly to the December 15 acquisition of Bradford Engineering by the Space and Defense group that John described previously, as well as some foreign currency exchange movements.

As you remember, our 12-month free cash flow forecast for fiscal 2012 was $110 million. So it would appear that that we are off to a slow start, but it is all timing, and we do expect our quarterly cash flow to return to more normal conversion levels as the year progresses.

Specifically in the quarter, our working capital increased by $35 million. There are lots of moving pieces, and I would like to single out two of the more significant items. First, invoicing on a particular military aircraft program went out a bit later in Q1 than we had expected due to some contract negotiations that were being finalized. And we should see that program's cash situation catch-up in the second quarter.

Also, our annual profit sharing checks that we pay to our employees each year during the first fiscal quarter were sent out. We believe the remainder of the year's free cash flow will be much better on average, and we are maintaining our fiscal 2012 forecast of free cash flow at $110 million.

Before leaving cash flow, I would like to comment on a couple of balance sheet related items. Customer advances increased during the quarter by $18 million to $116 million, due largely to late quarter invoicing on a military aircraft program. Loss reserves declined from the prior quarter by $3 million to $42 million. Capital expenditures were $27 million in the quarter and on pace with our forecast of $105 million for all of fiscal 2012, and depreciation and amortization totaled $24 million in the first quarter, and we are now thinking that D&A will come in closer to $104 million, down just slightly from our last forecast.

Regarding pensions, last quarter we described how we accelerated the payment of our fiscal 2012 US defined benefit pension plan contributions into fiscal 2011's fourth quarter. So in Q1 of this year, our global DB plan contributions were only $2 million, while our expense was $9 million.

We are currently estimating our full-year 2012 global DB plan contributions and expense to be $8 million and $35 million, respectively.

Turning now to some of our financial ratios. Our quarter-end net debt as a percentage of total cap was 33.7%, slightly better than the 34.8% from last year's first quarter. Our leverage ratio was 1.92 times, and we currently have $542 million of unused capacity on our $900 million revolver. It terms out in 2016. So we have plenty of capacity.

Regarding acquisitions, we continue to actively look for strategic properties that will be a good fit with our core business.

Our effective tax rate in the first quarter was 31.3%, up from last year's 27.0%. Last year's rate was favorably influenced by a US foreign tax credit that is no longer available as the tax laws have since changed and by the recording of a catch-up adjustment for R&D tax credits due to delayed passage of legislation that took place in 2010.

We are forecasting our effective tax rate for all of fiscal 2012 to be 30.3%, unchanged from our last forecast.

As John summarized, we believe we are off to a solid start in a year that should produce a 6% increase in sales to $2.48 billion, despite some noticeable currency translation headwinds from a stronger US dollar. Year-over-year operating margins should improve, earnings will be up 12% to $152 million, and we think our free cash flow conversion for our growing Company will be respectable.

Although we are very aware of rain clouds on the horizon in the form of US defense spending pressures and global industrial economic uncertainty, we are confident that we made some good strategic decisions that position us for solid long-term growth and improving financial performance.

Now I will turn it back to John for any questions and answers.

Thanks, Don, and I will turn it back over to John the host of the call to give instructions for asking questions. John?

(Operator Instructions) Julie Yates, Credit Suisse.

Good morning. Thanks for taking my question, guys.

Good morning, Julie.

So a couple of questions on commercial aftermarket. First, just within the quarter within the flattish market aftermarket performance, did you start to see any of the initial 787 spares provisioning?

Yes, there is a small amount of that, Julie. We had plans to have -- there is a plan to have spares IP throughout the year, but it's a little bit slower than we had anticipated. And, of course, I think that lines up with the delivery slowdown that Boeing has seen.

Okay. And then what's the actual percentage increase that you are looking for now. I believe it was 9% before?

Year over year?

Yes and whole year.

It's about 6%.

Okay. Great. Thank you.

You're welcome.

Cai von Rumohr, Cowen & Co.

Yes, thanks so much, guys. Good quarter. So why if your Boeing sales are coming down, is that the 787 or is that other programs?

I think you are talking for the year, are you?

Yes.

Yes, it's actually a combination of both. There is a little bit of a reduction on the OEM side, and that's really just a reflective reflection of what we've seen in the first quarter. It's still -- our plan is that it will be up 9% from fiscal 2011. So perhaps our first number out of the box was a little bit more optimistic than we thought. And there's a little bit of a reduction in the 787. Again, I think the schedule there has been moving out a little bit.

Okay. Would you share with us approximately what sort of build rate you are at currently and when you expect to increase that on the 787?

Our anticipated -- well, I mean, we match, of course, with Boeing's production schedule. But we're thinking that this year it would be about 40 units on the 787. That is kind of our plan for this year and then kind of ramping up over the next couple of years.

I mean is that flat throughout the year, or at what point do you lift your rates?

Well, I mean our rate will be a gradual increase, so it's not as if from one quarter to the next we go from two chipsets to three chipsets. And the timing of orders and Boeing schedule, it's very hard to connect that back from their delivery of airplanes directly to our production facilities.

So I would describe our production ramp will be a gradual production ramp over the course of the next several years, rather than we go from two to three to four. I think on average if you take a, you know, a quarter this year versus a quarter last year will be at a higher rate. But I don't think you should think about it as we are going from two chipsets to three chipsets and from quarter two to quarter three.

So last year we shipped about an equivalent of 25 chipsets to Boeing and this year it's 40. And, of course, you've got to keep in mind that if we shipped 25 last year and Boeing delivered three airplanes, there's an enormous amount of inventory in the channel already, and that, again, makes it difficult to connect Boeing's delivery of airplanes directly back to our ramp rate.

Absolutely. And then in Medical, help me understand why you did a 4.6% margin in the first quarter and you're only going to do 3.4% for the year?

I think we would prefer to do a little bit better rather than a little bit worse in Medical. Our number may be a little bit conservative.

Having said that, you know we've got three quarters under our belts of moderate profitability, and at this stage, I wouldn't like to get ahead of myself and suggest that it's going to continue to improve for the year. The business is solid, but there's nothing significant that will change over the next year. We have some sales, as I said, hopefully in the latter part of the year that may come in from the IV pumps as that sales channel starts to build up. But I think we would like to stay conservative in our medical business and meet that forecast rather than disappoint.

Okay. So then maybe a last question (technical difficulty), why the second quarter down from $0.80 to $0.73, and maybe give us some color on kind of the quarterly patterns you see for the year?

Yes, well, the quarterly pattern that I mentioned is -- so $0.80 in the first quarter, $0.73 in the second quarter, $0.85 in the third quarter and then $0.93 -- (multiple speakers).

Yes but the question is why the $0.73 in the second half of the year -- (multiple speakers)

I understand. If you go back 90 days, we had said that we would do $0.73 in the first quarter and then $0.76 and ramp up from there. And our first quarter came in $0.07 ahead of what we had anticipated. And, as I mentioned, that's FMS sales that we had forecasted for the year, but they just came in very strong in the first quarter, and we could get product out.

So $0.07 of earnings per share came into the first quarter and essentially came out of the rest of the year. And three of those came out of the second quarter. That is our estimate. So that's why it goes from $0.76 back to $0.73.

Could you give us maybe the sales for the second, third and fourth?

No, we don't typically do that.

Okay. Terrific. Thanks so much.

Eric Hugel, Stephens.

Hey, good morning, guys. Good quarter.

Thanks, Eric.

Hey, can you talk about sort of where things stand in terms of R&D spend, I guess, relative to your prior plan for the 787 and the A350, and has there been any impact to the program because of the recent A350 delay?

Yes, our R&D plan for the year is pretty much -- it's actually the same as last year. It comes in just under $120 million, and there's tiny shifts in the plan for the 87 just as people have kind of trued it up coming out of the first quarter. But, again, it in the noise. So the 87 is a kind of $4 million to $5 million tab, the 350 is in the kind of $35 million to $40 million, and those numbers have stayed pretty much flat for this quarter from last quarter. So no, no change of any significant from what our plan was.

And you haven't seen impact in terms of timing of work statements because of the A350 delay?

I think what will happen as happens on all programs is not that it's an additional ramp in our expense now, it just means that you continue to spend until the program gets into production. So it isn't that we would see a significant ramp now, it's just that the ramp down that we would be anticipating out a year or two years, that ramp down may start to be pushed out a little bit. So you end up spending in total some more money on the program.

Now you try to moderate that as best you can, but generally speaking, as programs go longer, the spend continues.

Sure. Any update on, I believe, you're still trying to get, what is it a large volume pump in the Medical business through the FDA? Any update there with regard to certification?

We said last quarter that we need to do some -- redevelopment work on it. We did some testing on it, market testing. Turned out there were some things that we determined were not what we would like. We are going through a cycle of development work on that, and then we will have to submit it to the FDA. And, as I said a quarter ago, that is not going to be a fiscal 2012 event.

Hopefully, it will be a fiscal 2013 event, but it depends on a FDA process that unfortunately right now we and I don't think any other company fully understands because they have just changed the rules, but nobody has actually gotten new pumps through that process. So how long that process might take, whether it is nine months, 12 months or 18 months is an unknown, and I guess we'll have to see as that unfolds. So it's not a 2012 event.

Do you see that from just an industry perspective that sort of all the players are kind of stymied in terms of getting new devices through?

Definitely in terms of the pumps words, that is absolutely the case. How it affects broader medical devices, I don't have a lot of information on that. But, in terms of the types of products that we are in, the flow of new products to the market has dried up dramatically I think over the last couple of years because of the heightened FDA scrutiny on this particular segment of the market.

Fair enough. And, Don, can you just maybe give us some numbers in terms of what you guys are expecting for 2012 in terms of your corporate overhead, stock comp and interest expense?

Sure. For 2012, I think you asked for three numbers, let's see if I can pick them out. Interest is forecasted to be about $35 million, consistent with where we were last quarter. Our corporate expenses are up just slightly at [$21] million. It is close to where we were last quarter. And then our equity-based comp is forecasted to be $6.6 million for the year.

Mike Ciarmoli, KeyBanc.

Good morning, guys. Thanks for taking my questions. Nice quarter. Just if I could focus maybe on the military side, it looks like, I guess, your F-35 forecast hasn't really changed. In light of what looks to be a reduced reduction or reduced deliveries here, you know, kind of laid out yesterday, what sort of risks are you guys seeing around that number if any?

Well, I think fiscal 2012, our fiscal 2012, which runs through the end of September, I think that's finished. I mean I think they came out yesterday is looking out fiscal 2013 and beyond.

Right.

So I think we are feeling pretty comfortable that nothing has changed in our fiscal 2012 plan. We are in LRIP 4. I think that looks pretty good.

Clearly, as we look out over the next few years, we have been planning a ramp-up in our F-35 sales, and that ramp-up will now be tempered by what came out yesterday. So that will mean that we will have a slightly slower ramp-up in sales than we had been hoping for, not that we have got capital or excess people or anything like that in place that we would have to try to reduce.

The real positive for us, though, over the last two weeks is the fact that the [Sinovel], the B variant got out of jail. I mean essentially that's given the go-ahead now, and that's a very important program for us. Because we have almost twice the content on that that we have on the other two. And the fact that that has got the go ahead, I would say more positive news for us than the news that came out yesterday, which indicates that the ramp-up will be somewhat slower.

I mean the Defense Department did say they're committed to the full program and to the total 2400 airplanes, and that's great news. So if it takes a couple of years longer to get up to full rates, then I think we can deal with that.

Okay. That's a good data point. Does the slower ramp impact what you guys were looking at in terms of your profit booking rate or margin assessments there?

No, no, not for fiscal 2012.

Beyond fiscal 2012 perhaps?

Well, we don't book margins or profit rates beyond fiscal 2012.

And then just to follow-up, maybe I think Cai asked it on the R&D. You know, I know you guys have really been spending a lot on some of these bigger programs. Looking out not maybe this year but beyond maybe two years, three years down the road, is there the expectation that you may see the R&D holiday and you know the aircraft control margins can start to tick back up. If that is the case, what are sort of some of the big drivers there? I mean does it hinge on one program like the A350 with that R&D winding down, or are you guys looking out and see enough opportunities in the pipeline where this R&D level might just be sustained?

No, I think if you look out a few years, we do anticipate that R&D will come down. It will definitely come down as a percentage of sales just given the ramp-up on the sales line.

I suspect it will also even the dollar amount will start to come down as some of the very big programs like the 87 and the A350 are behind us.

There aren't any major new starts that we can see at the moment that kind of match that level of spend that we have done on the 350 and the 87. I mean there may be some opportunities for a surplus or two on the 37 or the 320, but there's not full-scale redesign of those airplanes.

And there will definitely be some other smaller jobs perhaps regional jet or business jet opportunities that I'm sure will come along over the next few years. And it's important, of course, to keep a level of capability in-house that we have built up over the last years and not lose that capability before the next major overhaul comes along, whether it's a 777 or you pick it.

So I do think R&D as a percentage of sales will clearly come down probably in the dollar value. It may be constant or it may -- it will probably come down a little bit, and you will see that margin expansion both from the reduction in R&D but also from improving margins on the production programs as the production starts to ramp up, we get some units under our belt, and we start to get the costs better under control.

Okay. Great. Thanks, guys. And then just last one, maybe Don. Share count for the remainder of the year given the buyback, how should we be thinking about that?

Yes, in our model we have got an estimate of 45.8 million shares.

Great. Thanks a lot, guys.

(Operator Instructions) To the presenters, there are no further questions coming in.

Thank you very much, indeed, for your time. Thanks for joining us, and we look forward to speaking with you all again in 90 days time. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.